L16: Real Estate Appraisal Flashcards
Non-Fungible Commodity
A commodity that cannot be exactly replaced by another, example: land
Perceived value
Value that people see in that specific property
It’s determined by the use of land and location
Assemblage
Act of combine in parcels into a single tract of land
It often results in an increase in value
Plottage
The increase in value by successful assemblage
Things that influence the real estate value (4)
A. Income (generated by the property as an investment)
B. Appreciation (increase in value of a property)
C. Use
D. Tax Benefits
(4) Characteristics that make real estate valuable (DUST)
Demand
Utility
Scarcity
Transferability
Market Value
The price for which a property will theoretically sell under typical conditions
AKA value (which predicts market price)
(Market) Price
Amount a ready, willing, and able buyer agrees to pay
Cost
Amount of money required to build, buy or develop something
Direct (labor & material) + Indirect (everything else)
3 ways to assign value
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)
3 Main Types of Value
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
Other types of value (besides mkt, appraisal & assessed)
- 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
Economics Principles of Value (8)
- Principle of Anticipation
- Principle of Contribution
- Principle of Substitution
- Principle of Change
- Principle of Conformity
- Principle of Regression
- Principle of Progression
- Principle of Competition
Principle of Anticipation
Economics Principles of Value 1/8
Present value is affected by the anticipated income or utility the property will give
Principle of Contribution
Economics Principles of Value 2/8
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
Principle of Substitution
Economics Principles of Value 3/8
The value of something is affected by the cost of getting in a similar (substitute) item elsewhere
Principle of Change
Economics Principles of Value 4/8
Any change can affect value of the property
Principle of Conformity
Economics Principles of Value 5/8
Values are highest when houses in the neighborhood are roughly the same
Principle of Regression
Economics Principles of Value 6/8
When lower-value properties surround the subject, its price can be dragged down
Principle of Progression
Economics Principles of Value 7/8
The opposite of regression
Value goes up if surrounded by better properties
Principle of Competition
Economics Principles of Value 8/8
Notion of supply and demand
3 Main approach to determining value
1) sales comparison approach (comps)
2) cost approach (how much to replace)
3) income capitalization approach (ROI)
Sales comparison approach
Approach to determining value 1/3
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)
Comparable Market Analysis (CMA)
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
Cost Approach
Approach to determining value 2/3
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
Replacement cost
Coast approach for determining value
Cost of giving new building similar feature using comparable modern materials at current prices
Reproduction Cost
Approach to determining cost value, cost approach
Cost of procuring exact copies of the building’s component preserving styles & materials
Types of Depreciation (2) and Classifications (2)
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
Age of Property (2) & Economic Life
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
Age-Life Depreciation
Determines how much longer (% years) are left on the property (useful life)
Depreciation (%) = Age of property/total useful life
Income Approach
Approach to determining value 3/3
Used for commercial buildings
Value (V) = net operating income (NOI)/capitalization rate (R)
ROI
Income approach
ROI = Net Profit / Initial investment
Capitalization Rate
Income approach
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
Potential Gross Income vs Effective Gross Income
Income approach valuation
- 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)
Net Operating Income
Income approach valuation
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
Automated valuation models
A computerized valuation of a property that takes into account comparables, tax assessors, nationwide market values and sales history
Reconciliation (valuation)
Finding of a fair value using multiple appraised values, whether they be of different approaches or the same
Gross Rent Multiplier & Gross Income Multiplier
Income approach valuation
- 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.
Depreciation
Approach to determining value, cost approach
Reduction in value for any reason
Fair Value
The highest price a buyer is willing to pay and the lowest price a seller is willing to accept
