Revision Flashcards
What is value? (property definition)
“Market value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing where the parties had each acted knowledgeably, prudently, and without compulsion.”
Three key attributes to ascertain value?
1) a property’s income producing ability,
2) the prices paid for similar properties or,
3) a property’s cost to replace.
Objective value is?
Value derived from market conditions (auctions). Market value is a mixture of; 1. Estimated amount 2. Date of valuation 3. Willing buyer/willing seller 4. Highest and best use
Subjective Value is?
Value that takes into consideration; age, historical meaning, location.
Ratcliffe defines value as?
- A price in dollar terms.
- A prediction (the valuer simulating the sale).
- A probability (valuation is imprecise and the valuer should tell his client what probability attaches to the estimate).
- A pragmatic-objective value – based on the actual real estate market.
Describe ‘Highest and best use’
The most probable use of a property, which is physically possible, appropriately justified, legally permissible financially feasible and which results in the highest value of the property being valued.
The 4 characteristics of value are;
- Utility
- Scarcity
- Demand
- Transfer-ability
Describe the Sales approach (comparable sales approach);
In its simplest form the sales approach involves comparing like with like.
The 5 main steps in the sales approach are;
STEP 1: Sales and Physical Data are Collected and Verified
STEP 2: Select the Most Comparable Sales-Sufficient Quantity to Distinguish Market Pattern
STEP 3: Analyse Sales Using the Appropriate Unit of Comparison
STEP 4: Compare the Sales Evidence to the Subject Property Using the Unit of Comparison
STEP 5: Estimate the Value of the Subject Property
Describe the Cost approach;
A cost (less depreciation) valuation methodology. Except in Insurance Valuations the cost approach cannot stand on its own. It should be used together with one or more of the other main valuation techniques.
The 4 main steps in the Cost approach are;
- Estimate land value (from sales evidence).
- Estimate current replacement cost of the improvement: SQUARE metres x COST PER m2 = CURRENT REPLACEMENT COST
- Estimate and subtract depreciation: REPLACEMENT COST – DEPRECIATION = PRESENT VALUE OF IMPROVEMENT
- Add back land value: LAND VALUE + PRESENT VALUE OF IMPROVEMENTS = TOTAL VALUE
6 Methods used to value replacement costs;
A. Sight B. Unit of Accommodation C. Quantity Surveying D. Cubic Method E. The Square Method F. Fixed and Variable Costs
describe the ‘Modal house concept’;
Refers to a range of model houses that’s costing’s have been acquired for example the cost of a standard single story 100m2 residential house may be 700 per m2. Can be a useful basis and is extensively researched in NZ.
Depreciation calculation simplified is?
MV = RC – DEP.
That is MV (Market Value) equals RC (Replacement Cost) minus DEP (Depreciation
Describe the income approach;
Calculating a properties value based of its income producing abilities, Management needs to be factored in as a cost in this method.
The 6 steps in the income approach are?
- Estimate Gross Income Potential
- Estimate Vacancy and Rent Loss
- Subtract to get Effective Gross Rent
- Subtract annual expenses for Net Income
- Select Capitalization Rate
- Divide net income by ‘cap’ rate to indicate value
Valuation methods in summary;
Multiple approaches are often used, and are in turn correlated to create meaning. A mixture of approaches can minimize the margin of error, although no one approach is perfect in application.
Describe the term ‘Time value of money’;
“This is a fundamental concept of finance. Under this concept, individuals prefer to receive a dollar today than to receive that same dollar promised in a year’s time. This is because in the interval we could have earned interest on today’s dollar and so ended up with more than a dollar in a year’s time”
Describe the shortfalls of ‘Payback period’;
Ignores cash flows after the payback period
Timing of cash flows during the payback period are ignored
Makes no adjustment for risk
Shortfall of an ‘NPV’;
The major limitation of the NPV measure is that the investor must specify a “subjective rate of return”
The NZ Shortfall Method is?
This method is use the current market rent (rent psm* area) minus the current rent shortfalls which equals to (market rent psm-current rent psm)* area.
what is the Layer and Hardcore method?
Method is to use the layer (Current) Rent (which equals to the current total rent* total area) plus the marginal rent whose 3 floor are adjusted respectively.
3 types of property ownership are?
- Joint tenants (split equally between 2 people)
- Tenants in common (multiple owners with different shares in property)
- Individuals (one person)
Information included in a certificate of title?
Type of tenure Present & previous owners Previous sales prices Transfer documents Mortgages, and payments Building restrictions Diagrammatic documents Whether or not property faces north Restrictive covenants (fencing, obligations, buiding limits)
Protective covenants (Native trees, maori burial sites)
Easements, reserve strips and public access strips.
