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Unit 18: Real Estate Appraisal
Terms in this set (38)
Competitive Market Analysis (CMA)
assists seller clients in asking for reasonable selling price
assists buyer clients to make reasonable offers
covers nation, city, region, neighborhood
covers details of subject property as well as detailed comparative data
estimate or opinion of value based on approved methods and evidence
Uniform Standards of Professional Appraisal Practice (USPAP)
Appraisers expected to follow these standards.
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
any appraisal used in connection with a federally related transaction be performed by a competent individual whose professional conduct is subject to supervision and regulation
Broker's Price Opinion (BPO)
An opinion of real estate value commissioned by a bank or attorney and provided by a broker. Less extensive than appraisal. Cannot be used if it is a federally related transaction.
The most probable price property would bring in an arm's-length transaction under normal conditions on the open market. Opinion of value based on an analysis of data
What it actually sells for
Cost does not equal market value
For example, a homeowner may install a swimming pool for $20,000; however, the cost of the improvement may not add $20,000 to the value of the property.
value is created by the expectation that certain events will occur
No physical or economic conditions remain constant
Maximum value is created when a property is in harmony with its surroundings
Highest and Best Use
most profitable single use of a property that is legal and feasible
Law of Increasing Returns
As long as money spent on improvements produces an increase in income or value, the law of increasing returns applies.
Law of diminishing returns
point where additional improvements do not increase value
Assemblage and Plottage
Assemblage is merging two properties together. Pottage is the amount value has increases by merging the two properties
Regression & Progression
A better property is negatively affected by worse properties being around it.
The value of a modest home would be higher if it was closer to higher value properties
An appraisal principle that states that the maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property,
Sales Comparison Approach (market data approach)
Estimating value of property by comparing it to actual sales of other properties. Because no two parcels of real estate are exactly alike, each comparable property must be analyzed for differences and similarities between it and the subject property. This approach is a good example of the principle of substitution
Also based in principle of substitution. by adding to the estimated land value the appraiser's estimate of the reproduction or replacement cost of the building, less depreciation.
Cost Approach: Reproduction Cost
Cost of exact duplicate.
Cost Approach: Replacement Cost New
Not exact. Similar. Using CURRENT construction methods and materials
Square Foot Method
Appraiser using cost approach in order to compute the reproduction or replacement cost. Method is he cost per square foot of a recently built comparable structure is multiplied by the number of square feet (using exterior dimensions) in the subject building. Most common and easiest
Unit in Place Method
Appraiser using cost approach in order to compute the reproduction or replacement cost. method based on the construction cost per unit of measure of individual building components, including material, labor, overhead, and builder's profit.
Quantity Survey Method
Appraiser using cost approach in order to compute the reproduction or replacement cost. The quantity and quality of all materials (such as lumber, brick, and plaster) and the labor are estimated on a unit-cost basis.
Appraiser using cost approach in order to compute the reproduction or replacement cost. A factor representing the percentage increase of construction costs up to the present time is applied to the original cost of the subject property.
Physical Deterioration - incurable and curable
curable- need of repair that is economically feasible, and would increase value equal to or exceeding cost
Functional Obsolescence - incurable and curable
Obsolescence means a loss in value from the market's response to the item.
curable- easily remedied
incurable- not easily remedied
If caused by negative factors not on the subject property, such as environmental, social, or economic forces, the depreciation is always incurable
The loss in value cannot be reversed by spending money on the property.
Straight line method (depreciation)
easiest and least effective method. Assumed to occur at an even rate
Improvement value / improvement lifespan
The process of estimating the value of an income-producing property through capitalization of the annual net income expected to be produced by the property during its remaining useful life.
Net Operating Income (NOI)
The income projected for an income-producing property after deducting losses for vacancy and collection and operating expenses. Net operating income is also referred to as NOI.
The rate of return a property will produce on the owner's investment
Annual net income: $15,000
Sold for: $187,500
Capitalization Rate: 15,000 / 187,500
Gross Rent Multiplier
1-4 units for appraisal value
sales price / monthly gross rent
To establish an accurate GRM, an appraiser must have recent sales and rental data from at least four properties that are similar to the subject property.
Gross Income Multiplier
5 or more units for appraisal value
sales price/ annual gross income
The final step in the appraisal process, in which the appraiser combines the estimates of value received from the sales comparison, cost, and income approaches to arrive at a final estimate of market value for the subject property.
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