Valuation and Market Analysis Flashcards
A formal opinion of value that a real estate appraiser assigns, based on supportable evidence, for a specific purpose, party, and property, as of a specific date and in accordance with Uniform Standards of Professional Appraisal Practice (USPAP).
Appraisal
This person estimates the value of a building or a piece of land. They may specialize in either commercial or residential property.
Appraisers
The process of forming an opinion for a property’s value.
Valuation
What are the 7 steps for a Uniform Standards of Professional Appraisal Practice (USPAP)
SIGHE PRD
- State the problem
- Identify data needed
- Gather and analyze data
- Highest and best use
- Estimate the land value (as if the land were vacant)
- Pick between the three approaches to valuation, depending on property type.
- Reconcile values to determine the final appraised value.
- Develop and deliver the appraisal report.
sales comparison | income | or cost approach Valuation Types
Requires that appraisals performed in conjunction with federally related transactions must be completed by state-certified or licensed appraisers.
Financial Institutions Reform | Recovery and Enforcement Act
(FIR REA)
These transactions are not FHA insured or VA guaranteed and will not be sold to a GSE such as Fannie Mae or Freddie Mac.
Federally related transactions
The intent is to ensure that appraisals reflect an accurate, unbiased property value by requiring that appraisers be:
Certified or licensed in the state in which the appraised property is located
Knowledgeable about the local real estate market
Qualified to appraise the subject property
Appraiser Independence Requirements (AIR)
The most probable price a property will sell for in an open market if neither the buyer nor the seller is under duress.
Market value
A property’s objective worth and may not equal price or cost.
Value
The amount to recreate that property if it disappeared off the face of the earth today.
Cost
The amount a buyer paid for a property and the seller accepted.
Market price
What are the Four characteristics of value?
DUST
Demand: How popular or desirable a property is.
Utility: The property’s function.
Scarcity: Relates to market supply.
Transferability: The ease with which another person can purchase the property; a property with a title defect may suffer a loss of value because of the difficulty of being able to transfer title to another.
What are the Other types of value?
VAMII
Value in use Assessed value Mortgage value Insured value Investment Value
What are the economic principles of value?
PACS PRACC
Plottage
Assemblage
Conformity
Substitution
Progression Regression Anticipation Competition Contribution
What a property is worth to the person using it.
Other Types of Value
Value in use
What the local taxing authority thinks a property is worth.
Other Types of Value
Assessed value
Price at which the property can be loaned on or sold for at a foreclosure sale.
(Other Types of Value)
Mortgage value
Cost to replace or rebuild a property.
Other Types of Value
Insured value
The return on investment a property may provide.
Other Types of Value
Investment Value
A property’s value is determined in part by how well it conforms to its surrounding area (how similar it is to other properties in the neighborhood).
(principles of value)
conformity
A property’s value is determined in part based on what else is available.
(principles of value)
competition
A reasonable person will not pay more for a property if a comparable one can be had for less.
(principles of value)
substitution
The value of any given change to the property is dependent on the value of the property as a whole.
(principles of value)
contribution
An increase in value that occurs by combining adjacent parcels of land into a single parcel.
(principles of value)
plottage
The process of combing the parcels.
principles of value
assemblage
A decline in value due to the decline in value of neighboring properties.
(principles of value)
regression
The increase in property value from increased surrounding property values.
(principles of value)
progression
Changes in value may be caused by the expectation of events.
principles of value
anticipation
A process in which an appraiser uses both superior and inferior units of comparison such as age, transaction price and others, in order to determine a probable range of values for a property.
Bracketing
This value approach is based on the concept that the entire property is worth:
Value of the land + Value of the improvements on that land.
Appraisers use and rely on this approach when the property is unique and is not being used to generate rental income.
Cost approach
Three causes of depreciation
FEP
Functional obsolescence
External depreciation
Physical deterioration
caused by factors outside the property (e.g., an airport is nearby, causing noise).
(cause of depreciation)
External depreciation
a form of depreciation or loss in value caused by defects in design and can occur with outdated structures or systems or when a property is overbuilt for the area.
(cause of depreciation)
Functional obsolescence
occurs with wear and tear, damage, and improper maintenance.
cause of depreciation
Physical deterioration
This depreciation refers to an item of physical deterioration or functional obsolescence where the cost to cure the item is less than or the same as the anticipated increase in the property’s value after the item is cured.
Curable depreciation
This depreciation includes items not practical to correct.
Incurable depreciation
This approach bases value on the cost to build a functionally equivalent property.
replacement cost
This approach determines the cost to build an exact replica of the property with the same materials and deficiencies.
reproduction cost
This analysis approach bases the current property value on potential income that the property can generate for residential investment rental properties, such as single-family homes or residential buildings that comprise two- to four-family units.
Income analysis approach
Three methods for estimating value within the income approach?
GGC
gross rent multiplier
gross income multiplier
capitalization method
Used for the appraised value of four or fewer units.
X = Sales price ÷ gross monthly rent.
Gross monthly rent * X = value.
Gross rent multiplier (GRM)
Used for the appraised value of five or more units (considered “commercial” property).
X = Sale price ÷ gross annual income.
Gross annual income * X = value.
Gross income multiplier (GIM)
An annual rate of return from an income-producing property
Capitalization rate or cap rate
Divide net operating income by value (or sales price)
I ÷ V = R
Cap rate
Divide net operating income by cap rate
I ÷ R = V
Determines the value using the cap rate formula
Multiply cap rate by value
R x V = I
Determine net operating income using the cap rate formula
This analysis helps clients make price decisions.
comparative market analyses (CMAs)
