Module 1: Real Property Valuation Flashcards
The Michigan State Constitution states that all property shall be assessed how?
Uniformly at 50% of its true cash value (TCV).
What three values does an assessor have to determine every year?
Assessed Value, State Equalized Value (SEV), and Taxable Value
The taxable value is the lower of what two values?
SEV or Capped Value, whichever is lower.
What does “ad valorem” mean?
At Value
The General Property Tax Act defines “True Cash Value” as what?
The usual selling price obtained at a private sale, not an auction dale.
When valuing property, the assessor should take into consideration the zoning of the property,
the location of the property, the condition of structures on the property, the income potential
of the property, and in farm areas the soil quality, value of standing timber, availability of
water, and any mineral rights that are included in the ownership. To have value the property
must have what?
D. U. S.T.
1. Desirability - a consumer must want the product for it to have value.
2. Utility - the ability to satisfy as human want, need or desire.
3. Scarcity - the present or anticipated supply of an item relative to the demand for it.
4. Transferability - a consumer must be able to purchase the property.
Define “real estate”
The physical land and any structure attached to it.
Define “real property”
The rights of ownership (bundle of rights) enjoyed by the owner of real estate.
What are the rights (bundle of rights) obtained with fee simple title?
S - Right to sell
L - Right to lease or rent
U - Right to use
G - Right to give away
E - Right to enter or leave
R - Right to refuse to do any of these
What rights of ownership are removed by government?
- Police power - power to regulate
- Power of eminent domain
- Power to Tax
- Escheat
What are the three most common types of ownership?
- Fee simple (highest degree of ownership)
- Partial estate
- Life estate
Define “value in exchange”
The amount of money or goods you can receive if you sell the property.
Define “value in use”
The value property has in a specific use.
Which economic principle is found in all three approaches to value?
The principle of Substitution.
What is the reasonable, probable an legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value?
Highest and Best use.
Which economic principle illustrates how the available supply and consumer demand affects the market price of goods and services?
The principle of Supply and Demand.
Which economic principle refers to a large number of buyers or sellers who are always free to enter and leave the market?
The principle of Competition.
Which economic principle states that dynamic social, economic, environmental, and
governmental factors impact market value?
The principle of Change.
Which economic principle states that the value of any part of a property is measured in terms of its contribution to the whole; however, the value of the whole property may not be equal to the sum of the total cost of the individual parts?
The principle of Contribution.
What economic principle refers to the observation that value is added to properties that are similar in appearance and use and conform to the demands of the market?
The principle of Conformity.
What economic principle describes the market value as a present worth of all future benefits expected by market participants.
The principle of Anticipation.
What economic principle states that a property’s value tends to be set by the cost of acquiring an equally desirable substitute?
The principle of Substitution.
What economic principle addresses the net income attributable to the land after paying for the costs of other factors of production?
The principle of Surplus Productivity.
What economic principle explains why value is added to real property when contrasting or interacting components are in the state of equilibrium?
The principle of Balance and the Law of Diminishing Returns.
What economic principle is basic to the study of economics and stems from the fact that society’s resources are limited compared with the unlimited desires and wants of consumers?
The principle of Opportunity Cost.
What are the four components of Highest and Best use analysis?
- Legally permissible
- Physically possible
- Financially feasible
- Optimally productive
In an appraisal, the final estimate of value is determined by what?
Reconciliation
What are the three approaches to value?
- Cost
- Sales Comparison
- Income
The outcomes of the cost, sales comparison, and income approaches are reconciled to determine what?
An estimate of value.
Define replacement cost.
The cost to construct a building of similar utility using modern materials and methodologies.
Define reproduction cost.
The cost to reproduce all components of the building with the same materials and
same labor as found in the current structure
What are the three principal steps in the cost approach?
- Land Valuation
- Estimate Cost New
- Estimate Depreciation
Land + (Replacement Cost New - Depreciation) = Value
What are the three methods of estimating cost new?
Three Methods of estimating cost new (RCN):
1. Quantity Survey Method
2. Unit-in-Place Method
3. Comparative Method
In which method of estimating cost new does the assessor itemize all the materials, labor, and overhead that go into the construction of a building?
Quantity Survey Method
In which method of estimating cost new are the costs of material, labor, and overhead combined into a single unit-in-place cost?
Unit-in-Place Method (Cost Approach)
In which method of estimating cost new uses standard “cost schedules” and is the basis for the majority of mass appraisal for assessing in Michigan?
Comparative Method
Define depreciation.
The loss in value from RCN due to:
Physical wear and tear
Effects of nature
Changing tastes and preferences
Changing technology
Forces outside the property reducing its value
What are the three categories that depreciation is divided into?
- Physical Deterioration
Short-life curable,
Short-life incurable,
Long-life incurable - Functional Obsolescence
Deficiency, curable,
Modernization, curable,
Superadequacy, curable,
Deficiency, incurable,
Superadequacy, incurable - External/Economic Obsolescence
Considered incurable,
May be a locational issue,
May not be permanent,
Often will affect both land and building values,
The loss in value is not due to a problem with the
subject property, but something outside the property
What type of depreciation is the reduction in life and value resulting from use, abuse, and action of the elements?
Physical Deterioration
What type of depreciation is a loss in value to a structure or a part thereof to perform the function for which it is intended?
Functional Obsolescence
What type of depreciation is a reduction in value caused by factors external to the property such as economic forces which affect supply-demand relationships or proximity to noxious elements?
External/Economic Obsolescence
What is the formula to measure the amount of obsolescence?
Obsolescence = Cost to cure (remodel) - cost as part of new construction
A house has few closets.
The cost to put in closets as a remodel is $1,000. The cost of the closets as part of new construction today is $800
What is the measure of obsolescence?
$1000 - $800 = $200
What is the test of whether an item is curable or incurable?
Whether the cost to cure (to fix the problem) is at least offset by the increase in value.
Which approach estimates the value of property by applying verified data from the market?
Sales comparison approach
The sales comparison approach estimates the value of property by applying what?
Adjustments to the sale prices of comparable properties that have recently sold in the same market.
What are the four basic steps on the sales comparison approach?
- Select sales of comparable properties
- List and verify the sales: The data about each sold
property - Adjust and tabulate the sales prices toward the
subject - Correlate and reconcile the value of the subject property and justify that conclusion
What principle implies that a prudent byer will not pay more for a property than it will cost to buy an equally desirable substitute property?
Substitution
What are the four conditions a comparable must meet?
- It must be reasonably similar.
- It must reflect the market value at the time of the sale.
- It must be a verified sale.
- It must be a qualified sale.
The best comp will be the one that is what?
Most like the subject property.
In the sales comparison approach, which property do you adjust?
The comparable
If the comp has a feature not found in the subject, the comp will receive what type of adjustment?
Negative Adjustment
If the subject has a feature not found in the comp, the comp will receive what type of adjustment?
Positive Adjustment
What is a unit selling price?
A rate per unit of an item. Also, the amount paid per unit of an item being sold.
What are the advantages of the sales comparison approach?
- Best reflection of actions of buyers and sellers in
market - Less opinion and judgment is required when there
are sufficient sales for the paired sales analysis for
adjustments - Courts, including Michigan Tax Tribunal, prefer
this approach as the most straight forward - Most easily explained to taxpayers
What are the disadvantages of the sales comparison approach?
- Requires an active market with sales of like properties
- Difficult to defend large numbers and large gross adjustment
amounts - Assumes that buyers and sellers were informed and that
they made the best decision for themselves - Assumes that the same supply and demand factors at the
time of the sales exist today, or that the market conditions
adjustment is able to account for changes - Adjustments must not be made based on RCN of items, but
based on the amount the adjustments contribute to the value
of the entire property - Not all properties will have comparable sales
