Course 9 Valuation Analysis Flashcards
What is highest and best use?
The concept of highest and best use (HBU) provides a foundation for the valuation of any property. USPAP requires this in every appraisal. The appraiser must determine the highest and best use of the property and provide the detail and conclusion in the appraisal.
What are the four principles of highest and best use?
- Legally permissible
- Physically possible
- Financially feasible
- Maximally productive
The Appraisal Institute definition is “The reasonable and probable use of the property that is physically possible, appropriately supported, and financially feasible that results in the highest value.”
What are the types of adjustments made in the sales comparison approach?
Comparables are adjusted for every quantifiable difference between them and the subject. The following factors must be noted about adjustments:
* May be made as whole dollar (lump sum) amounts or percentages, depending on the type of adjustment and how it is quantified. When an exact amount of a discount is known the sale price can be adjusted accordingly.
* May be needed for both transactional factors and property specific factors.
* Must be applied in proper sequence.
* Should be supported by market evidence and sound logic.
* The relative importance of the factor will affect the amount of the adjustment.
Explain the different adjustment directions?
Comparables that are inferior to the subject are adjusted upwards.
Comparables that are superior to the subject are adjusted downwards
What is the first sequence of adjustments?
Transactional Adjustments
* Real property rights conveyed (fee simple, leased fee, below market, ground lease)
* Financing terms (establish cash equivalency, seller financing)
* Conditions of Sale (foreclosure, REO, unusual motivation, non-arm’s length)
* Expenditures made immediately after purchase (demolition, environmental remediation)
* Market conditions (date of sale)
What is the second sequence of adjustments?
Property Adjustments
* Location
* Physical characteristics (size, access, frontage, condition)
* Economic characteristics (tenant mix, expense ratios)
* Use (building codes, zoning)
* Non-realty components of value (business value, franchise – very rare)
How are costs determined in the cost approach?
Direct Costs – payment to the general contractor for materials, labor and profit for construction of the building(s). The primary sources for obtaining the direct costs estimates include the actual construction costs for the subject or similar properties, a contractor’s estimates, or cost estimation services (Marshall & Swift, Boeckh, F.W. Dodge, R.S. Means.
What is reconciliation?
Reconciliation occurs throughout the appraisal process. Every data point is interpreted by an appraiser throughout the analysis. An appraiser must understand how to weigh various indications (value, rent, etc.) and apply their professional judgement to reach a final value conclusion.
What are some questions an appraiser may ask about each of the three approaches?
- Appropriateness – Is the approach relevant? An income approach for a non-income producing property? A cost approach on a 40-year old shopping center?
- Accuracy – How reliable is the data within the approach? How reasonable are the adjustments? Are adjustments very large? Are comparables truly similar?
- Quantity of evidence – Is there enough data leading the appraiser to the (value) indication? Can it be duplicated?
What is depreciation and what are the calculation methods?
Loss in improvement’s value from any cause. It is the difference between the improvement’s cost and its contributory value.
What are the three sources of depreciation?
- Physical Deterioration – wear and tear
- Functional Obsolescence – physical or design flaws which reduce the building value by diminishing its function or utility.
- External Obsolescence – economic or market factors which negatively impact the value of the improvements.
What are three methods for estimating depreciation?
- Economic Age-Life Method – compares the effective age of the building to its total economic life to estimate the loss in contributory value.
- Breakdown Method – isolate each factor and estimate its effect by analyzing the physical building components based on age and condition, analyzing the functional issues to estimate the loss in value, and analyzing external and economic factors.
- Market Extraction Method – analyze property sales to mirror the behavior of the market.
What is remaining economic life?
The period over which improvements to real property contribute to property value. HUD requires that the loan term be no less than 75% of the remaining economic life of the property.
What is remaining useful life?
The period of time over which a structure or component of a property may be reasonably expected to perform the function for which it is designed.
What is the difference between indirect costs and direct costs in construction?
- Direct Costs – payment to the general contractor for materials, labor and profit for construction of the building(s).
- Indirect Costs - include the following:
1. Permits, Fees and Proffers
2. Design Fees – Architectural and Engineering
3. Other professionals (legal, appraisal, market study)
4. Financing Costs (HUD, Lender, interest during construction and lease up, bond fees/costs of issuance)
5. Owner’s Administrative costs and construction management fees
6. Operating costs during construction (payroll, utilities, taxes)
7. Marketing and Lease up costs to reach stabilization
