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Chapter 12: Real Estate Appraisal
Terms in this set (34)
An appraisal is an estimate or opinion of a property's value.
Utility value is sometimes referred to as value in use.
This is because it reflects how useful the property is to a particular person, the owner.
Market value is the most probable price the property should bring under all conditions needed for a fair sale.
Market value is also called value in exchange.
Market price is the price someone paid to acquire a property, in an actual transaction.
Highest and Best Use
An appraiser doesn't just consider how the property is currently being used, but also what its highest and best use would be.
The highest and best use is the use which, at the time of appraisal, is most likely to produce the greatest net return from the property.
The principle of change states that a property's value changes constantly, in response to changing social, economic, and government conditions, and in response to changes in the property itself.
Every property has a four-phase life cycle: integration, equilibrium, disintegration, and rejuvenation.
According to the principle of anticipation, people buy property in anticipation of receiving benefits from it in the future.
An appraiser must consider not only the present state of the property, but how it may change in the future.
Supply and Demand
According to the principle of supply and demand, as the demand for a certain type of real estate in a certain location exceeds the supply, the market value of properties in that category tends to rise.
Likewise, as the supply exceeds the demand, the market value of that type of property tends to fall.
According to the principle of substitution, the maximum value of a property is set by how much it would cost to obtain another property that is equally desirable.
The principle of conformity states that a reasonable degree of conformity among the properties in a neighborhood has a positive effect on their value.
Progression and Regression
According to the principle of progression, an inexpensive home is generally worth more in a neighborhood of better homes than it would be worth in a neighborhood of similar homes.
The principle of regression holds that a valuable property surrounded by less expensive properties will tend to be worth less than it would be worth surrounded by similar homes.
An improvement may contribute less or more to the value of the property than it costs.
The principle of contribution requires an appraiser to distinguish between the cost of an improvement and its contribution to value.
The value of property is affected by competition. Every property competes with other properties of the same type.
A profitable business will attract competitors to the area, which will tend to lower its profits and, therefore, its value.
General data is information concerning matters outside the subject property that have an impact on its value, such as the economic situation in the community.
An appraiser performs a neighborhood analysis to evaluate how the neighborhood affects the subject property's value.
Specific data is information about the subject property itself.
The appraiser gathers specific data in a site analysis and a building analysis.
The results of the different appraisal methods are referred to as value indicators.
The appraiser reconciles the value indicators to arrive at a final value estimate.
Sales Comparison Approach
The sales comparison approach relies on the recent sales prices of comparable properties to estimate the market value of a property.
It is also called the market data approach because it uses information gathered about recent transactions in the local real estate market.
A comparable property is one that is similar to the subject property and has recently been sold under normal conditions of sale.
Normal Market Conditions
To be considered a comparable sale, a transaction must have taken place under normal market conditions, which requires that: the parties to the sale are unrelated, both parties have full knowledge of the property's merits and shortcomings, neither party is acting under unusual pressure, and the property was on the market for a reasonable length of time.
Arm's Length Transactions
A transaction in which the buyer and the seller are unrelated by close personal, family, or business ties, making it more likely that the purchase price reflects the true market value of the property.
Unrelated parties are one component of normal market conditions.
Using the cost approach, the appraiser estimates the replacement cost of the building, deducts depreciation, and adds the value of the site.
The replacement cost is the cost of building improvements with the same utility as those on the subject property, using modern materials and construction methods.
The reproduction cost is how much it would cost to build an exact replica of the building.
Since this is usually not a reliable indicator of a building's value, it is generally not used in the cost approach.
Depreciation is a loss in value due to any cause.
The three categories of depreciation are physical deterioration, functional obsolescence, and external obsolescence.
Physical deterioration is depreciation resulting from property damage, wear and tear, or age.
Physical deterioration may be curable or incurable.
Curable physical deterioration is also called deferred maintenance.
Functional obsolescence is depreciation caused by functional inadequacies or outmoded design.
Functional obsolescence may be curable or incurable.
External obsolescence is also called economic obsolescence.
It is depreciation caused by forces outside the property, such as neighborhood decline or proximity to a nuisance. External obsolescence is always incurable.
In the income approach to value, an appraiser changes net operating income into value by using a capitalization rate.
Potential Gross Income
A property's potential gross income (also called its economic rent) is the amount it would rent for if it were available for rental in the current market.
Effective Gross Income
Effective gross income is the property's potential gross income minus a vacancy factor.
Net Operating Income
Net operating income is calculated by subtracting operating expenses from effective gross income.
The capitalization rate is the rate of return an investor wants on his investment in the property.
Gross Income Multiplier Method
An appraiser uses the gross income multiplier method to estimate the value of a small rental property.
The appraiser locates comparable rental properties that have recently sold, then analyzes the relationship between the sales price and the rental rate of each comparable.
Reconciliation is the process of assembling and interpreting the value indicators in order to arrive at a final value estimate.
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