chapter 3 property line and apprised Flashcards
Demand:
The supply of willing and able buyers in the marketplace or lack thereof
Scarcity:
A lack of supply.
Supply:
The amount of a certain good or service that is available in the market.
Market value
is defined as the price a willing seller will sell for, and the price a willing buyer will pay when neither is acting under exceptional pressure. Market value is also defined as the most probable price. Market value is most commonly associated with the price a party pays for a property.
four basic characteristics of value:
Remember: “DUST”
Demand
Utility
Scarcity
Transferability
Demand
there must be a demand for the item. Does anyone want it?
Utility
the item must be needed or wanted. Can it be used?
Scarcity
there must be a limited supply. How much is there?
Transferability
the item must be able to be sold – ownership rights must be transferable
appraisal
s an opinion. It is an estimate of value. The accuracy of the appraisal depends on the integrity and competency of the appraiser and the availability of the needed information.
Appraisers use principles of value to help them arrive at their final opinion. These principles of value include:,
Highest and Best Use
he legal use that gives the greatest return in money and/or amenities. Highest and best use can be considered the most important detail by an appraiser. A potential use cannot be considered to be the highest and best use unless it is all four of the following:
Legally allowable
Physically possible
Financially feasible
Maximum utility / Profitability
Principle of Substitution
sets an upper limit on price. The maximum value of a property is set by the cost of acquiring a similar substitute property. This principle is used to demonstrate the need to price correctly. An overpriced property will not sell.
Principle of Conformity -
states that maximum value is found when there is a reasonable degree of similarity or sameness.
Principle of Contribution
he value of a part is determined by its contribution to the total value of the property rather than by its cost. The value of a particular component is measured in terms of its contribution to the value of the whole property or as the amount that its absence would detract from the value of the whole. The cost of an item does not necessarily equal its value.
Principle of Increasing and Decreasing Returns
nvest in property whenever each dollar invested will return a dollar or more of increased value and stop when each dollar invested returns less than a dollar in value. Do not over-improve a property.
The Principle of Change
– change is constant and is reflected in values. Appraisers must make adjustments for changes in market conditions, and for time. An appraisal is only considered to be good for six months.
The Principle of Regression -
the presence of lower-valued properties in the neighborhood leads to a decline in the value of your property. Conversely, the presence of higher valued properties will increase the value of your property and this is called progression.
The Principle of Competition
an increase in competition will result in decreased profits for current providers. Competition lowers prices. Success leads to competition. For example: a very profitable restaurant will usually find a competitor opening nearby.
The Principle of Anticipation
purchase price is affected by the expectation of future appeal and benefits. The value of the property can depend on the anticipated utility or income that will accrue to the property owner in the future
The Principle of Balance –
mixed land use should result in maximum value for all properties involved (master-planned communities demonstrate this principle). The principle states that value is created and maintained when the amount and location of essential types of real estate are in equilibrium (balanced).
APPRAISAL PROCESS
- State the purpose of the appraisal.
- Collect and verify information about the property.
- Estimate value using all three approaches, or as many approaches as needed to get the best result.
- Reconcile the estimates by determining weighted averages. This step is necessary because the third step will result in up to three different values. Reconciliation completes the process of determining an exact number rather than a range of values.
- Prepare the report. It may be oral, in a letter, on a form, or a narrative report. In 1989, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) to regulate the appraisal industry nationwide. This law requires the use of a state-licensed or state-certified appraiser to perform any appraisal used in connection with a federally related transaction of property valued at $250,000 or more.
All appraisers must adhere to the Uniform Standards of Professional Appraisal Practice (USPAP) outlining how appraisals are developed and communicated.
Although an appraisal is not required for a cash sale, many buyers choose to have one to protect themselves.
three basic approaches to appraisal
market data or sales comparison, income or capitalization method, and replacement or reproduction cost approach.
market data approach i
is used primarily in residential appraisals. An appraiser should have 3-5 sales, no more than six months old, and in the same general neighborhood. In using this approach, the appraiser will add to the value of comparables when the subject property has more amenities, and deduct from the comparables when the subject property has less. In choosing comparables, the best choice will be the one with the least number of adjustments, regardless of cost.
market data approach examples
An appraiser has been asked to determine the market value of a residential property. The house has 3 bedrooms and 2-1/2 baths. The first comparable has 4 bedrooms and 2-1/2 baths and sold for $290,000. The second comparable has 3 bedrooms and 2 baths and sold for $275,000. The appraiser has determined that an extra bedroom is valued at $10,000 and a half bath is valued at
$5,000.
The appraiser will decrease the value of the first comparable by $10,000 for the extra bedroom to make it the same as the subject: $290,000 - $10,000 = $280,000. The appraiser will increase the value of the second comparable by $5,000 for the half bath to make it the same as the subject: $275,000 + $5,000 = $280,000. The subject is appraised at $280,000.
NOTE: If the adjusted values of all comparables are not the same, an average of the adjusted values would provide the correct answer.
cost approach
is used for unique properties, such as churches or government buildings. It is also used when there are no comparables for a particular property.
Land Value + Building Reproduction Cost - Depreciation = Value
OR
Land Value + Replacement Cost - Depreciation = Value
Reproduction cost
would be the cost to exactly duplicate a building. Replacement cost is the cost to build a building of similar size and usefulness using today’s methods and materials.
The appraiser considers
three types of depreciation in the cost approach - physical deterioration, functional obsolescence, and economic or external obsolescence.
Physical deterioration
is ordinary wear and tear. It is curable. This has the least impact on the appraisal because all buildings have it (chipped paint, worn flooring).
Functional obsolescence
is brought about by factors in the property. It is often or mostly curable (inferior materials to cut costs, curb appeal, not enough baths/bedrooms, an unpopular floor plan, property that lacks updating for modern technology).
Economic obsolescence
is a loss of value due to outside factors. This is also called external obsolescence and is incurable (zoning, air pollution, noise, traffic, jobs, etc.) It is also called environmental obsolescence.
income approach
or capitalization method is used for income-producing properties.
if a property has rent,
then use the income approach. It involves a math formula using the “T” for the calculations. Net annual income = rate of return x market value.
potential gross income
for an investment property is the total rental income at 100% occupancy
actual gross income or effective gross income
is the actual rent collected after subtracting for vacancies or uncollected rent.
net rent or net operating income
is the actual gross less expenses.
Cap or Capitalization rate
is the percentage (acceptable to an average buyer) used to determine the value of income property through capitalization.
in the income approach helps an investor determine interest.
Gross rent multiplier (GRM)
is the ratio of the price of a real estate investment to its annual rental income before accounting for expenses such as property taxes, insurance, and utilities. GRM is the number of years the property would take to pay for itself in gross received rent. For a prospective real estate investor, a lower GRM represents a better opportunity
Licensees or appraisers
may use the Gross rent multiplier (GRM) as a simple technique to determine a range of value.
Gross rent multiplier (GRM
is used for residential properties and stands for Gross Rent Multiplier. The GRM is a factor based on location and rent – a price per rent. This number, when multiplied by the monthly rent, gives an estimate of value for the property. (GRM x rent = price)
gross rent multiplier Grm example
For example, if the GRM is 150 and monthly rent on a single-family house is $1,000, then the value of the house is 150 x $1,000 = $150,000
GRM is calculated by taking the property value and dividing it by monthly rent. (Price / rent = GRM) If a property in a neighborhood is valued at $175,000 and charges $1,000 in monthly rent, then the GRM on that property is $175,000 divided by $1,000 = 175.
For commercial properties, a GIM is used. The GIM is based on annual rent rather than monthly
Comparative Market Analysis (CMA) i
is a tool used by licensees to help sellers determine a realistic price for their property. A CMA compares a subject property to current listings, recent sales, and even expired listings of unsold properties. The information from expired listings is the least important part of the CMA. The result of a CMA is a range of value for a property rather than an exact price. It is not an appraisal. This is also called a competitive market analysis.
BPO or Broker’s Price Opinion
is basically the same as a CMA. It is a broker’s written opinion of value. It is most often requested by an attorney or a relocation company, rather than by a principal to the transaction. BPO’s can also be used by a lender involved in a “short sale” of a distressed property. A broker usually will receive a fee for preparing a BPO.
Assessed value
is the value of your property for tax purposes. The tax rate times the assessed value will tell you the yearly taxes. Lists of assessed values for all the properties in a taxing district are found in the assessment rolls. These can be used for comparison purposes.
Tax rates
re often expressed as dollars per hundred of valuation. In that case, a tax rate of $2.50 means the property owner will pay $2.50 of tax for every $100 of taxable value. In some cases, a mill rate is used; and is a tax rate per thousand. Therefore, a rate of 25 mills means the property owner will pay $25 of tax for every $1000 of taxable value.
special assessment tax
If the local government is providing a benefit to a limited number of property owners, such as curbs or sidewalks in a neighborhood, a special assessment tax may be levied against only those property owners who benefit from the improvement.
special assessment,
In a real estate sale with an unpaid balance on a special assessment, the special assessment is usually paid by the seller but could be prorated at closing.
municipal improvement district
property is located in a municipal improvement district, also called a property improvement district, the property owner will receive a tax bill, similar to a special assessment, until the improvement is paid for, or the improvement district designation is removed. In other words, this can be temporary or permanent.
