Income Approach Definitions Flashcards
A projected income and expense statement for proposed development. See also reconstructed operating statement.
Pro Forma
An element of comparison in the sales comparison approach; comparable properties can be adjusted for the effects of differences in the real property rights (fee simple, leased fee, leasehold, easements, or other encumbrances, involved in the transactions being compared.
Real property rights Conveyed
An architectural style typified by a single-story, low roof construction.
Ranch
The interests, benefits, and rights inherent in the ownership of real estate. Also called realty.
Real Property (the rights)
Buyers and sellers of particular real estate and the transactions that occur among them.
Real Estate Market
An identified parcel or tract of land, including improvements, if any.
Real Estate
A remainder that has negligible economic utility or value due to its size, shape, or other detrimental characteristics; also called on economic remainder or uneconomic remnant. See also remainder.
Remnant. A small piece of land left over from assemblage or division that is not worth anything.
Briefly details the unit information, such as lease terms, contact rent, as well as the effective date of the leases that are in place for the property.
Rent Roll
Prepared by the appraiser, a reconstructed operating income statement reflects anticipated net operating income.
Reconstructed Operating Statement
The official responsible for maintaining records or deeds, mortgages and other recorded documents.
Recorder
In an urban area, the development or improvement of land that is undeveloped or has been cleared; technically includes the erection of buildings and other development and improvement of the land by private or public redevelopers to whom the land has been made available.
redevelopment
A lump sum benefit that an investor receives or expects to receive upon the termination of an investment; also called reversionary benefit.
Reversion
Money paid to an owner of real estate or the owner of mineral rights if different than the owner of the real estate, for the right to deplete natural resource (oil, gas, minerals, ect)
Royalty
A dwelling that is designed for human habitation.
Residence
An appropriation from surplus funds trhat is allocated to deferred or anticipated contingencies. In business, a credit account created to accumulated funds to retire debt or cover losses that are payable or expected to accrue in the future.
Reserve
An overall capitalization rate used to estimate the resale price of the property; usually applied to the anticipated stabilized income for the year beyond the holding period; also called terminal capitalization rate.
Residual Capitalization rate
think of the residual capitalization rate as a tool that investors use to predict the property’s value after they’ve owned it for some time and it’s fully stabilized, meaning it’s generating a consistent and predictable income.
The annual rate of return on capital that is commensurate with the risk assumed by the investor; the rate of interest or yield necessary to attract capital.
Risk Rate
The price expected for a whole property or a part of a property that is removed from the premises usually for use elsewhere.
Salvage Value
According to the Uniform Relocation Assistance and Real Property Acquisition Policy Act, a rule used in the establishment of just compensation. Any decrease or increase in the fair market value of real property, prior to the date of valuation, caused by the public improvement for which the property is to be acquired, or by the likelihood that the property would be acquired for improvement, other than that due to physical deterioration within the reasonable control of the owner, will be disregarded in determining the compensation for the property. (Uniform Relocation Assistance and Real Property Acquisition Policy Act of 1970 (P.L. 91-646) 42 USC. §4651 (3))
Scope of the Project Rule
In simple terms, the “scope of the project rule” is a guideline used when determining the fair compensation for real property that is being acquired by the government for public improvements like building roads, schools, or other infrastructure projects.
According to this rule, any changes in the property’s value that happened before the official valuation date, and are directly related to the government’s public improvement project or the likelihood of the property being acquired for that project, should not be considered when calculating the compensation for the property owner.
In other words, if the property’s value increased or decreased because of the upcoming public improvement project, that change in value should not be taken into account when determining how much the property owner should be compensated. This rule ensures that property owners are fairly compensated based on the property’s value as of the valuation date, regardless of any changes caused by the government’s project before that date. It helps to prevent property owners from being unfairly disadvantaged or overcompensated due to the public improvement plans.
A transaction in which real estate is sold by its owner-user, who simultaneously leases the property from the buyer for continued use. Under this arrangement, the seller receives cash from the transaction and the buyer is assured a tenant.
Sale-Leaseback
The minimum required rate of return on invested capital. Theoretically, the difference between the total rate of return and the safe rate is considered a premium to compensate the investor for risk, the burden of management, and the illiquidity of the capital invested; also called riskless rate or relatively riskless rate.
Safe Rate
A physical characteristic of real property that says there is a limited supply of real estate; the perceived supply of a good or service relative to the demand for the item.
Scarcity
The measure of the efficiency of insulation in a structure. R-values measure thermal resistance, which indicates whether or not the inside temperature is flowing to the outside. The higher the R value, the better the insulating properties.
R-value
Data that is compiled by other parties and used by the appraiser.
Secondary Data
A tax levied only against properties that benefit from a public improvement (e.g., a sewer or streetlight), to cover the cost of the improvement; this creates a special assessment lien, an involuntary lien.
Special Assessment
Permission granted by a local zoning agency that authorizes a use as a special exception to the applicable zoning. A special use permit in a residentially zoned area might allow for construction of a church or hospital. Such uses are considered conditional uses, only permitted upon the approval of the zoning authority. Sometimes referred to as a conditional use permit.
Special Use Permit
A financial institution which collects mortgage payments from borrowers and applies the appropriate portions to principal, interest and any escrow accounts.
Servicer
Similar to rezoning but typically has small or individual land parcels as its subject rather than an entire zone or area. In some jurisdictions spot zoning is not permitted.
Spot Zoning
Personalized evidence indicating authentication of the work performed by the appraiser and the acceptance of the responsibility for contents, analyses, and the conclusions in the report. USPAP
Signature
- The act of removing anything attached or affixed to land, or a part of the land itself, that causes a change of its character from real estate to personal property. 2. The separation of mineral ownership from land ownership; a conveyance of land in which mineral rights are excepted or reserved. 3. The termination of a joint tenancy or a tenancy in common. 4. Sometimes used as a synonym for severance damages.
Severance
In condemnation, the benefits that arise from the peculiar relation of the land in question to the public improvement, usually resulting from a change in its highest and best use. Special benefits may accrue to multiple parcels (such as all four quadrants of a newly constructed freeway interchange) because the parcels are directly benefitted in a similar manner, if not to the same degree
Special Benefits
In simple terms, “special benefits” refer to the advantages or positive changes in value that certain properties may experience due to a public improvement project, such as the construction of a new road or highway.
Here’s a straightforward explanation using an example:
Imagine that the government is building a new freeway, and one of the exits of this freeway will be a large interchange connecting four different roads. Each road represents a separate parcel of land owned by different people or entities. When the interchange is completed, these four parcels will experience specific benefits that arise because of their close proximity and easy access to the new interchange.
A method for determining the cost of a building that estimates the cost of reproducing it, by determining the unit cost of each of the component parts of the structure and adding them together based on actual need and usage.
Unit-In-Place Method
The interval when space (office, retail, etc.) is unoccupied after one tenant has left and before another has moved in; used in consideration of the gross income estimate in discounted cash floe (DCF) analysis.
Vacancy Window
The total amount of money that can be made from an investment.
Yield
The monetary relationship between properties and those who buy, sell, or use those properties, expressed as an opinion of the worth of a property at a given time. USPAP
Value
A unit or area of a building that is not rented
Vacancy
Data, information, and documentation necessary to support the appraiser’s opinions and conclusions and show compliances with USPAP. (USPAP)
Workfile
In condemnation, the process of determining just compensation by estimating the value of the portion to be acquired as part of the whole property plus the net damages; maybe referred to as a taking plus damages rule. See also before and after rule.
State Rule
“the before and after rule” or “the taking plus damages rule.”
The act of process of developing an opinion of value; an opinion of value. Of or pertaining to appraising and related functions such as appraisal practice or appraisal services.
Appraisal
A nonprofit private organization which is recognized by Congress as the authority for professional appraisal standards and appraiser qualifications.
Appraisal Foundation
An income approach to appraisal, with the overall rate of return, including discounted cash flow, considered.
Yield Capitalization
An independent board of the APPRAISAL FOUNDATION, which writes, amends, and interprets USPAP. The ASB is composed of up to seven appraisers appointed by the Foundation’s Board of Trustees. The ASB holds public meetings throughout the year to interpret and amend USPAP.
Appraisal Standards Board (ASB)
A building separate from the main structure on a property. Often used for a specific purpose, such as a workshop, storage shed or garage.
Accessory Building
A government’s valuation of property for tax purposes. 2. A special tax, usually used to pay for community improvements.
Assessment
An income capitalization technique that proportionally weights the interest charges and yields with respect to each segment of the financing.
Band of Investment Technique
In simple terms, the “band of investment” technique is an income capitalization method used in real estate to determine the overall rate of return on an investment property. This technique takes into account both the equity invested by the owner and the debt borrowed to finance the property.
Proportional Weights: The technique proportionally weights the interest charges (the cost of borrowing money) and the yields (the expected returns on the investment) based on the amounts of equity and debt used to finance the property.
By considering both the cost of borrowing and the expected returns, the band of investment technique helps determine the appropriate rate of return required by investors to justify investing in the property. This rate of return is also known as the “capitalization rate” or “cap rate,” and it’s a crucial factor in evaluating the profitability and attractiveness of the investment opportunity.
Housing where each unit shares a common wall, ceiling or floor with at least one other unit.
Attached Housing
The ratio of a property’s tax assessed value to market value.
Assessment Ratio
An appraiser’s opinions or conclusions, not limited to value, that were developed while performing an appraisal assignment, an appraisal review assignment, or a valuation service other than an appraisal or appraisal review.
Assignment Results
A means of setting construction standards, requiring builders to use particular methods and materials; regulations establishing minimum standards for construction and materials. (There are different building codes for different systems: Electric, plumbing, etc.)
Building Code
Two story houses with windows divided into small panes, usually with shutters. The main façade is detailed and symmetrical, generally with a center entrance. Architecture following the style of New England colonial houses.
What type of architectural style is noted by a house in which the second floor living area is 100% of the first floor living area and is very symmetrical with a centered door with windows equally spaced on both sides? (this means the second floor living room is just as big as the first floor.)
Colonial Architecture
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 in year’s income is used. Yield and value changes are implied, but not explicitly identified.
Direct capitalization
A one-story, home-style dating from the early twentieth century. Often characterized by a low-pitched roof.
Bungalow
Specific items of personal property which are installed in a real estate improvement such that they become part of the building. Built-in microwave ovens and dishwashers are common examples.
Built-Ins
An opinion, based on supporting market data, of the length of time that the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal.
Exposure Time
The overall capitalization rate obtained by dividing a property’s net operating income for the first year after purchase by the present value of the property.
Going-In Capitalization Rate
The use(s) of an appraiser’s reported appraisal or appraisal review assignment results, as identified by the appraiser based on communication with the client at the time of the assignment. (USPAP)
Intended Use
The annualized yield 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.
Internal Rate of Return
In easy-to-understand terms, the “internal rate of return” (IRR) is a measure used to calculate the overall rate of return on an investment over a period of time. It tells you how much your investment has grown or earned annually, on average, during the time you held it.
Here’s a simple explanation of how IRR works:
Imagine you invested some money in a project or property, and over several years, you received various cash flows from that investment, such as rental income or profits. The IRR is the rate at which the total value of all those cash flows grows each year.
For example, let’s say you invested $10,000 in a real estate project, and over five years, you received annual cash flows as follows:
Year 1: $1,000
Year 2: $1,200
Year 3: $1,500
Year 4: $1,800
Year 5: $2,200
To calculate the IRR, you find the interest rate that, when applied to these cash flows, makes the initial $10,000 investment grow into the sum of all the cash flows received over those five years. The IRR is expressed as a percentage.
The IRR represents the average annual return on your investment. A higher IRR indicates a better-performing investment because it means your money is growing at a faster rate. Investors use the IRR to compare different investment opportunities and assess their potential profitability.
Harriet is trying to establish an economic life for her subject property. She has found a comparable sale that is quite similar to her subject, and is located in the same market. It sold for $500,000 one month ago, and the sale price is reflective of market value. The building is 20 years old, and Harriet assumes the actual age is reflective of the effective age. The cost new of the building is $569,500. Harriet contacted the listing agent of the comparable and discovered that, prior to the sale, the comparable’s site had a ground lease with an NOI of $10,000 and a land cap rate of 10%. Given these data, what is the estimated economic life of the improvements of the comparable sale property?
The comparable site has an NOI of $10,000 and land cap rate of 10%. Therefore, $10,000/.10 = $100,000 land value. The sales price was $500,000 and is reflective of market value (i.e. it is a market price). The market price - $100,000 (site value) = $400,000 (value of the building). The RCN is $569,500; subtract the value of the building $400,000 to arrive at the accrued depreciation of $169,500. The total depreciation divided by the total RCN = $169,500/$569,500 = 30%. The percent depreciation divided by the effective age = the annual depreciation rate: 30%/20 = 1.5%. The age-life method states that the effective age divided by depreciation rate is equal to the economic life. By the same token, looking at the formula one-year-at-a-time gives us the total economic life of the comparable: 1/1.5% = 67 years (rounded). This problem illustrates how principles from all three approaches can be used synergistically to solve an appraisal problem.
If the market rent exceeds contract rent the difference is called
Deficit Rent
If the market rent (what the property should rent for) exceeds contract rent (what the property is rented for), from the owner’s perspective, the property is operating at a deficit.
If the contract rent exceeds market rent the difference is called
Excess Rent
If the contract rent (what the property is rented for) exceeds market rent (what the property should rent for), from the owner’s perspective, the property is operating at a surplus, or excess.
Property owner Bob is concerned about his roof cover. He wants to start saving to replace the roof cover, which has a useful life of 20 years. The estimated cost of the roof cover will be $40,000. Using a straight-line method, what is the estimated replacement reserve for the roof?
The replacement reserve is the non-cash set-aside to save for items that will have to be replaced. Examples include roof covers, water heaters, ect.The straight-line method ignores the fact that these reserves could be in interest-bearing accounts with principal and interest accruing over the term. According to the straight-line method the replacement reserve is: $40,000 replacement in 20 years = $40,000/20 years = $2,000/year.
Operating expenses include
Operating expenses are deducted from effective gross income to derive net operating income and include
fixed expenses,
variable expenses, and
reserves for replacement.
Janet is appraising a 3-unit building. Her discussions reveal the following data: Unit 1 has experienced 3 months’ vacancy over the last year. Unit 2 has had 1 month. And Unit 3 has had 2 months. Assuming the vacancy rate remains stable for the upcoming year, what is the forecasted vacancy rate?
Unit 1 has been vacant 3 months out of 12. Unit 2 has been vacant 1 month out of 12. Unit 3 has been vacant 2 months out of 12. That is 6 vacant months out of a total of 3 x 12 = 36 months. 6/36 = 16.7%
Pre-tax cash flow (PTCF) is
NOI minus accumulated tax reserves
The pre-tax cash flow (PTCFAA) is the MOI minus annual debt service. It is also known as the equity dividend.
The operating expense ratio (OER) can be expressed as
1 - NIR (where NIR is the net income ration)
The OER is operating expenses (OE) divided by the effective gross income (EGI), or OE/EGI.
OER and NIR are complementary; that is, they add up to 100%.
Therefore, 1.00 - OER = NIR and 1.00 - NIR = OER.
The debt coverage ratio (DCR) is
NOI/Debt service
The DCR is NOI/debt service. The DCR measures the adequacy of NOI to cover the debt service. Lenders often look to this performance measure to see if the investment is efficacious.
Now, to remember the order of division, think about the “top” and “bottom” parts of the fraction:
The capitalization rate (Ro) is the
Rate of return of and on investment
The capitalization rate reflects the rate of return of investment (getting your original investment back) and the rate of return on investment (receiving interest on your investment).
In simpler terms, the cap rate helps you understand both how soon you might get your initial investment back and how much extra money you could make from the property every year. It’s a way to compare different investment opportunities and decide which one might be a better choice based on how quickly you can recover your money and how much “interest” you’ll earn.
Remember, a higher cap rate doesn’t always mean a better investment because it might come with higher risks or other factors to consider. And a lower cap rate doesn’t necessarily mean a bad investment if there are other advantages, like lower risks or potential for property value appreciation. It’s just one tool to help you make informed decisions about your investments.
The Net Income Ratio is the ________________ of the Operating Expense Ratio.
Complement
The net income ratio (NIR) is NOI/EGI. The operating expense ratio (OER) is operating expenses/EGI. If the NIR is .30, then the OER must be .70; in other words they add up to 100%, which means they are complementary.
The break-even ratio measures
The occupancy level at which the property can cover operating expense and debt service.
The break-even ratio is (operating expenses plus debt service)/PGI.
Say the expenses are $40,000 and debt service is $50,000. If PGI = $100,000 then: ($40,000 + $50,000)/$100,000 = .90.
The subject breaks even at 90% occupancy.
The loss of income due to non-payment of scheduled rent is called
Collection Loss
The loss of income due to non-payment of scheduled rent is called collection loss. This is usually a more insidious problem than mere vacancies, because a collection loss infers the presence of tenants who are not paying rent and who are, therefore, undergoing eviction proceedings.
The relationship between the capitalization rate and the value is
Inverse
If the NOI is constant and the rate increases, the indicated value drops. Conversely, if the rate declines, the indicated value rises. Capitalization rates and values therefore have an inverse relationship.
Pre-tax cash flow is also known as the
Equity dividend
The relationship between the net income multiplier (NIM) and the capitalization rate (Ro) is
Reciprocal
If the net income multiplier (NIM) is value / net income (NOI), and
the capitalization rate (Ro) is NOI/Value, then
Ro = 1/NIM (and the opposite is also true: NIM = 1/Ro). Therefore NIM and Ro are reciprocal.
The loan constant is:
the capitalization rate of the loan
Debt service/(loan amount). value of the loan
The loan constant is higher than the interest rate because the loan constant represents the return on (interest) and the return of (principal) investment to the lender.
What is the relationship between the level of risk and the capitalization rate?
A high level of risk equals a high capitalization rate. A high level of risk implies a high possibility of loss on the investment, a high-risk property will have a lower selling price or value.
Ad valorem taxs, hazard insurance premiums, and utilities are all
operating expenses.
Deb service is the principal and interest payment made to the lender, and is not an operating expense.
An investment property has an NOI of $24,000 per annum and an OER of 40%. The EGIM is 15. What is the indicated value of the property?
The OER is 40%, therefore the NIR is 60% $24,000/.60 = $40,000 EGI x 15 = $600,000.
Absolutely, in really easy terms:
When you take $24,000 and divide it by 0.60 (which is the same as 60%), you’re figuring out how much the original income (before expenses) would be if only 40% is spent on expenses. This gives you an effective gross income.
So, $24,000 divided by 0.60 equals $40,000. This $40,000 is the effective gross income, which means it’s the income after subtracting only the expenses (in this case, 40% of the original income).
This helps us understand how much money the property is making after accounting for its expenses.
What is the process to determine land residual?
Determining land residual value involves estimating the value of a piece of land based on the potential income it can generate when a development is built on it. This method is often used in real estate to evaluate the value of land for development purposes. Here’s a step-by-step process to determine land residual value:
Understand the Basics:
The land residual method takes into account the potential income from a future development on the land and subtracts the costs associated with that development. The result is an estimated value of the land itself.
Estimate Future Income:
Determine the potential income that the development (like an office building, apartments, etc.) on the land could generate. This includes factors like rent, lease payments, or any other revenue sources.
Calculate Future Expenses:
Estimate all the costs associated with operating the development. This includes operating expenses, maintenance costs, property management fees, and any other relevant expenses.
Determine Net Operating Income (NOI):
Subtract the estimated expenses from the potential income to get the net operating income (NOI). This is the income generated by the development after expenses.
Research Capitalization Rates:
Look for market data on capitalization rates for similar developments in your area. The capitalization rate (cap rate) is the rate of return an investor expects to receive based on the income from the property. It’s used to convert the income into an estimated property value.
Calculate Property Value:
Divide the NOI by the chosen cap rate to estimate the value of the developed property. This gives you the total property value if the development were already in place.
Subtract Development Costs:
Deduct the estimated costs of constructing the development from the calculated property value. This includes construction costs, permits, design fees, and any other expenses related to building the development.
Land Residual Value:
The remaining value after subtracting the development costs is the land residual value. This represents an estimate of the value of the land itself, considering its potential to generate income through the development.
Compare to Market Data:
It’s essential to compare your land residual value with recent sales of similar vacant lands in the area. This helps ensure that your estimation is in line with the market trends.
Consider Risk and Market Trends:
Take into account any risks associated with the development, as well as the current market conditions. If the market is volatile or demand for the specific type of development is uncertain, adjust your calculations accordingly.
The cost to construct the subject residence is $150.25/SF. The effective date is March 10. The effective age is 10 years; the actual age is 25 years. The subject residence has experienced recent remodeling. The gross living area of the house is 2,125 SF. The remaining economic life is 65 years. The land to building value ratio in the subject neighborhood is 25%. Given the above data, which of the following ranges best represents the subject’s land value?
90,000 - $95,000
( The land to value is figured on the value of the building new)??
The cost approach formula is: C - D + V(L) = V(O). Therefore: the cost is 2,125 SF @ $150.25/SF or $319,281.25. The age-life method of calculating depreciation uses effective age rather than actual age: effective age/economic life = % depreciation. Therefore, depreciation is 10/75 = .133. $319,281.25 x .133 = $42,570.83 (total depreciation). The value of the building = $319,281.25 - $42,570.83 = $276, 710.42. The L:B Value Ratio is 25%. Therefore, land is 25% of the total value, and the building is 75% of the total value. The value of the building is $276,710.42, which is 75% of the overall value. 276,710.42/.75 = $368,947.22. Subtracting the building value yields $92,236.80, which falls into the range $90,000 - $95,000.
If a lot contains 1,500 square yards and has a width of 50 feet, the depth is:
270 feet
1,500 square yards is 13,500 square feet. (1,500 x 9). 13,500 divided by 50 (frontage) equals a depth of 270 feet.
All of the following methods are acceptable methods of valuing an individual single family lot which is not generating any rental income EXCEPT:
Capitalizing ground rent
The value of residential property may be estimated using the sales comparison method, the allocation method, or extraction method.
Capitalization of ground rent and land residual technique require the property to be income-producing. The subdivision development method is not used in valuing single lots like the subject.
Which technique for determining land value requires an appraiser to deduct the net income applicable to the building from the total net income, and then capitalize the remainder and attribute the result to the land?
Land Residual
When using the land residual technique, the appraiser first deducts the NOI that is earned by the building from the total NOI. The remainder NOI is attibutable to the land. This remainder NOI is capitalized at the land capitalization rate to produce an indication of land value.
Which method of site valuation would be used to appraise a surface parking lot in a downtown area leased to a parking lot operator?
Ground rent capitalization
QUESTION RATIONALE
This procedure is used when land rental and capitalization rates are readily available. The ground rent paid for the right to use and occupy the land is divided by a land capitalization rate.
Which method of valuing the land component of a property subtracts the depreciated cost of improvements from the total sale price of an improved property?
Extraction
The extraction method of valuing land is subtracting the depreciated cost of improvements from the total sale price.
The original cost of the improvements on a property was $350,000. The depreciated cost of the improvements is $250,000. The sale price of the property is $400,000. What is the value of the land by the extraction technique?
$150,000
Sales price $400,000 minus depreciated cost of improvements $250,000 equals $150,000.
The landlord’s ownership interest in leased property. Defined by the amount of contract rent over and above market rent. Also, called Leased Fee Estate.
Leased Fee Interest
Statement by the appraiser explaining the framework used to reach the appraisal value and establishing the report’s limitations.
Limiting Conditions
The price expected for a whole property (e.g., a house) or a part of a property (e.g., a plumbing fixture) that is removed from the premises usually for use elsewhere.
Salvage value
A use of land available to the owner under current laws and zoning regulations.
Legal Permissibility
In the context of “legal permissibility” related to the use of land, it refers to whether a particular use or activity on a piece of land is allowed and authorized by the applicable laws and regulations. It addresses whether the proposed use aligns with the zoning rules, land use regulations, and any other legal requirements in the specific jurisdiction.
Appropriate or fair value for private land taken by the government for public use. See: Eminent Domain.
Just Compensation
A tax term used in exchanges. Property may be exchanged for like in kind property and the tax postponed. The term does not refer to the physical similarity of the properties but the purpose and intent 9investment) of the tax payer.
Like In Kind Property
A form of co-ownership in which the co-owners have equal undivided interests and the right of survivorship. Joint tenancy must have the four unities present.
Joint Tenancy
A non-possessory interest in property, giving a lienholder the right to foreclose if the owner does not pay a debt owed to lienholder. 2. A financial encumbrance on the owner’s title.
Lien
One who conveys the rights of occupancy and use to others under lease agreement.
Lessor
One who has the right to occupancy and use of the property of another for a period of time according to a lease agreement.
Lessee
Larger Parcel
In simple terms, a “larger parcel” is a bunch of neighboring pieces of land that are owned or controlled by one person or group. These pieces of land should be used together in a smart way to get the most value from them.
To think of it simply, imagine you have a few plots of land next to each other. If these plots are owned by one person or group and can be used in a similar way to make the most money or be the most useful, then you can call them a “larger parcel.”
When people want to take a part of this land for things like building roads or other projects, they look at how it affects the whole group of land. They make sure that the taken part still makes sense as part of the bigger group. This is important because it helps figure out how much money the owner should get for the part that was taken.
Sometimes, even if the pieces of land are not right next to each other, they can still be considered a larger parcel if they are used together in a special way that makes sense. This helps in cases where the parts of the land are not all connected, but they still have a common purpose or use that’s really important.
A description of land that identifies the real estate according to a system established or approved by law; an exact description that enables the real estate to be located and identified.
Legal Description
Any type of written letter, memorandum, or statement that serves as a notice of delivery from the valuer to the client of a report containing an opinion or conclusion concerning real estate; often a brief document in the introduction to a report that formally presents the report to the person for whom the appraisal was prepared.
Letter of Transmittal
Think of a “letter of transmittal” as a special note or message that an appraiser writes to someone who hired them to evaluate a property (like a house or land). This note is like a formal way of saying, “Hey, I’m giving you the report with my thoughts and conclusions about the property.”
An estate that gives the holder (tenant) a temporary right to possession, without title. Also called Less-than-Freehold Estate.
Leasehold Estate
An income method of site valuation that attributes a certain part of the income produced by a property to the building or other improvement, then attributes the remaining income to the land.
Land Residual Method
The amount of money a lender is willing to loan to someone to finance a property.
Loan Value
The characteristics or attributes of properties and transactions that cause the prices of real property to vary; include real property rights conveyed, financing terms, conditions of sale, expenditures made immediately after purchase, market conditions, location, physical characteristics, and other characteristics such as economic characteristics, use, and non-realty components of value.
Elements of Comparison
An element of depreciation; curable defect caused by a flaw involving the structure, materials, or design, which can be practically and economically corrected.
Curable Functional Obsolescence
A set of procedures through which the value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive, deducting depreciation from the total cost, and adding the estimated land value. Adjustments may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised.
Cost Approach
A cost approach appraisal method which has the appraiser count the number and type of each part and material that were used to construct the building, plus adding a cost for labor, profit, permits, etc.
Quantity Survey Method
An qualitative technique for analyzing comparable sales; a variant of relative comparison analysis in which comparable sales are ranked in descending or ascending order of desirability and each is analyzed to determine its position relative to the subject.
Ranking Analysis
A property title that title insurance company agrees to insure against defects and disputes.
Insurable Title
An element of depreciation; a defect caused by a deficiency or superadequacy involving the structure, materials, or design that cannot be practically or economically corrected as of the effective date of the appraisal.
Incurable Functional Obsolescence
A method that requires the recognition of the differences between the comparable data and the subject property and assigning either a market derived dollar or percentage amount as an adjustment.
Quantitative Adjustments
A site valuation method takes an estimated value of improvements and subtracts that from the total sales price to derive a figure for the land value.
Extraction Method
A site valuation method that separates the value of the land from the structures that sit on it by taking a ratio of the land or site value to the total property value, based on a typical property in the area.
Allocation Method
A method used after any quantitative adjustments have been applied that employs the appraiser’s judgment in forming opinions relying on such methods as relative comparison analysis (bracketing), ranking analysis, and/or personal interviews. The method requires good judgment and reasoning skills of the appraiser.
Qualitative Analysis
An element of comparison in the sales comparison approach; comparable properties can be adjusted for differences in the points in the real estate cycle at which the transactions occur. Sometimes called a “time adjustment” because the difference in dates of sale are often compared, although that usage can be misleading because property values di nit change merely as the result of the passage of time.
Market Conditions
A quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties. To apply this technique, sales or rental data on nearly identical properties, or adjusted data, is compared to isolate an estimate a single characteristic’s effect on value or rent. Often referred to as paired sales analysis.
Paired Data Analysis
The cost (including entrepreneurial incentive) to restore an item to new or reasonably new condition.
Cost to Cure
The value of a property if sold under duress or in a must-sell situation with less than typical market exposure.
Liquidation Value
Impairment of condition; a cause of depreciation that reflects the loss in value due to wear and tear, disintegration, use in service, abuse and the action of the elements. See also curable physical deterioration; depreciation; incurable physical deterioration.
Deterioration
The value of property for accounting purposes, based on cost, less accrued depreciation.
Book Value
The value of property based on specific investment criteria.
Asset Value
Method for determining the cost of a building that uses the cost of recently built comparable buildings as a basis for estimating the cost of replacing the subject property.
Comparative Unit Method
Statistical measure that attempts to ascertain the source of change in variables.
Regression Analysis
- Characteristics that affect a property’s income. 2. An element of comparison in the sales comparison approach. Comparable sales can be adjusted for differences in the attributes that affect a property’s income, such as operating expenses, quality of management, tenant mix, rent concessions, lease terms, lease expiration dates, renewal, options, and lease options such as recovery clauses.
Economic Characteristics
The decline in property value caused by external forces, such as neighborhood blight or adverse development. See external obsolescence.
Economic Depreciation
A sale of property when the seller is under extreme pressure to sell. Generally the property is sold for less than market value.
Distress Sale
The subject site is 25’ x 125’, rectangular, flat topography, zoned residential. The site is currently unimproved. Similar lots in the neighborhood sell for $50,000. The site is adjacent to a landfill that is capped. The poor location reduces site value by 25%. What is the external obsolescence indicated for the subject site?
$ 0
(just remember land cannot depreciate)
The definition of depreciation is a “loss of value from any cause to the improvements.” The subject property is an unimproved site which, by definition, cannot depreciate.
Since external obsolescence is a form of depreciation, and the site cannot depreciate, the answer is zero dollars.
If the question was “How much did the subject site lose due to its poor location?” then the answer would be: $50,000 x 25% = $12,500
An office building is valued at $100,000 and has a net income of $10,000. If the net income remains the same, but the capitalization rate increases by one full percentage point, what would the estimate of value be?
Net income/value = capitalization rate. $10,000/$100,000 = 0.10 or 10%. If the capitalization rate increases by 1%, then $10,000/0.11 = $90,909.
When developing an opinion of site value of an improved property, an appraiser must value the site as if it is:
Vacant and available for development to its highest and best use
The cost approach to value requires the appraiser to estimate the value of the site as if vacant and available for use under the land’s highest and best use. The use may or may not be the land’s current use.
When land value is estimated by deducting the depreciated cost of improvements on a property from the total sale price of the property, this is known as
When land value is estimated by deducting the depreciated cost of improvements from the sales price, it is called extraction.
In a site appraisal the conditions of subsoil, specifically its suitability for a foundation and its bearing quality, are usually defined by a(an) _______________study.
Engineering
An engineering study would reflect the conditions of the subsoil and determine its suitability for a construction site.
A fee simple defeasible form of ownership is
subject to conditions.