Valuation of Real Property Flashcards
_________ is the process of determining how much a piece of real property is worth. An appraisal is an ________ or _______ of a property’s nature, quality, value, or utility. It is an estimate of specified interests in, or aspects of, identified real estate which is supported by relevant, factual evidence.
Valuation
estimate or opinion
A ______ ________ is an informal estimate of value utilizing some or perhaps all of the techniques employed by the professional appraiser.
market analysis
Appraisers who attend the required courses through the Appraisal Institute may use the designation, MAI, ______ of _________ _________, after their name. Appraisers are also required to take a course in _______ _________ of ____________ _________ ________, or USPAP.
Master of Appraisal Institute
Uniform Standards of Professional Appraisal Practice
_____ is a relationship between a potential purchaser and the thing he desires.
Value
_____ can also be defined as the desirability or worth of a thing - property, goods, or services- to buyers and sellers.
Value
_____ is the present worth of future benefits that arise from the ownership of real property.
Value
_____ is the quantity of one thing which can be obtained in exchange for another
Value
_____ is the amount that a ready, willing and able buyer will pay and the seller will accept.
Value
_____ is the term used to describe the sum of all economic aspects of a location which invest it with economic value. A property situated in an economically desirable location, that is, a location which allows it to successfully fulfill human needs, is said to benefit from ________ _____.
Situs
positive situs
___________ ______ ________ (CMA) can help the salesperson determine a listing
price for the seller, and is a comparison of the prices of properties recently sold, properties currently on the market, and properties that did not sell. Comparison properties must be similar to the seller’s property in location, size, age, style and amenities. The CMA is not a formal appraisal, but it uses the same
principle and many of the same methods as the sales comparison approach.
Comparative Market Analysis
Although value can exist in many specialized forms - cash value, book value, insurance value, going-concern value, intrinsic value, assessed value, salvage value, use value, scrap value, and investment value, to name a few, the type of value most useful when dealing with the appraisal of real estate is ______ _____.
market value
______ _____ is the power of an item to command other valuables in exchange for that item. It is also the most probable price in terms of money which a property should bring in a competitive and open market, assuming the price is not affected by undue stimuli. It always refers to the future value.
Market value
______ _____ is the amount that is actually paid, or is about to be paid, for a property’s ownership rights at a specific point in time. Always refers to present value.
Market Price
______ ____ refers to the past outlay of sufficient capital for the supervision, land, materials, labor and other valuables that are needed to bring an improvement into existence. This includes financing and the
expenses incurred in selling the piece of property. Always refers to past.
Market Cost
The willing and informed buyer on the open market place will exchange valuables for an item only if that
item has four essential “____________ of _____” present and working together in useful combination. These four interact in various complex ways. Their interaction is reflected in the basic principle of “supply and demand”. They can be remembered with the acronym “DUST”.
determinants of value
“Is there a sufficient number of persons in the market willing to purchase the product with adequate purchasing power?” ______ is the desire to purchase along with the ability.
demand
To be “useful” means to meet a need or to render a service. To determine ______ we can ask the question, “Does the product satisfy a need?”
Utility
A commodity’s market value is related also to its relative ________. To determine ________ we can ask the question, “Is the available supply limited relative to the desire or demand for the product?”
Scarcity
_______________: A commodity may have utility, scarcity, and be in effective demand, but unless an item can readily be conveyed from the seller to the buyer, it will not have economic value. “Can the product be conveyed or transferred from one person to another?”
Transferability
____________: This is the perception that value is created by the expectation of benefits to be derived in the future. It is the basis for the Income Approach to value.
Anticipation
_______ states that property values are maximized when all of the factors of production are in _______, equilibrium, or proper proportion.
Balance
The factors of production are:
HInt: CMLL
Capital
Management
Labor
Land
The principle of _______ is related to the Law of Increasing and Decreasing Returns which states that successive increments of one or more of the factors of production added to fixed amounts of other factors
of production will enhance income at an increasing rate until a maximum return is reached.
balance
The principle of ______ states that the world is in a constant state of flux, and that changes in physical, social, economic, and governmental forces continuously affect the value of property.
Change
___________ is the active demand for real estate in short supply by two or more market participants. Prices are directly affected by the amount of demand for a property. It is not measured by the number of participants who want property, nor by the number who have the ability to purchase property, but by the number of participants who desire and have the ability to purchase similar properties to that of the subject property.
Competition
__________ refers to the concept that form, manner and character of structures are in harmony with one another. It states that overall, the prices of an area will be maximized if structures are similar in style, size, quality, etc. It is the basis for subdivision restrictions.
Conformity
The value of a particular component is measured in terms of its ____________ to the value of the whole property, or as the amount that its absence would detract from the value of the whole.
For example, a swimming pool may cost $20,000, but may only add $5,000 to the value of the property.
Contribution
_____________ This principle states that conditions not directly related to a parcel of property can have a positive or negative effect on the value of that property.
Externalities
_______ and ____ ___ is the reasonable and probable use which, at the time
of the appraisal, is most likely to produce the greatest net return in terms of money or amenities to the land or improvements over a given period of time.
Highest and best use
These principles are an extension of the
principle of conformity. ___________ is the concept that the value of an inferior property is enhanced by its association with better properties of the same type. __________ is the concept that the value of a superior property is adversely affected by its association with an inferior property of the same type. However, nonconforming uses may enhance or detract from the value, depending on the property’s location near either superior or inferior properties.
Progression
Regression
For example, a very small house located next to a large house would experience an increase in value (Progression) whereas the large house would experience a decrease in value (regression)
____________ states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. For example, W. E. Fargo & Co. builds garages in the $3,000 - $5,000 range. Its competitor, the Davis Garage Co. begins marketing pre-fabricated garages having a top-of-the-line price of $2,500. Because garages erected by the Davis Company have the same utility and appearance as those sold by Fargo, Fargo is forced to lower its prices to effectively compete with those of Davis. ____________ is the basis for the Sales Comparison Approach.
Substitution
______ and ______ This principle states that the price of real property varies directly, but not necessarily proportionately, with demand, and inversely, but not necessarily proportionately, with supply.
This is a simple relationship between price and quantity.
Supply and Demand
For example, after World War II, many cities experienced acute housing shortages. Because apartments and single family residences were in limited
supply in relation to effective demand, rents and housing prices rose sharply.
_______ ____________: This is the net income that remains after the costs of labor, capital and coordination have been paid. The net income accrues to the land and not the improvements. For example, two similar stores sell for $250,000 and $500,000. The second store sold for more because it is in a better location and sells more of its product. The additional value is attributable to the location of the land.
Surplus Productivity
FACTORS AFFECTING VALUE
HInt: The Four..
Productivity
DUST
Influence Value
The Four Agents of Productivity
The Four Factors That Create Value
The Four Forces that Influence Value
THE FOUR AGENTS OF PRODUCTIVITY
Labor
Management
Capital
Land
THE FOUR FACTORS WHICH CREATE VALUE – (DUST)
Demand
Utility
Scarcity
Transferability
THE FOUR FORCES THAT INFLUENCE VALUE
HINT: ST, EFF, GCR, EC&PF
- Social Trends
- Economic and Financial Factors
- Government Controls and Regulations
- Environmental Conditions and Physical Factors
______ ______: A community’s social ideals and standards can shape patterns of collective behavior which in turn affect the value of real property.
Social Trends
Desirable social features such as high quality schools, churches, well-maintained
roads, convenient public transportation systems, pleasant landscaping, and careful city planning are social __________. These features attract buyers and increase the value of real property.
Amenities
___________ ______: Communities tend to grow and develop unevenly, expanding in certain directions while remaining unchanged or declining in others. Property located in a community’s path of
growth may increase in value, while property in an area of declining growth depreciates.
Directional growth
__________ __________: Subdivision developers may impose protective and restrictive covenants on real property to regulate its use and stabilize its value. For example, a subdivision declaration may prohibit hanging wash out on Sunday, or require that lawns be mowed at specified
intervals, or forbid repairing automobiles in driveways. Property values may be enhanced by such regulations of social behavior
behavioral regulations
___________ ______: Real estate values may be affected by long range trends of population growth and decline, by the marriage and divorce rates, and by the birth and death rates. For example, the
post World War II baby boom created not only a demand for housing, but also for expanded recreational and educational facilities.
demographic trends
________ of __________ and _______: Localities having a large percentage of homeowners tend to enjoy greater economic stability than areas populated by a high proportion of renters. The homeowners’ greater financial, social, and emotional investment in their dwellings is reflected frequently in the economic stability of their neighborhoods.
Proportion of homeowners and renters
________ and _________ _______: The market value of a given piece of real property is affected by the operation of large economic forces apart from the intrinsic value of the particular property itself.
Economic and Financial Factors
______ of _____, ________, and _______: The value of real property rises in proportion to the purchasing power of potential buyers. If money in the form of wages, savings, and loans is readily available, the effective demand for real property will increase. For example, the availability of FHA and VA loans can exert a substantial, positive influence on the effective demand for real estate. The reverse is also true: in times of high interest rates and widespread unemployment, the level of buyers’ financial resources naturally diminishes, and as a result the effective demand for real estate may markedly
decrease.
Levels of wages, salaries, and savings
________ ______ of ________: According to the principle of supply and demand, as the supply of real property increases, its price must decline if all available units are to be sold or rented. Because the supply of land itself is relatively fixed and can be increased only by employing such extreme measures as filling in lakes, the balance of the supply and demand of real property is measured most accurately by
tabulating current vacancy rates and the number of houses which have been on the market unsold for excessive periods of time. High vacancy rates and many unsold properties indicate a condition of low
effective demand, and vice versa.
Existing supply of property
__________ and __________ ______: The expansion of industrial and commercial enterprises can stimulate economic growth which in turn can raise the value of real property.
Industrial and commercial trends
_______ _________ _______: Fluctuations in a locality’s financial climate may considerably influence the value of real property. Money and credit are commodities, like automobiles, houses and clothing.
Current financial climate
_____________ ________ ____________: Breakthroughs in technology, such as solar heating, and innovations in product design and manufacturing techniques, such as mobile homes and prefabricated housing, can alter patterns of consumer demand and the level of available housing supply, changes which can sharply affect the market value of real property. Real estate construction costs, of course, are contingent upon the costs of building materials, wage levels and the available labor supply.
International economic developments
__________ ________ and ___________: Local, state, and federal agencies are empowered to tax and otherwise control real property in a variety of ways, and are obligated as well to provide certain goods
and services for the benefit of owners and renters of real property. Such legal and economic governmental activities affecting the value of real property discussed in this section are the following: Taxes, Zoning, Rent controls, Government spending and Utilities and related services
Government Controls and Regulations
_____ and special assessments have varying effects on property values. In some instances, excessively high taxation discourages commercial and industrial ventures and residential buyers, thus lowering effective demand and property values.
Taxes
b. zoning: The government’s police power to regulate the size, height, and placement of buildings on their sites, as well as its power to regulate construction methods and the uses to which property may be put, can have varying consequences regarding the individual properties affected thereby. ______ is thought to stabilize property values, because it enforces minimal standards of construction, assures a certain uniformity of building size and placement and
prevents detrimental incongruity in land use.
Zoning
____ ________: During inflationary times, the government can restrain the natural operation of supply and demand by regulating the cost of goods and services, including housing costs. Rents, for
example, have been controlled under the Rent Stabilization Act. Such regulatory measures increase the effective demand of potential renters. Investors, however, may be reluctant to acquire properties
temporarily subject to rent control because of their fixed income potential, which may not keep up with
inflation.
Rent Controls
Increased __________ ________ can prime the pump of an ailing economy, create new jobs and thus increase the effective demand for real property, thereby raising its value
Government spending
_________ and _______ ________: The value of real property is influenced by the availability of such governmental services as police and fire protection, garbage and sewage disposal, street lights, mail delivery, construction of streets and highways, and of other utilities, services and conveniences.
Utilities and related services
_____________ __________ and ________ _______: The economic worth of a parcel of land is influenced by geographical, locational, and economic factors. These elements interact with a parcel’s _____ to invest it with economic value.
Environmental Conditions and Physical Factors
situs
_______: Property in temperate regions may be more attractive and valuable than similar property situated in regions of extreme weather conditions.
climate
Land’s __________ - its surface contour - can enhance or detract from its value
depending on the proposed use of the property. For example, residential property is thought to be most
attractive when located among gently rolling hills, but property with excessively steep hills may require excessive grading (leveling) before construction can begin.
topography
____ and _____: Lots having identical square footage situated in comparable locations may vary significantly in value if one has a more pleasing or practical shape than the other
size and shape
Combining two or more lots into one large parcel may invest the new site with a
value greater than the sum of its previous parts. The act of joining lots together is ___________, and the resultant increase in value is designated a ________ _________.
assembliage
plottage increment
Shade trees enhance the desirability of residential property. Retail properties also benefit from _________ _____ because it protects merchandise from direct sunlight and attracts passers by. Because the south and west sides of the street receive the greatest shade, these are thought to be preferred locations for retail properties.
available shade
___________: A house’s placement on its lot in relation to prevailing winds, rays of the sun, and neighboring properties can influence its value. Ideally, a home should be sheltered from the elements and
not be in extremely close proximity to neighbors, yet it should not be so isolated from its surroundings that it seems cut off from its environment.
Orientation
____ _______________: Soil for residential properties must have adequate drainage and percolation.
Soil characteristics
________ refers to the ability of water to flow readily off the surface of the soil
Drainage
In the standard ___________ ____, a hollow rod is inserted into the soil, and the time it takes for a specified amount of water to be absorbed into the soil is measured.
percolation test
Pollution of air, water, and other natural resources creates undesirable, sometimes uninhabitable areas. Smog, water poisoned by industrial wastes, and jet noise all contribute to ____________ _____________ and lower property values.
environmental deterioration
The Six-Steps Appraisal Process:
HINT: DP,CPS,GD,CA&CD,R,IAR
- Defining the Problem
- Conducting the Preliminary Survey
- Gathering Data
- Comparing, Analyzing and Classifying Data
a. sales comparison approach
b. cost approach
c. income approach - Reconciliation – combining the results from 2 or more of the approaches to value
- Issuing the Appraisal Report
a. certificate or letter of appraisal
b. check sheet – most often used for residential properties
c. narrative report – usually used for commercial properties
Three Approaches to Value:
HInt: CA,SCA,IA
Cost Approach
Sales comparison approach
Income approach
The ____ _______ is the technique of estimating the value of the subject property by adding the depreciated replacement cost or reproduction cost of the improvements to the value of the land, if vacant. The depreciated replacement cost is calculated by subtracting the physical, functional, and
economic depreciation from the cost new of replacing or reproducing the improvements on the effective
date of the appraisal. Depreciation estimates are made by comparing the existing structure with a newly
constructed, duplicate or replacement building.
Cost Approach
The Cost Approach is based on the appraisal principles of substitution, supply and demand, balance, and highest and best use. The Cost Approach is especially valuable when a lack of market activity limits the reliability of the sales comparison approach. The site value is usually estimated by the Sales Comparison Approach. You cannot use cost approach for ____
land
___________ ____ is the cost at current prices to produce an exact duplicate.
Reproduction cost
___________ ____ is the cost at current prices to replace a building with one of
equivalent utility.
Replacement cost
The use of replacement cost usually results in an estimate that is considerably ____ than one based on reproduction cost.
lower
___________ ____ or ______ ____ ______– uses an average cost per square foot including
materials and labor. This is the most commonly used method.
Comparative Unit or Square Foot Method
____-in-_____ ______ – uses assigned values for each component part of the structure
Unit-in-Place Method
_____ ____ ______ – similar to square foot method but based on volume instead of area; may be used for something with unusually high ceilings like a warehouse.
Cubic Foot Method
________ ______ ______– computes the cost for every item that must be purchased to build the structure, then factors in the amount for the labor. This method is the most accurate and most expensive.
Quantity Survey Method
____________ is a loss in value for any reason, and is the difference between the cost to construct an improvement and the amount paid for it once built. It may be curable or incurable.
Depreciation
_______ ____________ is any type of depreciation in which the amount of money spent on repairing the deficiency
is equal to or less than the resulting increase in value
Curable Depreciation
_________ ___________ is any type of depreciation in which the amount of money spent on repairing the deficiency is more than the resulting increase in
value.
Incurable Depreciation
________ ____________: is the loss in value due to such factors as wear and tear from use, structural defects, and exposure to the elements. It is always curable.
Physical Depreciation
__________ ___________: is a loss in value due to the development of new technology or design, and is an inadequacy or a lack of functional utility, or superadequacy, due to overbuilding or overdesign. It is sometimes curable.
Functional Depreciation
________ ____________ is a loss in value caused by unfavorable economic influences occurring outside the property. It can be due to location or to economic factors. It is never curable. This is also sometimes called “________ ____________” or “________ ____________”.
External Depreciation
Economic Depreciation
Economic Obsolescence
_________ ___ is based on the condition of the property. For example, if two houses were both built 10 years ago and one has been well maintained and one has not, the one that has been maintained would
have a lower effective age than the other.
Effective age
________ ____ is the period of time over which a property may be profitably used. Forty to sixty years is the normal economic life of a building.
Economic life
________ ____ ______ of ____________: The amount of depreciation is the same each year and is found by dividing the value by the number of years over which the property is being depreciated. For
example, if a $90,000 property having a land value of $30,000 and an expected economic life of 60 years would have a depreciation of $1000 per year. ($60,000 divided by 60 years) This is the method used to depreciate rental property on your income tax returns.
Straight Line Method of Depreciation
The _____ __________ ________ is the technique of estimating the value of real estate by analyzing and comparing data of actual sales of similar, or comparable properties. Each comparable sale is adjusted to the subject property by making dollar value allowances for each significant difference. “This approach is
based on the principle of substitution”, which indicates that the value of the subject property is relative to the cost of acquiring an existing property with similar utility.
The Sales Comparison Approach
- Find recent comparable sales and listings.
- Verify data.
- Select relevant units of comparison.
- Compare to subject property and adjust for differences.
- Reconcile into single value or range of values.
The Five Steps in the Sales Comparison Approach
- Property rights conveyed
- Financing terms
- Conditions of sale
- Market conditions
- Location
- Physical characteristics
Elements of comparison & Order of Adjustments
Generally, an appraiser uses _ to _ comparables. However if the comparables are not all in the same area as the subject property, or if they sold more than 6 months ago, the appraiser should use more comparables. Appraisers can go farther back in time or farther away in distance to find comparable sales, but if so, more comparables should be used. So, as the question of how many comparables should be used, the best answer would be “__ ____ __ ________.”
3 to 5 comparables
as many as possible
________ _____ or ______ _____: This is the technique of estimating the value of adjustments by the following procedure:
Sale Price of Property with Component - Sale Price without Component
= _____ of _________
If the comparable is superior to the subject property, a negative adjustment is made to the comparable. If the comparable is inferior, a positive adjustment is made. The comparables should have the same highest and best use as the subject.
Matched Pairs or Paired Sales
Value of Component
The ___ __________ is found by adding or subtracting all of the adjustments.
net adjustment
The _____ __________ is the sum of all adjustments whether they were plus or minus. If the _____ __________ is very high, that means too many adjustments had to made and the comparable is not a very good one. The appraiser may decide either to discard that comparable or give it less weight in the calculations.
gross adjustment
The ______ ________ seeks to estimate the present worth of a property’s expected future income, and is
used for appraising income producing properties. “The principle of anticipation is the basis for the ______ _______.” The property’s value is expressed in the IRV formula:
Net Annual Income (I) divided by
Capitalization Rate X Value (RV)
The Income Approach
The ___ ______ _____ is found by subtracting all operating expenses from the annual gross income. Operating expenses include real estate taxes, insurance, repairs, maintenance, decorating, wages,
management fees, utilities, vacancy losses, and reserves for replacement of stoves, carpeting, etc.
The net annual income
The ______________ ____ represents the rate of return the investor can expect to receive from his investment in the property. It is expressed as a percentage. The _____ is understood to represent the present value of the anticipated benefits of ownership.
EXAMPLE: An apartment building brings in gross annual rents of $50,000. Expenses for the year were $10,000. If a capitalization rate of 10% is used, what is the value of the building?
$50,000 - $10,000 divided by 10% X V
$40,000 divided by 10%= $400,000
capitalization rate
value
The _____ ____ __________ is used for obtaining a rough estimate of the value of certain kinds of properties, mainly smaller income properties or single family homes. Use of the GRM, is not to be thought of as a full-fledged appraisal technique.
gross rent multiplier
The ___ is a number which when multiplied by a rental property’s income, gives an estimate of the property’s value.
GRM
GRM X INCOME= VALUE or
VALUE divided by INCOME = GRM or
VALUE divided by GRM = INCOME
___________ __________ usually use a monthly income figure, whereas commercial properties use annual
income. The gross income is always used in this formula. The numerical value of a property’s GRM is established through a market analysis of the gross incomes and sales prices of comparable properties
which have sold recently. This will establish the ______ ___.
Residential properties
market GRM
___________ __________ can appraise residential property up to a 4-plex.
Residential appraisers
_______ __________ can appraise any property including commercial and larger residential properties.
General appraiser
An appraiser who has completed the requirements of the Appraisal Institute may use the designation MAI which stands for ______ of _________ _________.
Master of Appraisal Institute
The single most important factor in determining the value of a property is:
a. CMA
b. situs
c. demand
d. comparison
b. situs
The four determinants of value are:
a. demand, utility, scarcity, transferability
b. desire, dust, competition, change
c. change, competition, demand, contribution
d. demand, utility, situs, transferability
a. demand, utility, scarcity, transferability
The principle which is the basis for the Income Approach to value is:
a. substitution
b. supply and demand
c. anticipation
d. externalities
c. anticipation
The principle which is the basis for the Sales Comparison Approach to value is:
a. substitution
b. supply and demand
c. anticipation
d. externalities
a. substitution
The principle which states that the difference in value between two similar income properties is attributed to the
location of the land is:
a. substitution
b. anticipation
c. supply and demand
d. surplus productivity
d. surplus productivity
The resulting increasing in value from assemblage is:
a. situs
b. plottage increment
c. surplus productivity
d. reconciliation
b. plottage increment
The process by which the value is derived when using two different approaches to value is called:
a. plottage increment
b. surplus productivity
c. reconciliation
d. unit-in-place method
c. reconciliation
The method of estimating cost which is the most accurate and the most time consuming is the
a. square foot method
b. cubic foot method
c. unit-in-place method
d. quantity survey method
d. quantity survey method
The type of depreciation which is NEVER curable is called:
a. physical
b. functional
c. external
d. straight line
c. external
- The subject property is a 1500 square foot home. Comparable one is 1450 square foot, selling price $85,000.
Comparable two is 1475 square feet, selling price $88,000. Comparable three is 1550 square feet, selling price
$93,000. Based on square feet alone, and using a value of $50 per square foot for adjustment, what would be the
value of the subject property?
a. 87,500 b. 89,250
c. 90,500 d. 89,083
d. $89,083
