Valuation Flashcards
Economic forces
Recognition by appraisers that the value of property is really dependent on Employment rates, interest-rate’s, and stock market are all examples of economic forces. Forces that contribute to value.
Unemployment may cause a decrease in the housing market.
Social forces
A term used by appraisers to indicate forces such as the rate of population growth, number of families, children, level of education and income, number of immigrants, etc.
Jobs, schools, shopping.
Governmental forces
Term used by appraisers to recognize that governmental forces affect the value of real estate through such actions as taxation, zoning and eminent domain.
Zoning ordinances.
Physical forces
Term used by appraisers to indicate physical or geographical features that affect the value of property such as transportation affects the value of local where houses.
Ex. Mountains
What are the forces that contribute to value?
– Economic forces
– Social forces
– Governmental forces
– Physical forces
Utility
Useful to someone.
Utility = value
Ex; a lakeside property with a beach has utility to a family with kids who play on the beach in the summer.
And acre of land in the middle of the Sahara desert has no utility no one has any use for it. Therefore it has no value.
Transferability
To have value the land must be transferable to someone who pay money for it. If someone is stuck with a parcel of land because no one can or will take title to it, it has no value.
Half to be able to sell
Supply and demand
Supply-If there are lots of buyers for very few properties, the price of the properties will go up.
Demand-On other hand if there are lots of properties and very few buyers, the value will decline.
Anticipation
Related to the concept of demand is anticipation. This recognizes that a property has value where prospective buyers anticipate enjoying or using the property. Like a family with four children can anticipate the utility of a five bedroom home with a fenced in yard.
Contribution
That’s an amenity or special feature of a property will contribute to its value.
Ex: two cape style homes identical in every way except that one as an added two car garage, appraisers say that the garage contributes value to that Cape.
Family room, deck, fireplace, or modern kitchen are examples of features that would contribute to value
Substitution
Where a buyer sees two properties for sale with equal utility, the buyer will substitute the less expensive property for the more expensive. Why would a buyer pay more for a home when one of equal utility is available for a lesser price?
Conformity
A property will have maximum value when is surrounded by similar conforming properties.
Change
Land-use in neighborhoods are in a constant state of change. Some neighborhoods are in a state of decline that Will result in a diminished value while others are in a state of improvement that willcreate an increase in value.
What are the economic principles that affect value?
– Utility – Transferability – Supply and demand – Anticipation – Contribution – Substitution – Conformity – Change
What are the three approaches to value?
- the comparable market approach
- the cost approach
- the income approach
The comparable market approach CMA
Finding comparable properties, current listings, and pending properties.
Estimating the sale price by find a comparable properties that have sold recently.
Conflict of interest
When aNother transaction broker from your company helps and gives you advice, they cannot get paid.
The cost approach
Used by appraisers to estimate the market value of properties where there are no comparables and the income approach may not be most reliable.
Using the replacement cost or the reproduce cost method.
Replacement costs and reproduce cost?
You can either replace the current structure with one that is modern in design and materials and matches the utility of the current structure, or estimate the cost of reproducing the existing structure, with elegant bronze stair railing’s etc.
What four steps does the appraiser take to make his decision on the cost approach?
- estimate the value of land as if it had no buildings or improvements
- estimate the cost, new, of replacing the improvements, the building.
- estimate the depreciation of the subject property
- add 3 with 1 to come up with the estimated value of the property.
What are the three ways the appraiser can use to come up with the cost approach in improvements?
- Quantity survey method
- unit in place method
- the square root method
The income approach
Uses the income of the property to establish a value.
What three steps does the appraiser take to figure out the income approach?
- the gross rent multiplier
- the gross income multiplier
- the caprate
What information do you need to get the gross rent multiplier for the income approach?
- the gross rent of similar properties
- the sale price of those similar properties
Sale price 200,000 / gross rent 2,000 = GRM 100
My rent 3,000 x GRM 100 = 300,000
Gross income multiplier
GIM uses annual income, not monthly income. Used more often for commercial or industrial properties.
Sale price 325,000 / annual gross 60,000 = GIM 5.42
Rent = month Income = annual
Cape Rate
Rate of return on their investment.
NOI= net operating income
Is the income left over after paying expenses of operating the property.
I/R = V I = NOI income R = capitalization rate and V = value
10,000 Income / .10 cap rate = 100,000 value
Net operating income
NOI
Income after expenses and such.
The appraiser subtract three types of expenses:
- anticipated vacancy and credit losses
- operating expenses
- a reserve
What are the three types of listing agreements?
- Open listing
- Exclusive agency listing agreement
- Exclusive right to sell
Open listing
A.k.a. non-exclusive listing
The seller may list with multiple real estate companies, the first company to bring The buyer will earn the commission. The remaining companies receive nothing. The seller has the right to find a buyer and sell property without paying a commission.
Exclusive agency listing agreement
The seller agrees to list with only one real estate company.
If the company finds a buyer a commission is paid. If the seller finds a buyer he does not have to pay a commission.
Exclusive right to sell
The seller list with just one real estate company and gives up the right to find a buyer. If the seller does find a buyer a commission is still payable to the company.
What is functional and External obsolescence?
Functional = dated kitchen. Some are curable and some are incurable.
External = neighborhood changed.
