Chapter 4 - Appraisal and Market Analysis Flashcards
What is an appraiser and what is an appraisal?
Appraiser - individual licensed or certified by a state authority who is educated in the field of valuation and skilled in estimating the current value of property
Appraisal - estimate of current price that would happen at arm’s length transaction
The best indicator of a property’s value is the actual price paid
What is the Uniform Residential Appraisal Report (URAR)?
Standard format of a written appraisal as required by many institutions
What are the Uniform Standards of Professional Appraisal Practices (USPAP)?
Establishes the quality control standards applicable for real property, person property, intangibles, and business valuation appraisal analysis and reports
What are appraisal used for?
1) Verify value of collateral for lenders (most common)
2) Establish value for insurance company using “co-insurance” clause in their policies. Usually insured must carry insurance to at least 80% of property’s value
3) IRS - for “means testing” to determine if prop value owned is consistent with income reported by tax payer
4) Fed Institutions Reform, Recovery and Enforcement Act (Savings and Loan Bailout Act) - determined a lot of losses in S & L industry due to incorrect appraisal valuation
What are the 8 appraisal principles?
1) Highest and best use
2) Substitution - market will not pay substantially more for similar properties
3) Conformity - prop should be consistent with surroundings. If property is much nicer than neighborhood, price regressed downward
4) Supply and Demand
5) Contribution - what will market pay for an amenity (like a pool)?
6) Increasing and decreasing returns - does cost of improvement adds more or less value than cost of improvement/repair
7) Plottage and assemblage - if several parcels could be brought together (assemblage) for increased value (plottage)
8) Change and anticipation - changes could mean property worth more for other usage
What are the 3 appraisal approaches to value?
1) Cost approach - based on appraisal principle of substitutiont (built from ground up on paper). Normally replacement cost where build similar property w current supplies or reproduction cost if too unique for available materials
2) Market data or comparable sales
3) The income approach - value of income producing property
What are the 5 steps in the cost approach?
1) Determine value of land
2) Determine the replacement cost of the structure
3) Determine accumulated depreciation
4) Subtract accumulated depreciation from replacement cost
5) Add in land value
What are the 3 sources of depreciation (obsolescence)?
1) Physical - property in bad state of repair
2) Functional - property out of style for market place, although working properly, is inadequate for property
3) External/Environmental/Locational/Economic
How is curable (vs. incurable) depreciation determined?
Curable consists of:
1) Depreciation can be cured (fixed or repaired)
2) Added value to property by curing will be more than cost to cure it
Physical and functional depreciation are curable. Environmental or locational are incurable
What are the 4 general influences on an appraisal?
DUST
1) Demand - there must be demand in the market for the property. Effective demand - refers to the market having the ability to purchase the property
2) Utility - the property must be useful in the eyes of the market
3) Scarcity - the extend of the supply in the marketplace
4) Transferablility - must be able to be sold (transferred) from one owner to another
How do you do appraisal using the market data or comparable sales analysis?
Based in principle of substitution - looking for properties that have recently sold, in close proximity, and comparable features and amenities
How does one adjust adjust the comparable property based on subject?
Appraiser determines market value of features or amenities which different from the comparable property and subject.
Will adjust comparable price upward (downward) if it lacks features or amenities that the subject has (doesn’t have)
What are important when choosing comps?
- Location
- Regency of sale (usually last 3-4 months)
- Price per square foot
- Amenities - curb appeal, condition of exterior, nearby parks and shops, neighborhood condition, traffic/noise, school district
How do you appraise using the income approach?
Using value of income producing property - reflection of required rate or return (IRS circle - income on top half with rate and value sharing bottom half)
Rate is the rate of return or cap rate
What is Net Operating Income (NOI) and how is it calculated?
Gross scheduled income minus annual operating expenses and annual vacancy minus bad debt property experiences
GSI/PSI (gross scheduled or potential gross income) - V/BD (vacancies and bad debt) = EGI (effective gross income) - OE (operating expenses) = NOI
