value.For example, the federal governments participation

Principles of Real Estate II Flashcards Law of increasing returnsPg 324 ExternalitiesThe principle of externalities states that influences outside a property may have a positive or negative effect on its value.For example, the federal government's participation in interest rate levels, mortgage loan guarantees, slum clearance, and rehabilitation has a powerful impact on stimulating or retarding supply and demand. At the neighborhood level, even decorative features such as fresh paint, flowers, and plush lawns can enhance property values.Pg 324 Market priceWhat a property actually sells for (it's selling price) The sales comparison approachSometimes called the market data approachCompares the subject property with recently sold comparable properties and is based on the principle of substitution.Because no two parcels of real estate are exactly alike, each comparable property must be compared with the subject property, and the sales prices must be adjusted for any dissimilar features. The principal factors for which

adjustments must be made fall into four basic categories:

Date ofSale, Location, Physical Feature, Terms and Conditions of Sale.Essential in almost every appraisal of real estate. It is considered the most reliable of the 3 approaches in appraising residential property, where the amenities (intangible benefits) may be difficult to measure otherwise.The sales prices of comparable properties are adjusted by making the features of the comparable properties match those of the subject property.Pg 325 ChangeNo physical or economic condition remains constant. Real estate is subject to natural phenomena such as tornadoes, fires, and the routine wear and tear of the elements. The real estate business is also subject to the demands of its market, just as tiny other business. an appraiser shoul be knowledgeable about the past, and perhaps, the predictable further effects of natural phenomena and the behavior of the marketplace.Pg 325 Market ValueThe most probable price a property should bring-- not the average price, highest price, or lowest price AppraisalThe act or process of developing an opinion of value; an opinion of value.Supply and DemandThis principle states that the value of a property will increase if the supply decreases and the demand either

increases or remains consistent-- and vice versa.For example, the last lot to be sold in a residential area where the demand for homes is high probably would be worth more than the first lot sold in that area.Pg 324

Law of diminishing returnsPg 324 CostThe original capital outlay for land, labor, materials and profitPg 323 Basic principles of value*highest and best use*substitutionsupply and demand'conformity*externalities*anticipation*increasing and diminishing returns*plottage value*contribution*competition*change ValueMonetary worth based on desirability Plottage valueThe increased utility and value from the combining or consolidating of adjacent lots into one larger lot is the principle of plottage value.for example, 2 adjacent lots are each value at $35,000; each one will accommodate a duplex. if the two lots are combined into one lot that will accommodate an eight-unit apartment complex, the loan might be worth $90,000. The process of merging the 2 lots under one owner is known as assemblage.Pg 324 The Cost ApproachThe cost approach to value is based on the improvement's reproduction cost or replacement cost. This is sometimes

called appraisal by summation. Consists of 5 steps:1.

Estimate the value of the land as if it were vacant and available to be put to its highest and best use.2. Estimate the current cost of constructing the building(s) and site improvements3. Estimate the amount of accrued depreciation resulting from physical deterioration, functional absolve science and/or external absolve science.4. Deduct accrued depreciation from the estimated construction cost of a new builing(s) and any site improvements5. Add the estimated land value to the depreciated cost of the building(s) and site improvements to arrive at the total indicated value by the cost of approach.Pg 327 TransferabilityThe relative ease with which ownership rights are transferred from one person to another Date of saleAn adjustment must be made if economic changes occur between the date of sale of the comparable property and the date of the appraisal; as a general rule it is best to use properties that have sold within six months of the appraisal.Pg 325 Replacement costThe construction cost of the subject property at current prices of a property that is not necessarily an exact duplicate but serves the same purpose or function as the original. Replacement cost is used more frequently in appraising older structures because it eliminates obsolete features and takes advantage of current construction materials and techniques.Pg 328

ConformityMaximum value is realized if the use of land conforms to existing neighborhood standards. In single-family residential neighborhoods, for example, buildings should be similar in design, construction, size, and age.for example, the biggest house on the block tends to lose value to its neighbors; it is said to be overbuilt for the neighborhood.the reverse is sometimes true for the smallest house on the block. any decrease in value for large homes or increase in value for small homes would be on a per-square-foot basis.Pg 324 Physical FeaturePhysical features that may case adjustments include age of building; size of lot; landscaping; instruction; number of rooms; square feet of living space; interior and exterior condition; the presence or absence of a garage, fireplace, or air conditioner, and so forth.Highest an best useThe most probable use to which a property is suited that will result in its "highest value." The most probable use must be legal, physically possible, and financially feasible.The highest and best use of a site can change with social, politely and economic forces.For example, a parking lot in a busy downtown area may not maximize the land's profitability to the same extent as an office buildingPg 323 terms and conditions of saleThis consideration becomes important if a sale is not financed by a traditional mortgage The three approaches to value*the sales comparison approach*the cost approach*the income approachEach method serves as a check against the others and narrows the range within which the final opinion of value will fall. Each method is generally considered most reliable for specific types of property.ContributionThe value of any component of a property is measured by the amount it contribute to the value of the whole or the amount its absence detracts from that value.For example, the cost of installing an air-conditioning system and remodeling and older office building may be greater than is justified by the rental increase that may result from the improvement to the property.Pg 324 LocationAn adjustment may be necessary to compensate for locational differences.For example, similar properties might differ in price from neighborhood to neighborhood or even in more desirable locations within the same neighborhood.Reproduction costThe dollar amount required to construct an exact duplicate of the subject building at current prices.Pg 328 ScarcityA finite supply CompetitionThis principle states that excess profits tend to attract competition. For example, the success of a retail store may