Unit 6 - Property Valuation Flashcards
What’s an AVM?
Automated Valuation Models (AVM)
They use statistical methods to automatically arrive at a property value based on property records in a database
What are the three approaches to valuations and which is most common?
And if you do just that most common one, what is the appraisal called?
The three types are cost approach, income approach, and direct comparison approach.
Direct comparison is now most common for many lenders and doing just this approach is called a limited use appraisal.
What are the 8 steps in the appraisal process?
- Define the problem
- So establish terms of reference and identify the 5Ws - Preliminary survey and appraisal plan
- determine what approach you’ll take and what’s needed - Data Collection
- Collect general info such as local market trends and specific such as renos, landscaping, etc. - Apply the cost approach
- Apply the direct comparison approach
- Apply the income approach
- Reconcile the facts to estimate final value
- Prepare final report
If you are representing a seller and the buyer agent requests that the seller warrants that there has been no “traumatic or horrific events,” what should you do?
You need to ask for more specifics on what they are inquiring on. These terms are way too vague to sign off on without more info – it opens them up to litigation and a bad NSREC audit.
What are the top 3 things that decrease stigma with a property?
- Time heals all
- Number of owners
- Otherwise occupied (just putting it on rental market can decrease stigma)
Say you have a seller client who has some stigmas associated with their property but doesn’t want to disclose them? What should you do?
Ultimately, it is your duty to disclose only what the seller wants to disclose. However, don’t be afraid to walk if they are being unreasonable and trying to hide things. Say that is not how you do business and move on.
What is the different between a narrative and form appraisal report?
A narrative report is a long-form report prepared by a fee appraiser.
Whereas a form report is standardized and associated with property valuations for residential property such as mortgage application
What are 4 steps for the direct comparison approach?
- Select Comparables
- Make adjustments
- Establish adjusted sale price
- Complete reconciliation
What are the 4 criteria used to select comparables?
- Time (sales close to date of appraisal)
- Market Value (sale of comparable should have had informed buyer/seller, prudent behaviour, etc)
- Similarity (physically similar)
- Proximity (located on same street or in close proximity)
Reconciliation of a comparable appraisal involves what type of reasoning? Deductive reasoning or mathematical formulae?
Involves deductive reasonnig based on jusgement and experience. It is not mathematical.
What are the 5 steps to the cost appraisal approach?
- Estimate the site value (estimate cost of vacant lot with comparables)
- Estimate the replacement cost new (to build a building with same utility)
- Estimate the accrued depreciation
- Estimate total depreciated cost (replacement cost - depreciation = total depreciated cost)
- Estimate the value of the property (site value + depreciated cost = estimated value by cost approach)
What are the two methods for calculating accrued depreciation?
- The age-life depreciation
So if it has a lifespan of 60 years and has been around for 12, then depreciation is %20 of the new-build worth - Flat Depreciation method (most common)
Just taking a flat deprecation rate. So for example, at %1 per year, if it was 12 years old you’d take %12 of the new-build worth as accrued depreciation
What are the 3 main forms of depreciation that make up modified age-life depciation?
- Physical Deterioration
As it sounds, things start to fall apart. Put in two buckets, curable (can fix or replace economically) or incurable (doesn’t make sense to fix or replace) - Functional Obsolescence
When things become outdated and therefore unusable. Like putting a modern kitchen into a 60 amp house, or parking an SUV in an old tiny garage. - External Obsolescence
These are things external to the property that can even impact new builds. Say an intersection next to the house becomes super busy, or they built too many new homes flooding the market and causing reduced pricing, which would be economic obsolescence.
What are the 6 steps to the income approach to appraising value?
- Estimate potential rental income
- Forecast 100% occupancy fo highest possible rent - Calculate effective rental income
- Factor vacancy and credit losses and reduce potential rental income above by these losses - Calculate gross operating income
- Add income from other sources (such as parking, laundry, etc) to effective rental income - Calculate net operating income
- subtract operating expenses from the above calculated gross operating income to find net operating income for the year - Select appropriate capitalization (CAP) rate
- CAP rate for building type and market is usually found from market research and consulting services - Capitalize net operating income into an indication of value
- Take the above net operating income and divide it by the CAP rate to get the value!
What is the handy IRV triangle for remembering income approach calculations?
I ontop
R and V on bottom
(the trick: park the RV in the basement)
So I/R = V
I/V = R
And RxV = I
I = Income R = Rate V = Value
