Real Estate Appraising Flashcards
Is the most probable price a property would bring in an arm’s-lengths transaction under normal conditions on the open market. The appraiser’s opinion of what a typical buyer would pay.
Market Value
What four basic elements must be present before any product has a market value?
A market exists only when demand has been created by a product’s utility, or usefulness, coupled with its relative scarcity. The product must also have the quality of transferability; that is, there must be no impediment to its sale, such a lien or other encumbrance. (DUST)
Life cycle - both buildings and neighborhoods go through life cycles. As they are developed, they achieve growth, attain a period of equilibrium (or stability) in which little change is evident, they decline as properties deteriorate.
the combination of land uses that results in the highest property values overall. For example, housing should benefit from its proximity to places of employment and shopping areas.
Balance, principle of
Takes into account the effect on market value of the relationship between the number of properties on the market at a given time and the number of potential buyers.
Supply and demand, principle of
Holds that property values are maximized when buildings are similar in design, construction, and age, particularly in residential neighborhoods.
conformity, principle of
The worth of a less valuable building tens to be enhanced by proximity to buildings of greater value.
progression, principle of
A building’s value will decline if the buildings around it have a lower value.
Regression, principle of
A component part of a property is valued in proportion to its contributions to the value of the entire property, regardless of its separate actual cost.
Contribution, principle of
Business profits encourage competition, which ultimately may reduce profits for any one business.
Competition, principle of
Effect on property value of constantly varying physical, economic, social, and political forces.
Change, principle of
Expectation that property will offer future benefits, which tends to increase present value.
Anticipation, principle of
Principle of Market value tends to be set by the present or recent cost of acquiring an equally desirable and valuable property, comparable in construction, utility, or both.
Substitution, principle of
Market comparison approach; market date approach; appraisal method in which the sale prices of properties that are comparable in construction and location to the subject property are analyzed and adjusted to reflect differences between the comparables and the subject.
Sales comparison approach.
A transaction in which neither party acts under duress and both have full knowledge of the property’s assets and defects, the property involved has been on the market a reasonable length of time, there are no unusual circumstances and the price represents the normal consideration for the property sold, without unusual financing terms.
Arm’s-length transaction.
Appraisal method in which site value is added to the present reproduction or replacement cost of all property improvements, less depreciation, to determine market value.
Is ideal for special purpose properties-those that have no comparables in the area or which produce no income. Example are Museums, schools, and churches.
Cost approach.
The formula for the cost approach is as follow:
Reproduction or replacement - Accrued + Site value
cost of improvement(s) depreciation
The cost of a new building of exactly the same design and materials as the subject property.
Reproduction cost
The cost of a new building using modern construction techniques, design, and materials but having the same utility as the subject property.
Replacement cost.
Determination of land value exclusive of improvements.
Site Value
The subjective value of property to its present owner, as opposed to market value, which should be objective
Value in use
The most probable price property would bring in an arm’s-length transaction under normal conditions on the open market.
Market Value
Way of finding reproduction cos by multiplying the current cost per square foot of a comparable building by the number of square feet in the subject building.
Square-foot method
Way of estimating building reproduction cost by adding the construction cost per unit of measure of each of the components parts of the subject property: each unit cost includes material, labor, overhead, and builder’s profit.
unit-in-place method
Way of estimating building reproduction cost by making a thorough itemization of all construction costs, both direct (materials and labor) and indirect (permits, overhead, profit), then totaling those cost.
quantity survey method
Way of estimating building reproduction cost by multiplying the original cost of the subject building by a factor that represents the percentage change in construction cost generally from the time of construction to the time of valuation.
It is a very imprecise method, however, and for that reason it should be used only as a check on the value arrived at by one of the other methods.
Index method
Decrease in value of an asset that is allowed in computing property value for tax purposes; in appraising, a loss in the value of a property improvement from any cause; depreciation is curable when it can be remedied by a repaid or an addition to the property, and it is incurable when there is no easy or economic way to cure the loss.
Depreciation
Loss in value brought about by wear and tear, disintegration, use, and action of the elements.
Physical deterioration
Loss in value due to adverse factors within a structure that affects its marketability, such as its design, layout, or utility.
functional obsolescence
Economic or environmental obsolescence; loss in value due to outside causes, such as changes in nearby land use. Ironically, rezoning may increase the value of the rezoned property while decreasing the value of a adjacent property.
external obsolescence
Depreciation computed at a constant rate over the estimated useful life of the improvement.
Straight-line method
Breakdown method: depreciation computed by estimating the loss in value caused by evert item of depreciation, whether curable or incurable.
it requires the appraiser to estimate the loss in value caused by every individual item of depreciation, whether curable or incurable.
Observed condition method
Appraisal method in which the actual or likely net operating income of property is divided by its expected rate of return(capitalization rate) to arrive at an estimate of market value.
Income capitalization approach
The maximum income that property is capable of producing.
Potential gross income
The rent that could be charged for property at the present time, based on demand and the number of available properties.
Market rent
The rent agreed to by lessor and lessee.
Contract rent
Property income from all sources, less allowance for vacancy and collection losses.
Effective gross income
Profit; the money remaining after expenses are deducted from income.
Net operating income
Capitalization x Value = Net Operating income
The rate of interest that is considered a reasonable return on an investment, used in the process of determining value based on net operating income; the yield necessary to attract investment.
Capitalization rate
Net operating income / Value = Capitalization rate
In appraising, the final step, in which the estimates of value reached by each of the three appraisal approaches ( sales comparison, cost, and income capitalization) are weighed in light of the type of property being appraised, the purpose of the appraisal, and other factors, to arrive at a final conclusion of value.
Reconciliation
Narrative report; most comprehensive type of appraisal report, including a thorough statement of the background date supporting the opinion of value.
Self-contained report
Appraisal report using a standardized form, such as the Uniform Residential Appraisal Report (URAR) developed by Fannie Mae and Freddie Mac.
Summary Form Report
Property appraisal that will be limited in either the method of valuation used or the property interests valued.
Restricted use report.
In appraising real estate, the most profitable, physically possible, and legally permissible use for the property under consideration.
Highest and best use
The appraiser can use any one or more of the following four methods to find the reproduction or replacement cost of property improvements:
Square-foot method
Unit-in-place method
Quantity survey method
Index method
The three forms of depreciation are as followed:
Physical deterioration
Functional obsolescence
External obsolescence=
An annual GIM (gross income multiplier) is more likely to be used for industrial or commercial property.
A monthly GIM (gross income multiplier) generally is used for residential property. Because its income is generally limited to rent, the multiplier for a single-family residence is usually termed a gross rent multiplier (GRM).
The sales comparison approach usually is the best indicator of value for residential property. The cost approach is the most reliable indicator for newly constructed or special purpose property. The income capitalization approach is the best indicator of value for commercial/industrial property and apartment buildings of five units or more.
