REE Ch. 20 - Valuation and Pricing Properties

Jim is using the cost approach to appraise Greg's property. John has the following figures: land value $25,000, building value $137,500, total depreciation, $33,000. Using these figures, what will John estimate as the total value of the property?

$129,500 ($137,500 - $33,000 + $25,000)

If an appraiser is using the cost approach to determine the value of a property where the land is valued at $20,000 and the replacement cost of the improvements is $125,000 with a total depreciation of $9,000, what is the indicated value of the property?

$136,000

A property is being appraised by the cost approach. The appraiser estimates that the land is worth $10,000 and the replacement cost of the improvements is $75,000. Total depreciation from all causes is $7,000. What is the indicated value of the property?

$78,000

A property sold for $185,000 and is producing an annual net operating income of $16,650. What is the capitalization rate?

9%

Economic principles that influence value include:

Anticipation Assemblage Change Conformity Competition Contribution Diminishing Return Highest and Best Use Progression and Regression Substitution Supply and Demand

The income approach is based on which two principles of value?

Anticipation and substitution

What is the first step in the cost valuation approach?

Approximate land value as if it were vacant

A property owner buys an adjacent parcel and combines it with the original parcel to create a property with a higher value than the total of the two separate property values. The operative principle of value in this situation is called?

Assemblage

The value of a property as estimated by a taxing authority as the basis for ad valorem taxation is which type of real estate value?

Assessed value

A taxing authority determines the

Assessed value.

The value of the property used for ad valorem taxation is called

Assessed value.

When getting ready to do a CMA, a licensee will do the following:

Collect and analyze information about the seller's property. Choose comparable properties in the area. Compare the seller's property to the comparables and do some adjusting to the value of the comparables. Estimate a reasonable and realistic selling price for the seller's property.

The income approach to determining value would best be used for which type of property?

Commercial

What the market recognizes as "the change in value an improvement makes to a property" is called what?

Contribution

When improvements are continually added to a property with no increase to the value of the property, it is called

Diminishing return.

After collecting and organizing all the information on the seller's property and some number of comparable properties, what will be your next steps to complete the CMA?

Estimate the values for the differential features Adjust the comparables Estimate a price range Present the data to the seller

Of what value are expired listings to a CMA and what would be a particularly good example of one?

Expired data may show the seller that the asking prices of these homes were significantly higher than the selling prices of the homes on the recently-sold list. A particularly good example to share with a seller would be that of an expired listing that had been re-listed and is now on the sold properties list.

A competitive market analysis is an attempt to do what?

Identify an estimate of a property's value based on comparables

There are a number of different types of value.

Investment value Insured value Use value Mortgage value Exchange value Reproduction value Replacement value costs. Salvage value Assessed value Condemned value Depreciated Rental value

Grace and Paul spent $75,000 on a complete remodel of their kitchen. What does this mean to the value of their home?

It depends on what the market recognizes as the change in value the improved kitchen makes. A remodeled kitchen might add $50,000, $75,000 or even $100,000 to the value of a home.

The highest price a buyer is willing to pay and the lowest price the seller will accept for a property is known as what?

Market Value

Explain the difference between market value and market price.

Market value is an opinion of the value of a property based on analyzing data collected about the property. The market price of a property is the actual sales price and can in some circumstances be greater or lesser than market value.

The extra value created by merging two parcels of land is called

Plottage value.

What terms besides selling price should be important considerations that influence a home sale?

Possession date Contingent sale Financing terms

If a property is on the market for quite some time and does not sell, what is most likely the reason?

Price is too high.

Bob has the largest, nicest home in a neighborhood that is not being kept up by the other homeowners. What principle affects the value of Bob's home?

Regression

What's the difference between reproduction cost and replacement cost?

Reproduction cost is the cost at today's prices of producing an exact duplicate of the current building, including its improvements and its flaws. Replacement cost is the construction cost at today's prices of producing a similar or equivalent structure.

If supply is low and demand is high, prices will

Rise.

The principle of substitution is the major basis of which valuation approach?

Sales comparison

There are three approaches to estimating value that appraisers use:

Sales comparison approach Cost approach Income approach

The value of a property that has reached the end of its economic life is called the

Salvage value.

Under the _________ heading of the Comparative Market Analysis Form is a row to add all the pertinent information about the seller's property.

Subject

The sales comparison approach is based on what principle of value?

Substitution

Explain the principle of substitution.

Substitution says a buyer will not pay more for a home than what he or she would pay for another home that is equally desirable and available.

What does the term anticipation mean as it relates to property value?

The benefits a buyer expects to receive over the period of time he or she holds the property.

The cost approach is

The cost approach attempts to estimate either the property's replacement cost or reproduction cost.

A property's market price is

The highest price a buyer will pay and the lowest price the seller will accept.

This approach assumes that an investor will purchase a property based on the future income stream the property will produce - the principle of anticipation.

The income approach (also called the income capitalization approach)

When determining a property's listing price based on the sale price of similar properties, only properties that have been sold within ___________ should be included.

The last 3 to 6 months

To what properties does the licensee make adjustments when doing a CMA?

The licensee will always make the adjustments to the comparables, never to the perceived value of the seller's property.

listing range

The licensee will then give the seller a listing range, and the seller can then set whatever price he or she feels comfortable with within that range.

When collecting information about the seller's property for analysis, what should a licensee focus on?

The neighborhood The home site Existing property improvements

The sales comparison approach is thought to be the most reliable appraisal approach for what kind of property?

The sales comparison approach is thought to be the most reliable for appraisals of single-family homes.

What important information can a licensee glean from sales price, original price and number of days on the market when looking at sold properties?

This data gives information about how competitive the home was in the marketplace at the time.

What is the last step in completing a CMA?

To estimate a reasonable and realistic selling price for the seller's property

How would you go about collecting information on a seller's property in preparation for doing a CMA?

Tour the home, taking notes about the home's features and faults. After getting answers to all questions, leave the home and drive through the local neighborhood, sizing up the features and benefits as well as any noticeable shortcomings. While driving through the neighborhood, look for homes that are currently for sale or have sold signs in the yard.

The value a property holds for the owner is the

Use value.

Where will you find homes that are comparable to the seller's home you're wanting to list?

You will find homes in the same neighborhood by looking through your own files, checking with fellow agents and checking out the listings on your local MLS database.

The licensee should give the seller ____________ and then the seller can set the price to whatever he or she feels comfortable with.

a listing range

Evaluation is

a study of the nature, quality, or utility of certain property interests in which a value estimate is not necessarily required.

If a comparable lacks a feature that the seller's property has the licensee will

add the value of the feature to the price of the comparable.

The market price of a property is

an amount a particular purchaser agrees to pay and a particular seller agrees to accept under the circumstances surrounding the transactions, in other words, the actual sales price.

Evaluation of a property does not result in

an estimate of value. Evaluation looks at a number of economic principles that influence the value of a property.

An appraisal is

an unbiased estimate of the nature, quality, value or utility of an interest in or aspect of identified real estate and related personalty as of a certain date.

The sales comparison approach is

based on the principle of substitution. With this approach, the value is determined by comparing the property being appraised with recently sold comparable (equivalent) properties.

A broker or salesperson who is attempting to establish a listing price, or range of prices for a property, uses a scaled-down version of the appraiser's sales comparison approach called a

comparative market analysis, or CMA.

The licensee should keep track of the pending sales and the active listings of the homes that he or she included in the CMA. This responsibility falls under

documentation.

Salvage value refers to the nominal value of a property that has reached the end of its

economic life.

While most appraisals seek to estimate market value the CMA serves a useful purpose to

establish a listing price, or range of prices for a property.

Appraisers use the income approach (also called the income capitalization approach) to

estimate the value of properties that produce income, usually from rent paid on leases. This approach also assumes that an investor will not pay any more for a property with a certain income than he or she would pay for a similar property with a similar income - the principle of substitution.

The broker's (CMA) will be__________ than the appraiser's estimate of value.

less reliable

Once the licensee has chosen comparable properties in each category, he or she will compare each of them to the seller's property. The licensee makes the comparison based on

location, physical characteristics, sale date and financing terms. The licensee will use the differences in those factors to make small adjustments to either the sale price or the listing price of the comparables.

People often have the misconception that market value and cost are the same. This could be true with

new construction.

A comparative market analysis (CMA) is

not an appraisal. A CMA is done by a listing agent to give the seller information about the sales prices of similar homes, so that the seller can decide how much to ask for the property.

Using the cost approach to appraise value, if the cost of constructing at current prices, a "precise duplicate" of the subject improvements is used, the appraiser is using the

reproduction cost method.

The sales comparison approach is believed to be the most reliable for appraisals of

single-family homes.

If a comparable has a feature that the seller's property does not have, the licensee will

subtract the value of that feature from the price of the comparable.

The licensee will always be making the adjustments to

the comparables.

Market value is

the most probable price, as of a specific date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should be sold after reasonable exposure in a competitive market under all conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress.

Before the licensee comes up with an estimate, he or she will evaluate the soundness of each comparable. The most reliable comparables would be those that are

the most similar to the seller's property - most similar meaning the fewest number of adjustments.

A licensee should keep in mind that the information on pending sales is not as reliable as on sold homes because

the price the licensee sees is only the listing price, not the sales price, and the sale is not final.

Valuation is

the process of estimating the value of an identified interest in specific property as of a given date. The purpose of valuation is largely to determine a property's market value.

The cost approach is most reliable for properties that

were built recently, since the appraiser can get access to the actual costs of the development and construction. It's also a good approach for special purpose buildings when data on income is not available or there are no comparable sales.

According to the principle of substitution, a buyer

will not pay more for a home than what he or she would pay for another home that is equally attractive and available.