Valuation and Appraisal Flashcards
Appraisal
estimate or opinion of value
goal of appraisal is to determine:
The market value, insurance value, salvage value or the tax value of a property.
Compensation is based on time and effort never on the established price of the property.
Appraisal process
State the problem. Gather, record and verify the necessary data. Analyze and Interpret using: Neighborhood Analysis Neighborhood Cycle Site Analysis Estimate Land Value. Estimate the value of the property by: Sales Comparison Cost Income Capitalization Reconcile estimated values for the final value estimates. Report final value estimates.
Appraisal Rules
Payment must be in cash or its equivalent
Buyer and seller must be unrelated and acting without undue influence, menace or duress.
The property must be marketed for a reasonable time in an open and free-flowing market.
Both buyer and seller must be well-informed consumers.
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 homes.
Narrative: The most comprehensive of all appraisal reports. Used for commercial and investors.
10 Real Estate Value Principles
Highest and Best Use - the possible use of a property that would produce the greatest net income and thereby develop the highest value.
Substitution - the maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property. (Comparison shopping - basis for Sales Comparison Approach.)
The Law of Supply and Demand - the value of a property increases when the supply is short and decreases when there is too much. Similarly, the value increases when the supply is short, and decreases when there is little demand.
Conformity - the more a property or its components are in harmony with the surrounding properties or components, the greater the contributory value. (The more the properties are alike, the more they retain value.)
Regression and Progression - occur between dissimilar properties. 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 larger house.
Anticipation - property can increase or decrease in value in expectation of something in the future such as appreciation or rezoning.
Contribution - means the value of any component of a property is what it gives to the value of the whole or what its absence detracts from the whole.
Assemblage - is the combining of two or more adjoining lots into one larger tract to increase their total value.
Competition - is when one business attracts another business of similar type; together they may make more money than they would have singularly. Too much competition is ruinous.
Change - real property is constantly changing- expanding, stabilizing, declining or rebirth. We are all familiar with areas that have or may be going through these changes.
Sales Comparison Approach
Used for appraising residential property and vacant land.
The principle of substitution holds that if a buyer will pay a certain price for a property, he will pay a similar price for a “substitute” property of similar characteristics.
Sales Comparison Steps
Identify comparable sales.
Compare comparables to the subject and make adjustments to comparables. One always adjusts the values of the comparables – never the subject.
Reconcile values indicated by adjusted comparables for the final value estimate of the subject - a judgmental evaluation based on all value indicators.
Cost Approach
Used for properties with limited comparable data or income data or for properties where the original cost is particularly applicable.
Square Foot Cost
using outside measurement, how many square feet times a cost for either replacement or reproduction of the improvement
Unit in Place
based on the construction cost per Chapter of measure of individual building components.
Quantity Survey Method
The quantity and quality of all materials and the labor are estimated on a Chapter cost basis. These factors are added to indirect costs to arrive at the total cost of the structure.
Cost Approach Steps
Estimate the value of the land alone as if vacant.
Determine the replacement or reproduction cost of the improvements.
Deduct all accrued depreciation from the replacement cost.
Add the estimated land value plus site improvements to the depreciated replacement or reproduction cost.
Depreciation Classes
Physical depreciation is a form of depreciation caused by the action of the physical elements.
Functional obsolescence is a loss of value of an improvement due to functional inadequacies, often caused by age or poor design.
External obsolescence is a loss of value resulting from extraneous factors that exist outside of the property itself. It is caused by environmental, social, or economic forces over which an owner has little or no control.
Chronological Age
actual age in years of the building, based on building date. It cannot be changed
Effective Age
differs from the actual age by such variable factors as depreciation, quality of maintenance, and the like.
Physical Life
is the actual age or life of a structure that is considered habitable - defined by the durability of its structural components
Economic Life
is the estimated period where an improved property will yield a return over and above market rent.
Income Capitalization Approach to Value
Estimate the annual Potential Gross Income.
Deduct an allowance for vacancies to arrive at Effective Gross Income.
Deduct the annual operating expenses from Effective Gross Income to derive Net Operating Income (NOI).
Estimate the rate of return that an investor would demand for this investment - Capitalization Rate.
Divide the Cap Rate into the Net Operating Iincome to identify the property’s value.
Formulas
To solve for Value: I / R = V
To solve for Cap Rate: I / V = R
To solve for Income: V x R = I
Gross Rent Multiplier GRM
Value ÷ Monthly rent = Gross Rent Multiplier
GRM x Monthly rent = Value
Value ÷ GRM = Monthly rent
Gross Income Multiplier GIM
Value ÷ Annual rent = Gross Income Multiplier
GIM x Annual rent = Value
Value ÷ GIM = Annual rent
Competitive Market Analysis CMA
Locate Comparable Properties - those with the same highest and best use that have sold recently (last 3-6 months).
Compare the Subject to the Comparables - adjustments in a CMA are not normally as detailed as those made in an appraisal.
Reconcile all comparable information and draw the value conclusion.
Cap Rate
desired rate of return (profit) on the investment
Cap Rate parts
Risk Interest Rate - the return on the money invested. The higher the risk rate, the higher the cap rate.
Recapture Rate - the return of the money invested. Based on the economic life left in the building
