Unit 6: Methods of Valuation Flashcards
What are the 3 methods of appraisals?
- Market Data Approach
- Cost Approach
- Income Approach
What value method is used for residential properties and vacant land?
Market Data Approach
What is the market data approach?
Using the sales prices of comparable properties to estimate the value of the subject property.
T/F When doing a sales comparison approach, always adjust the subject, the property that is being appraised.
False. NEVER adjust the subject property.
In a rapidly changing market, the comparables should have sold between what time periods?
Within 6 months and no longer than 12 months.
When doing a sales comparison approach, what are the primary elements that are being compared and adjusted?
- Lot size
- Date of sale
- Days on market
- Amenities
- Square footage
T/F Adjustments are made to the comps.
True
T/F If the comp is better than subject, subtract.
True
T/F If the comp is worse than subject, add.
True
What is a paired sales anaylsis?
The appraiser finds two properties that are nearly identical, with the exception of the item being adjusted.
T/F The value is based on what the improvement cost to purchase and/or install.
False. The value is NOT based on what the improvement cost to purchase and/or install but on what the market will pay for it.
What is another name for the market data approach?
Sales Comparison Approach
Which appraisal approach is used for new construction and unique or special purpose properties?
Cost Approach
What is the cost approach?
The subject property’s value is figured out by estimating the cost of replacing (reproducing) the improvements, then subtracting the accrued depreciation and adding the land value.
cost to build new - accrued depreciation + land value = estimated value
When appraising a property using the cost approach, why do you need to add the value of the land?
Land does not depreciate.
What are the 2 methods used to figure out the cost to build new value?
- Reproduction
2. Replacement
How do you figure out the reproduction cost?
Cost to build a replica with the same or highly similar materials.
When is the reproduction cost used in a cost approach?
For historic properties.
How do you figure out the replacement cost?
Cost to replace improvements with the same functionality/utility.
What is depreciation?
The loss of value for any reason.
T/F Depreciation affects land.
False. Depreciation affects IMPROVEMENTS. It NEVER affects land.
What are the 3 types of depreciation?
- Physical
- Functional
- Economic
What is another name for depreciation?
Obsolescense
What is physical depreciation?
The wear and tear of a property.
What is functional depreciation?
The design or other inadequacies of the property.
What is economic depreciation?
The external factors (location or surroundings) of a property. These factors are typically outside of the property boundaries.
Which appraisal approach is used for properties that generate income?
Income Approach
What is the income approach?
The subject property’s value is based on the net income it produces.
What are the 2 other names for the income approach?
- Capitalization Method
2. Investor’s Method of Appraisal
Using the income approach, how do investors determine what they will pay for a property?
Investors use the capitalization rate also known as the rate of return.
What do appraisers use when doing an income approach appraisal?
Appraisers use past sales to estimate the present value of a property.
What is capitalization?
The process of converting estimated future income into a present value.
What is the alternative to capitalization?
Gross Rent Multiplier
What is the gross rent multiplier?
Takes into account gross income but not vacancies, bad debts, or expenses.
What kind of property would an appraiser use the gross rent multiplier instead of the capitalization rate when doing an income approach appraisal?
Single-family rental homes.
What is the final step in an appraisal?
Reconciliation
What is reconciliation?
The appraiser assembles and interprets the data in order to arrive at a final value estimate.
What is another name for reconciliation?
Correlation
T/F The appraisal value for a property is the average of all the 3 appraisal methods.
False. The estimated value of a property is NOT the average of all 3 appraisal methods.
