Topic 8 Flashcards by Jade Dupuis

_____ is the process of determining how much a piece of real property is worth.

Valuation

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______ is an estimate or opinion of a property’s nature, quality, value, or utility. It is an estimate of specified interests in, or aspects of, identified real estate which is supported by relevant, factual evidence. Arriving at such estimates of value for such purposes is the role of the qualified professional real estate appraiser.

An appraisal

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An appraisal may be used for…

mortgage financing
insurance
taxation
estate settlement
probate condemnation proceedings
for buying, selling, and exchange of real property.

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A ____ is an informal estimate of value utilizing some or perhaps all of the techniques employed by the professional appraiser.

market analysis

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Definitions of value:

) VALUE is a relationship between a potential purchaser and the thing he desires
) VALUE can also be defined as the desirability or worth of a thing - property, goods, or services - to buyers and sellers.
) VALUE is the present worth of future benefits that arise from the ownership of real property.
) VALUE is the quantity of one thing which can be obtained in exchange for another.

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A time tested real estate maxim asserts that three factors determine the economic value of real property:

LOCATION
LOCATION
LOCATION

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____ is the term used to describe the sum of all economic aspects of a location which invest it with economic value.

Situs

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A property situated in an economically desirable location, that is, a location which allows it to successfully fulfill human needs, is said to benefit from ____.

positive situs

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____ can help the salesperson determine a listing price for the seller, and is a comparison of the prices of properties recently sold, properties currently on the market, and properties that did not sell. Not a formal appraisal, but it uses the same principle and many of the same methods as the sales comparison approach.

COMPETITIVE MARKET ANALYSIS (CMA)

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Comparison properties must be similar to the seller’s property in ____.

location
size
age
style
amenities.

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The type of value most useful when dealing with the appraisal of real estate is ____.

market value

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the power of an item to command other valuables in exchange for that item. It is also the most probable price in terms of money which a property should bring in a competitive and open market, assuming the price is not affected by undue stimuli. Both the buyer and the seller must have a reasonable knowledge of the current price commanded by items similar to the one being exchanged, and must enter into the transaction without undue influence, without pressure either to buy or sell. Always refers to the future.

Market value

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the amount that is actually paid, or is about to be paid, for a property’s ownership rights at a specific point in time. A property’s price then, is factual information. We can say that it is an accomplished or historic fact of a transaction or an artifact of a transaction, but because property may be sold for more or less than it is actually worth, and because of inflation and other forces to which real property is subject, a property’s sales price, like its cost, cannot be trusted to give an entirely reliable indication of its present value. Always refers to the present.

Market price

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refers to the past outlay of sufficient capital for the supervision, land, materials, labor and other valuables that are needed to bring an improvement into existence. This includes financing and the expenses incurred in selling the piece of property. Cost does not create value, nor does cost necessarily equal value. We can also say that cost is an historical concept, and because the price level of labor, materials and management rises and falls, discovering an item’s past cost of production gives little, if any, indication of its present value. Always refers to the past.

Market cost

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The determinants of value can be remembered with the acronym “DUST”. They are:

) Demand
) Utility
) Scarcity
) Transferability

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A commodity may be useful and scarce, but if consumers have no need or desire for it, its market value will be low or non-existent because of lack of _____. Furthermore, if consumers do desire a particular item, this demand means little unless it is effective, that is, the consumer must have the purchasing power with which to acquire the commodity. Demand without financial means to buy is merely want.

We can ask the question, “Is there a sufficient number of persons in the market willing to purchase the product with adequate purchasing power?”

demand

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To be “useful” means to meet a need or to render a service. For instance, in many localities, an air conditioner is a useful appliance, but in a region like the Arctic Circle, the utility of this device is negligible. Likewise, land in a fully developed subdivision has more ____ than swamp land because it meets a larger number of potential needs.

To determine we can ask the question, “Does the product satisfy a need?”

utility

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Commodity’s market value is related also to its relative ____. While certainly not all scarce items are valuable, goods in abundant supply rarely have great market value. For instance, air and water are unquestionably useful, but since these substances are in plentiful supply, their market value, except in unique circumstances, is slight.

To determine scarcity we can ask the question, “Is the available supply scarce or limited relative to the desire or demand for the product?”

scarcity

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A commodity may have utility, scarcity, and be in effective demand, but unless an item can readily be ______ from the seller to the buyer, it will not have economic value. Government owned land, such as a national park, or property owned under a clouded or restricted title, as in a life estate, may be completely or partially non-transferable, and thus the market value of such property may be slight or non-existent.

To determine transferability we can ask the question, “Can the product be conveyed or transferred from one person to another?”

transferability

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12 basic principles of value:

) Anticipation
) Balance
) Change
) Competition
) Conformity
) Contribution
) Externalities
) Highest and best use
) Progression/regression
) Substitution
) Supply and demand
) Surplus productivity

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This is the perception that value is created by the expectation of benefits to be derived in the future. The basis for the Income Approach to value.

Anticipation

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tates that property values are maximized when all of the factors of production are in balance, equilibrium, or proper proportion.

balance

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The factors of production are:

) capital
) management
) labor
) land

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The principal of balance is related to the ______.

Law of Increasing and Decreasing Returns

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States that successive increments of one or more of the factors of production added to fixed amounts of other factors of production will enhance income at an increasing rate until a maximum return is reached. Then income will decrease until the increment to the value becomes increasingly less than the value of the added agent or agents.

The Law of Increasing and Decreasing Returns

Occurs when an insufficient profit is realized by the next incremental addition of the component to the whole

law of decreasing returns

States that the world is in a constant state of flux, and that changes in physical, social, economic, and governmental forces continuously effect the value of property

change

the active demand for real estate in short supply by two or more market participants. Prices are directly affected by the amount of demand for a property. Isn't measured by the number of participants who WANT property, nor by the number who have the ability to PURCHASE property, but by the number of participants who desire AND have the ability to purchase similar properties to that of the subject property.

competition

refers to the concept that form, manner, and character of structures are in harmony with one another. States that overall, the prices of an area will be maximized if structures are similar in style, size, quality, etc. The basis for subdivision restrictions

conformity

The value of a particular component is measured in terms of its contribution to the value of the whole property, or as the amount that its absence would detract from the value of the whole.

contribution ex. a swimming pool may cost $20k, but may only add $5k to the value of the property

states that conditions not directly related to a parcel of property can have a positive or negative effect on the value of that property

externalities

the reasonable and probable use which, at the time of the appraisal, is most likely to produce the greatest net return in terms of money or amenities to the land or improvements over a given period of time.

highest and best use

In evaluating the highest and best us of single family residential properties, more weight is usually given to the property's...

1. ) utility 2. ) comfort 3. ) other amenities than to the property's cash income, which most often is non-existent. For this reason, many single family residential properties can be said to be achieving their highest and best use even though they generate no income.

an extension of the principle of conformity.

progression/regression

the concept that the value of an interior property is enhanced by its association with better properties of the same type

progression

the concept that the value of a superior property is adversely affected by its association with an inferior property of the same type.

regression

when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution.

substitution

The price of real property varies directly, but not necessarily proportionately, with demand, and inversely, but not necessarily proportionately, with supply. A simple relationship between price and quantity.

supply and demand

the net income that remains after the costs of labor, capital, and coordination have been paid. The net income accrues to the land and not the improvements.

surplus productivity

The 4 agents of productivity...

1. ) labor 2. ) management 3. ) capital 4. ) land

The four factors with create value (DUST)...

1. ) Demand 2. ) Utility 3. ) Scarcity 4. ) Transferability

The 4 forces that influence value...

1. ) Social trends 2. ) Economic and financial factors 3. ) Government controls and regulations 4. ) Environmental conditions and physical factors

A community's social ideals and standards can shape patterns of collective behavior which in turn affect the value of real property.

social trends

Among the social forces affecting the value of real property are:

1. ) amenities 2. ) directional growth 3. ) behavioral regulations 4. ) demographic trends 5. ) proportion of homeowners and renters

Desirable social features such as high quality schools, churches, well-maintained roads, convenient public transportation systems, pleasant landscaping, and careful city planning are _____. These features attract buyers and increase the value of real property.

social amenities

Communities tend to grow and develop unevenly, expanding in certain directions while remaining unchanged or declining in others. Property located in a community's path of growth may increase in value, while property in an area of declining growth depreciates.

directional growth

Subdivision developers may impose protective and restrictive covenants on real property to regulate its use and stabilize its value. Property values may be enhanced by such regulations of social behavior.

behavioral regulations Ex. - prohibit hanging wash out on Sunday - require lawns to be mowed at specified intervals

Real estate values may be affected by long range trends of population growth and decline, by the marriage and divorce rates, and by the birth and death rates.

demographic trends Ex. The post WWII baby boom created not only a demand for housing, but also for expended recreational and educational facilities.

Localities having a large percentage of homeowners tend to enjoy greater economic stability than areas populated by a high proportion of renters. The homeowners' greater financial, social, and emotional investment in their dwellings is reflected frequently in the economic stability of their neighborhoods.

proportion of homeowners and renters

The market value of a given piece of real property is affected by the operation of large economic forces apart from the intrinsic value of the particular property itself.

economic and financial factors

Among the economic forces affecting the value of real property which should be taken into account are the following:

1. ) levels of wages, salaries, and savings 2. ) existing supply of property 3. ) industrial and commercial trends 4. ) current financial climate 5. ) international economic developments

The value of real property rises in proportion to the purchasing power of potential buyers. If money in the form of _______ is readily available, the effective demand for real property will increase. The reverse is also true: in times of high interest rates and widespread unemployment, the level of buyers' financial resources naturally diminishes, and as a result the effective demand for real estate may markedly decrease.

levels of wages, salaries, and savings

According to the principle of supply and demand, as the supply of real property increases, its price must decline if all available units are to be sold or rented. Because the supply of land itself is relatively fixed and can be increased only by employing such extreme measures as filling in lakes, the balance of the supply and demand of real property is measured most accurately by tabulating current vacancy rates and the number of houses which have been on the market unsold for excessive periods of time. High vacancy rates and many unsold properties indicate a condition of low effective demand, and vice versa.

existing supply of property

The expansion of industrial and commercial enterprises can stimulate economic growth which in turn can raise the value of real property.

industrial and commercial trends

Fluctuations in a locality's financial climate may considerably influence the value of real property. Money and credit are commodities, like automobiles, houses and clothing. When money and credit are in short supply, their price goes up, in accordance with the principle of supply and demand, resulting in tight money and high interest rates. Because tight money reduces the number of potential real estate buyers, it tends to lower the value of real property. The reverse is also true: an enlarged supply of money and easily available credit raise the value of real estate by increasing the effective demand for it.

current financial climate

Breakthroughs in technology, such as solar heating, and innovations in product design and manufacturing techniques, such as mobile homes and prefabricated housing, can alter patterns of consumer demand and the level of available housing supply, changes which can sharply affect the market value of real property. Real estate construction costs, of course, are contingent upon the costs of building materials, wage levels and the available labor supply.

international economic developments

Local, state, and federal agencies are empowered to tax and otherwise control real property in a variety of ways, and are obligated as well to provide certain goods and services for the benefit of owners and renters of real property.

governmental control and regulations

Such legal and economic governmental activities affecting the value of real property are:

1. ) taxes 2. ) zoning 3. ) rent controls 4. ) government spending 5. ) utilities and related services

___ and special assessments have varying effects on property values. In some instances, excessively high taxation discourages commercial and industrial ventures and residential buyers, thus lowering effective demand and property values. However, if they create improvements clearly upgrading the community, their economic effect can be beneficial, resulting in increased effective demand and property values.

taxes

The government's police power to regulate the size, height, and placement of buildings on their sites, as well as its power to regulate construction methods and the uses to which property may be put, can have varying consequences regarding the individual properties affected thereby. Is thought to stabilize property values, because it enforces minimal standards of construction, assures a certain uniformity of building size and placement and prevents detrimental incongruity in land use.

zoning

During inflation times, the government can restrain the natural operation of supply and demand by regulating the cost of goods and services, including housing costs. Such regulatory measures increase the effective demand of potential renters. Investors, however, may be reluctant to acquire properties temporarily subject to this because of their fixed income potential, which may not keep up with inflation.

rent controls

Rents have been controlled under the ___.

Rent Stabilization Act

Increased ____ can prime the pump of an ailing economy, create new jobs and thus increase the effective demand for real property, thereby raising its value.

government spending

The value of real property is influenced by the availability of such governmental services as police and fire protection, garbage and sewage disposal, street lights, mail delivery, construction of streets and highways, and of other utilities, services, and conveniences. Land in unincorporated areas lacking some or all of these services and conveniences is likely to be less attractive to buyers of residential property than property benefiting from such services and improvements.

utilities and related services

The economic worth of a parcel of land is influenced by geographical, locational, and economic factors. These elements interact with a parcel's, situs to invest it with economic value. Land, in other words, acquires economic value in relation to the unique physical qualities of the particular portion of the globe which it happens to occupy.

environmental conditions and physical factors

In evaluating the physical forces affecting the economic value of land, the following elements should be taken into account:

1. ) climate 2. ) topography 3. ) size and shape 4. ) assemblage 5. ) available shade 6. ) orientation 7. ) soil characteristics 8. ) environmental deterioration 9. ) environmental hazards and nuisances

Property in temperate regions may be more attractive and valuable than similar property situated in regions of extreme weather conditions. Naturally, exceptions to this guideline abound. For instance, a special purpose property like a ski lodge requires cold and snow to operate successfully.

climate

Land's ____ - its surface contour - can enhance or detract from its value depending on the proposed use of the property.

topography residential property is thought to be most attractive when located among gently rolling hills, but property with excessively steep hills may require excessive grading (leveling) before construction can begin. Land having monotonously flat terrain can be well suited for commercial and industrial developments.

Lots having identical square footage situated in comparable locations may vary significantly in value if one has a more pleasing or practical shape than the other. Irregularly shaped lots with narrow front footage usually are worth less than their more conventionally shaped counterparts.

size and shape

Combining two or more lots into one large parcel may invest the new site with a value greater than the sum of its previous parts.

assemblage

the resultant increase in value due to assemblage is designated a _______.

plottage increment.

Shade trees enhance the desirability of residential property. Retail properties also benefit from available shade because it protects merchandise from direct sunlight and attracts passers by. Because the south and west sides of the street receive the greatest shade, these are thought to be preferred locations for retail properties.

available shade

A house's placement on its lot in relation to prevailing winds, rays of the sun, and neighboring properties can influence its value. Ideally, a home should be sheltered from the elements and not be in extremely close proximity to neighbors, yet it should not be so isolated from its surroundings that it seems cut off from its environment.

orientation

Soil for residential properties must have adequate drainage and percolation.

soil characteristics

the ability of water to flow readily off the surface of the soil.

drainage

In the standard _____, a hollow rod is inserted into the soil, and the time it takes for a specified amount of water to be absorbed into the soil is measured.

percolation test

Pollution of air, water, and other natural resources creates undesirable, sometimes uninhabitable areas. Smog, water poisoned by industrial wastes, and jet noise all contribute to environmental deterioration and lower property values.

environmental deterioration

Property in areas markedly susceptible to floods, tornadoes, hurricanes, earthquakes, landslides, and similar natural disasters may be in low effective demand because of potential damage to property and human life.

environmental hazards and nuisances

The 6 step appraisal process:

1. Defining the Problem 2. Conducting the Preliminary Survey 3. Gathering Data 4. Comparing, Analyzing and Classifying Data a. sales comparison approach b. cost approach c. income approach 5. Reconciliation – combining the results when using two or more of the approaches. 6. Issuing the Appraisal Report a. certificate or letter of appraisal (a simple business letter) b. checksheet (a two page legal size form); this one is most often used for residential. c. narrative report ( a lengthy written report usually for commercial properties.)

Three approaches to value:

1. ) Cost approach 2. ) Sales Comparison Approach 3. ) The Income Approach

the technique of estimating the value of the subject property by adding the depreciated replacement cost or reproduction cost of the improvements to the value of the land, if vacant. Based on the appraisal principles of substitution, supply and demand, balance, and highest and best use. Especially valuable when a lack of market activity limits the reliability of the sales comparison approach.

cost approach You can NOT use cost approach for land.

calculated by subtracting the physical, functional, and economic depreciation from the cost new of replacing or reproducing the improvements on the effective date of the appraisal.

depreciated replacement costs

made by comparing the existing structure with a newly constructed, duplicate or replacement building.

depreciation estimates

The site value is usually estimated by the

sales comparison approach

the cost at current prices to produce an exact duplicate.

reproduction cost

The cost at current prices to replace a building with one of equivalent utility.

replacement cost The use of replacement cost usually results in an estimate that is considerably lower than one based on reproduction cost.

Methods of Estimating Cost:

1. ) comparative unit or square foot method 2. ) unit-in place method 3. ) cubic foot method 4. ) quantity survey method

This method is based on an average cost per square foot for the area

comparative unit or square foot method

this method assigns an average cost for each unit, such as a bathroom, kitchen, bedroom, etc

unit-in place method

this method is based on an average cost per cubic foot. This method would be used for a structure with unusually high ceilings, such as a warehouse, where square foot method wouldn't be accurate

cubic foot method

this method calculates the total cost for every single item that must be purchased to build the structure, plus labor costs and indirect costs. This method is the most accurate and the most time consuming.

quantity survey method.

a loss in value for any reason, and is the difference between the cost to construct an improvement and the amount paid for it once built.

depreciation The land is never depreciated.

any type of depreciation in which the amount of money spent on repairing the deficiency is equal to or less than the resulting increase in value.

curable depreciation

any type of depreciation in which the amount of money spent on repairing the deficiency is more than the resulting increase in value.

incurable depreciation

is the loss in value due to such factors as wear and tear from use, structural defects, and exposure to the elements. Always “curable”.

Physical depreciation

is a loss in value due to the development of new technology or design, and is an inadequacy or a lack of functional utility, or superadequacy, due to overbuilding or overdesign. Sometimes curable, depending on severe the problem is and how much work is involved to correct it.

functional depreciation

is a loss in value caused by unfavorable economic influences occurring outside the property. It can be due to location or to economic factors. Never curable because it is not something that is on the property itself.

External depreciation or economic depreciation or economic obsolescence.

The amount of depreciation is the same each year and is found by dividing the value by the number of years over which the property is being depreciated. This method is called the ________.

STRAIGHT LINE METHOD OF DEPRECIATION or economic age-life method Ex. f a $90,000 property having a land value of $30,000 and an expected economic life of 60 years would have a depreciation of $1000 per year. ($60,000 divided by 60 years).

based on the condition of the property.

Effective age Ex. f two houses were both built 10 years ago and one has been well maintained and one has not, the one that has been maintained would have a lower effective age than the other.

is the period of time over which a property may be profitably used.

economic life normally 40-50 years

the technique of estimating the value of real estate by analyzing and comparing data of actual sales of similar, or comparable properties. Each comparable sale is adjusted to the subject property by making dollar value allowances for each significant difference. In order for the approach to be accurate there must be sufficient market activity in the area of the subject property. This method is not normally used for properties not sold on the open market such as public holdings, churches, etc.

The Sales Comparison Approach

The Sales Comparison Approach is based on the _________, which indicates that the value of the subject property is relative to the cost of acquiring an existing property with similar utility.

principle of substitution

The Five Steps in The Sales Comparison Approach:

1. Find recent comparable sales and listings. 2. Verify data. 3. Select relevant units of comparison. 4. Compare to subject property and adjust for differences. 5. Reconcile into single value or range of values.

Elements of Comparison & Order of Adjustments:

1. Property rights conveyed 2. Financing terms 3. Conditions of sale 4. Market conditions 5. Location 6. Physical characteristics

How do all three valuation approaches make use of sales comparison?

1. ) In using the Sales Comparison Approach, properties similar to the subject property are found and sales prices are adjusted to account for differences between the comparables and the subject. 2. ) The Cost Approach requires that land value be estimated separately, and this is often accomplished by analyzing the prices of comparable vacant land. 3. ) In the Income Approach, the rent that the subject property is likely to produce is estimated by analyzing the rents of comparable properties.

Limitations in using the Sales Comparison Approach:

1. ) The value derived is only as accurate as the data used. 2. ) If the comparable properties differ substantially from the subject property, the resulting value estimate is likely to be less accurate. 3. ) Properties that are unusual or have special features often cannot be appraised using this process. 4. ) If there are few recent sales in the area, the process becomes less accurate.

Generally, an appraiser uses ____ comparables.

3-5 However, if the comparables are not all in the same area as the subject property, or if they sold more than 6 months ago, the appraiser should use more comparables. So, as to the question of how many comparables should be used, the best answer would be “as many as necessary”.

Matched Pairs or Paired Sales is the technique of estimating the value of adjustments by the following procedure:

Sale Price of Property with Component - Sale Price without Component = Value of Component

If the comparable is superior to the subject, a _____ is made to the subject property.

negative adjustment

If the comparable is inferior, a _____ is made.

positive adjustment The comparables should have the same highest and best use as the subject.

The net adjustment is found by ....

adding or subtracting all of the adjustments.

The _____ is the sum of all adjustments whether they were plus or minus. If the gross adjustment is very high, that means too many adjustments had to be made and that comparable is not a very good one. The appraiser may decide either to discard that comparable or give it less weight in the calculations.

gross adjustment

Appraisers also sometimes make adjustments for ...

- property rights being conveyed - financing terms - market conditions - location - size - other conditions of sale

seeks to estimate the present worth of a property's expected future income, and is used for appraising income producing properties.

income approach

The _____ is the basis for the income approach

principle of anticipation

The property's value is expressed in the IRV formula:

Net Annual Income/ Capitalization Rate X Value I/RV

The ______ is found by subtracting all operating expenses from the annual gross income.

net annual income

Operating expenses include...

- real estate taxes - insurance - repairs - maintenance - decorating - wages - management fees - utilities - vacancy losses - reserves for replacement of stoves, carpeting, etc.

The ____ represents the rate of return the investor can expect to receive from his investment in the property. Expressed as a percentage.

capitalization rate

The ____ is understood to represent the present value of the anticipated benefits of ownership.

value

The ____ is used for obtaining a rough estimate of the value of certain kinds of properties, mainly smaller income properties or single family homes. Use is not to be thought of as a full-fledged appraisal technique. It's a number which when multiplied by a rental property's income, gives an estimate of the property's value.

gross rent multiplier (GRM) GRM x INCOME = VALUE or VALUE/ INCOME = GRM The gross income is always used in this formula.

Residential properties usually use a ____ income figure, whereas commercial properties use ____ income.

monthly annual

The numerical value of a property's GRM is established through a market analysis of the gross incomes and sales prices of comparable properties which have sold recently. This will establish the _____.

market GRM

_____ can appraise residential property up to a 4-plex.

Residential appraisers

_____ can appraise any property including commercial and larger residential properties.

General appraisers

An appraiser who has completed the requirements of the Appraisal Institute may use the designation _____.

Master of Appraisal Institute (MAI)

Topic 8 Flashcards

Valuation (126 cards)