PSI Exam Prep: Valuation and Market Analysis Flashcards
it is a formal opinion of value that a real estate have, based on supportable evidence, for a specific purpose, party, and property, as of a specific date
An appraisal
it is the process of forming an opinion of a property’s value.
Valuation (formal appraisal)
Appraisers follow the Uniform Standards of Professional Appraisal Practice (USPAP) and use these steps:
State the problem
Identify data needed
Gather and analyze data
Determine highest and best use
Estimate the land value
Use one or more of the three approaches to valuation
Reconcile values to determine the final appraised value
Residential properties valued at ___________ or less are exempt from federal appraisal requirements.
$400,000
Does FHA loans should be appraised?
Yes, by a state licensed appraiser
Does VA loans should be appraised?
Yes, by a VA licensed appraiser
What AIR stands for?
Appraiser Independence Requirements of 2010
What are the 3 requirements of AIR appraisers?
- State Certified
- Local Market knowledge
- Qualify to appraise
it is the most probable price a property will sell for in an open market if neither the buyer nor the seller is under duress.
Market value
it is a property’s objective worth and may not equal price or cost.
Value
it is the amount to recreate that property if it disappeared off the face of the earth today
Cost
it is the amount a buyer paid for a property and the seller accepted.
Market price
it refers to a property’s legal and feasible use that would be the most profitable.
The principle of highest and best use
How popular or desirable a property is.
Demand
The property’s function
Utility
Relates to market supply
Scarcity
The ease with which another person can purchase the property; a property with a title defect may suffer a loss of value because of the difficulty of being able to transfer title to another.
Transferability
What a property is worth to the person using it.
Value in use
What the local taxing authority thinks a property is worth
Assessed value
Price at which the property can be loaned on or sold for at a foreclosure sale
Mortgage value
Cost to replace or rebuild a property
Insurance value
The return on investment a property may provide
Investment Value:
A property’s value is determined in part by how well it conforms to its surrounding area (how similar it is to other properties in the neighborhood).
The principle of conformity
A property’s value is determined in part based on what else is available.
The principle of competition
A reasonable person will not pay more for a property if a comparable one can be had for less.
The principle of substitution
The value of any given change to the property is dependent on the value of the property as a whole. Because of this, the same improvement to different houses may result in an increase in value in one, while the other sees no appreciable change.
The principle of contribution
An increase in value that occurs by combining adjacent parcels of land into a single parcel
The principle of plottage
The process of combing the parcels
The principle of assemblage
A decline in value due to the decline in value of neighboring properties
The principle of regression
The increase in property value from increased surrounding property values
The principle of progression
Changes in value may be caused by the expectation of events. A suburban residential property that is located near the site of a proposed public transportation facility may see an increase in value before the actual benefit is realized.
The principle of anticipation:
is based on the principle of substitution and uses the prices for which similar properties have sold recently to estimate the subject property’s market value. The similar properties are referred to as “comps” or “comparables.” The property being appraised is called “subject property.”
The sales comparison appraisal approach
it is a process in which an appraiser uses both superior and inferior units of comparison such as age, transaction price, etc., to determine a probable range of values for a property.
Bracketing
Appraisers will make adjustments for a number of factors, applying the elements of comparison in this specific order, including:
Financing terms and cash equivalency Conditions of sale Market conditions Location Physical characteristics
it is based on the concept that the entire property is worth the sum of the value of the land and the value of the improvements on that land.
The cost approach
Appraisers use and rely on this approach when the property is unique and is not being used to generate rental income. A movie theater, hospital, church, or school fall into this category. It is also used in newly constructed or unique high-value homes.
The cost approach
it is caused by factors outside the property (e.g., an airport is nearby, causing noise).
External depreciation, also known as economic obsolescence
it is a form of depreciation or loss in value caused by defects in design and can occur with outdated structures or systems or when a property is overbuilt for the area.
Functional obsolescence
it occurs with wear and tear, damage, and improper maintenance
Physical deterioration
it refers to an item of physical deterioration or functional obsolescence where the cost to cure the item is less than or the same as the anticipated increase in the property’s value after the item is cured.
Curable depreciation
it includes items not practical to correct
Incurable depreciation
it bases value on the cost to build a functionally equivalent property.
The replacement cost approach
it determines the cost to build an exact replica of the property with the same materials and deficiencies
The reproduction cost approach
it assumes the land is vacant and bases the opinion of value on highest and best use.
The cost approach
This approach bases the current property value on potential income that the property can generate for residential investment rental properties, such as single-family homes or residential buildings that comprise two- to four-family units.
Income analysis approach
This is the most reliable approach to value when the property being appraised is primarily used to generate rental income, which includes shopping centers, apartment buildings, and office buildings.
Income analysis approach
Your client is purchasing a single-family home with a conventional loan. The listing price is $150,000. Does this situation require a licensed or certified appraiser?
No, since the sales price is less than $400,000
What is an appraisal?
An opinion or estimate of a property’s value as of a specific date
There are three different methods for estimating value within the income approach:
- Gross Rent multiplier = GSM = Sale/Gross Monthly Rent
- Gross income multiplier. GIM=Sale price ÷ gross annual income
- CAP RATE. Divide net operating income by value (or sales price)
they’re an informal estimate of market value.
comparative market analyses (CMAs)
What are arm’s length transactions?
Transactions that are not sold to relatives or under duress
How many comparable a licensee should do?
at least three comparables. More may be necessary if good comparables are difficult to find.
If a comparable is inferior to the subject property (e.g., next to a busy street), adjust upward. If it’s superior (e.g., in a secluded, quiet neighborhood), adjust downward.
Check point
When appraisers look past how a property is being used to determine a more optimal function, what are they determining?
Highest and best use looks past the current use (if there is one) to determine if there is another use that provides a higher value.
What are the two categories of comparison when evaluating comparables to a subject property in the market comparison approach?
Elements and units
What’s the estimated value by cost approach for a property if the site value is $25,000, the new cost of improvements is $100,000, and the total depreciation estimate is $15,000?
To estimate value using the cost approach, an appraiser adds the site value to the cost to replace improvements, then subtracts the amount of depreciation. Here, that gives us $100,000 + $25,000 - $15,000.
