Property valuation Flashcards
elements of value (DUST)
Demand – The number of people that want to buy the property (and are actually able to).
Utility – Something’s usefulness. The more useful it is, the more demand there is.
Supply – The more plentiful something is, the less it is worth (and vice versa).
Transferability – Sellable real estate must be free from clouds on title (issues with ownership). This is known as having good and clear title or marketable title. Real estate with title defects is difficult to sell, and thus has marginal value.
Principals of Value
Conformity – The idea that maximum value is achieved when a property is more or less in line with other the surrounding properties.
Contribution – Additional investment in a piece of property (as measured by the increase in value).
Increasing and Decreasing
Returns – Money spent to improve a property may not add value (this is a function of substitution). If you have spent too much it is over-improvement; not spending enough is under-improvement.
Competition – Profits attract competition. Competition increases supply, which drives down price (and the corresponding profits). It is assumed that, in free markets, profit will eventually be driven to zero by competition.
Consistent Use – This principle states that, when improved land is in a state of transition to another highest and best use, it cannot be appraised with one use for the land and another use for the improvements.
Highest and Best Use – The idea that properties will be optimized to their most optimal use over time. The highest and best use is that most optimal use.
Plottage Value – An increase in value associated with assemblage (the combination of multiple small pieces of land into one large parcel).
Annual Property Operating Data (APOD)
sheets show the annual income of a rental property. Think of them as profit and loss statements for investment properties.
GRM (the “gross rent multiplier”)
how many months of gross rent it takes for a property to pay for itself. It can be either a monthly or annual number.
The capitalization rate (or cap rate)
the percentage of a property’s value an investor can expect to receive as net operating income (income after expenses) every year.
