Valuation Flashcards
What is a CMA
Comparative Market Analysis
a comparison of the prices of recently sold homes (w/i the last year) that are similar to a listing sellers home in terms of location, style and amenities to determine the list price.
BPO - when a broker provides a cma is sometimes called a Broker Price Opinion
Appraisal
is an Opinion or Estimate of Value
The appraisal process includes:
- State the problem-determine the “highest and best” use of the property
- Gather, record, and verify the necessary data
- Analyze and interpret
- Estimate land value
- Estimate value by each of the three approaches to value
- sales comparison approach
- coat approach
- income approach - how much income will this property generate
Arms Length Transaction
A transaction in which buyers and sellers are dealing from equal, informed bargaining positions. The transaction is conducted without relying solely on each other for fairness or integrity and without being subject to each other’s dominance or control (as in menace or duress). Without arms length, and transaction is not considered to be a “fair market value”.
What are the three types of appraisal reports?
Letter: A short business letter stating all essential data but not including supporting data
Short or Form: contains all basics of a regular appraisal and is used primarily for home
Narrative: The most comprehensive of all appraisal reports. Used for commercial properties and investors
When doing an appraisal remember this…
Land does NOT depreciate whereas a house does-this is why we add them together
Which of the following is the most important in the appraisal process? A. Asking price of the property B. Highest and best use of the property C. Original cost of the property D. Selling prices of similar properties
B. Highest and best use of the property
Reconciliation is an appraisal term used to describe
- The appraisers determination of other properties highest value
- an average of real estate values for property similar to the subject property
- The appraisers analysis and comparison of the results of all three appraisal approaches
- The method used to determine the most appropriate capitalization rate for a property
- The appraisers analysis and comparison of the results of all three appraisal approaches
The purpose of an appraisal is to do what?
Estimate the value of a property
Economic Factors of Land?
There are 5 economic characteristics of land
D - Demand
U - Utility or Usefullness: a 4 bedroom home is more useful than a 2 bedroom home
S - Scarcity: one becomes available & sells quickly
T - Transferablility: Can be sold, willed, etc.
S - Situs: location, location, location
Lack of any of these will decrease the market value of the property.
When conducting an estimate of value, what must the appraiser do when a comparable property does not have a feature the subject property has?
- add value to the comparable
- subtract value from the comparable
- add value to the subject
- subtract value from the subject
Add value to the comparable
What are the 3 approaches to value?
Sales comparison, cost, income
When both parties are dealing from equal positions is called what?
Arms Length Transaction
An estimate of the value of a property is called what?
An appraisal
What is the 1st step in the appraisal process?
Define or state the problem.
SBA
If the subject property is better, add to the comparable
CBS
if the comparable property is better, subract from the comparable
An appraiser will always add or subtract from the comparable!!!!
Not the subject property - always leave that one alone.
When a comparable property has a feature that the subject property does not have, the value of the feature must be \_\_\_\_\_\_\_\_\_\_from the comparable. A. - Added B. - De-valued C. - Subtracted D. - Re-evaluated
C - Subtracted
Steps involved in the cost approach
- Estimate the value of the land alone as if vacant. (do not depreciate land)
- determine either the replacement or reproduction cost of the building
- deduct all accrued depreciation from the replacement cost
- add the estimated land value to the depreciated replacement or reproduction cost
Replacement cost
To replace with current materials and methods with utility and function similar to the original
Cost can be determined by one of the three methods which are
- -Square-foot method; using outside measurement, how many square feet times a cost for either replacement or reproduction. This is the least accurate
- -unit in place method; using “reproduction” by estimating the price of individual components. This is more expensive and used in historical buildings
- -quantity survey method; estimating individually the price of all new materials to be used. This uses the replacement value
Square Foot Method is what?
Length x Width = Square Footage
***for the test– basements, garages and decks do not count
Steps involved in the cost approach
- Estimate the value of the land alone as if vacant. (do not depreciate land)
- determine either the replacement or reproduction cost of the building
- deduct all accrued depreciation from the replacement cost
- add the estimated land value to the depreciated replacement or reproduction cost
What are the 3 types of Depreciation?
- Physical Deterioration (normal wear & tear)
- Functional Obsolescence
- External / Economic Obsolescense
Physical deterioration
A reduction in utility or value resulting from an impairment of physical condition.
- curable: painting or routine maintenance
- incurable: cost a lot of money and is it worth it. And example is installing siding on the building which also needs major interior repairs
Functional obsolescence
A loss of value of an improvement due to functional inadequacies, often caused by age are poor design.
- maybe curable such as putting in a new electric stove instead of a wood-burning stove or by updating and in adequate electrical system
- maybe incurable as in the case of a commercial building with wide load bearing columns
Is lack of insulation a functional obsolescence?
Yes lack of insulation equals functional obsolescence because it is not from wear and tear it’s just how it was built.
External or Economic Obsolescence
The loss of value typically in curable resulting from extraneous factors that exist outside the property itself, what type of depreciation caused by environmental, social or economic forces of original owner has little or no control. This is also called locational, economic, or environmental obsolescence.
This type is almost always in curable.
Ie; Nothing wrong with the house but everything wrong around the house or neighborhood.
If there’s a change in zoning, external obsolescence is likely to occur as in the following examples-
〰To a residence if an industrial plant is built next to it
〰to a well-maintained house in a deteriorating neighborhood
〰to a motel where a new highway is being built the results and difficult access to the motel
〰other causes might be proximity to nuisances and changes in the land or population
This type of obsolescence will be of the most concern to an appraiser doing a neighborhood analysis.
This type of obsolescence is most always incurable.
It would be virtually impossible to calculate or even apply the costs to cure.
Incurable vs. Curable: The deterioration of an improvement so that it is not economically feasible to repair correct the problem it’s considered in curable economic absolute sense is nearly always in curable.
Appreciation
Due to positive changes in the local economy
Depreciation
Only applies to buildings and improvements
Obsolescence
A feature that is no longer useful
Deterioration
Wear and tear
Curable depreciation
Can be remedied at a reasonable cost
Incurable Depreciation
Not worth the cost of modifications
What is the cost of duplicating property exactly as it is constructed?
Reproduction cost
What is the cost of producing improvement similar or equivalent to the subject property?
Replacement cost
