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NY Real Estate > Valuation Process and Pricing Properties > Flashcards

Valuation Process and Pricing Properties Flashcards

1
Q

Appraisal

A

An estimate of a property’s value by an appraiser who is usually presumed to be expert in his work. It is also an unbiased estimate of the nature, quality or value or utility of an interest in or aspect of, identified real estate and related personality. As of a SPECIFIC DATE.

  • Defensible estimated value
  • Data is compared to the property being appraised and adjusted for those differences
  • Market Value
  • Insurable Value
  • Assessed Value
  • Liquidation Value
  • Value in Use
  • Investment Value
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2
Q

Valuation

A

The process of estimating market value, investment value, insurable value or other properly defined value of an identified interest or interests in a specific parcel or parcels of real property as of a given date

  • Market Value (most probable price)
  • Insurable Value
  • Investment Value
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3
Q

Evaluation

A

A study of nature, quality, or utility of certain property interests in which a value estimate is not necessarily required, eg, highest and best use, feasibility, market supply and demand etc

  • not for a specific date
  • typically used to gather data for a specific range in a market (ex. gathering data (price range) for homes ranging from 1,200-1,800 sq ft in a specific market)
  • to analyze and specific market
  • used when analyzing the highest and best use of a property
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4
Q

Assessed Value

A

A valuation placed upon property by a public officer or a board, as a basis for taxation.

  • placed by a municipality to gain revenue for municipality
  • Maybe be equal Market Value
  • May be % of Market Value

NYC

  • Class 1: Residential - 6% of Market Value
  • Class 2: Multi-family - 45% of MV
  • Class 4: Commercial - 45% of MV
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5
Q

Insured Value

A

The value of an asset or asset group that is covered by an insurance policy; can be estimated by deducting cost of non-insurable items (e.g. land value) from market value.
-For insurance purposes

Replacement Cost New: “Like Kind”
Reproduction Cost: Replica

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6
Q

Value-in-use

A

The net present value (NPV) of a cash flow or other benefits that an asset (real property) generates for a specific owner under a specific use.

  • Typically used by someone ton run their business out of the property. It is NOT the sole purpose of this use to generate an income stream (ex Church, school, community center)
  • Value as it’s being used by the particular user
  • School would most likely use a value-in-use value when conducting an appraisal
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7
Q

Investment Value

A

The specific value of an investment to a particular investor or class of investors based on individual investment requirements; distinguished from market value, which is impersonal and detached.

  • to a particular investor looking for a specific rate of return
  • A commercial property will most likely yield investment value by an appraiser
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8
Q

Market Value

A

The most probable price that a property should bring if exposed for sale in the open market for a reasonable period of time, with both the buyer and seller aware of current market conditions, neither being under duress.

  • Probable price v highest price
  • Specific Date
  • Cash equivalency (price expressed in terms of cash)
  • Specified Right (real estate = bundle of rights)
  • Reasonable exposure vs. Marketing Time (how long it took for specific property to be absorbed by the market)

Establishing a Market Value:
Look at sales in past 3, 6, 12 months, current offerings, current listings, current contracts
-

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9
Q

Liquidation Value

A

Is the likely price of an asset when it is allowed insufficient time to sell on the open market
-typically used for bankruptcy or when someone is forced to sell

Unlike Market Value, Liquidation Value is typically realized when someone is forced to sell their property

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10
Q

Liquidation Value

A

Is the likely price of an asset when it is allowed insufficient time to sell on the open market

  • typically used for bankruptcy or when someone is forced to sell
  • most likely yield the lowest price for a property

Unlike Market Value, Liquidation Value is typically realized when someone is forced to sell their property

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11
Q

Price

A

The amount a purchaser agrees to pay and a seller agrees to accept in an arms length transaction.

  • Does NOT equal value
  • Varies depending on demand
  • Contractual agreement between a buyer and a seller
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12
Q

Cost

A

The total dollar expenditure for labor, materials, legal services, architectural design, financing, taxes during construction, interest, contractor’s overhead and profit, and entrepreneurial overhead and profit (may or may not equal value).
-Established and varies a litte

Direct Costs (Hard Costs) 
-Labor & Materials
Indirect Costs (Soft Costs)
-Architectural fees
-Engineering Fees
-Professional fees
-financing
-lease-up
-admin & filing fees

Cost of construction can exceed cost of property when demand is low
-cost won’t change much if market is drastically upward

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13
Q

Real Estate market is a slow market, but the market conditions can change rapidly

A

Due to market conditions, the PRICE can change drastically while the COST is more static

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14
Q

Comparative Market Analysis (CMA)

A

A property evaluation that determines property value by comparing similar properties sold within the last year. NOT an appraisal.

  • Gathering sales data
  • Looking at the difference between sold properties and NOT making adjustments
  • A CMA does NOT yield a defensible estimate of value

Can be done by participants in the market:
-Brokers, Salespersons, Appraisers etc

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15
Q

Residential Market Analysis

A
  • Collecting data of recently sold properties
  • expired offerings
  • current listings
  • contracts of sale
  • Analyze subject property in terms of buyer appeal
  • Understand the specific market and submarket

Q: How can an appraiser or salesperson determine if their estimated market value is correct?
A: the data you are collecting will lead you to certain conclusions and market trends

Changing Conditions in a Market:

  • -> Indicators of Market Appreciation
  • Offering Prices increase
  • Contractual prices increase
  • Time on market decreases
  • Properties move faster
  • Previously unsold properties are absorbed by market
  • -> Indicators of Market Depreciation
  • Exposure time increases
  • Offering prices will be reduced
  • Supply Increases

Best Indicators: Current offerings and Contracts of Sale

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16
Q

Salesperson’s Role

A
  • Competent
  • be able to answer questions
  • provide well researched listing
  • verify data presented to client
  • be diligent
  • able to adjust to market conditions
  • keep records and notes
  • effectively communicate with buyer and seller
17
Q

Highest & Best Use

A

As Vacant (unencumbered) - Provides the highest and best return to the site
As Improved - make make economic sense
-Evaluation used when analyzing the highest and best use of a property
-NOT used for determining value

  • legally permissible
  • physically possible
  • economically feasible
  • appropriate use for the site
18
Q

C6 Zoning

A

Zoning for a specific type of commercial use

19
Q

Site Valuation

A

A site is always valued as if it is unimproved and ready to be built upon
-Land can’t be created nor destroyed, but it can have a negative value when encumbered with an environmental hazard

Look at:
-Common unit of comparison (price/sq ft, price/buildable sq

20
Q

Sales Comparison Approach

A

Valuation method which compares a subject property’s characteristics with those of comparable properties which have recently sold in similar transactions.

  • Based on the principle of substitution where a comparable sale is equally desirable with the property in question
  • Any difference are compared to the subject property and are adjusted for accordingly ($, %)
  • Minimum number of comparable sales = 3, as many sales necessary to support your estimate of market value. After comparison you see what the difference is to determine why the price is different (ex garage vs no garage)
  • You must compare several properties, understand their differences and then determine price adjustments for the differences
  • Adjust each comparable sales to the subject property

–> Mostly used by salespersons and brokers to value residential and amenity type properties

Order of Adjustments:

  1. Rights conveyed
  2. Difference in financing
  3. Conditions of sale
  4. Differences in location
  5. differences in size
  6. …age
  7. ..condition, utilities, amenities
21
Q

Cost Approach

A

A method of estimating the value of real property by calculating a current construction cost, subtracting accrued depreciation and adding a land value obtained from the market. This method works best when the improvements are relatively new and estimates of depreciation are thus more likely to be accurate.
-hasn’t been sales in a while, or if property is unique, new

First establish: Replacement Cost (reproduction Cost New) - Depreciation = Depreciated Value of Improvement

Site Improvements:
Depreciated value site improvements + Depreciated value of overall improvements + value of site under highest and best use = Property Value

22
Q

Depreciation

A

A loss of utility and thus value caused by physical deterioration, functional obsolescence or economic obsolescence or any combination thereof.

Types of Depreciation:

  • -> Physical:
  • Curable ( broken window)
  • Incurable (ex. boiler)
  • -> Functional (ex. the market demands 2 bathrooms)
  • curable (ex. the cost of adding the additional bathroom is equal to or less than the contributory value)
  • incurable (economically not feasible)
  • -> External (ex. the main industry left town, which affects property demand)
23
Q

3 Approaches to Value

A
  1. Sales Comparison Approach (Market Approach) (ex. vacation home)
  2. Cost Approach (ex. Church)
  3. Income Approach (ex. Self Storage facility)
24
Q

Which items affect value?

A

The market determines the value of the contributing item

25
Q

Income Approach

A

An appraisal technique whereby the value of an income producing property is estimating by capitalizing its next operating income using an appropriate capitalization rate.

Value = Income / Rate

Most used when investor wants to purchase a property that creates an income stream

Calculated...
Gross Income -
Contingency Vacancy -
Holding Cost - (real estate taxes, insurance, maintenance, salaries, reserves) 
= Net Operating Income
26
Q

Investment Value

A

The specific value of an investment to a particular investor or class of investors based on individual investment requirements; distinguished from market value, which is impersonal and detached.

27
Q

Market Price

A

The actual selling price of a property

28
Q

Mortgage Value

A

The estimate worth of a particular asset which is established for the purposes of obtaining financing secured against that asset.
-value of mortgage

29
Q

Obsolescence

A

One of the causes of depreciation. It is the loss of desirability and usefulness caused by new inventions, changes in design, and improved processes for production, or from the influence of external factors. Obsolescence may be either economic or functional.

30
Q

Functional Obsolescence

A

Impairment of useful capacity or efficiency; loss of value caused by super adequacy, inadequacy or changes in the art inherent in the property itself. not to be confused with external effects of economic obsolescence. Curable if the cost to cure is justified by the resulting increase in value of the property; otherwise incurable.

31
Q

Economic Obsolescence

A

A loss in value caused by influences external to the property such as increasing industrial activity near a residential neighborhood.

32
Q

Plottage

A

Increment in unity value of a plot of land created by assembling smaller ownerships into one ownership
-assemblance of lots of land for development purposes

33
Q

Why Does an Appraisal Come in so Low?

A
  1. The market is not at the point where it can justify a higher property price/value
  2. The data is not indicating an active increasing market
  3. Market trends are unclear
  4. Inexperienced first time buyers might pay slightly higher prices than other market norms

NY Real Estate (21 decks)

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