Chapter 7 Flashcards
Appraisal
Formal, unbiased estimate of value by a licensed appraiser
What are the three reasons that appraisals are necessary in RE?
- Limited transactions to compare to
- Properties are heterogeneous (type & location)
- Errors are COSTLY
At the beginning of a RE transaction, who provides the estimation of value?
Real Estate brokers are used at the onset! They give an OPINION, but NOT an appraisal (they aren’t licensed)
Why would a buyer/seller use a broker to value a house at the onset?
Appraiser costs MONEY & takes TIME.
Jeremy and New Orleans seller agree on a price and an appraiser values the property lower than agreed price. What does he have the option to do?
- Walk away from deal
- Renegotiate
- Move forward with contract price. If I take out a loan, terms will be based on appraisal, not contract.
If I make an offer that’s lower than the appraisal estimate, what do I have to do?
NOTHING! You do not have to disclose this appraisal price to the seller at all!
Market value (RE property val.)
AKA appraised value. Probable selling price assuming normal sales conditions. It’s an OBJECTIVE value between imaginary participants.
Investment value (RE property val.)
Value to a particular investor. SUBJECTIVE.
Transaction price (RE property val.)
Price actually paid. Used to estimate current market value and investment value.
Which valuation method is used to estimate the other two methods?
Transaction used to measure market & investment value.
Property is appraised using its ______ ___ _____ use
Its highest and best use
What are the limitations of highest and best use?
- Legally permissible. Ex. Corn field zoned for agriculture. Valued w/ expectation that it can be rezoned for mall!
- Physically possible
- Financially feasible. Ex. If we can rezone for mall for $1B, is that feasible for a property that may only bring in $1M/year?
- Most PROFITABLE. This relates to first three.
If a property’s highest and best use differs from its existing use, what cost must we include?
Cost to demolish (raze it). Ex. Curtis’s parents’ house in Greeley. It’s on a lot that could be used much better.
What are the three property value estimation approaches?
- Sales comparison approach
- Cost approach
- Income approach
Can combine and weigh three approaches!
Sales comparison approach
Look at recent sales price of similar properties (comps)
The best comps are similar in which three factors?
- Type
- Location
- Time
What data sources are available for selecting good comps?
- MLS (owned by National Association of Realtors)
2. Public records. MUCH fewer data points than MLS.
Are foreclosures used as good comps?
No, because these prices aren’t reflective of the surrounding housing market!
Which form of prop. value estimation is used heavily in residential?
Sales comparison because there are a LOT of good comps.
Is it better to have a lot of moderate sales comps or a few really good ones?
A few really good ones! Choose comps that would be considered a COMPETITOR to the subject property. Ex. Buying Camry. Check price of Accord!
If comps differ from subject property, what must be done to make them more accurate?
Make ADJUSTMENTS! Ex. If the subject property doesn’t have a fireplace but the comp does, I need to subtract the value of adding the fireplace to comp.
Cost approach
Uses the cost to construct the property from scratch. Used primarily for unique, non-income properties. Ex. Historical buildings, Old Main.
_____ __ ________ and ________ _______ are not necessarily the same, but they will always be pressured towards each other.
“Cost to construct” and “market value”
What will happen if cost to build house > market value?
Builders will stop building –> supply drops –> market value rises. EQUILIBRIUM!
What is the formula for the cost approach?
Est. cost of building improvements - est. accrued depreciation = Dep. cost of building improvements \+ est. value of improved land = [VALUE]
What factors are considered when calculating est. accrued depreciation?
Physical deterioration (worn out) Functional obsolescence (outdated design) External obsolescence (location)
Ex. Curtis’s parent’s house. Func. obs. is a lot because house was designed in 70s.
How are estimated cost of building improvements calculated? (COST approach)
- Based on type of construction & quantities of materials.
- Replacement cost. What would it take to build something of equivalent function & quality?
- Reproduction cost. Physical replica. MORE EXPENSIVE. Ex. Historic building with a lot of customization.
How is land value estimated? (COST approach)
Must use comps! Recent, nearby sales of vacant improved land of the same type.
Automated Valuation Methods (AVMs)
Services that use recent, nearby sales of similar properties to estimate value. Basically sales comp. approach. INACCURATE! Ex. Zillow
Why are AVMs like Zillow unreliable?
- Can only see publicly available data points. Can’t see the details (ex. view from subj. prop.)
- Can’t see improvements made to the house (ex. backyard revamp at my house).
