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Unit 16 - Real Estate Appraisal
Terms in this set (95)
Loss in a property's value resulting from physical deterioration, external depreciation, and functional obsolescence.
The appraisal principal holding that value can increase or decrease based on the expectation of some future benefit or detriment produced by the property.
An ESTIMATE of the quantity, quality or value of something. The process through which conclusions of property value are obtained; also refers to the reports that set forth the process of estimation and conclusion of value.
Appraiser Independence Requirements (AIR)
Regulations passed by FANNIE MAE that must be followed by appraisers to ensure accurate and objective appraisals.
The combining of two or more adjoining lots into one larger tract to increase their total value.
Broker's Price Opinion (BPO)
The opinion of real estate value commissioned by a bank or an attorney and provided by a broker for a fee ("drive by")
In the Income Approach, the rate of return a property will produce on the owner's investment.
The appraisal principle that holds that no physical or economic condition remains constant.
The appraisal principle stating that excess profits generate this; THE INTERACTION BETWEEN SUPPLY AND DEMAND.
The appraisal principle that holds that the greater the similarity among properties in an area, the better they will hold their value. When a property is in harmony with its surroundings.
The appraisal principle stating that the value of any component of a property is what it gives to the value of the whole or what its absence detracts from that value. You can overbuild and not achieve the value you anticipated.
The process of estimating the value of a property by adding to the estimated land value the appraiser's estimate of the reproduction or replacement cost of the building, less depreciation.
In appraisal, a loss of value in property due to any cause, including PHYSICAL DETERIORATION, FUNCTIONAL OBSOLESCENCE, and EXTERNAL OBSOLESCENCE.
The number of years during which an improvement will add value to land.
Incurable depreciation caused by factors not on the subject property, such as environmental or economic factors i.e. crime rate, law changes and sprinklers no longer up to code). Always INCURABLE.
A loss of value to an improvement to real estate arising from problems of design or utility.
Gross Income Multiplier (GIM)
A figure used as a multiplier of the gross annual income of a property to produce an estimate of the property's value; usually used for commercial property. 5 or more residential rental units (commercial, industrial). Usually rent, concession, etc. Sales Price/Gross Income.
Gross Rent Multiplier (GRM)
The figure used as a multiplier of the gross monthly income of a property to produce an estimate of the property's value; usually used for single-family residential property. 1 to 4 rental units. Usually only produce rent. Sales Price/Gross Rent.
Highest & Best Use
The legally permitted and physically possible use of property that would produce the greatest net income and, thereby, develop the highest value.
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.
Law of Diminishing Returns
Point at which additional property improvements do not increase the property's income or value.
Law of Increasing Returns
Applies as long as money being spent on the property improvements produces an increase in the property's income or value.
Market Data Approach
An estimate of value obtained by comparing property being appraised with recently sold comparable properties. Also known as Sales Comparison Approach.
The most PROBABLE price that a property would bring in an arm's-length transaction under normal conditions on the open market.
Net Operating Income (NOI)
The income projected for an income-producing property after deducting anticipated vacancy and collection losses and operating expenses.
A reduction in a property's value resulting from a decline in physical condition; can be caused by action of the elements or by ordinary wear and tear.
The increase in value or utility resulting from the consolidation (assemblage) of two or more adjacent lots into one larger lot.
An appraisal principle that the value of a lesser-quality property is favorably affected by the presence of a better-quality property.
The final step in the appraisal process, in which the appraiser considers the estimates of value received from the sales comparison, cost, and income approaches to arrive at a final opinion of market value for the subject property.
An appraisal principle that the value of a better-quality property is affected adversely by the presence of a lesser-quality property.
Sales Comparison Approach
The process of estimating the value of a property by examining and comparing sales and listings of comparable properties.
The amount of money paid to a seller for the product sold.
An appraisal principle that the maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property, assuming that no costly delay is encountered in making the decision.
Supply & Demand
The appraisal principle that follows the interrelationship of the supply of and demand for real estate. Because appraising is based on economic concepts, this principle recognizes that real property is subject to the influences of the marketplace as with any other commodity.
Uniform Standards of Professional Appraisal Practice (USPAP)
A set of standards developed by the Appraisal Foundation that details information required for a property appraisal.
The power of a good or service to command other goods in exchange for the present worth of future rights to its income or amenities.
An opinion of market value given to a client or lender with detailed market information.
They are paid a fee (NOT a commission)
How are appraiser's compensated?
Changes made to the Truth in Lending Act to stop coercion from influencing appraisals through this:
Makes it necessary for appraisers to be separate from real estate professionals.
The property costs less than $250,000 (although lenders will likely still require)
FIRREA allows that an appraisal is NOT needed if:
The property being appraised is know as the:
Recently closed properties, other houses currently on the market & houses that did not sell
A CMA shows what?
An extensive list of detailed information that an appraisal report requires.
Demand; Utility; Scarcity; Transferability (DUST)
Characteristics of Value
When determining market value:
Buyer & seller are UNRELATED, WITHOUT PRESSURE;
INFORMED on USE, DEFECTS and ADVANTAGES;
payment in CASH or equivalent; NO OTHER COSTS (i.e. fees or other that can be weighed into the equation)
What a property actually sells for
Sales Comparison Approach; Cost Approach, Income Approach
The THREE Approaches to Value
If the property has less than fee simple ownership, the value is diminished
What affects value in the Sales Comparison Approach when discussing ownership?
CMA; Property Rights; Financing Concessions; Market Conditions; Conditions of Sale; Date of Sale; Location; Physical Features & Amenities
Reviewed in the Sales Comparison Approach:
What is reviewed in the Cost Approach of appraisals?
The Cost Approach
If the terms REPRODUCTION OR REPLACEMENT COSTS are seen in a question it refers to what?
Reproduction or Replacement Costs; Square Foot Method; Unit in Place Method; Quantity Survey Method; Index Method; Depreciation
Reviewed in the Cost Approach:
Square Foot Method
Used in the Cost Approach, this method multiplies the square footage by the cost per square foot.
Unit in Place
Used in the Cost Approach, this method's key word is "Builder's Profit". Value is estimated based on the construction cost per unit of individual building components (materials, labor, OH, profit).
Quantity Survey Method
Used in the Cost Approach, this method is very precise. It takes into account the quantity and quality of ALL materials. Labor is estimated on unit cost basis and all of this is added to indirect costs coming up with a total. Used mostly for historic buildings.
Used in the Cost Approach, this method, it is used as a CHECK of the appraiser's estimate and NEVER A STAND-ALONE system. It uses a PERCENTAGE RATE of construction costs applied to the original costs of the subject property
Physical Depreciation; Functional Obsolescence; External Obsolescence
In the Cost Approach, these are three types of DEPRECIATION
Curable & Incurable
In the Cost Approach, these are two types of PHYSICAL DETERIORATION (or DEPRECIATION)
Curable Physical Deterioration
In the Cost Approach, economically feasible repairs that would result in an increase in value at least up to its cost.
Incurable Physical Deterioration
In the Cost Approach, repairs that are not economically feasible and would cost more to repair than its worth.
Curable & Incurable
In the Cost Approach, these are two types of FUNCTIONAL OBSOLESCENCE
Curable Functional Obsolescence
In the Cost Approach, these are currently undesirable physical or design features that can be replaced or redesigned and would be offset by the anticipated increase in ultimate value.
Incurable Functional Obsolescence
In the Cost Approach, these are currently undesirable physical or design features that cannot be easily remedied (and the cost would be greater than the resulting increase in value).
SEPERATE; REPLACEMENT; DEPRECIATE
In the Cost Approach, these are the three things to watch out for re: COST APPROACH
Gross; Income; Vacancy; Expenses; Net Operating Income (GIVEN)
In the Income Approach, the appraiser takes these five steps to estimate value.
Annual Potential Income (Gross Income)
In the Income Approach, an estimate of what can be made from a property (i.e. rental) such as income from parking spaces, vending machines, laundry machines.
Effective Gross Income
In the Income Approach, deduction of an appropriate allowance for vacancy and rent loss.
Mortgage payments are considered considered what?
The Income Approach is only for property that is what (i.e. not residential)
Net Operating Income
In the Income Approach, deduction of the annual operating expenses from the effective gross income
Comparing the Net Operating Income with the sales price of of similar properties that have sold in the current market
(i.e. $15,000 NOI/$187,000 sales price = 8%
How is Cap Rate determined?
Total income before taxes, etc.
Total income after taxes, etc.
Market Data Approach
If you see a question that has BOTH Market Data Approach and the Sales Comparison Approach, choose
Highest & Best use of the property
What is most important in the appraisal process?
Keep on good terms with tenants by overlooking infractions for building rules.
What is not important for a property manager to do?
$470 x 4 = 1,180
1,180 x 12 = 22,560
22,560 x 65% = 14,664
A building is valued at $215,000 and contains 4 apartments that rent for $470 each per month. The owner estimates that the net operating income is 65 percent of the gross rental receipts. What is the capitalization rate?
Relationship of sales prices to the rental income.
The gross rent multiplier is used as a guideline for estimating value based on the...
Divide the net operating income by the capitalization rate.
To find the value of a property using the income approach to value, if the net operating income and the capitalization rate were known, the appraiser would...
Value x Rate = Income
Value, Income, Rate Formulas
The price it is sold for.
The market price of a parcel of real estate is...
Convert income into value.
Capitalization is a process to...
The amount of money a buyer and seller agree to exchange to complete a transaction.
The demand must literally come to the supply.
What is an important characteristic of real estate?
The foremost factor contributing to commercial and residential demand in the market.
Have been increasing
A construction boom in a market is an indication that prices...
Expanding the sewer system
A local government could stimulate the real estate market by...
Trade area population and spending patterns.
Two important concerns of retail property users are...
The seller offers below-market seller financing
In the sales comparison approach, an adjustment is warranted if...
Weighs the comparables
To complete the sales comparison approach, the appraiser
Loss of value for any reason
From the reproduction or replacement cost of a building, the appraiser deducts depreciation, which represents...
Differences in original cost
What would not be important when comparing properties in the sales comparison approach?
Curable physical deterioration
A house with outmoded plumbing is suffering from:
Sales prices of similar properties
In the cost approach, an appraiser uses:
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