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Real Estate FL > L16: Real Estate Appraisal > Flashcards

L16: Real Estate Appraisal Flashcards

1
Q

Non-Fungible Commodity

A

A commodity that cannot be exactly replaced by another, example: land

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2
Q

Perceived value

A

Value that people see in that specific property

It’s determined by the use of land and location

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3
Q

Assemblage

A

Act of combine in parcels into a single tract of land

It often results in an increase in value

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4
Q

Plottage

A

The increase in value by successful assemblage

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5
Q

Things that influence the real estate value (4)

A

A. Income (generated by the property as an investment)

B. Appreciation (increase in value of a property)

C. Use

D. Tax Benefits

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6
Q

(4) Characteristics that make real estate valuable (DUST)

A

Demand
Utility
Scarcity
Transferability

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7
Q

Market Value

A

The price for which a property will theoretically sell under typical conditions

AKA value (which predicts market price)

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8
Q

(Market) Price

A

Amount a ready, willing, and able buyer agrees to pay

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9
Q

Cost

A

Amount of money required to build, buy or develop something

Direct (labor & material) + Indirect (everything else)

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10
Q

3 ways to assign value

A

1) APPRAISAL (official, done with appraiser)
2) VALUATION (collecting info & developing an opinion of value)
3) EVALUATION (statement regarding the usefulness/utility of property. The focus is not on actual value but on best use, feasibility & market’s supply and demand)

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11
Q

3 Main Types of Value

A

A) MARKET VALUE —> price seller & buyer would probably accept; it’s an opinion & it’s temporary

B) APPRAISED VALUE —> number given on an appraisal; tends to be close to what will go for an open market and it’s normally done for mortgage loans

C) ASSESSED VALUE —> value placed by a governmental unit for property tax calculation purposes

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12
Q

Other types of value (besides mkt, appraisal & assessed)

A
  • taxable value (assessed value - tax exemption)
  • investment value (most an investor would be willing to pay based on goal)
  • insurable value
  • mortgage value
  • actual cash value (depreciated value of a property)
  • value-in-use (current worth of the future benefits of ownership)
  • condemnation value
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13
Q

Economics Principles of Value (8)

A
  • Principle of Anticipation
  • Principle of Contribution
  • Principle of Substitution
  • Principle of Change
  • Principle of Conformity
  • Principle of Regression
  • Principle of Progression
  • Principle of Competition
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14
Q

Principle of Anticipation

Economics Principles of Value 1/8

A

Present value is affected by the anticipated income or utility the property will give

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15
Q

Principle of Contribution

Economics Principles of Value 2/8

A

The value of each component contributes to the total value
The contribution value of an item is different than cost of the item

Not-so-smart investment VS. over-improvement

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16
Q

Principle of Substitution

Economics Principles of Value 3/8

A

The value of something is affected by the cost of getting in a similar (substitute) item elsewhere

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17
Q

Principle of Change

Economics Principles of Value 4/8

A

Any change can affect value of the property

18
Q

Principle of Conformity

Economics Principles of Value 5/8

A

Values are highest when houses in the neighborhood are roughly the same

19
Q

Principle of Regression

Economics Principles of Value 6/8

A

When lower-value properties surround the subject, its price can be dragged down

20
Q

Principle of Progression

Economics Principles of Value 7/8

A

The opposite of regression

Value goes up if surrounded by better properties

21
Q

Principle of Competition

Economics Principles of Value 8/8

A

Notion of supply and demand

22
Q

3 Main approach to determining value

A

1) sales comparison approach (comps)
2) cost approach (how much to replace)
3) income capitalization approach (ROI)

23
Q

Sales comparison approach

Approach to determining value 1/3

A

Aka, Direct sales comparison approach/market data approach
– based off the principle of substitution and contribution
- value is estimated by comparing the subject property to the sales price of similar properties around
– mostly use for owner-occupied residential properties and vacant land

Formula: subject property value = comparable property sale +or- adjustments.

*Adjustments: + or - to a comparable property’s sales price based on subject property’s differences (features, age, size, market)

24
Q

Comparable Market Analysis (CMA)

A

Report that compares prices of recently sold/listed homes (comparables) in order to estimate the market value of a similar property (subject property) located in the same area

Steps:

  • evaluate neighborhood
  • evaluate subject property
  • find comparables
  • compare and adjust selected comparables
  • establish a listing price range
25
Q

Cost Approach

Approach to determining value 2/3

A

Aka, summation approach/reproduction cost/cost-depreciation
- determines how much it would cost to replace the building/improvement

  • Formula: property value = reproduction cost - depreciation + land value
26
Q

Replacement cost

Coast approach for determining value

A

Cost of giving new building similar feature using comparable modern materials at current prices

27
Q

Reproduction Cost

Approach to determining cost value, cost approach

A

Cost of procuring exact copies of the building’s component preserving styles & materials

28
Q

Types of Depreciation (2) and Classifications (2)

A

Types:
A. Physical Deterioration (wear overtime)
B. Obsolescence (loss of value due to functional or external/economic)

Classification:

1) Curable (can be fixed and at reasonable price), i.e. physical and functional
2) Incurable, i.e. physical (foundation issue), functional, obsolescence (outdated floorplan) and external

29
Q

Age of Property (2) & Economic Life

A

1) Chronological Age (literal age of a property)
2) Effective Age (estimated age influenced by updates/maintenance)

Economic life = length of time for which an improvement is expected to remain functional and useful

30
Q

Age-Life Depreciation

A

Determines how much longer (% years) are left on the property (useful life)

Depreciation (%) = Age of property/total useful life

31
Q

Income Approach

Approach to determining value 3/3

A

Used for commercial buildings

Value (V) = net operating income (NOI)/capitalization rate (R)

32
Q

ROI

Income approach

A

ROI = Net Profit / Initial investment

33
Q

Capitalization Rate

Income approach

A

Formula: (Net Operating Income/Current Market Value)*100

Calculate the percentage expected annual income earned over a property’s value
It’s determined by external factors

34
Q

Potential Gross Income vs Effective Gross Income

Income approach valuation

A
  • Potential Gross Income (PGI) = amount of income the property would bring if it was 100% occupied.
    It’s contract rent + projected rent of empty units at market value
  • Effective Gross Income (EGI) = PGI + other income (laundry machine, rent event space, etc.) - income loss (vacancies and collections)
35
Q

Net Operating Income

Income approach valuation

A

Net Operating Income = Effective Gross Income - Operating Expenses

Operating Expenses are occasional & continuous expenses required for the operation of an income-producing property.
NB: debt obligations (ex. Mortgage) is not an expense

36
Q

Automated valuation models

A

A computerized valuation of a property that takes into account comparables, tax assessors, nationwide market values and sales history

37
Q

Reconciliation (valuation)

A

Finding of a fair value using multiple appraised values, whether they be of different approaches or the same

38
Q

Gross Rent Multiplier & Gross Income Multiplier

Income approach valuation

A
  • Gross Rent Multiplier (GRM) = Ratio of the price of investment property to it’s annual rental income before EBITDA
    GRM = Property Price/Annual Rent Income
  • Gross Income Multiplier (GIM) = same as GRM + other sources of income
    GIM = Property Price/(Annual Rent Income + Other income)
    The LOWER the Gross Income Multiplier, the better the Investment may be.
39
Q

Depreciation

Approach to determining value, cost approach

A

Reduction in value for any reason

40
Q

Fair Value

A

The highest price a buyer is willing to pay and the lowest price a seller is willing to accept

Real Estate FL (16 decks)

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