Chapter 6 - Overview Of Real Estate Valuation Flashcards
What is the difference between purpose and function of an appraisal?
Purpose: to estimate a specific type of defined value depending on why the appraisal is needed (i.e. insurable value, replacement value, reproduction value, value at a certain date, market value, etc.)
Function: relates to how the client intends to use the appraisal. i.e. will it be used to decide whether to buy or sell the property? Establish a max loan value for a property? Function guides the type of appraisal that will be done to estimate the type of value required, the effective date of the appraisal, and so forth.
What may real estate licensees appraise and what can they not?
The CAN do appraisals, but can’t hold themselves out as “appraisers” unless they’re also certified or licensed appraisers unless they hold the separate license for that.
They can conduct appraisals of real estate that do NOT require state-certified or licensed appraisers SO LONG AS THEY ABIDE BY THE UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE (USPAP). ALL “appraisals” in Florida must be in writing and must conform to USPAP, regardless of who is doing it and what it is for.
These types of appraisals require an appraisal license:
1: Appraisal reports involving a federally related transaction (any real estate-related financial transaction that a federal financial institutions regulatory agency (FFIRA) has either contracted for or regulates).
There are five FFIRA’s:
a. Office of Thrift Supervision
b. Office of Comptroller of the Currency
c. Board of Govs of the Federal Reserve Board
d. FDIC
e. National Credit Union Administration
2: Fannie Mae
3: Freddie Mac
4: HUD (FHA) and
5: VA (Veterans Administration)
What is the difference between price, cost, and value?
Price: dollars or other currency that a particular buyer agrees to pay and particular seller agrees to accept under the specific circumstances surrounding a transaction. The amount of money actually paid in a transaction. Actual $$$ paid.
Cost: total dollar expenditure for land, labor, materials, overhead, and entrepreneurial profit required to bring a property into existence. Production; not exchange. Reproduction costs; Replacement costs.
Value: the monetary worth of goods (property) and services to buyers and sellers of real estate. Conceptual in nature and influenced by supply and demand. Appraisers are charged with the task of estimating the value that typical buyers most likely will place on a property. Opinion.
What are the characteristics of value?
DUST
Demand: desire plus ability to pay for it. Someone wants it.
Utility: the goods or services are useful. It has a use.
Scarcity: availability of goods or services in relation to the demand for them. Limited in quantity
Transferability: legal ability to convey title and possession of the goods or property. Can convey to another.
What is “value in use”?
The value of a property based on a specified use that may not represent its highest and best use. (Florida’s Greenbelt law)
Understand the concept of market value?
The probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming, the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
Buyer and seller are typically motivated
both parties are well informed and well advised, acting in their best interests
reasonable time is allowed for exposure on the open market
payment is made in US dollars or in financial arrangements; and
price represents the normal consideration for the property that sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
What is “value in use”?
The value of a property based on a specified use that may not be its current use.
The Greenbelt laws are a reason that property may be valued as agricultural based on its current use, while not considering its highest and best use, which may be as a hotel. The IRS also accepts the value in use vs. the highest and best use in valuing limited partnership interests or real property that may not be in use as its highest and best use.
Explain the concept of conformity
Homogenous look and feel of properties in an area make them most valuable. No geodesic homes in a neighborhood where all the other houses are ranch style.
When determining the highest and best use of a vacant site, what does an appraiser consider?
If the site were vacant, what type of structure or other improvements should be erected to get the highest and best use? Compares other nearby uses of sites to the subject site.
When determining the highest and best use of a site as though vacant, what does an appraiser consider?
Determining a property’s value as if the land is vacant and something would be built to put it to its highest and best use.
Compare one property’s highest and best use as follows:
Projected NOI at a particular use / Overall Cap Rate (OAR) to get the total value.
Then subtract development costs from the total values to get the residual land value.
The use with the higher land value is the higher and better use.
How do you calculate the average price per square foot using weighted averaging?
Multiply the price per square foot by the percentage of importance that the appraiser has assigned to each comparison, then add up the weighted values and divide by the total number of values to determine the weighted value.
Principal of Substitution in appraisals
When several goods offering similar benefits are available, consumers will pick the cheapest one.
What are the three approaches to value?
Sales Comparison: pay no more than the cost of acquiring an acceptable substitute property.
Cost-Depreciation: pay no more than it would take to buy an equally desirable site and build and acceptable substitute from scratch.
Income Capitalization: pay no more than you would pay for something that would give you the same return on your investment with the same level of risk.
What is required in a USPAP appraisal?
The date of the report and the “effective date” of the value’s estimate. Effective Date establishes the context of the valuation.
