Chapter 12: Real Estate Appraisal Flashcards

Chapter 12: Real Estate Appraisal Flashcards

Specific dataSpecific data is information about the subject property itself.The appraiser gathers specific data in a site analysis and a building analysis.DepreciationDepreciation is a loss in value due to any cause.The three categories of depreciation are physical deterioration, functional obsolescence, and external obsolescence.ChangeThe 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.Value indicatorsThe 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.Potential gross incomeA 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.Physical deteriorationPhysical 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.Utility valueUtility 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.General dataGeneral 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.Reproduction costThe 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.Net operating incomeNet operating income is calculated by subtracting operating expenses from effective gross income.ComparablesA comparable property is one that is similar to the subject property and has recently been sold under normal conditions of sale.Highest and best useAn 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.

CapitalizationThe capitalization rate is the rate of return an investor wants on his investment in the property.Gross income multiplier methodAn 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 Progression and regressionAccording 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.Functional obsolescenceFunctional obsolescence is depreciation caused by functional inadequacies or outmoded design.Functional obsolescence may be curable or incurable.Replacement costThe replacement cost is the cost of building improvements with the same utility as those on the subject property, using modern materials and construction methods.ReconciliationReconciliation is the process of assembling and interpreting the value indicators in order to arrive at a final value estimate.Income approachIn the income approach to value, an appraiser changes net operating income into value by using a capitalization rate.Cost approachUsing the cost approach, the appraiser estimates the replacement cost of the building, deducts depreciation, and adds the value of the site.Market priceMarket price is the price someone paid to acquire a property, in an actual transaction.Normal market conditionsTo 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.External obsolescenceExternal 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.Market valueMarket 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.

Effective gross incomeEffective gross income is the property's potential gross income minus a vacancy factor.Sales comparison approachThe 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.