Real Estate Valuation (S4U1&2) Flashcards
Appraisal
An estimate of value as of a specific date and for a specific use
Evaluation
Study of a property, potentially for land use or marketability
Valuation
Process of forming an opinion of a property’s value.
Assessed Value
what the local taxing authority thinks it’s worth.
Market Value
A price at which a willing buyer and willing seller can strike a deal given ordinary market conditions
Investment Value
The value to an investor of an investment property
DUST
Demand
Utility
Scarcity
Transferability
Anticipation:
The value of property today is the current value of the total anticipated future benefits.
Competition:
The more similar properties that are on the market, the lower the price will be driven.
Conformity:
Value is created and maintained when the characteristics of a property conform to the demands of the market.
Contribution
A change in a property impacts the value as a whole.
Highest & Best Use:
This is the most profitable use that is both legal (conforms to zoning) and economically feasible (won’t cost more than the increase in value).
Plottage:
The joining or assemblage of two neighboring land parcels increases the property value.
Regression:
This is the value a higher-quality property loses by being near a lower-quality property.
Progression:
This is the value a lower-quality property gains by being near a higher-quality property.
Substitution:
A property’s value is determined by what it would cost to purchase a similar substitute property.
The Principal of Substitution
the value of a property is equal to the value of an equivalent substitute property.
Elements of Comparison
analyze comparables’ locational/physical property characteristics and transaction differences. They explain why different prices are paid for comparables.
Units of Comparison
Allow the comparison to be standardized. Units may be price per square foot, per apartment unit, per acre, etc.
Financing Terms & Cash Equivalency
This is often offered by builders for new construction or as seller concessions in resale transactions.
Conditions of Sale
Was it an arm’s length transaction? Were personal items included, or fixtures excluded?
Market Conditions
at time of contract and closing.
Location
Underwriters assume appraisers understand the local marketplace, and will accept comparables that exceed distance, time, or other guidelines, if the appraiser supports the decision with written, detailed explanation that demonstrates that local expertise.
Physical Characteristics
This includes the site, view, construction quality, amenities, size, etc.
Drive By Comparisons
comparisons that are not on record such as a new circular drive, evidence of foundation shifting, a worn-out roof, superior or inferior view, and traffic or other nuisances such as airport noise.
Bracketing
a process in which an appraiser determines a probable range of values for a property by comparing a group of comparable sales to the subject that are below and above the property value.
The process of comps (substitution) (4 steps)
1) Analyze the subject property to identify its characteristics, particularly those that are in demand in the current market.
2) Identify comparable properties that have been recently sold.
3) Compare the comparables to the subject property and make adjustments to the sales price of the comparables where they are different.
4) Use the data to arrive at an opinion of value for the subject property on the date of appraisal.
Two categories of comparison
1) Elements of comparison
2) Units of comparison
If the subject property has a superior amenity, the sales price of the comparable property is ___________ by an appropriate amount or factor.
increased
If the subject property is inferior in an area (for example, the yard is not well-maintained, while the comparable property is beautifully landscaped), the sales price of the comparable property is ___________.
decreased
The amount of the adjustment is based on the value of the item in the market. For example, if the comparable home has a fireplace and the subject property doesn’t, and homes with fireplaces sell on average for $1,000 more, then the comparable property’s sales price is adjusted down by _______.
$1,000
To be able to make valid computations of adjustments, the elements of comparison must be applied in this order:(5 steps)
1) Financing terms and cash equivalency:
2) Conditions of sale:
3) Market conditions
4) Location:
5) Physical characteristics
The Cost Approach :
The cost approach to finding appraised value measures value as a cost of production, including the acquisition of the land and the construction costs. Its reliability depends on valid reproduction cost estimates (i.e., the cost of rebuilding) and appropriate depreciation estimates.
The cost approach most often used with
1) New construction of both residential and commercial property
2) Unique properties, such as highly energy-efficient houses, residential acreage with excess land, historic houses, and high-dollar houses with many amenities
3) Special-purpose commercial uses, such as hospitals, some manufacturing plants, hotels, and other single-purpose properties
The _________ approach isn’t used in condominium and cooperative properties and isn’t used as often with older properties, because accurately estimating depreciation is difficult.
cost
3 types of depreciation
Physical
Functional
External
Physical depreciation
is a loss in value caused by deterioration in physical condition.
Functional obsolescence
is a loss in value caused by defects in design, such as a poor floor plan or atypical or inconvenient sizes/types of rooms. Examples include houses where there are bedrooms on a level without a bath(s), or where the only access to a bedroom is through another bedroom.
External depreciation
or “economic obsolescence” is a loss in value caused by an undesirable or hazardous influence offsite. Examples are heavily trafficked areas, industrial odors, or airport noise
Curable depreciation
refers to an item that can be repaired or replaced, and 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. This includes items of deferred maintenance such a painting or repair of faucets. The cost to cure should be reasonable and economically feasible.
Incurable depreciation
includes items not practical to correct. Examples are a furnace or a roof that hasn’t reached the end of its economic life.
Replacement Cost
reflects the cost to build a functionally equivalent improvement.
Reproduction Cost
the cost to build an exact replica of the subject, with the same materials and deficiencies.
3 steps appraisers take to determine real cost
1) Use published indexes and tables to source the data, such as Marshall & Swift Tables™.
2) The cost is then adjusted by its loss in value due to depreciation from all causes.
3) Accurate site value is required as a separate figure. (The sales comparison approach is used most commonly to estimate this value.)
The Income Approach
The income approach (also known as the income capitalization approach) estimates the present value of any future benefits of owning a particular property. It’s based on the value principle of anticipation.
Gross Rent Multiplier
Use the gross rent multiplier (GRM) by dividing the sale price of a comparable property by that property’s monthly or annual gross rent to arrive at a single number, which is your GRM. That number is then multiplied by the subject property’s anticipated monthly or annual gross rent to arrive at a property value.
Gross Income Multiplier
Gross income multiplier (GIM) is essentially the same as GRM, but it uses all sources of income from the property rather than only rent. The multiplier is found from a comparable property by dividing the sales price by the property’s annual gross income from all sources. You can then apply the multiplier to the subject property’s income to determine value.
Direct Capitalization
This method calculates a net operating income (NOI) for a property over the next year, then applies a capitalization rate to that income to derive a market value for the property.
Capitalization Rate
or Cap Rate; formula used to estimate the potential return an investor will make on a property.
Yield Capitalization
This method is similar to direct capitalization, but projects farther into the future than one year. It also considers the potential value of the property upon resale.
Reconciliation
analyzing the findings from the approaches used, and then weighing the findings that each provided.
True or False: GRM doesn’t take into account any operating costs
True
Because it’s a rough estimate, it’s used in conjunction with ______________ in the area to arrive at a property value.
comparable sales
Gross Income Multiplier (GIM) is more suitable for _____________ properties
five-unit or larger
Cap rate formula
Cap Rate (R) = Net Operating Income (I)/ Property Value (V)
Direct capitalization is generally appropriate for ____________________properties and those with stable forecast net income.
small- to medium-sized
Yield capitalization is most often used for larger properties where the investor wants a value based on____________, along with the effect of ___________ and potential resale of the property on the ultimate return on investment.
long-term holdings; debt repayment
