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
What is the cost of curing the defect does not exceed the increase in property value?
Curable depreciation
What is the cost of curing the defect exceeds the increase in property value?
Incurable depreciation
What refers to the physical wear and tear on the property?
Physical deterioration
What refers to obsolete features in the building?
Functional obsolescence
What is the income approach?
This is used for income generating property such as apartments, commercial retail centers, multi tenant office buildings etc. This process of using income levels to estimate value is called income capitalization-the capitalization rate of return an investor will want to get.
Net operating income = (annual income minus annual expense)
NOI
Net Operating Income
___________________
Value x Cap %
To solve for Vaue …….NORI/R = V
To solve for Cap Rate……NOI/V = R
To solve for Income……V x R = NOI
Value is affected by what four things?
Page 18
- chronological age: actual agent years of the building based on the billing date
- effective age: differs from the actual age by such variable factors as depreciation & Quality of maintenance. Remodeling can extend the economic life of a structure by reducing or mitigating the impact of actual age and increasing the structures life expectancy. I.e.; Improvements are making a younger in age
Physical life: this is the actual age or life of the structure that is considered habitable (more like how long the house is supposed to last)
- economic life: this is the estimated. We are in improved property will yield a return over and above the economic rent. In the case of an older structure, economic life refers to the period during which the remaining improvements are depreciate it for tax purposes. Economic life is the period which an improvement has value in excess of it salvage value. This is also called service life or useful life. (if 25 year shingles on the roof has an economic life 25 years).
In the cost approach to value, the appraiser makes use of
A. The owners original cost of the building
B. The estimated replacement cost of the building
C. The sales price of similar buildings in the area
D. The assessed value of the building
B. The estimated replacement cost of the building
The sales comparison approach to value would be most important when estimating the value of a A. Existing residence B. Apartment building C. Retail location D. New residence
A. existing residence
When appraising a commercial property, the appraiser is most concerned with the A. Accrued depreciation on the property B. Income generated by the property C sales price of comparable properties D total debt service on the property
B. Income generated by the property
The period of time over which an improvement to the property Will remain useful for its original purpose is known as its A. Amortized life B. Chronological life C. Actual life D. Economic life
D. Economic life
A house with outmoded plumbing is suffering from? A. Functional obsolescence B. Curable physical deterioration C. Incurable physical deterioration D. External depreciation
Outmoded means no longer useful or acceptable.
A. Functional obsolescence
A home with his kitchen next to the master bedroom would be considered?
Physically obsolete
Functionally obsolete
Environmentally obsolete
Diminished
Functionally obsolete
In the cost approach an appraiser uses which of the following?
A. Sales price of similar properties
B. The owners original cost of construction
C. An estimate of the buildings replacement cost
D. The property is depreciated value as used for income tax purposes
C. An estimate of the buildings replacement cost
Set Back
The amount of space required between the lot line in the building line
Buffer zone
In the zoning, a strip of land separating one land-use from another
Nonconforming use
A permitted use of real property that was lawfully established and maintained at the same time of its original construction but no longer conforms to the current zoning laws
Variance
Permission obtained from government zoning authorities to build a structure or conduct a use that is prohibited by current zoning laws
Conditional use permit
A specific property within his own area is rezoned to permit a different use from the zoning requirement for that zone area. This may be done to benefit the community
Spot zoning
A change in zoning for a particular lot or spot is generally not permitted
Reproduction cost
To replace with same materials as original construction
How square footage is measured
Length x width
Replacement cost
To replace with current materials and methods
How is volume measured?
Length x Width x Height (in feet)
What never depreciates?
Land
What is it called when it is not worth the cost of modifications?
Incurable depreciation
What is it called when something has a feature that is no longer useful?
Obsolescence
Appreciation
Due to positive changes in the local economy
Curable depreciation
Can be remedied at a reasonable cost
Deterioration
Wear and tear
Depreciation
Only applies to buildings and improvements
Lot and block method
The lot and block method has developed a parcel of land is subdivided. The surveyor uses the metes and bounds method of government survey method to map out lots and blocks on a subdivision map this matter is called plat or a plat map
Platz frequently contain information be on the tip of the legal descriptions, such as easements, location markers, and a list of use restrictions are flying to the land.
640
Number of acres in one square mile
6
Distance, in Miles, between Township lines
16
Section always set aside for school purposes
36
Number of sections in a Township
1
Number of square miles in each section
A section = 1 square mile = 640 acres
A section = 1 square mile = 640 acres
Know this!
Principal meridian’s ↕️run north 🔺and south🔻
Principal meridians ↕️run north 🔺and south🔻
Baselines ↔️run east ➡️and west⬅️
Baselines ↔️run east ➡️and west⬅️
Township lines are lines running east and west, parallel with the baseline and 6 miles apart
Township lines ↔️are lines running east and west, parallel with the baseline and are 6️⃣miles apart
Lines referenced from monuments are called what?
Boundary lines
The starting and ending point in the legal description is called what?
Point of beginning
Fixed objects used to establish boundaries in the legal description are called what?
Monuments
And exact way of describing the location of real estate is called what?
The legal description
A method of describing real estate that uses distance and direction is called what?
Metes and bounds
Metes and Bounds
The metes and bounds system of describing land is the oldest of the three methods used. A meeting bounds description starts at a well-defined point of beginning and follows the boundaries of the land by courses and metes (measures, distances & compass direction) and bounds (land marks, monuments) and returns to a point of beginning.
The property description using the meats and bounds system must begin and end at the point of beginning, the same identifiable point. It basically encloses the perimeter of the land
Conformity
An appraisal principle of value based on the concept that the Mora property or its components are in harmony with surrounding properties, the greater the contributary value. The more properties are like the more they retain value. I.e.; purple house
Regression and progression
Between the similar properties, means the value of the better quality property is affected adversely by the presence of the lesser quality property and a lesser house will benefit from a better quality house.
I.e.; purple house makes regression in houses around it.
Fixed up better than others can make value progress
Anticipation
Property can increase or decrease in value in expectation of something in the future such as appreciation or rezoning. I.e.; a road being built between your house can be either good or bad
Contribution
States that the value of any component of a property is what it gives to the value of the whole or what is absence detracts from the value. I.e.; a bathroom contributes to the value and the lack of can detract.
Assemblage and plottage
Assemblage is the combining of two or more adjoining lots into one larger tract to increase the value.
Plotted value is the increased value resulting from the combining of adjacent lot into one larger lot.
Competition
Business attracts other businesses of similar type together they can make more money than they would have alone. Too much competition can have a negative end result.
Change
Real property is constantly changing - expanded, stabilizing, declining or rebirth
Went to more persons join to make and operate a real estate investment, the arrangement is called a A Subdivsion B. Timeshare C. Syndicate D. Group investment
C. Syndicate
