III. PROPERTY VALUE AND APPRAISAL Flashcards
Defined as the price a willing seller
will sell for and the price a willing buyer will pay when neither is acting under exceptional pressure.
Market value
The most significant type of value for real estate licensees is market value.
Market value is also defined as the most probable price.
Market value is most commonly associated with the price a party pays for a property.
There are four basic characteristics of value: (DUST)
- Demand – there must be a demand for the item and the purchasing power to acquire it.
- Utility – the item must be needed or wanted.
- Scarcity – there must be a limited supply.
- Transferability – the item must be able to be sold – ownership rights must be transferable.
Appraisers use Principles of value to help them arrive at their final opinion.
(Appraisers Use Arm’s Length)
These Principles of value include:
- Highest and Best Use - the legal use that gives the greatest return in money and/or amenities.
*Highest and best use can be considered the most important detail by an appraiser.
- Principle of Substitution - sets an upper limit on price. Maximum value of a property is
set by the cost of acquiring a similar SUBSTITUTE property. This principle is used to demonstrate the need to price correctly. An overpriced property will not sell. - Principle of Conformity - states that maximum value is found when properties are the
same or have a reasonable degree of similarity. (Price range, amenities, size, etc.) - Principle of Increasing and Decreasing Returns - invest in property whenever each
dollar invested will return a dollar or more of increased value and stop when each dollar
invested returns less than a dollar in value. The result of over-improving a property is also
referred to as the Law of Diminishing Returns. - Principle of Contribution -the value of a part is determined by its contribution to the
total value of the property rather than by its cost. - The Principle of Regression - the presence of lower-valued or declining-valued properties
in the neighborhood leads to a decline in the value of your property. Conversely, the presence
of higher-valued properties will increase the value of your property, and this is called
the Principle of Progression. - The Principle of Competition – an increase in competition will result in decreased profits
for current providers. Competition lowers prices. Success leads to competition. For example,
a very profitable restaurant will usually find a competitor opening nearby. - The Principle of Change – change is constant and is reflected in values. Appraisers must
make adjustments for changes in market conditions and for time. An appraisal is only considered
to be good for six months. - The Principle of Anticipation – purchase price is affected by the expectation of future
appeal and benefits. - The Principle of Balance – mixed land use should result in maximum value for all properties
involved (master-planned communities demonstrate this principle).
In addition to the principles of value, an appraiser must be aware of the other factors that can affect
value, including market cycles, political actions, economic forces -(rising interest rates can lower
prices), physical or environmental forces, and sociological forces.
The steps in the Appraisal Process are:
- State the purpose of the appraisal.
- Collect and verify information about the property.
- Estimate value using all three approaches, or as many approaches as needed to get the best
result. - Reconcile the estimates by determining weighted averages. This step is necessary because
the third step will result in up to three different values. Reconciliation completes the process
of determining an exact number rather than a range of value. - Prepare the report. It may be oral, in a letter, on a form, or a narrative report.
This law requires the use of a state-licensed or state-certified
appraiser to perform any appraisal used in connection with a federally related transaction of property valued above the statutory limit.
FIRREA - the Financial Institutions Reform, Recovery, and Enforcement Act was passed to regulate the appraisal industry nationwide.
Transactions requiring an appraisal include those involving the courts and those meeting FIRREA guidelines.
For example, cases heard to settle an estate when a will is challenged, challenges to Eminent
Domain awards, and cases of partition.
Although an appraisal is not required for a cash sale, many buyers choose to have one to protect themselves.
Primarily in RESIDENTIAL appraisals.
It involves COMPARISONS with known sales in the SAME area.
The Market Data Approach
An appraiser should have 3-5 sales no more than 6 months old.
In using this approach, the appraiser will:
ADD to the value of comparables when the SUBJECT property has MORE amenities
SUBTRACT from the comparables when the SUBJECT property has LESS.
Used for UNIQUE properties, such as Churches or Government buildings.
*It is also used when there are no comparables for a particular property.
The Cost Approach
Land Value + Building Reproduction Cost - Depreciation = Value (L+BC-D=V)
*Reproduction cost would be the cost to exactly duplicate a building.
- OR –
Land Value + Replacement Cost - Depreciation = Value (L+RC-D=V)
*Replacement cost is the cost to build a building of similar size and usefulness using today’s methods and materials.
The appraiser considers three types of Depreciation in the COST approach. They are:
- Physical deterioration is ordinary wear and tear. It is curable. This has the least impact on the
appraisal because all buildings have it (chipped paint, worn flooring). - Functional obsolescence is brought about by factors in the property. It is often or mostly curable
(inferior materials to cut costs, curb appeal, not enough baths/bedrooms, an unpopular
floorplan, property that lacks updating for modern technology). - Economic obsolescence is a loss of value due to outside factors. This is also called external
obsolescence and is incurable (zoning, air pollution, noise, traffic, jobs, etc.) It is also called
environmental obsolescence.
Approach used for INCOME-producing properties.
The Income approach
or
Capitalization method
The HIGHEST weighted criteria for an appraiser using this approach is the Net Annual Income,
which may also be called the Net Operating Income or NOI.
Net annual income = capitalization rate (rate of return) × market value.
A simple way to remember this is IRV. Income = rate x value.
Multiplier used for RESIDENTIAL properties.
(MONTLY RENT)
GRM and stands for Gross Rent Multiplier
The GRM is a factor based on location and rent – a price per rent.
To determine a neighborhood GRM use the average price divided by the average MONTHLY RENT.
For example, if the GRM is 150 and monthly rent on a single-family house is $1,000, then the value of the house is 150 × $1,000 = $150,000.
Multiplier used for COMMERCIAL properties
(ANNUAL RENT)
The GIM (Gross Income Multiplier)
based on ANNUAL rent rather than monthly rent.
Both the GRM and the GIM are appraisal tools. They are not approaches to appraisal.
The GIM is sometimes described as, “an appraisal tool with a YEARLY component in the calculation.”
A tool used by licensees to help sellers determine a REALISTIC
price for their property.
A Comparative Market Analysis (CMA)
A CMA compares a subject property to current listings, recent sales, and even expired listings of unsold properties.
The information from expired listings is the least important part of the CMA.
The result of a CMA is a range of value for a property rather than an exact price.
It is not an appraisal. This is also called a competitive market analysis.
It is a BROKER’S written opinion of value.
A BPO or Broker’s Price Opinion (same as a CMA)
BPO’s can also be used by a lender involved in a “short sale” of a distressed property.
A broker usually will receive a fee for preparing a BPO.
A sales licensee can prepare a BPO in the broker’s name.
*It is most often requested by an attorney or a relocation company rather than by a principal to the transaction.
It is the VALUE of your property for TAX purposes
Assessed Value
The tax rate times the assessed value will tell you the yearly taxes.
Lists of assessed values for all the properties in a taxing district are found in the assessment rolls or online.
These can be used for comparison purposes.
It can be called a “transfer tax” or a “deed tax.”
It can be expressed as mills or as a rate per hundred.
It is based on the full sale price of the property regardless of any profit or loss for the seller.
*If the local government is providing a benefit to a limited number of property owners, such as curbs or sidewalks in a neighborhood a SPECIFIC ASSESSMENT TAX may be levied against only those property owners who benefit from the improvement.
*
Also called a property improvement district, the property owner will receive a tax bill, similar to a special assessment until the improvement is paid for or the improvement district designation is removed.
In other words, this can be temporary or permanent.
Municipal Improvement District
