Chapter 3 - Property Value and Appraisal Flashcards
There are four basic characteristics of value: (DUST)
Demand, utility, scarcity, transferability
Demand
there must be a demand for the item and the purchasing power to acquire it.
Utility
the item must be needed or wanted.
Scarcity
there must be a limited supply.
Transferability
the item must be able to be sold – ownership rights must be transferable.
Appraisers use principles of value to help them arrive at their final opinion. These principles of value
include:
Highest and Best Use, Principle of Substitution, Principle of Conformity, Principle of Increasing and Decreasing Returns, Principle of Contribution, The Principle of Regression, The Principle of Competition, The Principle of Change, The Principle of Anticipation, the Principle of Balance
Highest and Best Use
- the 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.
Principle of Substitution
sets an upper limit on price. 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 properties are the
same or have a reasonable degree of similarity. (Price range, amenities, size, etc.)
Principle of Increasing and Decreasing Returns
invest 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. The result of over-improving a property is also
referred to as the Law of Diminishing Returns.
Principle of Contribution
the value of a part is determined by its contribution to the
total value of the property rather than by its cost.
The Principle of Regression
the presence of lower-valued or declining-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
the Principle of 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
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 Anticipation
the purchase price is affected by future appeal and benefits
The Principle of Balance
mixed land use should result in maximum value for all properties involved (master-planned communities demonstrate this principle).
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 value. - Prepare the report. It may be oral, in a letter, on a form, or a narrative report.
METHODS OF ESTIMATING VALUE AND BROKER PRICE OPINIONS (BPO)
There are three basic approaches to appraisal: market data or sales comparison, income or capitalization method, and replacement or reproduction cost approach
market data approach
used primarily in residential appraisals. It involves comparisons with known sales in the same area. An appraiser should have 3-5 sales no more than
six months old. In using this approach, the appraiser will add to the value of comparable
when the subject property has more amenities and deduct from the comparable when the
subject property has less.
Example: 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 Copyright © 2021 Champions School of Real Estate® 34 Chapter 3 Property Value and Appraisal 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. Subject 3 BR 2 ½ Bath Comparable 1 - 4 BR 2 ½ Bath $290,000 - $10,000 no change $280,000 Comparable 2 - 3 BR 2 Bath $275,000 no change \+ $5,000 $280,000 The subject is appraised at $280,000 based on the adjusted values of the comparables. (NOTE: If the adjusted values of all comparables are not the same, an average of the adjusted values will provide the correct answer)
The cost approach
The 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
floorplan, 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.
The income approach
or capitalization method is used for income-producing properties.
The highest weighted criteria for an appraiser using this approach is the Net Annual Income, which may also be called the Net Operating Income or NOI.
Generally, if a property has rent, then use the income approach.
It involves a math formula using the “T” for the calculations.
Net annual income = capitalization rate (rate of return) × market value. A simple way to remember
this is IRV. Income = rate x value.
Net Annual Income
Cap rate/rate of return Market Value
Copyright © 2021 Champions School of Real Estate®
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Chapter 3
Property
Value
and Appraisal
The potential gross income for an investment property is the total rental income at 100% occupancy.
The actual gross income or effective gross income is the actual rent collected after subtracting for
vacancies or uncollected rent.
The net rent or net operating income is the actual gross less expenses.
A Comparative Market Analysis (CMA)
) 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.
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.
