Definitions Flashcards
1st Step of Scientific Method:
- Observation: This is a description of a group of phenomena. In appraisal____________
This step defines a problem to be solved and the research objectives. For example, the growth of the condominium housing market next to a college campus might be observed for a market analysis within an appraisal.
2nd Step of Scientific Method:
- Formulation: This theory explains the formulation of a hypothesis. In appraisal______________
The hypothesis within an appraisal is the purpose of the appraisal such as to estimate market value. To estimate value, a research plan is implemented to test supply and demand factors, which are characteristics of a real estate market. For example, a developer may believe converting an apartment building into condominiums is feasible. A plan is then created to verify feasibility.
3rd Step of Scientific Method:
- Prediction: The use of the theory predicts the existence of other phenomena, or to predict quantitatively the results of new observations. In appraisal____________
In an appraisal, this step is the implementation of a plan to collect and analyze data, which determines the approaches necessary. For example, a developer contracts an appraiser to perform an appraisal detailing the feasibility of the condominium conversion. This example, Step 3, executes the plan developed in Step 2.
4 Steps of Scientific Method
- Observation -Define the problem and research objectives
- Formulation - Develop research plan
- Prediction - Implement plan (collect and analyze data)
- Analysis - Interpret & report results
4th Step of Scientific Method:
- Analysis: Experimental tests of the theories by several independent parties are conducted to ensure validity of the first three steps. In appraisal____________
Interpretation and reporting the results occur in an appraisal after testing various analyses (statistical, analogy, observation, etc). For example, the cash flows of the condominium conversion project might include a variety of parameters resulting in different analyses such as different development times, build-out, sales price per unit, unit sizes, or amenities. As a result, the appraiser and developer can project the feasibility based on the most likely circumstances.
Absorption:
The total demand for a type of real estate offered on the open market by all economic agents within an economy or market that may be leased or sold during a certain period.
Absorption:
Absorption: The total demand for a type of real estate offered on the open market by all economic agents within an economy or market that may be leased or sold during a certain period.
Adjustments in the sales comparison approach should be made in this order:
property rights
financing terms
conditions of sale
market conditions
location
physical characteristics
economic characteristics
Agents of production:
Traditionally considered land, labor, capital, and coordination (coordination is also sometimes called management or entrepreneurial profit).
Agents of production:
Agents of production: Traditionally considered land, labor, capital, and coordination (coordination is also sometimes called management or entrepreneurial profit).
AIRR
adjusted internal rate of return
Amenities:
Any tangible or intangible benefits of a property, especially those which increase the attractiveness or value of the property or which contribute to its comfort or convenience. Tangible amenities might include parks, swimming pools, health club facilities, party rooms, bike paths, community centers, door attendants, or garages, for example. Intangible benefits might include a “pleasant view” or other aspect, low crime rates, or a “sun-lit living room”, which all add to the living comforts of the property.
An arm’s length transaction:
An arm’s length transaction is a real estate contract where the purchaser and sellers of a real estate property are acting independently, without coercion, of their own self-interest, and are not related to one another.
Analysis:
Analysis: Experimental tests of the theories by several independent parties are conducted to ensure validity of the first three steps of the scientific method (observation, formulation, prediction).
Annuity.
A contract providing for regular payments of predictable amounts. Regular payments are those that occur at a constant periodic rate, such as monthly, quarterly, or annually. Predictable amounts include those that are level, that escalate based on the Consumer Price Index, that step up, or that can be predicted in any other way.
Anticipation
Anticipation is the present worth of revenue or other benefits expected in the future. These future benefits are either quantitative or qualitative. While many influences affect purchasers and sellers in arriving at market value, the principle of anticipation is perhaps the most influential. Even though this principle is reflected in all three approaches to value (Sales Comparison, Cost, Income), it is considered the fundamental foundation of the Income Approach.
Anticipation:
An economic theory where value is created by expectations of future benefits such as income, appreciation, tax benefits, etc.
Anticipation:
Anticipation: An economic theory where value is created by expectations of future benefits such as income, appreciation, tax benefits, etc.
Appraisal:
An opinion or estimate of value regarding real estate, as of a specified date, which is supported by documented data. The appraisal, or valuation process, is a sequence of steps used by the appraiser to derive a reasonable value estimate.
Appraisal:
Appraisal: An opinion or estimate of value regarding real estate, as of a specified date, which is supported by documented data. The appraisal, or valuation process, is a sequence of steps used by the appraiser to derive a reasonable value estimate.
Appraiser’s opinion:
Judgment supported by facts, logic, and reasonable analysis.
Appraiser’s opinion:
Appraiser’s opinion: Judgment supported by facts, logic, and reasonable analysis.
Appraisers can employ several techniques for extracting adjustments. Some of these include:
Paired sales technique
Rent analysis
Market survey
Cost analysis
Regression analysis
APR
annual percentage rate
ARM
adjustable rate mortgage
ATCF
after tax cash flow
ATIRR
after tax internal rate of return
Attitudinal surveys:
Consumers are interviewed based on their opinions or attitudes for certain characteristics of a property to determine demand.
Attitudinal surveys:
Attitudinal surveys: Consumers are interviewed based on their opinions or attitudes for certain characteristics of a property to determine demand.
Automated valuation model (AVM):
Automated valuation model (AVM): A computer-generated program that utilizes information obtained from agents, brokers, appraisers, public records, and other sources to provide value estimates for properties.
Balance
Balance is achieved when numerous factors exert proportional influence on value. This principle applies to several different factors, including the four agents of production: land, labor, capital, and coordination (entrepreneurial profit). For all types of real property, the highest value is achieved when these four agents of production are in balance or when these factors create the best return on the investment of the land.
Example: Developer A constructs an office building, at a cost of $2 million, on a 4-acre rural site he purchased for $100,000. Developer B constructs a $1.2 million office building on a 2-acre site in a local office park, which he purchased for $900,000. Both developers have $2.1 million in their respective projects, however, it is more likely that, upon completion, Developer B’s project will be worth more than Developer A’s, because of the relative balance between the land and improvement values.
Although the agents of production might be in balance, the most important combination is the land and the improvements. When combined, the improvements add the most value to the land when the property is utilized for its highest and best use.
Balance:
An economic principle that is caused when numerous factors exert proportional influence on value. Favorable factors include the four agents of production: land, labor, capital, and coordination.
Balance:
Balance: An economic principle that is caused when numerous factors exert proportional influence on value. Favorable factors include the four agents of production: land, labor, capital, and coordination.
Band of investment
A technique in which the capitalization rates attributable to components of an investment are weighted and combined to derive a weighted-average rate attributable to the total investment (i.e., debt and equity, land and improvements).
Before-tax cash flow (equity dividend):
Before-tax cash flow (equity dividend): Cash flow often used to evaluate the cash flow from an income-producing property by subtracting the debt service from the net operating income.
Bottom-up approach:
Bottom-up approach: In business development, a bottom-up approach means that the adviser takes the needs and wishes of the would-be entrepreneur as the starting point, rather than a market opportunity (which would be a “top-down” approach).
Break-even ratio (also known as default ratios):
Break-even ratio (also known as default ratios): A ratio that indicates the property’s ability to generate sufficient income to pay for debt services.
BTCF
before tax cash flow
BTIRR
before tax internal rate of return
Building residual technique
A capitalization technique in which the net operating income attributable to improvements is isolated and capitalized by the building capitalization rate (RB) to indicate the improvements’ contribution to the total property value. When the improvements’ value is added to the land value, a total property value estimate is produced.
Built-up method.
A method of developing a discount rate or capitalization rate using the basic elements of risk.
C
mortgage coefficient
Capital recovery rate.
The return of investment capital, expressed as an annual rate; often applied in a physical sense to wasting assets with a finite economic life; used interchangeably with amortization rateto express investors’ desire to recover their equity investment over a specified time period; also called capital recapture rate.
Capitalization rate (cap rate):
Capitalization rate (cap rate): The rate used for converting net income to an indication of value. The basic relationship of income to value is expressed by the formula V = I/R (value equals income divided by a rate) or V = I x F (value equals income multiplied by a factor).
Capitalization:
Capitalization: Capitalization is a simple method of converting the net income generated by a property into an estimate of value by capitalizing at an appropriate rate.
Cash equivalency analysis.
An analytical process in which the sale price of a transaction with nonmarket financing or financing with unusual conditions or incentives is converted into a price expressed in terms of cash or its equivalent.
Cash flow analysis:
Cash flow analysis: An analysis of the periodic payments that accrue from an investment after all cash expenses, payments, and taxes have been deducted.
Central Business District (CBD):
The center of an urban area, typically zoned for various uses such as retail, office, and residential. Further, in some areas, transportation starts and ends in the CBD since it is the central location for employment.
Central Business District (CBD):
Central Business District (CBD): The center of an urban area, typically zoned for various uses such as retail, office, and residential. Further, in some areas, transportation starts and ends in the CBD since it is the central location for employment.
Central Limit Theorem
Central Limit Theorem
The central limit theorem states that the sampling distribution of the sample mean approaches a normal distribution as the size of the sample grows. This means that the histogram of the means of many samples should approach a bell-shaped curve
generally speaking, the larger the sample size, the greater the reliability.
Change
Change is inevitable, especially in real estate. For instance, new social patterns, technology, employment, transportation, and other factors create new demands for real estate. However, demographic changes create demand for different types of housing and other commercial real estate as the desires of the community change.
Neighborhoods experience a life cycle that complements the business cycle of growth, slowdown, contraction, and revitalization. Other examples include new businesses in a neighborhood, gentrification, zoning changes that result in different land use patterns, and monetary supply fluctuations due to inflation or deflation. All of these economic circumstances create opportunities for change such as growth or decline.
The appraiser must consider the existing trends that affect the value of the subject property now and those that can be reasonably anticipated in the future.
Change:
An economic principle that demonstrates how new social patterns, technology, employment, transportation, and other factors create new demands for real estate.
Change:
Change: An economic principle that demonstrates how new social patterns, technology, employment, transportation, and other factors create new demands for real estate.
Cluster Sampling
Cluster Sampling
Cluster sampling is a random sample of a group or cluster of units of the population, sometimes known as grouped data analysis. Each unit of the selected cluster is a measurement of the sample.
As shown in the photograph below, the cluster sample is representative of the general population as applied to the previous systematic sample. Cluster sampling is often preferred due to the economic benefits compared to other sampling techniques.
Coefficient of Determination
A statistic indicating the proportion of the total variance in the dependent variable accounted for by the independent variable in a simple linear regression equation (one independent variable). Also identified as R-squared in many statistics software programs.
The coefficient of determination is represented by the symbol “r2” (pronounced R-squared).
r2 is always between 0% and 100%. An r2 of 1.00 would mean that 100% of the total variance in the dependent variable is explained by the independent variable.
The higher the r2, the better; it measures how well the regression line fits the data. If r2 is equal to .70, that means that 70% of the variation is explained by that variable. The remaining variation is always 1-r2. In this case, it would be
1 - .30, or 30%.
Commercial real estate:
A non-residential property for use by office, hotel, or a retail user. Nearly all local governments require restrictions for commercial locations in conjunction with residential properties.
Commercial real estate:
Commercial real estate: A non-residential property for use by office, hotel, or a retail user. Nearly all local governments require restrictions for commercial locations in conjunction with residential properties.
Comparable property:
Comparable property: A property that is analyzed within the sales comparison approach to arrive at an indicated value for the subject property.
Competition
Competition in economics encompasses the notion that individuals and firms strive for a greater share of a market to sell or buy goods and services, each acting independently to secure the business of a third party by offering the most favorable terms.6 Basic concepts presented by Adam Smith in The Wealth of Nations (1776) and by later economists support the following scenario.7
Multiple real estate firms develop new projects or developments, which give consumers a greater selection and better products. The greater selection typically results in lower prices for the products, compared to what the price would be if there were no competition (monopoly) or little competition (oligopoly).8
The principle of competition is important when a property is selling above the cost of its replacement. For example, real estate developers who add a large profit above the cost of construction will eventually price their homes above the market value. Eventually, demand will decrease as competition increases, as other developers enter the market with lower-priced homes.
Competition:
An economic principle stating that individuals and firms strive for a greater share of a market to sell or buy goods and services, each acting independently, by offering the most favorable goods and services.
Competition:
Competition: An economic principle stating that individuals and firms strive for a greater share of a market to sell or buy goods and services, each acting independently, by offering the most favorable goods and services.
Conformity
Conformity is a principle which states that property value is maximized when the characteristics of a property are in conformance with market expectations and demands. Conformity applies to both private preferences of buyers and renters (style, size, quality) as well as governmental regulations (zoning ordinances, building codes, land use restrictions). Stated simply, the more a property and its components are in harmony with the surrounding properties, the greater the contributory value. Conformity is sometimes referred to as homogeneity. Highest and best use will generally conform to the permitted uses due to zoning regulations and private restrictions.
Example 1: A homeowner adjacent to a large university declines an offer from the university to purchase his property. Over time, his home most likely will decline in value after surrounding parcels are improved with classroom and office buildings, parking lots, and other uses that are beneficial to the university, because the home will no longer be in conformity with its surroundings.
Example 2: A parcel of vacant land in a residential neighborhood is zoned to permit either apartments or professional offices. It is likely that construction of an apartment building would maximize property value, because it would be in conformity with the residential nature of the surrounding community.
Conformity:
An economic principle which states that value maximizes when a property is in conformity with the demands of market participants.
Conformity:
Conformity: An economic principle which states that value maximizes when a property is in conformity with the demands of market participants.
Consistent use:
A principle that states the site and improvements must be valued on the basis of the same use.
Consistent use:
Consistent use: A principle that states the site and improvements must be valued on the basis of the same use.
Consumption:
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt.
Contribution
Contribution holds that the value of a particular component of a property is dependent upon its contribution to the value of the entire property. For example, the contributing value of a new four-car garage to a property will be minimal if it is an over-improvement in the neighborhood. However, if this type of garage is common for the market area and property type, then value may increase commensurate with the cost of the garage.
Contribution:
The value of a component of property depending upon its contribution to the value of the whole property. This principle is also known as marginal productivity.
Contribution:
Contribution: The value of a component of property depending upon its contribution to the value of the whole property. This principle is also known as marginal productivity.
Cost Approach:
Cost Approach: One of three appraisal methods used for estimating value that involves a separate value for the site and the present value of the improvements less accrued depreciation and obsolescence.
Cost:
Cost: Is the amount expended (labor and/or materials) to produce an item.
DCF
discounted cash flow analysis
DCR
debt coverage ratio
Debt coverage ratio (DCR).
debt coverage ratio (DCR). The ratio of net operating income to annual debt service (DCR = NOI/IM), which measures the relative ability of a property to meet its debt service out of net operating income; also called debt service coverage ratio (DSCR). A larger DCR typically indicates a greater ability for a property to withstand a reduction of income, providing an improved safety margin for a lender.
Debt coverage ratio (DCR):
Debt coverage ratio (DCR): The ratio that indicates the property is producing adequate income to cover the loan payment. This ratio assists investors and lenders with their investment decisions. A DCR less than “one” means a property does not produce adequate income to make the loan payment.
Delta (Δ)
In mathematics, change in a variable, symbolized by the upper case Greek letter delta. For example,Δx means “change in the variable x.”
Demand segmentation:
Demand analysis that includes the investigation and identification of the most probable user including his or her preferences based on behavioral, motivational, and psychological factors.
Demand segmentation:
Demand segmentation: Demand analysis that includes the investigation and identification of the most probable user including his or her preferences based on behavioral, motivational, and psychological factors.
Demand:
The desire for a specific good or service.
Demand:
Demand: The desire for a specific good or service.
Demographics:
Demographics: The study of a population and its characteristics such as age, sex, familial status, occupation, income levels, etc.
dependent variable
The variable being estimated (outcome or response variable) in a predictive model such as a multiple linear regression equation.
Depreciation:
Depreciation: The difference between the cost of the improvements if it were new, and the present value of the improvements. Land does not “depreciate” or “wear out” so depreciation does not apply to the land.
Descriptive statistics:
Descriptive statistics: The study of methods and tools in statistics for collecting data and mathematical models to describe and interpret data.
Desire:
The motivation of an individual, group of persons, or business entity to purchase property.
Desire:
Desire: The motivation of an individual, group of persons, or business entity to purchase property.
Developer:
A person or company who purchases a tract of vacant land and develops the real estate with improvements to yield a profit.
Developer:
Developer: A person or company who purchases a tract of vacant land and develops the real estate with improvements to yield a profit.
Development patterns:
Patterns of growth that would affect consumer behavior in an area such as a river, forest, topography, transportation, etc.
Development patterns:
Development patterns: Patterns of growth that would affect consumer behavior in an area such as a river, forest, topography, transportation, etc.
Development process:
A process of real estate development whereby vacant land is identified, purchased and a design concept implemented.
Development process:
Development process: A process of real estate development whereby vacant land is identified, purchased and a design concept implemented.
Direct capitalization.
A method used to convert an estimate of a single year’s income expectancy into an indication of value in one direct step, either by dividing the net income estimate by an appropriate capitalization rate or by multiplying the income estimate by an appropriate factor. Direct capitalization employs capitalization rates and multipliers extracted or developed from market data. Only one year’s income is used. Yield and value changes are implied but not explicitly identified.
Discounted cash flow analysis (DCF)
The procedure in which a discount rate is applied to a set of projected income streams and a reversion. The analyst specifies the quantity, variability, timing, and duration of the income streams and the quantity and timing of the reversion, and discounts each to its present value at a specified yield rate.
Discounted cash flow:
Discounted cash flow: In finance, the discounted cash flow (or DCF) approach describes a method of valuing a project, company, or asset using the concepts of the time value of money, by discounting future cash flows to present value.
Discounting
- Conversion of benefits received in the future (e.g., periodic incomes, cash flows, reversion) to present value. 2. Money paid at the beginning of a time period for the use of capital during that period; commonly deducted from the principal when the funds are advanced.
Discounting:
Discounting: The method used to allow for loss of compound interest which money would typically earn if not invested in real estate. It is commonly used to convert anticipated future cash flows into a current value.
Due diligence:
Due diligence: The process of exerting reasonable effort while compiling information for an analysis.
Econometrics:
Econometrics: The application of mathematical and statistical techniques to economic data and problems.
Economic base analysis:
This type of market analysis is the study of a specific macroeconomic market area along with the supply and demand factors for a specific property type focusing on local economics.
Economic base analysis:
Economic base analysis: This type of market analysis is the study of a specific macroeconomic market area along with the supply and demand factors for a specific property type focusing on local economics.
Economic Influences
Economic Influences relate to the financial capability of the market area occupants to own, rent, maintain, and/or renovate a property. The economic influences that an appraiser considers while performing the analysis include:
Development trends
Employment
Income levels for households
Occupancy versus rental levels
Trends of property values
Vacancy rates
Effective purchasing power:
Occurs when a prospective purchaser has enough disposable income available to satisfy his or her desires, needs, and wants.
Economics:
Economics is the social science that studies the production, distribution, and consumption of goods and services.
Economics:
Economics: Economics is the social science that studies the production, distribution, and consumption of goods and services.
Effective gross income multiplier:
Effective gross income multiplier: The EGIM is the sales price divided by the effective gross income at stabilized occupancy. This calculation is utilized for investment properties.
Effective gross income:
Effective gross income: The amount remaining after vacancy and collection loss is subtracted from potential gross income and miscellaneous income.
Effective purchasing power:
Effective purchasing power: Occurs when a prospective purchaser has enough disposable income available to satisfy his or her desires, needs, and wants.
EGI
effective gross income
EGIM
effective gross income multiplier
Ellwood Tables:
Ellwood Tables: Financial tables originally published in 1959 by their formulator, L.W. Ellwood, which were used to formulate computers and pocket calculators to solve mortgage-equity problems (See also “Six functions of dollar”)
Eminent domain:
The power of a government to take private property for public use, usually with compensation paid to the owner.
Eminent domain:
Eminent domain: The power of a government to take private property for public use, usually with compensation paid to the owner.
Environmental conditions
Environmental conditions consist of any artificial or natural features that affect a market area. These features include:
Attractiveness of area
Climate (temperatures, rainfall, dust, wind, etc.)
Features important to wildlife
Hazards of surrounding properties (smell, noise, trash, etc.)
Land use patterns (currently and in the possible future)
Liabilities (land slide, flooding, etc.)
Maintenance of subject and surrounding properties
Open space
Property size
Public utilities (electric, water, gas, sewer, cable, etc.)
Subsurface terrain (marsh, rock, clay, sand, etc.)
Topography (terrain and vegetation)
Transportation (railway, commuter buses, etc.)
Waterways
Equity dividend
The portion of net operating income that remains after total mortgage debt service is paid but before ordinary income tax on operations is deducted; also called equity cash flow.
Equity:
The value of a piece of property over and above any mortgage or other liabilities attached to it.
Equity:
Equity: The value of a piece of property over and above any mortgage or other liabilities attached to it.
Example: The average per capita income is $11,855, while the average household income is $23,776. This information estimates that there are two income-generating persons in each household, and one child.
Question: Why is the average household income important?
Question: Why is the monthly household allowance important?
.
Answer: The household income predicts the amount of typical monthly household allowance
Answer: The monthly household allowance helps determine if there is a need for the subject property.
Expert:
An expert is someone who has successfully completed formal study, experience, and passed a state licensing exam, where applicable.
Expert:
Expert: An expert is someone who has successfully completed formal study, experience, and passed a state licensing exam, where applicable.
External obsolescence:
External obsolescence: Factors or circumstances that originate from outside the subject property that decrease a property’s value. Examples include nuisances or hazards, reduced highest and best value due to rezoning, or economic recession.
Externalities
Externalities is a principle which holds that an item or event external to the boundaries of the property can have a positive or negative impact on the property. External factors affecting the value of a property can be national or international in scope, such as a recession or economic crisis. These factors can also be regional or local, such as a local employer shutting down, or a new freeway being constructed. External factors may also be specific to a single property or a small number of properties, such as a wastewater treatment plant located immediately adjacent to an apartment building.
Example: A small industrial park in a semi-rural area sees a marked increase in demand and property values after a new highway interchange is constructed one-half mile away
Externality:
An economic principle pertaining to an item or event, which is external to the boundaries of the property. It can have a positive or negative effect on the property. Many of the forces that affect or influence real estate values pertain to governmental, physical, economic, and social factors.
Externality:
Externality: An economic principle pertaining to an item or event, which is external to the boundaries of the property. It can have a positive or negative effect on the property. Many of the forces that affect or influence real estate values pertain to governmental, physical, economic, and social factors.
Extracting adjustments - Cost Analysis
Cost Analysis
In a previous chapter, we covered the principle of contribution, which states that the value of a particular feature or attribute of a property is based upon its contribution to the property. We are also aware that cost does not necessarily equal value. However, if an appraiser is somehow able to establish a link between cost and value, this link can sometimes be used to estimate adjustment amounts.
Example: An appraiser is trying to estimate an adjustment for an outdoor all-weather sports court which is part of an agricultural-residential property. This court is new, and was installed at a cost of $80,000. The appraiser has no sales of properties with sports courts in order to extract an adjustment. The appraiser is able to analyze sales of properties with in-ground swimming pools; this analysis indicates that pools contribute 40% of their cost in value to the property. Because both pools and sports courts are recreational amenities with similar seasonal capabilities for use, the appraiser estimates that this 40% ratio of cost to value would likely be applicable. The appraiser applies this 40% factor to the cost of the subject’s sports court (i.e., its contribution to value is 40% of its cost) and makes an adjustment of $32,000 to each of the comparable sales for this amenity.
Extracting adjustments - Linear Regression
Linear Regression
Regression analysis is somewhat similar to paired sales analysis, in that actual sales of properties are analyzed, and adjustments extracted based on the comparisons. What distinguishes regression analysis from paired sales analysis is that regression analysis usually depends on computer-based applications or programs, and requires larger sample sizes. Of course, regression analysis can be accomplished with smaller sample sizes, but like any other statistical application, it becomes more reliable as the sample sizes become larger.
Simple regression utilizes only one independent variable. For example, we can analyze sale prices of commercial lots, using the size as the independent variable and the sale price as the dependent variable. After all, the sale price is dependent upon the lot size. This can easily be done by an appraiser, even without the help of a computer, with just a piece of graph paper.
Multiple regression is more complex, and can be used to estimate adjustment amounts for several variables at once. In order for this analysis to be credible, it requires a computer program and a large amount of reliable data.
Extracting adjustments - Market Survey Method
This method is sometimes also called the contingent valuation method (CVM), or stated preference method.
The market survey method is just what it says: an appraiser will survey market participants, including buyers, sellers, renters, brokers, salespersons, property managers, other appraisers - anyone with market knowledge that could possibly be in a position to help the appraiser come up with an adjustment. After the appraiser surveys a sufficient number of individuals, a pattern should develop, which the appraiser can use as the basis for an adjustment. This type of technique is particularly useful when appraising stigmatized properties, properties that are subject to construction defects, or properties with structural stability issues.
Extracting adjustments - Rent Analysis
Rent Analysis
The Rent Analysis method of extracting adjustments is based on analysis of the additional rent that a feature would command in the market. This type of analysis can be applied to all types of properties, but it is most applicable to income-producing properties.
Simply put, the amount of rent that is attributable to a particular feature or attribute is isolated. These rental amounts can be compared and a percentage adjustment extracted, or the additional rent may be multiplied by a GIM or divided by a capitalization rate to extract a contributory value for that feature. This analysis also can be applied in reverse; the rent loss due to a property’s lack of a particular feature can also be multiplied or capitalized to arrive at an adjustment amount.
Fair Market Value (FMV):
Fair Market Value (FMV): A term used in both law and accounting based on the economic term of “market value.” It is the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.
Fair Market Value (FMV):
Fair Market Value (FMV): A term used in both law and accounting based on the economic term of “market value.” It is the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.
FASB
Financial Accounting Standards Board
Fee simple absolute:
Fee simple absolute: Fee simple estate is absolute ownership of real property, limited by the four basic government powers of taxation, eminent domain, police power, and escheat as well as encumbrances or conditions in the deed
Fee simple absolute:
Fee simple absolute: Fee simple estate is absolute ownership of real property, limited by the four basic government powers of taxation, eminent domain, police power, and escheat as well as encumbrances or conditions in the deed.
Fee simple ownership:
Absolute ownership of real property, limited only by the government powers of taxation, police power, eminent domain, and escheat. In addition, fee simple ownership could also be limited by certain encumbrances such as the mortgage loans, deed restrictions, unpaid taxes, easements, mechanics’ liens, and leases.
Fee simple ownership:
Fee simple ownership: Absolute ownership of real property, limited only by the government powers of taxation, police power, eminent domain, and escheat. In addition, fee simple ownership could also be limited by certain encumbrances such as the mortgage loans, deed restrictions, unpaid taxes, easements, mechanics’ liens, and leases.
Fieldwork:
Fieldwork: Market research by a personal visit to a real estate property to interview tenants, neighbors, etc. for compiling property and location data.
Financially feasible:
Financially feasible: A criteria within highest and best use analysis that requires that a use must produce a positive return on investment.
Financially feasible:
Financially feasible: A criteria within highest and best use analysis that requires that a use must produce a positive return on investment.
FIRE (finance, insurance, real estate):
FIRE (finance, insurance, real estate): The study of capital and income that characterizes the financial services industries as part of the SIC/NAIS breakdown of types of industry: finance, insurance, and real estate. The SIC was replaced by the North American (Canada, USA, Mexico) Industry Classification System (NAICS) in 1997.
FIRE (finance, insurance, real estate):
FIRE (finance, insurance, real estate): The study of capital and income that characterizes the financial services industries as part of the SIC/NAIS breakdown of types of industry: finance, insurance, and real estate. The SIC was replaced by the North American (Canada, USA, Mexico) Industry Classification System (NAICS) in 1997.
A knowledgeable person would not pay more for a used property than a new property.
Cost and value may be equal under the following circumstances:
- The property is new or proposed
- The improvement represents the highest and best use of the property
- Supply and demand are in balance
Formulas for
Capitalization Rate (CR)
Gross Rent Multiplier (GRM)
Expense and Vacancy Rate (EVR)
Capitalization Rate
CR = NET Operating Income / Value
Gross Rent Multiplier / Gross Income Multiplier
GRM = Value / GROSS Income
Expense and Vacancy Rate
EVR = 1 - GRM x CR
Frequency Distribution
Frequency Distribution
A frequency distribution uses both qualitative and quantitative data placed in a table. This table summarizes groups of data and observations divided into specific classes as well as the number of occurrences in each class. In other words, class frequencies are the number of observations in each class. By organizing the data, results can show a variety of information such as income distributions for an area, sales prices of properties in a market area within a certain period of time, or other data that is important in a real estate appraisal.
Typical graphs used with frequency distributions are column and bar charts, histograms, line graphs, and pie charts. The various types of graphs and charts are demonstrated after the example of a frequency distribution chart.
Functional obsolescence:
Functional obsolescence: Imperfections in a property that cause a decrease in value such as poor design, ineffective utilization, outdated equipment, or super-adequacy.
Fundamental analysis:
Fundamental analysis: A fundamental analysis forecasts demand based on specific information within the subject market. For instance, the appraiser utilizes capitalization rates for specific types of properties within the subject market area to estimate the value of the subject. This analysis relies on the appraiser’s problem-specific data searches, interviews, and surveys: known as primary data.
Fundamental capture method:
Fundamental capture method: A method that compares the subject’s share of the market, adjusts the subject to the competition using quantifiable rating techniques, calculates the subject’s historical capture rate, and other factors.
GAAP
generally accepted accounting principles
General data:
General data: Relates to information appropriate for many properties, which includes all of the four forces (social, economic, environmental/physical, and governmental).
General data:
General data: Relates to information appropriate for many properties, which includes all of the four forces (social, economic, environmental/physical, and governmental).
General merchandise, apparel, furniture and other (GAFO):
General merchandise, apparel, furniture and other (GAFO): In retailing, general merchandise such as apparel, furniture, etc.
General merchandise, apparel, furniture and other (GAFO):
General merchandise, apparel, furniture and other (GAFO): In retailing, general merchandise such as apparel, furniture, etc.
Gentrification:
Gentrification: The principle that an older lower-valued area, often an inner-city neighborhood, can be revitalized as properties are renovated or remodeled.
Gentrification:
Gentrification: The principle that an older lower-valued area, often an inner-city neighborhood, can be revitalized as properties are renovated or remodeled.
GIM
gross income multiplier
GLA
gross leasable area
Going concern value:
Going concern value: A type of value used for properties such as a restaurant or hotel which includes both tangible and intangible assets of an established and operating business with an indefinite life, as if sold in aggregate. Now considered an outdated term by many within the appraisal profession, it has largely been replaced by the term market value of the going concern.
Going concern value:
Going concern value: A type of value used for properties such as a restaurant or hotel which includes both tangible and intangible assets of an established and operating business with an indefinite life, as if sold in aggregate. Now considered an outdated term by many within the appraisal profession, it has largely been replaced by the term market value of the going concern.
Goods and Services:
Goods and Services: An economic output divided into physical goods and intangible services.
Goods and Services:
Goods and Services: An economic output divided into physical goods and intangible services.
Governmental influences
Governmental influences pertain to the laws that affect properties in the market area as well as the enforcement of these laws. The governmental influences an appraiser considers and analyzes include:
Building, housing, and sanitary codes
Code enforcement
Environmental regulations
Land use
Local development levies (impact fees)
Police and fire protection
Rent controls
School districts
Special assessments
Taxation
Traffic patterns
Zoning
Gravity models:
Gravity models: A model within market delineation that predicts and describes behaviors that imitate gravitational interaction such as public transportation or real estate demand.
Gravity models:
Gravity models: A model within market delineation that predicts and describes behaviors that imitate gravitational interaction such as public transportation or real estate demand.
GRM
gross rent multiplier
Gross income multiplier:
Gross income multiplier: The sales price divided by the gross income generated by the property; does not account directly for vacancy, collection loss, or operating expenses.
Growth or expansion:
Growth or expansion: The preliminary stage in a life cycle that refers to increased development of an area.
HBU
highest and best use
Highest and best use:
Highest and best use: The reasonably probable and legal use of vacant land or an improved property which results in the highest value as a result of applying the four test criteria: physically possible, legally permissible, financially feasible, and the maximally profitable.
Highest and best use:
Highest and best use: The reasonably probable and legal use of vacant land or an improved property which results in the highest value as a result of applying the four test criteria: physically possible, legally permissible, financially feasible, and the maximally profitable.
i
nominal rate of interest
Impact fee:
Impact fee: A fee required by local governments for proposed real estate development that helps the locality pay for costs of public services to the new development such as water, sewer, public schools, etc. These fees typically help the locality reduce the economic burden because of population growth within the area.
Impact fee:
Impact fee: A fee required by local governments for proposed real estate development that helps the locality pay for costs of public services to the new development such as water, sewer, public schools, etc. These fees typically help the locality reduce the economic burden because of population growth within the area.
Improved property:
Improved property: An addition to vacant land that increases the value such as a residential home, commercial property, streets, electric, or sewerage system.
Improved property:
Improved property: An addition to vacant land that increases the value such as a residential home, commercial property, streets, electric, or sewerage system.
In the Sales Comparison Approach, elements of comparison can be placed into two categories: intangible and tangible. Intangible are also sometimes called _____________ and are _______________
transactional adjustments
Property rights conveyed
Financing
Conditions of sale
Market conditions (time)
In the Sales Comparison Approach, elements of comparison can be placed into two categories: intangible and tangible.
Tanglible are also sometimes called ____________ and are _____________
property adjustments
Tangible or property differences between the comparable sales and the subject include:
Location, visibility, traffic patterns, market appeal, size, zoning, age, view, quality, and condition of improvements, or other factors.
Income capitalization approach:
Income capitalization approach: Also known as the Income Approach. One of three appraisal methods based on the concept that a property’s value relates to its income-producing potential.
Increasing/decreasing returns:
Increasing/decreasing returns: An economic principle that states a feature, repair, addition, etc. might increase or decrease real estate values. As such, the laws of increasing or decreasing returns state that beyond a certain point, adding additional features may or may not increase value.
Increasing/decreasing returns:
Increasing/decreasing returns: An economic principle that states a feature, repair, addition, etc. might increase or decrease real estate values. As such, the laws of increasing or decreasing returns state that beyond a certain point, adding additional features may or may not increase value.
Inefficient market:
Inefficient market: A market that is characterized by an uneven flow of information, with goods and services that are not easily produced or transferable.
Inefficient market:
Inefficient market: A market that is characterized by an uneven flow of information, with goods and services that are not easily produced or transferable.
Inference:
Inference: An assumption of the future instead of the known conclusion.
Inferential or inferred analysis:
Inferential or inferred analysis: The inferred analysis, often referred to as a trend analysis, is a technical analysis utilized to forecast changes in future value by analyzing historical information. An inferred analysis is not specific to a particular property or subject. A technique or analysis that compares the subject to general market indicators such as comparable property data, secondary data surveys and forecasts, the subject’s historical performance, local economic analysis, and other factors.
Inferential statistics:
Inferential statistics: The systems and techniques in statistics for making probability-based decisions and accurate predictions based on incomplete (sample) data.
Information asymmetry:
Information asymmetry: During the negotiation process, only one party is privy to important information that may affect the outcome of the transaction. Information asymmetry causes inefficient markets, since not all the market participants have access to the information needed for their decision-making processes.
Information asymmetry:
Information asymmetry: During the negotiation process, only one party is privy to important information that may affect the outcome of the transaction. Information asymmetry causes inefficient markets, since not all the market participants have access to the information needed for their decision-making processes.
Intangible:
Intangible: An item typically described in economics, accounting, or financial transactions as a saleable portion of a property or business that does not possess inherent productive value; incapable of being touched.
Internal rate of return (IRR).
The annualized yield rate or rate of return on capital that is generated within an investment or portfolio over a period of ownership. Alternatively, the indicated return on capital associated with a projected or pro forma income stream.
IRR
internal rate of retur
Land residual technique
Land residual technique. A method of estimating land value in which the net operating income attributable to the land is isolated and capitalized to produce an indication of the land’s contribution to the total property.
Law of Diminishing Returns
Law of Diminishing Returns states that if a feature, repair, addition, or other improvement will increase real property value, there is a point where a more elaborate feature, a more expensive repair, a larger addition, or a more significant improvement will no longer add value commensurate with its cost. This point is known as the point of decreasing returns.
Example: Renovating the facade of an older shopping center may be a wise investment, which will increase the value and attract new tenants. However, tearing up and resurfacing the parking lots and access roads in order to improve traffic flow may not result in additional income or value.
Leased fee interest:
Leased fee interest: The property owner’s ownership interest in a property that is subject to a lease agreement.
