Exam 3 Appraisal Flashcards
(114 cards)
1
Q
Cost approach
A
Value is derived by reproducing a new subject property and depreciating it to be comparable to the subject
2
Q
Sales Comparison Approach
A
Value is derived by comparing the subject property through adjustments made to units of comparison to sales of similar properties in the area
3
Q
Income approach
A
Value is derived by analyzing a property’s capacity for earnings and capitalizing the income into an indication of present value
4
Q
contribution and substitution are
A
Basic principles used in this approach to value
5
Q
Contribution
A
each part contributes to the whole
6
Q
Substitution
A
building a substitute for the subject
7
Q
does cost equal value
A
NO
8
Q
Common uses for cost approach
A
- Special purpose commercial properties (doctor’s office, laboratory, car wash, church)
- New residential homes
- Property insurance
9
Q
factors that effect the cost approach
A
use type, quality of construction, size, shape, height, site improvements
10
Q
Quality of construction CA
A
good construction is more expensive than average, average is more expensive than fair
11
Q
size CA
A
higher is more expensive but bigger tends to be less per square foot
12
Q
shape CA
A
weird shapes are more expensive
13
Q
height CA
A
higher you build the more expensive it is because of steel
14
Q
site improvements CA
A
commercial has higher cost site improvements (need more parking, sidewalk, possibly covered sidewalks), residential a ranch house will be more than a 2 story
15
Q
Reproduction cost:
A
reproducing the subject with the original materials
16
Q
Replacement cost:
A
replacing the subject with todays materials, Do a lot more of these in appraisal because its cheaper
17
Q
Direct cost (hard cost):
A
materials and labor
18
Q
Indirect cost (soft cost):
A
profit, overhead, engineering, architects, appraisals, surveys
19
Q
There are three major ways to compute the cost approach to value are as follows:
A
- Quantity-survey method
- Unit-in-place/segregated cost method
- Comparative-unit method
20
Q
Comparative Unit Method:
A
- easiest
- Appraiser estimates dollars per unit of area based upon known costs of similar structures.
- This method is the most widely used method for this approach to value
21
Q
Unit-In-Place Method:
A
Appraiser estimates the cost of the major components of construction using subcontractor quotes or cost handbooks.
- This method is very useful for industrial buildings as they are often shells.
- Break it up into parts of a building (Ex: foundation, framing, roofing, plumbing, heating and air)
22
Q
Quantity-Survey Method:
A
- hardest
- Appraiser estimates quantities of all the materials in the construction process (ex: 2 x 4 wood beams, roofing nails)
- It is the most precise method but takes more time and detail. General Contractors use this more than appraisers
23
Q
Depreciation
A
loss in value
24
Q
Physical deterioration or depreciation:
A
wear and tear, use and age
25
Functional obsolescence or deprecation:
becoming out dated, Ex: one bathroom isn’t acceptable anymore, window air conditioners or space heaters aren’t acceptable anymore
26
External obsolescence or depreciation:
externalities affect your properties or how your neighbors affect you, Do a 360 before you buy a property, don’t want to be next to the airport or railroad, ugly neighboring houses
27
Physical Depreciation: Cure Incure
- Curable deprecation: it adds more value than it costs (example: fixing a roof with greatly increase house value because it is a major component)
- Incurable depreciation: it costs more then the value it adds (example: pool because it is a luxury item and may not add much value to a home)
28
Functional obsolescence: Cure Incure
- Curable (can it be?): adding a bathroom to an outdated one-bathroom home
- Incurable (can it be?): changing height of ceiling – lower ceiling in an old home in order to add more inculcation
29
External obsolescence: Cure Incure
- Curable (can it be?): Can never be curable – hard to change your neighbors and surrounding properties
30
Total economic life:
total life expectancy of a property that it remains economically feasible (usefulness)
31
Effective age:
age that considers remodeling and renovation
32
Remaining economic life:
total economic life – effective age
33
Estimate of Accrued Depreciation:
Effective age and remaining economic life are determined by the appraiser and the depreciation calculation is as follows:
o (EA/(EA + REL) or (EA/TEL)
34
Physical inspection:
walk them
35
Plat/Survey:
gives boundaries and shows acreage
36
Plot Plan:
map that the county approves, shows lots size, proposed improvements, and utilities locations
37
Topographical Map:
shows elevations
38
Soil Survey:
different soils
39
how do we examine sites
Physical inspection, Plat, plot plan, topographical map, soil survey
40
onsite improvements
utilities, parking, driveways, landscaping
41
offsite improvements
road, streetlights, curb, storm swear, sidewalks
42
assemblage
put two lots together to value them
43
plottage
an increase in value when you assemble lots, commercial has plottage value (because you can increase the rent), residential doesn’t have this value because average buyer doesn’t need more land
44
excess land
second lot in residential would be excess land, decrease in value per square acre
45
Sales comparison method
Sales of Similar vacant lots are examined and compared, and adjustments are made for differences. This is the most commonly used approach to valuing vacant sites
46
Appraise based on the front foot when doing
retail
47
Appraise in front foot residential for
waterfront or golf course lots
48
Anything over 5 acres should be measured in
acreage, especially when considering mobbing from residential to agricultural
49
Small lots should be in
square foot
50
Financing Differences:
tends to be negative
51
Time Adjustment (Date of Sale):
markets can change
52
Physical Attributes:
size, road frontage, utilities, topography, etc.
53
adjustments are typically made for
financing differences, location, time adjustment, and physical attributes
54
adjust the comp to be like the
subject
55
adjustments are
positive or negative, if the subject is superior we add to the comp, if the subject is inferior we subtract from the comp
56
abstraction method
When the sales price of a comparable home is known, the “depreciated” cost of the improvements are subtracted to get the land value.
57
extraction method
Typically used when finding land values where the improvements are reasonably new, or they contribute very little to the market value
58
allocation method
Develop a ratio of land and building value for improved property sales using historical data (in a given county or city) and apply this ratio to the subject property, may not be accurate to the location, used in old cities
59
common uses for the sales comparison approach
- land
- residential homes (any age)
- commercial properties in an active market
60
land SCA
not much cost to dirt and not much land is rented
61
residential homes SCA
any sales that show the market, within a mile
62
commercial SCA
if you have sales use them
63
SCA uses a
grid to make comparisons between the subject property and comp sales
64
SCA can be physical comparisons or income comparisons
-physical: brick to brick
- income: price per bedroom
65
what is the difference with having 3 comp sales and 1 comp listing
comp listing hasn't sold (listings are more current) sale has sold
66
why bracket comps?
bracket by size, having something bigger and something smaller
67
why have 1 comp outside the subdivision with new construction
because a contractor could take control
68
some adjustments are not
quantitate (age, better location)
69
how do you choose comps
- location: most important, tells you most about the property
- size: how much use you can get
- age: how long before renovations
- design: 1 story to 1 sort
- significant features: something weird like a swimming pool
70
gross adjustments:
cannot exceed 25%
71
net adjustments
cannot exceed 15%
72
line item adjustments
one adjustment cannot be more than 10% of the sales price
73
Paired sales
easiest way to calculate adjustments, identical sales with a few adjustments
74
why are commercial buildings more difficult to find paired sales for
they are not the same
75
why is it hard in rural va
not enough buildings and not enough new ones
76
Depreciated Cost
Adjustments are made by using the depreciated cost of the item being adjusted
77
where do you find depreciation costs
Marshall evaluation services
78
typical units of comparison
price per sqft, PGIM, EGIM, NIM
79
problems with the SCA
- Comparable sales are seldom identical or “paired”.
- There can be a lack of sales in the subject neighborhood or area.
- This is not a mechanical exercise and requires judgment.
- Very reliable specific data can be hard to obtain on every sale.
80
The market value should be between the
final “adjusted” prices of the comparable sales or between the multiplier ratio values of the comparable sales
81
Appraisal judgment is required in
choosing the final value estimate in this approach
82
The concept of anticipation is
fundamental here as we are basing a value on future benefits of a piece of property
83
lessor
landlord
84
lessee
tenant
85
property manager
manages property and deals with the people
86
leasing agent
finds tenants to rent
87
market rent
rent we use for appraisal, from your markets competition
88
contract rent
rent on your lease
89
overage rent
used in percentage leases, paying over a base rent
90
gross lease
landlord pays operating expenses (highest lease)
91
net lease (triple net, double net)
tenant pays operating expense (cheapest), triple net pays 3 operating expenses (most common lease)
92
step-up (graduated payment) lease
your lease goes up regularly (usually annual
93
index lease
lease is indexed for inflation, increases with inflation
94
percentage lease
pays a base rent and percentage of sales, common in retail (benefits tenants having cash flow problems: pay more when busy, less when business is slow)
95
Direct Capitalization:
Used to convert a single year’s cash flow (CF) estimate into an indication of value
96
Yield Capitalization : This is often called Discounted Cash Flow Analysis (DCF)
Used to convert a stream of income estimates, including reversion from resale, into an indication of value
97
potential gross income (PGI)
maximum rent possible (fully occupied)
98
Vacancy and collection
- space not occupied or rented
- collection loss, when someone can't pay you
- natural vacancy or turnover, space being fixed or remodeled between tenants
99
effective gross income (EGI)
income - vacancy
100
operating expenses
mandatory expenses to run/use real estate
101
net operating income (NOI)
income after vacancy and operating expenses
102
capitalization rate (Cap Rate)
NOI/Value, annual return
103
fixed expenses
expense that doesn't vary (property taxes)
104
variable expenses
expenses varies based upon occupancy
105
replacement reserves
cash saved for future repairs and expenditures
106
reversion
cash you bring home from the sale
107
holding period
the period you had onto property
108
discount rate
the rate you discount the cash flows
109
going-in cap rate
year 1 cap rate
110
terminal or exit cap rate
cap rate when you sell
111
leasing commission
commission you pay the leasing agent when tenant signs
112
tenant improvements
start of the holding period, doing improvements for the tenants
113
return on the investment
profit
114
return of the investment
capital recapture (break-even)
