Unit 7: Appraisal Flashcards
The cost of replacing an improvement with another of similar quality but not an exact replica
Replacement cost
The process of converting a future income stream into an expression of PRESENT VALUE
Capitalization
Loss in value due to causes EXTERNAL to the property
Economic obsolescence
Method of valuing property by comparing the subject property to similar properties that have recently sold
Market Data Approach /Sales Comparison
Demand
Utility
Scarcity
Transferability
Essential elements of VALUE
An estimate or opinion of value of a specific property
Appraisal
Income Capitalization Approach
NOI \ capitalization rate
Based on the principal of substitution
Sales Comparison Approach
Appraiser calculates accrued depreciation
Cost Approach
Functional Obsolesce
Curable. Physical or design features considered no longer desirable
Step in which the appraiser weighs all approaches to determine final value
Reconciliation
Increase in value due to rising market
Appreciation
Mathematical process never used in appraisal process
Averaging
Method that relates the sales price of a property to its expected rental income.
Gross Rent Multiplier (GRM)
Sales Prices/
Rental Income = GRM
Rental Income X GRM
Estimated Market Value
Used when a property’s income also comes from no rental sources
Gross Income Multiplier (GIM)
Appraise residential properties
Certified Residential Appraisers
Appraise commercial properties
Certified general appraisers
Established many federal agencies charged with the task of setting appraisal standards and minimum qualification requirements
The Financial Institutions Reform, Recovery and Enforcement Act if 1989
The analysis of sales similar recently sold properties in order to derive an indication of the probable sales price of a particular property by a licensed real estate broker
Comparative Market Analysis (CMA)
Relationship between an object desired and a potential purchaser
Value
The most probable price the a property will bring in a competitive and open market , allowing reasonable time to find a purchaser, who buys the property with knowledge of all the uses to which it us adapted and for which it is capable of being used.
An opinion based on analysis of potential income, expenses, replacement costs
Market Value
What a property ACTUALLY sells for.
Market Price
Forces and factors influencing property value
Social
Economic
Political
Physical
Trends in marriage, divorce rates, family size, longevity, desirability of social activities
Social forces
Income, employment levels, rate of property taxation, current interest rates, general economic growth
Economic forces
Government activities such as zoning, building codes, growth management, environmental legislation, tax structures
Political forces
Topography, location, climate, size, shape, proximity to major a retrials, jobs, public transportation
Physical forces
Most profitable single use to which a property is adapted and for which it is needed, or the use that is likely to be in demand in the reasonably near future. Can only be one use at any given time.
Highest and best use
Several items with essentially the same amenities and utilities are available, the item with the lower price will attract the most demand
Substitution
States that the value of the property will change if supply decreases and demand increase and vice versa.
Supply and demand
Maximum value is realized if the use of the land confirms to existing neighborhood standards
Conformity
Value can increase or decrease in anticipation of some future benefit or detriment
Anticipation
Affirms that the value of any component of a property is defined by what it’s addition contributes to the value of the whole or what it’s absence detracts from that value
Contribution
Principle that states that profit tends to attract competition
Competition Principal
No physical or economic condition remains constant
Change Principal
4 phases of cycle of change
Growth, stability, decline, renewal = Neighborhood Life Cycle
Comparative data relating to costs, sales, and income & expenses of properties similar to and competitive with subject property
Specific Data
Covers the nation, region, city, and neighborhood
General data
Steps of an appraisal
State the problem List the data needed and the sources Gather, record and verify the necessary data Determine the highest and best use Estimate the land value Estimate the value by each of the three approaches Reconcile the estimated values Report final estimate
Estimate of value us obtained by comparing the subject property with recently sold comparable properties
*used most for single family homes
Sales Comparison Approach (Market Data Approach)
4 categories of Sales Comparison Approach
Date of Sale
Location
Physical Features
Terms and Conditions of Sale
Property did not sell for an unusually high or low price bc of a special relationship between buyer and seller
Arm’s Length Transaction
Value of feature present in comparable property but not in subject property
SUBTRACTED from comparable property’s total sales price
Based on substitution which states that the maximum value of a property tends to be set by the cost of acquiring an equally desirable and valuable substitute. Most helpful in the appraisal of special-purpose buildings such as schools, churches, public buildings.
The Cost Approach
5 steps of cost approach
1) estimate the value of the land as if it was vacant (sales comparison approach)
2) separate the land from improvements, estimate the current cost of constructing the buildings and site improvements based on cost data and experience
3) estimate accrued depreciation resulting from physical deterioration, functional or economical obsolescence
4) deduct accrued depreciation from the estimated construction cost and the contributory depreciated value of site improvements
5) add estimated value of the land to the depreciated cost of the building and site improvements to determine total property value
Dollar amount required to construct an exact duplicate of the subject building at CURRENT prices
Reproduction Cost
Cost per square foot of a recently built comp x sq feet in subject building. Most common method of cost estimation
Square foot method
Replacement cost of a structure estimated based on construction cost per unit of measure of individual building components including material, labor, overhead and profit. Most components are measured in sq feet
Unit-in-place method
Estimate made of the quantities of raw materials needed to replace the subject structure as well as current price of materials plus installation. These factors are added to indirect costs (survey,payroll taxes, building permit) to arrive at total replacement cost
Quantity-survey method
Loss in value for any reason. Adversely affects the value of an improvement to real property
Depreciation
Curable. Repairs that are physically possible and economically feasible and will result in an increased appraisal value equal to or exceeding their cost
Physical deterioration : curable
Repairs to major structural components if a building which deteriorate at different rates may not be economically feasible
Physical deterioration : in curable
Physical or design features that are no longer desirable but can be replaced
Functional obsolescence :curable
Undesirable design features that can NOT be remedied easily. (Older multistory industrial building )
Functional obsolescence : Incurable
Effective age of a building and it’s economic (useful) life
Age life method
Cost of an asset is depreciated evenly over its useful life
Straight line method of depreciation
A building’s economic life x amount of depreciation the building has suffered
Effective Age
Based on the present worth of the future rights to income. Assumes that the income derived from a property will control the value of the property. Used on apartment buildings, office buildings, shopping centers
The Income Capitalization Approach
Annual potential gross income- appropriate allowance for vacancy and rent losses
Effective Gross Income
Effective gross income - annual operating expenses (taxes,insurance, maintenance,repairs, mgmt costs)
Net operating income (NOI)
Rate if return an investor would will demand for investment in building. Compares NOI to sales prices of similar properties sold in current market
Capitalization Rate
Net operating income /
Capitalization rate = Value
Income capitalization rate
Income/rate = Value
Income/value = Rate
Value x rate = Income
Variations in estimating value of income producing property
Used to appraise single and two family homes used as income properties
Gross Rent Multipliers or Gross Income Multipliers
Sales Price /
Rental income
Gross rent multiplier (GRM)
Rental income x GRM
Estimated market value
Federally related appraisals must follow guidelines stated in
Uniform Standards of Professiinsl Appraisal Practice (USPAP)
Economic principals of value
Highest and best use Substitution Supply and demand Conformity Anticipation Contribution Competition Change
