Chapter 17: real estate appraisal Flashcards

Chapter 17: real estate appraisal Flashcards

Thin marketOnly a few buyers and a few sellers Fictional depreciationAllowed Depreciation deduction on income taxes as incentive to invest in property. Even though property might actually be appreciating Projected annual operating statementPro formaEffective gross income - total operating expenses = net operating income CapitalizeTo convert future income to current valueIncome/rate (of return) = value Principle of substitutionPresent value of a property is influenced by the price for a reasonably desirable substitute.Principle of increasing returnsA dollar spent adds more than a dollar to value Limited appraisalProcess of estimating value performed under and resulting from invoking departure provision Broad marketMany buyers and sellers are in the market at the same time Principles of valueKey factors that determine value in real estate:Anticipation, substitution, change, conformity, highest and best use, supply and demand, increasing returns, decreasing returns, contribution Net operating incomeWhen you deduct the annual operating expenses of the real estate from the effective gross income.Salvage valueWhat are you structure is worth if it has to be removed and taken elsewhere, whole or dismantled.Economic lifeThe period of time a property may be expected to be profitable or productive; useful life.PlottageWhen assemblage causes an increase in value over the cost Physical lifethe number of years a building will be physically sound Operating expensesExpenditures necessary to maintain production of incomeImprovements are not expensive - they increase usefulness of property which increases rent which increases value ReservesEstablished for items that must be replaced or repaired more than once during the life of the building but not yearly Economic obsolescence/external obsolescence Loss of value due to external forces or events. Always in curable. ex- Air or noise pollution, drop in demand for real estate Straight line depreciation(Cost of building/economic life) x effective age Cost approachLand value plus current construction costs minus depreciation DepreciationLoss in value due to physical deterioration, functional obsolescence, and economic obsolescence

Cost handbooksCost information for each feature available from construction cost handbooks. Includes photographs and brief descriptions.Square-foot methodMost widely used - fast and simple - reasonably accurateCompare a newly constructed building similar in size, type of occupancy, design, materials, and construction quality.Current construction cost /by square feet = cost per square foot.Competitive market analysis/CMAA listing tool to show a seller what it home is likely to sell for.Compares homes that have recently sold, Homes presently on the market, and homes listed but did not sell.Return of investmentCompensation for the fact that the building is wearing out Characteristics of valueDUSTDemandUtilityScarcityTransferability Complete appraisalAct or process of estimating value without invoking the departure provision Highest and best useuse of land that yields the most value Principle of supply and demandValue of commodity will RISE as demand INCREASES and/or supply DECREASES Principle of contributionWorth an improvement adds regardless of cost AssemblageBringing two or more adjoining lots together under one ownership.Operating expense ratioTotal operating expenses divided by effective gross income Physical deteriorationLoss of value due to wear and tear - use, nature, neglect, vandalism Return on investmentInterest received for investing money Principle of competitionDemand create the profits, profits create competition, competition stabilizes prices Gross rent multiplier/GRMEconomic comparison factor - gross rent as relates to its purchase priceSales price divided by gross annual

rentWeakness: too simple. Doesn't take into account

expenses or life expectancy of property Replacement valueCurrent cost of building a structure of equivalent utility Income approachAnalysis of value of property using return on investment Functional obsolescenceloss of value due to worn or outmoded features Plottage ValueThe amount of the increase in value from assemblage Principle of changeThe more potential changes identified equals a more accurate estimate of present worth The principle of conformityHomogeneity = maximum value Market valueMost probable selling price in an arms length transaction Market comparison approachAn appraisal method using the principles of substitution to

compare recent sales of similar propertiesUses:

Comparables, sales records, verification, number of comparables, adjustments, time adjustments, house size, garage and patio, age condition and quality, landscaping, features and location, terms and conditions of sale,

correlation process Quantity survey methodMost detailed and time consuming method, but most accurate. Item-by-item inventory of all costs Effective ageThe age indicated by a structure's condition and utility.Valuation processStep-by-step procedure that appraisers used to conduct their work

Principle of anticipationPresent value is influenced by the anticipation of future benefit principle of decreasing returnsA dollar spent adds less than a dollar to value Curable depreciationBenefit cure equals or exceeds cost to cure Incurable depreciationCost to cure exceeds the economic benefit Schedule gross/projected grossEstimated rent expected from a fully occupied property on annual basis Value approaches1. Market comparison approach2. Cost approach3. Income approach AppraisalAn estimate of the current value of the property.Rental valueValue of right to use property for a specific period of time

Unit in placeThe cost of the unit of construction: labor, materials and

how many. Example fireplace