Property Valuation Flashcards
What is value?
What a ready, able & willing buyer is ready to pay & an informed seller is willing to accept.
Who determines value?
The buyer-because a seller can ask for any amount, but the buyer is only willing to pay a certain amount.
who are appraisers and what do they do?
Appraisers are licensed as appraisers. They determine formal estimates of value.
Typically-they work on behalf of the lender. Lenders want to make sure the buyer is not paying an inflated price. This will help cover the lender’s bases in the event of a foreclosure.
CMA
Comparative Market Analysis.
Sales agents do this. Agents will look at comparable properties that have sold within the last 6 months within a mile or so of the property in question. This helps determine listing price.
BPO
Broker Price Opinion.
Sales agents can do this.
Typically a bank will pay for this in the event of a foreclosure. This is a lot less intrusive than a formal appraisal.
A BPO is only based on recent sales and square footage.
How are appraisers governed?
They are governed by the USPAP (Uniform Standards of Professional Appraisal Practice). Part of title XI of Financial Institutions Reform Recovery & Enforcement act of 1986.
They must be licensed as Appraisers.
When are appraisals required?
In all federally related transactions.
Can real estate agents do appraisals?
NO, it is a separate license.
What do sales agents do?
Sales agents can suggest listing price for property use. -use comps via MLS to create CMA/BPO.
-listing price recommendation is based on price per square foot, availability in area, special features & upgrades.
What is the appraisal process?
- Define the problem: What rights does this property have? Are the easements? What is the use?
- What rights, real estate & definition are being considered. - Preliminary survey: They look at the lot size, condition or the property & the property itself.
- Appraisal plan: Includes data, time requirements & fee.
- Collects information: Takes info & looks at the macroeconomic climate (Is it a seller’s market? Are people losing their jobs? What is the data like in the town vs. how properties are preforming), economic data, property details & comps from the last 6 months within a 1 mile radius (usually).
- Highest & best use analysis: Is the property being used for the best purpose?
- Land value
- Improvements on land: based on 3 approaches to value.
- Findings are reconciled: Findings are put into a written report called URAR (Uniform Residential Appraisal Report). This is the standard form accepted by Frannie Mae, Freddy Mac & all the lenders who sell their loans to Frannie Mae & Freddy Mac.
What are the elements of value?
Think D.U.S.T.
D-Demand: Number of people that want to buy & actually have the ability to do so.
U-Utility: Somethings usefulness-The more useful something is, the more demand for it.
S-Supply: The more plentiful, the less it is worth.
T-Transferability: Sellable real estate must be free from clouds on title. Known as having a clear & marketable title.
Types of real estate value:
Market Value: Theoretical value-fair market value of what a property would sell for in today’s market in an arm’s length transaction. -think market price
Value-In-Use: The value to a particular user of a property.
Cost: What it would cost to build that property?
Investment Value: Value of a property tp investors.
Insurable value: Value of a property for insurance -(CLUE-comprehensive Loss in Underwriting Exchange).
Assessed Value: Tax valuation of a property.
Liquidation Value: Foreclosure value.
What is an arm’s length transaction?
A transaction concerning two unrelated, unconnected parties.
Market Price
Price a ready, willing & able buys is willing to pay & an informed seller is willing to accept. Actual amount paid in the market.
What are the 13 Principles of Value
Terms that appraisers use when valuing real estate: Change Anticipation Substitution Progression/Regression Four Stage Life Cycle Balance Conformity Contribution Increasing/decreasing returns Competition Consistent Use Highest & Best use Plottage Value
Change
Principle of value: Real estate values change over time in response to economic environment.
Anticipation
Principle of value: Function of change. The benefit a property owner expects to receive over their lifetime of ownership. -What does the owner expect the property to be worth in the future.
Substitution
Principle of value: Buyers will not pay more for something than they have to for a comparable good.
Progression/Regression
Principle of value: Appreciation=Increase; Depreciation=Decrease; Is the market increasing or declining?
Four Stage Life Cycle
Principle of value: Growth->Stability->Decline -> Revitalization->…then the cycle starts over.
Balance
Principle of value: Value is created & maintained when there is an equilibrium among the amount & location of types of real estate.
Conformity
Principle of value: Idea that the maximum value is achieved when the property is in line w/ the surrounding properties.
Contribution
Principle of value: Are you making improvements on the property to increase value?
Increasing/decreasing returns
Principle of value:
- over improvement: too much in comparison to other similar properties are worth.
- under improvement: not enough in comparison to other comparable properties.
Competition
Principle of value: Profits attract competition, which increases supply, then drives down prices & corresponding profits.
Consistent Use
Principle of value: When improved land is in a state of transition to another highs & best use, it can NOT be appraised for land w/ the use and improvements for another use.
Highest & Best use
Principle of value: Properties will be optimized when used for highest & best use.
Plottage Value
Principle of value: An increase in value associated with assemblage (combination of lots in larger parcel).
Influences on property value
Social Trends: What do people want?
Economic: Are people losing their jobs? Can they buy?
Government & Legal: What can you do with this property? Are their restrictions via zoning?
Environmental & Physical: Location! Is it near a dump? Is it near a beach? etc.
What are the three approaches to value?
Sales Comparison Approach
Investment Approach
Cost Approach
Sales Comparison Approach
Quintessential appraisal approach.
Also known as a Market Data Approach.
Compares value of subject property to comparable properties.
-Makes adjustments to comp. properties.
-Uses a weighted average of adjusted prices.
Investment Approach
Used for income producing real estate & investors.
Also known as the Income Approach.
Use of APOD (Annual Property Operating Data) sheet.
Factors can include:
Gross Rent Multiplier (GRM)
Capitalization Rate
Cash on Cash Return
What is an APOD sheet
Used in Investment approach.
Annual Property Operating Data
Essentially a profit/loss sheet for real estate. What rents is the property bringing in? What are the costs of the property? What are the gross profits?
Factors include:
Operating expenses: Cost to run a property.
Debt service: P&I payment (principal & interest payment)
Capital expenditures: Cost to make improvements to property to increase value.
Example: Potential Gross Income -Vacancies =Effective Gross Income -Operating Expenses =Net Operating Income (NOI) -Debt Service & Capital Expenditures =Cash Flow before taxes -Income taxes =Cash flow after taxes
GRM
Part of investment approach.
Gross Rent Multiplier
How many months of gross rent is takes for a property to pay for itself.
Doesn’t take into account operating expenses.
Formula: Sales price/Rent=GRM
Capitalization Rate
Part of Investment approach.
It determines whether or not the investment will generate enough return. “How profitable is the property based on NOI vs. its sales price?”
Cap rate=Capitalization rate
The percentage of the property’s value that an investor expects to receive as NOI (Net operating Income) every year.
More reliable than GRM.
Investors usually have a goal cap rate. (Buyers want a high cap rate; sellers want a low cap rate.)
Formula: NOI/Sales price=cap rate
Cash on Cash Return
Part of Investment approach:
Return on Investor’s cash investment.
How long will it take me to get my cash investment back? Am I going to get a return every year based on my investment?
Most popular investment value option for investors. Helps investors determine how their real estate is performing.
Percentage of total investment received as annual cash slow (before taxes).
ideally investors want cash on cash return to be higher than cap rate.
Cash flow after taxes will change any time there is a debt service paid.
Formula: Cash flow before taxes/dollars invested-cash on cash return.
Cost Approach
The cost approach is a method that surmises that the price a buyer should pay for a piece of property should be the equivalent to the cost to build.
Uses the cost of construction to estimate value.
Used for unique properties w/ no comps or income.
Uses the replacement/reproduction approach.
Uses the comparative unit method, the unit-in-place method, or the Quantity Survey Method.
What are the 2 approaches to the Cost Approach?
- Replacement: Replace w/ a similar property.
- Reproduction: Reproduce the property exactly the same.
- Both use today’s construction costs minus depreciation to estimate value.
- Construction costs are based on gross living area as measured from the exterior of the building.
GLA
Gross Living Area
Length x width (sq. ft.) of any livable finished, heated & above grade space.
What are the 3 methods to Cost Approach?
Comparative Unit Method: Determines the cost of the building on a price per sq. ft. basis. Focuses on the replacement cost (how much to build a similar property?). price/sq. ft.=price per sq. ft.
Unit-in-Place Method: Value of systems & components (like HVAC). Adds everything up. Uses both replacement & reproduction approaches.
Quantity Survey Method: Determines total cost to replicate the structure using today’s material, permitting, & construction costs. Focuses on reproduction approach (how much to build the exact same property?)
Depreciation
Loss in value due to aging of a property.
Accrued depreciation: already accrued when the property was purchased (not a new house).
Remainder depreciation: Occurs after the property is purchased.
What are the two methods used to calculate depreciation?
- Straight line method: Uses economic life to calculate annual loss in value.
- economic life for a residential property is 27.5 years.
- economic life for a commercial property is 39 years. - Cost to cure method: Uses total cost to repair curable depreciation plus any incurable depreciation.
- curable depreciation is how much it would cost you to repair an item you can fix (like a roof).
- incurable depreciation cannot be fixed (like location).
Types of Depreciation
Loss of value due to any of the following curable/incurable depreciation:
Physical Deterioration: Aging, wear & tear or neglect of the building (curable).
Functional Obsolescence: Poor/outdated design or change in building standards (curable).
Economic Obsolescence: External factors having a negative impact (incurable).
A nice 5 story office building w/ out an elevator sold less than its owner expected, based on office building sales prices in the area. What might explain the lower sales price?
Functional obsolescence
Real estate agents typically prepare…
CMAs
A property’s roof needs to be replaced. this is…
Physical deterioration
Liquidation value is best described as…
The value of the property in foreclosure.
An 8 bedroom, 6 bathroom home is built in a neighborhood of nice 2-3 bedroom homes. When the house is sold, the sales price is lower than the owners had expected. this is most likely because of…
Over improvement.
