Ch 7, Unit 1-7
Subdivision regulations
Besides the restrictions established by the grantor, cities also control subdivision construction as part of the master plan. Examples of these regulations are: 1. location, grading, surfacing, and widths of streets, highways and other rights of way 2. installation of sewers and water mains 3. minimum dimensions of lots and length of blocks 4. building and setback lines 5. areas reserved for public use such as schools or parks 6. easements for public utilities As stated earlier, in a case where the grantor's restrictions and covenants are more restrictive than the city's regulations, the more restrictive will govern.
Building codes
Building codes set the standards for the types of materials to be used for construction, electrical wiring, fire prevention standards etc. Most cities use the BOCA (Building Officials Conference of America) requirements for building. A Building Permit from a city clerk or other municipal official is usually required to build, alter, or repair an existing building. The purpose of a building permit is to control compliance with building codes and zoning ordinances by examining the plans and inspecting the work. A fine can be levied if the work is not to code.
Limiting restrictions
State things you can never do. (No fences, no dog runs, etc.)
Income approach to value
The Income Capitalization Approach is a value based on the present value of the rights to future income. This is for income generating properties. The steps are as follows: 1. Estimate the annual Potential Gross Income. This is equal to the number of units times the annual market rent for each unit, plus non-rental income. 2. Deduct an allowance for vacancies to arrive at Effective Gross Income. 3. Deduct the annual operating expenses from Effective Gross Income to derive Net Operating Income (NOI). --If you are given the monthly income and no other information in a problem, you must assume that it is the Net Operating Income. You must multiply monthly income times 12 to derive the annual net income, and then finish the problem. 4. Estimate the rate of return that an investor would demand for this investment. This rate of return is called the Capitalization (Cap) Rate. 5. Divide the Cap Rate into the Net Operating Income to identify the property's value, or I / R = V where I is Net Operating Income; R is the cap rate; and V is the value. Key Income approach formulas -To solve for Value:I / R = V (Income divided by Cap Rate = Value) -To solve for Cap Rate (rate of return, or R):I / V = R (Net Income divided by Value = Cap Rate) -To solve for Income (Net Operating Income):V x R = I (Value x Cap Rate = Net Income) Example: Illustration #1: Solving for the Value A man owns a building with 6 apartments. Three of the 6 apartments net him $200 per month and the other three net him $150 each month. For what amount should he sell the building to achieve a return of 9%? Solution: The question seeks to find value or V. The formula is therefore I / R = V (Income divided by Cap Rate = Value) Total net income = ($200 X 3 = $600 a month X 12 = $7,200) plus ($150 X 3 = $450 a month X 12 = 5,400). $7,200 + $5,400 = $12,600 total annual net operating income. Next, divide the net income by the 9% cap rate: $12,600 / 9% = $140,000. Thus, in order to sell this property with a 9% return, the investor must sell it for $140,000. Illustration #2: Solving for net income. An apartment complex is valued at $480,000. The property was appraised using a 10% cap rate. What is the property's net income? Solution: The question seeks to find net income, or "I". The formula is therefore V x R = I (Value x Cap Rate = Net Income) Value = $480,000, and the cap rate is 10%. Multiply $480,000 times 10%. Net income is $48,000. Illustration #3: Solving for the cap rate. A property purchased for $3,600,000 has a gross income of $500,000 and expenses of $200,000. What is the cap rate, or rate of return for this property? Solution: The question seeks to find the cap rate, or "R". The formula is therefore I / V = R (Net Income divided by Value = Cap Rate) Solve for net income by subtracting expenses from gross income: $500,000 - $200,000 = $300,000. Next divide net income by the value: $300,000 / 3,600,000 = 8.33% The cap rate for this property is 8.33%. Illustration #4: Solving for the value given income and expense data An investor wants to purchase a 20 unit apartment complex. Monthly, ten units rent for $900, five for $975, and five for $1,050. Vacancy and collection losses are estimated to be 5% of the Potential Gross Income. Operating expenses are expected to be $95,850. Using a cap rate of 8%, what should he pay for the property? Solution: The formula for solving for value is V= I/R To derive (annual) net income, identify potential income, subtract out vacancy and expenses:Potential income = ($900/mo. x 10 units x 12 months) + ($975/mo. x 5 units x 12 months) + $1,050/mo. X 5 units x 12 months) = $108,000 + 58,500 + 63,000 = $229,500 total potential rentPotential income less vacancy = gross income. Thus, $229,500 - (5% x 229,500) = $229,500 - 11,475 = $218,025 gross incomeGross income - expenses = net income. Thus $218,025 - 95,850 = $122,175 net income Next, solve for value by dividing net income by the cap rate per the formula in #1 above: $122,175 / 8% = $122,175 / .08 = $1,527,187 value.
The law of supply and demand (value principles)
The value of a property increases when the supply is short and decreases when there is too much. Similarly, the value increases when the supply is short, and decreases when there is little demand. Example: In an area where few properties are sold from year to year, when a property is placed on the market, it will usually sell quickly. Conversely, when there are many properties to choose from, the market for an individual property will be in less demand. If a large employer in an area closes, the likely effect on the area's real estate values will reflect the principle of supply and demand.
Exceptions to zoning
-Buffer Zones such as landscaped parks and playgrounds to separate and screen residential areas from nonresidential areas. These "Buffer Zones" are used between areas of properties being used for different purposes. For example: A "Buffer Zone" (like a park) would be placed between a residential subdivision and a commercial development. -Nonconforming Use: An improvement that does not comply with the zoning ordinances because it was constructed prior to the adoption of the zoning laws, and its use is one that clearly differs from current zoning. Usually, nonconforming uses result when a zoning change leaves existing properties in violation of the new ordinance. This type of nonconforming use is a LEGAL nonconforming use. A board usually treats this kind of situation by allowing it to continue either: --indefinitely --until the structures are torn down --only while the same use continues, or --until the property is sold Example: If a bowling alley is in an area that no longer allows commercial activity, the zoning board rules that the bowling alley may continue to operate until it is sold, destroyed, or used for any other commercial purpose. If the property burns down it cannot be rebuilt as a bowling alley without obtaining a variance. Without the variance from the proper governmental authority the property becomes residential use. A legal nonconforming use is one that conflicts with the ordinances that were enacted after the use commenced. For example, if the bowling alley in the previous example is sold or leased, and the new owner or tenant continues to operate the property as a bowling alley it is still a legal nonconforming use. When purchasing or renting a nonconforming structure, a buyer or tenant should be made aware that in case of substantial destruction by fire or otherwise, the zoning statutes may prohibit reconstruction of the structure. The buyer or tenant should discuss the possibilities of purchasing demolition insurance from an insurance agent. A nonconforming use also terminates if the property is abandoned. A Variance may be sought to provide a deviation from an ordinance such as sign construction or zoning, so long as it is before the construction or reconstruction takes place.
Planning/zoning
-Master Plan: This "Master Plan" is both a statement of policies, and a presentation of how it will be implemented once a local government has adopted it. "Master Plans" are put into effect through zoning ordinances. -Zoning: The regulation of structures and uses of property within designated districts or zones. Zoning regulates and affects such things as use of the land, lot sizes, and types of structure permitted, building heights, setbacks, and density (the ratio of land area to improvement area). Zoning laws are enacted in the exercise of police power and are upheld as long as they may reasonably protect the public health, safety, morals, and general welfare of an area. Counties and/or municipalities generally enact their own zoning ordinances pursuant to an enabling act of the state. -Bulk Zoning: Controls density and avoids overcrowding, such as restrictions on setback, building height, and percentage of open area, as its primary purpose. -Aesthetic Zoning: Requires that new buildings conform to specific types of architecture (all Spanish fronts, colonial, etc). -Directive Zoning: Encourages zoning as a planning tool to use land for its highest and best use.-
Police power:
-planning -zoning -codes that regulate building construction -subdivision regulations -environmental protection legislation
Metes and bounds system
A description starts at a designated place on a parcel called a Point of Beginning (POB). The description then describes the perimeter of the tract by reference to linear measurements and directions. Monuments are fixed objects that serve as markers for the property, and are used to establish the parcel's boundaries. A property description using the metes and bounds system must BEGIN AND END at the point of beginning. (The same identifiable point.) If the description does not meet these guidelines it is not a valid description.
Homestead exemption
A homestead is a parcel of real property that is owned and occupied as a family home. Some states exempt a portion of the value of the homestead from judgments to protect families against eviction by creditors. States and counties may exempt a portion of the assessed value of the principal residence from property taxation. A property owner generally qualifies for a homestead exemption by meeting two criteria: -Is head of a family -Resides on the property for a required length of time Some states also allow a single person to claim the homestead exemption. Depending on state law, homeowners may have to apply every year for the exemption, or they may receive it automatically without filing. For example, if a property is assessed at $400,000, and it is the owner's principal residence, the owner may file for a homestead tax exemption. If the exemption were $25,000, the taxable portion of the property would become $375,000. Taxable value is the assessed value subject to taxation after all exemptions have been taken into account.
External obsolescence
A loss of value resulting from extraneous factors that exist outside of the property itself. It is a type of depreciation caused by environmental, social, or economic forces over which an owner has little or no control. If there is a change in zoning, external obsolescence is likely to occur, as in the following examples: to a residence if an industrial plant is built next to it; to a well-maintained house in a deteriorating neighborhood; and to a motel where a new highway is being built that results in difficult access to the motel. Other causes might be proximity to nuisances and changes in land use or population. Also called locational, economic or environmental obsolescence. External obsolescence is generally considered incurable since this form of value loss is beyond the control of the individual property owner. Moreover, the costs to cure would be virtually impossible to calculate or even apply.
Environmental protection legislation
A number of environmental laws have been passed by Congress and the states to protect citizens and the environment. Examples of such laws are the Clean Air Act and The Clean Water Act. Many states have enacted laws that prevent builders or others from constructing septic tanks or other disposal systems in certain areas, particularly where public bodies such as, streams, lakes, rivers and public water sources are concerned. The Residential Lead-Based Paint Hazard Reduction Act and enabling regulations require affirmative action on the part of the sellers, landlords, and real estate agents and renovators disturbing more than two square feet of old paint in houses built before 1978, to ensure that lead-based paint hazards are addressed in the sale and leasing of homes and apartments constructed prior to 1978. Disclosure of knowledge of Lead Paint on any sale or lease of a residential property is mandatory. To insure the safety of an area, frequently a PERCOLATION TEST is required to test ground water for runoff. This is done with wells, septic systems and gasoline tanks.
Conditional use permit
A property owner is granted a special use permit for a property that is deemed to be in the public interest contrary to the zoning that exists such as a restaurant near an industrial plant.
Physical depreciation
A reduction in utility or value resulting from an impairment of physical condition, which deterioration can be divided into either curable (painting/routine maintenance) or incurable types (20 year old foundation and framing). Physical depreciation is a form of depreciation caused by the action of the physical elements, such as wind or snow, or just ordinary wear and tear.
Deed restrictions/restrictive covenants
A restriction is a use encumbrance. Restrictive covenants limit the use of a property. Usually placed by the grantor in a deed, thereby binding future owners. Deed Restrictions may restrict an owner's use more severely than a zoning ordinance (government control). For example, if the deed restriction says that a building must be "set back" from the street 15 feet and the zoning ordinance says 10 feet, the most restrictive would govern. In other words, the more restrictive of the two takes precedence. Deed restrictions are recorded with the deed or on the deed itself. This is not the same type of ownership as a fee simple or life estate, but rather rules that govern the property. Some restrictions and covenants have time limits placed by the grantor.
Enabling acts
A statute creating the power or authority to carry out an activity, as under the provisions of a federal housing program, or to do something not previously authorized. For example, a condominium law creating the unique condominium of ownership.
Zero lot line
A term generally used to describe the positioning of a structure on a lot so that one side rests directly on the lot's boundary line. Such construction is generally prohibited in many areas by setback ordinances unless, of course, it is a part of a special space-conserving project. (Party Wall, Patio Home, Planned Unit Development) Planned Unit Development (PUD) is a relatively modern concept in housing which produces a high density of housing units, while maximizing the use of open space. Because buildings are clustered together, more area is left open for parks and recreation. PUDs allow greater flexibility for residential land, usually resulting in lower-priced homes and minimum maintenance cost.
Chronological age
Actual age in years of the building, based on building date. The "Chronological Age" of a building cannot be changed. If the building is 20 years old the "Chronological Age" is 20 years.
Conformity (value principles)
An appraisal principle of value based on the concept that the more a property or its components are in harmony with the surrounding properties or components, the greater the contributory value. (The more the properties are alike, the more they retain value.) Example: A million dollar home in a neighborhood of one hundred thousand dollar homes will not usually return the investment. Conversely, a one hundred thousand dollar home in a neighborhood of million dollar homes may benefit because of the value of the million dollar homes.
Sight (light and air) easement
An owner has no right to light and air and cannot complain when a neighbor erects a structure that cuts off his or her light and air. To eliminate this possibility, some abutting owners attempt to purchase an easement for light and air over the neighbors' property. If there is a dispute between the parties the issue of whether or not one party can block the "Light and/or Air Rights" of the other would be decided in a court of law.
Area and volume formulas
Area is always expressed in square feet or square yards: (1) Area of a rectangle: Area = base x height Example: a rectangle is 40 ft x 60 ft. Area = 40 x 60, or 2400 square feet (sf) (2) Area of a trapezoid: (a shape with two bases of different lengths, and one height dimension) (a) Area = Average base length x height (b) Average base length = (base 1 + base 2) / 2 Example: a trapezoid has one base of 20 ft., another base of 80 ft., and a height of 30 ft. The average base length is (20 + 80) / 2, or 50 ft. Average base of 50 ft. x height of 30 ft = 1,500 sf (3) Area of a triangle: Area = ½ base x height Volume is always expressed in cubic feet or cubic yards: A solid rectangle, or prism: Volume = length x width x depth A solid triangle, or pyramid: Volume = (Length x Width x Height) / 3 Measurement Formulas 1 mile = 5,280 linear feet 1 square yard = 9 square feet 1 cubic yard = 27 cubic feet 1 square mile = 640 acres = 1 section 1 acre = 43,560 square feet. In Unit 1, a comparative market analysis (CMA) was compared with an appraisal. To recap, a CMA can be performed by a real estate licensees, whereas an appraisal must be performed by a licensed appraiser. When performing a CMA, a licensee will use the formula for determining square footage. Although many local associations of REALTORS® use guidelines, there is no universal method. Some associations use a range of size, rather than the specific square footage, and some don't include the square footage at all. Garages and exterior areas are not included as finished square footage. If a licensee does include the square footage, it is imperative that the measurements and square footage calculations are accurate.
Regression and progression (value principles)
As stated on the previous slide, regression and progression occur between dissimilar properties. This means the value of the better quality property is affected adversely by the presence of the lesser quality property and a lesser house will benefit from a larger house.
Incurable vs. curable
As stated previously, the deterioration of an improvement that it is not economically feasible to repair or correct is considered incurable, as defined by an adverse gap between the cost to repair and the ending value resulting from the repair. External obsolescence is nearly always incurable. Since the negative factor is external to the property, it is impractical to even contemplate that a homeowner will spend funds to 'fix' something that may not even be a part of his or her property - much less to assume that if the expenditure was made that it would increase the property's value beyond the amount expended.
Depreciation
As the Cost Approach formula suggests, a critical component of the process is identifying how much depreciation to apply to the improvements. To do this one must be familiar with the types of depreciation. Taken as a whole, depreciation is the loss in value to a property due to any cause or any condition that adversely affects the value of an improvement. For appraisal purposes, depreciation is divided into 3 classes according to its cause: -physical deterioration -functional obsolescence -external obsolescence
Effective age
Differs from the actual age (chronological age) by such variable factors as depreciation, quality of maintenance, and the like. Remodeling can extend the economic life of a structure by reducing or mitigating the impact of actual age and increasing the structures life expectancy. Example: If a person maintains a building keeping it in good repair the "Effective Age" is reduced. So a 20 year old building with this improvement may be effectively 18 years old.
Functional obsolescence
Functional obsolescence is a loss of value of an improvement due to functional inadequacies, often caused by age or poor design. For example, functional obsolescence may be attributable to such things as outmoded plumbing fixtures, inadequate closet space, poor floor plan, excessively high or low ceilings, or antiquated architecture. Functional obsolescence may be curable such as putting in a new electric stove instead of a wood burning stove. Functional obsolescence may be incurable, as in the case of wide columns in a building that cannot be removed, or curable, as in the case of an inadequate electrical system that can be updated. More specifically, curable deterioration or obsolescence is distinguished from incurable as a function of the costs to remediate the subject item in relation to the value the remediation added to the property. Thus, if it costs $3,000 to upgrade the plumbing fixtures, and the value generated by the upgrade is $5,000, then the obsolete plumbing was curable. If the $3,000 repair returned $1,500 in value to the property, the plumbing obsolescence would be considered incurable. REMEMBER: It is important for students to be able to distinguish between physical deterioration, functional obsolescence, and external obsolescence. If you encounter a quiz, exam, or state exam question that presents a series of depreciation items, and asks you for the total deterioration, or functional obsolescence, or external obsolescence, or any combination thereof, remember to only add those items that fall within the category of depreciation that the question is asking for!
Ad valorem taxation
General property taxes are levied on an ad valorem basis, meaning that they are based on the assessed value of the property. Assessed value is determined according to state law, usually by a county or township assessor or appraiser. The actual tax, though based on assessed value, may be derived as a legislated percentage of the assessed value. Some tax jurisdictions may employ an assessment ratio where the assessed value used for taxation is a percentage of the property's market value. Thus, if a property is valued at $300,000 and its taxing jurisdiction uses a 60% assessment ratio, the assessed value of this property would be $180,000. Tax Base The tax base of an area is the total of the appraised or assessed values of all real property within the area's boundaries, excluding partially or totally exempt properties: Tax base = assessed values - exemptions Taxing entities generate the annual revenues they require by levying taxes on the tax base. The tax rate, or millage rate, determines how much of a tax levy the tax base will receive. The tax rate for each taxing entity is calculated by dividing the amount of revenue required by the tax base. This rate is then applied to the taxable value of each individual real property to determine its tax levy. Value assessment. County or township officers, called assessors or appraisers, value the real property within their jurisdiction for purposes of levying taxes. This valuation process results in an assessed value. Assessment practices differ from state to state. In many states, assessed value does not reflect the market value that an appraisal for other purposes might aim to estimate. For instance, in some areas, assessors use a sales comparison approach to assess the value of land and a cost approach to value improvements. The role of the assessor in the taxing process is limited to making the valuation and notifying the owner of the assessed value; other tax officials determine the tax rate and the tax levy.
Determining market value
If an appraiser is hired to determine Market Value he/she is looking for what the sales price would most likely be in an open market if the following conditions were met: 1. Payment must be in cash or its equivalent - the appraiser assumes the buyer is either paying cash for the property or is in the process of obtaining a loan. 2. Buyer and seller must be unrelated and acting without undue influence, menace or duress. - The transaction is "arms-length" meaning there is no relationship between the buyer and seller. (Father and daughter) A few more examples of "arms-length transactions." To establish value the appraiser must assume: - that neither the seller nor the buyer have been forced into a contract to purchase or sell the property. - the seller is not being forced to sell at a reduced price because of an impending divorce or other similar situation. - a buyer is not being forced to purchase because he/she has been transferred to a new town, and the family is on the way to town. 3. The property must be marketed for a reasonable time in an open and free-flowing market. 4. Both buyer and seller must be well-informed consumers.
Competition (value principles)
Is when one business attracts another business of similar type; together they may make more money than they would have singularly. Too much competition is ruinous. As an example, just look at what some of the large chain stores have done to the downtown areas in small towns. On the other hand, shopping centers in large cities attract shoppers every day.
Land use control
Land is one of our most valued assets. To control its use and ensure that land is put to its highest and best use, land use controls are necessary. There are three types of land use controls: 1. Private Land-use controls 2. Public land-use controls 3. Public-owned land
Contribution (value principles)
Means the value of any component of a property is what it adds to the value of the whole or what its absence detracts from the whole. Example: A fully remodeled kitchen or bathroom adds to the value of a property. A kitchen or bathroom that has not been remodeled would subtract from value. Think of the items that would be the most important to you as a consumer, and usually they will add value to a property. While a finished basement that is below grade is nice to have if you live there, the seller may not realize full value from the improvement. Appraisers will not give full value to the improvement, if it does not have a walkout from that level. These types of components either add or subtract from value.
Private land-use controls
Private Land use is controlled by the grantor (seller, builder) of the deed. The grantor (seller) decides how the grantee (buyer) can use the property. The grantor creates deed restrictions (also called restrictive covenants), which limit the use of the property. These restrictions are ENCUMBRANCES on the property.
Anticipation (value principles)
Property can increase or decrease in value in expectation of something in the future such as appreciation or rezoning. Examples: If a person discovers that an airport is going to be built in an area and buys the land in "Anticipation" of a future value. Another example would be if a person has knowledge that a zoning change is about to take place, which will make the property more valuable and buys the property in "Anticipation" of a future value increase.
Appraisal
Real estate salespeople are called upon to provide comparable sales to a seller who wants to list a property for sale. This is called a "Competitive Market Analysis." ("CMA") This task is usually accomplished by looking at the properties, which have been sold recently in the marketing area of the property. However, the "CMA" is not the basis upon which a lender determines a loan amount nor does an insurance company issue a policy for a potential purchaser. To establish market value, insurance value, salvage value, and/or tax value an independent licensed fee appraiser is employed to determine value. Real Estate Appraisal An Appraisal is an estimate or opinion of value. There is no question that making an appraisal is one of the most important functions in the entire chain of selling and purchasing a property. There is also not any doubt that two appraisers could appraise the same property for totally different values. During this section of the course, we will take you through the appraisal process. The goal of the appraiser is to determine the market value, insurance value, salvage value, and/or the tax value of a property. Compensation of the appraiser is based on time and effort never on the established price of the property.
Real estate taxation
Real estate taxation refers to the taxation of real estate as property. Real estate property taxes are imposed by "taxing entities" or "taxing districts" at county and local levels of government. There are no federal taxes on real property. The Constitution of the United States specifically prohibits such taxes. The federal government does, however, tax income derived from real property and gains realized on the sale of real property. The federal government can impose a tax lien against property for failure to pay any tax due the Internal Revenue Service. Counties, cities and municipalities, townships and special tax districts levy taxes on real property to raise funds for providing local services. It is common for the county to collect all real property taxes and distribute it among the other taxing bodies. County and local governments establish tax districts to collect funds for providing specific services. The boundaries of such districts typically do not coincide with municipal boundaries. The major tax district in most areas is the school district. Other important tax districts are those for fire protection, community colleges, and parks.
Change (value principles)
Real property is constantly changing- expanding, stabilizing, declining or rebirth. We are all familiar with areas that have or may be going through these changes. Example: downtown Chicago has gone through all of the cycles above, and many other areas of the country are experiencing the same.
Affirmative restrictions
State things you must abide by. (Set back requirements, minimum square footage, front of house must be brick, etc.) When there is a problem between one neighbor and another over restrictions, the neighbor seeking help must go to the courts for relief, rather than the police or taking action individually. -Anyone living under the same bylaws and/or restrictions can bring an action asking for enforcement. -The courts enforce the restrictions. -The court issues an Injunction to prevent a neighboring lot owner from violating the recorded restrictions.
Ad valorem tax calculation
Tax bill calculation illustration For example, a certain property is owned and occupied as a primary residence and qualifies for a homestead exemption. The assessed value of the property is $200,000, and the exemption is $30,000. The property is taxed by the school district at a rate of 5 mills, and by the county at a rate of 2 mills. The property tax bill for these items would be calculated as follows. I. Taxable Value assessed value$200,000- homestead exemption-30,000 taxable value$170,000 II. Tax Calculations taxable value$170,000x 5 mills -- school dist.x .005 school tax$850 taxable value$170,000x 2 mills -- countyx .002 county tax$340 III. Totaling school tax$850+ county tax+ 340 total tax bill$1,190 Special Assessments A special assessment is a tax levied against specific properties that will benefit from a public improvement. Common examples are assessments for sidewalks, water service and sewers. Special assessments are based on the cost of the improvement and apportioned on a pro rata basis among benefiting properties according to the value that each parcel will receive from the improvement. For example, a dredging project is approved to deepen the canals for a canal-front subdivision. The project cost is $50,000. Although there are 100 properties in the subdivision, only the 50 that are directly on the canal stand to benefit. Therefore, assuming each canal-front lot receives equal benefit, the 50 properties are each assessed $1,000 as a special assessment tax. Note that, as opposed to annual ad valorem taxation, once the work is completed and paid, the assessment is discontinued. If a taxing entity initiates an assessment, the assessment creates an involuntary tax lien. If property owners initiate the assessment by requesting the local government to provide the improvement, the assessment creates a voluntary tax lien. Special assessments are usually paid in installments over a number of years. However, taxpayers generally have the option of paying the tax in one lump sum or otherwise accelerating payment.
Tax rate derivation
Tax district budgeting. The derivation of a tax rate, or millage rate, begins with the taxing body determining its funding requirements to provide services for the year. This requirement is formalized in the annual budget. Then the county or district looks at its sources of revenue, such as sales taxes, business taxes, income taxes, state and federal grants, fees, and so forth. The part of the budgeted expenditures that cannot be funded from other income sources must come from real property taxes. This budgetary shortfall becomes the ad valorem tax levy. The tax levy is derived every year, since budget requirements and revenue tallies are performed on an annual cycle. Tax rate. Each individual taxing body has its own tax rate. The tax rate is determined by dividing the taxing body's budgeted amount to be collected from real estate taxes by the tax base: tax requirement ÷ tax base = tax rate (millage rate) If, for example, a taxing body needs $500,000 from property taxes, and the tax base for the district is $15,000,000, the tax rate for this body is: $500,000 ÷ 15,000,000 = .03 This tax rate of .03 or 3% may be expressed in a number of ways, depending on local practice: as mills, as dollars per $100 of assessed value, or as dollars per $1,000 of assessed value. A mill is one one-thousandth of a dollar ($.001). A tax rate of one mill means that the owner pays one dollar for every thousand dollars of assessed value. Thus the rate of .03 above could be expressed as: -30 mills -$3 per $100 -$30 per $1,000 -3 percent For jurisdictions who denominate tax rates as dollars per hundred, note that it is common practice to round up fractions of a hundred of the assessed value. Thus, if a property has an assessed value of $100,050, and the tax rate is $3 per hundred, or fraction thereof, the tax would be applied to 1001 hundreds as opposed to 1000.5 hundreds (or 1000 hundreds). Here, the tax would then be: 1. $100,050 ÷ 100 = 1000.5; round up to 1001 hundreds 2. 1001 x $3.00 per hundred = $3003 tax
Adaptation of zoning ordinances
Tests of validity of power: Zoning ordinances must not violate the rights of individuals and property owners. -The power must be exercised in a reasonable manner. -The provisions must be clear and specific. -The ordinance must be free from discrimination. -The ordinance must promote public health, safety, and general welfare under the police power concept. -The ordinance must apply to all property in a similar manner.
Cost approach
The Cost Approach primarily relies on the original cost of the property's land and improvements, the cost to reproduce or replace the property's improvements, and the degree to which the improvements have depreciated. The Cost Approach is primarily used for properties with limited comparable data or income data or for properties where the original cost is particularly applicable, such as brand new homes. Other examples would include non-income producing buildings, government properties or unique-purpose buildings such as a school, museum, or library. In applying the Cost Approach, the appraiser may employ one of two forms of improvement cost: the cost to reproduce the improvement, and the cost to replace an improvement. The distinctions are as follows: -Reproduction cost: to replace with the same materials as the original construction -Replacement cost: to replace with current materials and methods with similar utility and function to the original improvement Cost can be determined by one of three methods: 1. Square Foot cost: Using outside measurement, how many square feet times a cost for either replacement or reproduction of the improvement. 2. Unit in Place: In the "Unit In Place Method", the replacement cost of a structure is estimated based on the construction cost per unit of measure of individual building components, including material, labor, overhead and builder's profit. Most components are measured in square feet, although items such as plumbing fixtures are estimated by cost. The sum of the components is the cost of the new structure. 3. Quantity Survey method: The quantity and quality of all materials (such as lumber, brick, and plaster) and the labor are estimated on a unit cost basis. These factors are added to indirect costs (for example, building permit, survey, payroll, taxes and builders profit) to arrive at the total cost of the structure. Because of the detail and the time consumed, this method is usually used only in appraising historical properties. It is however the most accurate method of appraising new construction. Steps involved in the Cost Approach: 1. Estimate the value of the land alone as if vacant. 2. Determine either the replacement or reproduction cost of the improvements. 3. Deduct all accrued depreciation. 4. Add the estimated land value to the depreciated replacement or reproduction cost. It is critical to note that in applying the cost approach to a property, the appraiser identifies the amount of depreciation the property's improvements have experienced and deducts that amount from the property value. The land, however, never depreciates. Thus, the values of the land and the improvements must be identified individually so that the depreciation can be applied to the improvements only - and subsequently the land value added back to derive the total value. Example: To illustrate the Cost Approach, an appraiser estimates a property's land value to be $51,000, and the value of the improvements to be $157,500. In addition, he estimates that there is $15,000 of depreciation applicable to the improvements. The formula is as follows:
Gross rent multiplier formulas
The Gross Rent Multiplier and Gross Income Multiplier methods of valuation are abbreviated forms of valuation using the income approach, but without the complications of property expenses, reserves, depreciation, and debt service. This method is used to arrive at very general estimates of value based purely on the property's monthly or annual gross income. If one is using the Gross Rent Multiplier method, one uses the property's monthly rent. If using the Gross Income Multiplier, one uses the property's annual income. Gross Rent Multiplier is generally used for one to four residential units. Gross Income Multiplier is applied to larger properties and commercial properties. The Gross Rent Multiplier itself is a ratio number reflecting the relationship between a property's price or value and its income. Once a multiplier is known, it can also be used to identify the price of the property, or its general income range, by simple manipulation of the formula. The formulas for both valuations are: Gross Rent Multiplier (GRM) Formulas 1. Value ÷ Monthly rent = Gross Rent Multiplier (GRM) 2. GRM x Monthly rent = Value 3. Value ÷ GRM = Monthly rent Gross Income Multiplier (GIM) Formulas 1. Value ÷ Annual rent = Gross Income Multiplier (GIM) 2. GIM x Annual rent = Value 3. Value ÷ GIM = Annual rent As the formulas suggest, if the appraiser knows any two of the three variables of multiplier, rent, or value, he or she can solve for the unknown variable. Note also that in these methods, one can use the terms price and value interchangeably. In solving for a GRM in a market, appraisers will use comparable sold prices as value numbers. In using the multiplier and rent to identify value, obviously one would use the term value instead of price. Examples: Using the equations from the previous screen, we can apply the GRM and GIM methods to identify a property's value, rent, and multiplier. Solving for the multiplier Gross Rent Multiplier: Assume a property has a total monthly rent of $1,500, and a value of $250,000. What is its GRM? Solution: Value ÷ Monthly rent = Gross Rent Multiplier (GRM) $250,000 ÷ $1,500 = 167 GRM Gross Income Multiplier: Assume a property has a total annual rent of $18,000, and a value of $250,000. What is its GIM? Solution: Value ÷ Annual rent = Gross Income Multiplier (GIM) $250,000 ÷ $18,000 = 13.88 GIM Solving for the value: Using the Gross Rent Multiplier: Assume a property has a total monthly rent of $1,500, and a GRM of 167. What is its value? (rounded to the thousands) Solution: GRM x Monthly rent = Value167 x $1,500 = $250,000 Value Gross Income Multiplier: Assume a property has a total annual rent of $18,000, and a GIM of 13.88. What is its value? (rounded to the thousands) Solution: GIM x Annual rent = Value13.88 x $18,000 = $250,000 Value Solving for the income: Using the Gross Rent Multiplier: Assume a property has a value of $250,000, and a GRM of 167. What is its estimated income? (rounded) Solution: Value ÷ GRM = Monthly rent$250,000 ÷ 167 = $1,500 Monthly rent Gross Income Multiplier: Assume a property has a value of $250,000, and a GIM of 13.88. What is its estimated income? (rounded) Solution: Value ÷ GIM = Annual rent$250,000 ÷ 13.88 = $18,000 Annual rent
Rectangular survey system
The Rectangular Survey System, sometimes referred to as the government survey system or Government Rectangular Survey System, is the third method used in describing a parcel of real estate. This system is based on sets of intersecting lines. -Principal Meridians run north and south. -Base Lines run east and west. -Township lines are lines running east and west, parallel with the base line and six miles apart. Range Lines are lines on either side of a principal meridian and are divided into six mile wide strips by lines that run north and south parallel to the meridian. A Township is a 36 square mile area formed by the intersection of a township and range lines. Each township square is divided into 36 Sections each one mile square. One section is also equal to 640 acres.
Sales comparison approach
The Sales Comparison Approach is primarily used for appraising residential property and vacant land. This approach compares the subject property to similar properties and makes adjustments on the basis of the date of the sale, the location, the physical features and/or amenities. The underlying premise of the Sales Comparison Approach is the principle of substitution. This principle holds that if a buyer will pay a certain price for a property, he or she will pay a similar price for a 'substitute' property of similar characteristics. The Sales Comparison Approach consists of comparing sale prices of recently sold properties that are comparable with the subject, and making dollar adjustments to the price of each comparable to account for competitive differences with the subject. After identifying the adjusted value of each comparable, the appraiser weights the reliability of each comparable and the factors underlying how the adjustments were made. The weighting yields a final value range based on the most reliable factors in the analysis. Steps in the Sales Comparison Approach 1. Identify comparable sales. 2. Compare comparables to the subject and make adjustments to comparables. If the subject property is better, add value to the comparable. If the comparable property is better, subtract value from the comparable. In making adjustments, one always adjusts the values of the comparables - never the subject. 3. Reconcile values indicated by adjusted comparables for the final value estimate of the subject. The appraiser here is careful to give more weight to more similar properties, and less weight to less similar properties in arriving at the final value estimate. Note that weighting and reconciliation is not an averaging exercise, but a judgmental evaluation based on all value indicators.
Physical life
The actual age or life of a structure that is considered habitable.Thus the physical life is defined by the durability of its structural components. Example: A building sitting vacant without a tenant has a "Physical Life" but there is no economic life because there is no income.
Appraisal process
The appraisal process is outlined below: -State the problem: The appraiser determines why he/she has been hired to make an appraisal on the property. As stated earlier, is the job to determine market, insurance, salvage, and/or tax value? -Gather, record and verify the necessary data: The appraiser should use all tools available. The appraiser uses the three appraisal processes (sales comparison, cost, and income approaches. (More later in this section about these approaches to value.) -Analyze and Interpret using the following information: --Neighborhood Analysis: A gathering of facts about a neighborhood to determine the appeal to the buyer. These facts include: employment stability, convenience to employment, convenience to shopping, adequacy of public transportation, recreation facilities, adequacy of utilities, property compatibility, protection from detrimental conditions, police and fire protection, general appearance of properties, appeal to the market, zoning ordinances, topography and building codes. --Neighborhood Cycle: The process of neighborhood change, involving the four phases of change (See Principle of Change which is covered in Unit 2). --Site Analysis: Gathering of facts about a particular location. These include: estimate of highest and best use, identification of key features and identification of possible legal or physical problems. Example, if an appraiser is comparing a home with another property that had low taxes, good community programs, and was located in a convenient area, he/she should conclude that this home has economic desirability. -Estimate Land Value: For appraisal purposes, land never depreciates in value. -Estimate the value of the property by each of the three approaches to value (explanation to follow): --Sales comparison --Cost --Income -Reconcile estimated values for the final value estimates: This is the final step in the appraisal process, in which the appraiser reconciles the estimates of value received from the Sales Comparison, Cost and Income approaches to arrive at a final estimate of market value for the subject property. An appraiser never averages comparable sales to obtain a final value. The appraiser evaluates all three methods of appraising property, Sales Comparison, Cost, Income, and determines which would be best to use for the property in question. Example: If an appraiser is asked to appraise a single family home or a vacant lot the approach to value most often used is the Sales Comparison. Assuming recent comparable sales can be found the appraiser would compare the subject property to the comparable and determine value. If there are no comparable properties then the appraiser may have to use the Cost Approach to value, and determine replacement cost of the components of the property. Usually, this approach is used for unusual properties where comparable properties cannot be found. (Church, school, post office etc.) Lastly, the appraiser may apply the Income Approach if the property is income producing. Usually, this is not the case in a residential property. -Report final value estimates - Types of Appraisal Reports: --Letter: A short business letter stating all essential data but not including supporting data. --Short or Form: Contains all basics of a regular appraisal and is used primarily for homes. --Narrative: The most comprehensive of all appraisal reports. Used for commercial and investors.
Assemblage (value principles)
The combining of two or more adjoining lots into one large tract. This is usually done to increase the value of the individual lots because a larger building capable of producing a larger net return may be erected on the larger parcel. The resulting "added value" is called "plottage value."
Economic life
The length of time during which an improvement will contribute to the value of a property. Economic life ends when the improvement no longer represents the "highest and best use" of the property.
Substitution (value principles)
The maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property. (Comparison shopping- basis for Sales Comparison approach.) Example: this is the principle used when determining value based on the Sales Comparison approach to value. This principle is based on the fact that similar properties will bring similar values. (Substituting one property for another.)
Highest and best use (value principles)
The possible use of a property that would produce the greatest net income and thereby develop the highest value. Example: An area of the municipality has developed into commercial office buildings. If there is a vacant piece of land or a single family home in the area one could assume that the highest and best use for this property at that time would be for an office building. This is the first "principle" that an appraiser should determine when establishing value. An appraiser would ask him/herself, "What is the highest and best use for this property at this time".
Spot zoning
The reclassification of one piece of property in an area for a specific purpose such as a convenience store in a residential neighborhood. This is also called contract zoning.
Lot and block system
The recorded plat method, also called the lot and block system, is used to describe properties in residential, commercial, and industrial subdivisions. Under this system, tracts of land are subdivided into lots. The entire group of lots comprise the subdivision. In a large subdivision, lots may be grouped together into blocks for ease of reference. The entire subdivision is surveyed to specify the size and location of each lot and block. The surveyor then incorporates the survey data into a plat of survey, or subdivision plat map, which must comply with local surveying standards and ordinances. If local authorities accept it, the subdivision plat map is recorded in the county where the subdivision is located. The recorded lot and block numbers of a subdivision parcel, along with its section, township and meridian reference, become the property's legal description. The description of a recorded plat property first presents the property's lot number or letter, then the block identifier and the subdivision name. Note that this is only a portion of the full legal description, which must describe the subdivision's location within a section, a township, a county, and a state. For example, if the subdivision in the exhibit is situated in the southeast quarter of Section 35 of Township T28S, R19E, of the Tallahassee Principal Meridian, the legal description of the lot marked "7" would be: "Lot 7, Block 8 of the Grand Oaks Subdivision of the SE 1/4 of Section 35, Township T28S, R14E of the Tallahassee Principal Meridian in Pinellas County, Florida."
Legal descriptions
There are many common ways of describing properties: address (100 Main Street), name (Buckingham Palace), and general description ("the south forty acres"). Such informal descriptions are not acceptable for use in public recordation or, generally speaking, in a court of law because they lack both permanence and sufficient information for a surveyor to locate the property. Even if a legal document or public record refers to an address, the reference is always supported by an accepted legal description. A legal description of real property is one which accurately locates and identifies the boundaries of the subject parcel to a degree acceptable by courts of law in the state where the property is located. The general criterion for a legal description is that it alone provides sufficient data for a surveyor to locate the parcel. A legal description identifies the property as unique and distinct from all other properties. Legal description provides accuracy and consistency over time. Systems of legal description, in theory, facilitate transfers of ownership and prevent boundary disputes and problems with chain of title. A legal description is required for: -public recording -creating a valid deed of conveyance or lease -completing mortgage documents -executing and recording other legal documents In addition, a legal description provides a basis for court rulings on encroachments and easements. The three accepted methods of legally describing parcels of real estate are: 1. recorded plat method, or lot and block method 2. metes and bounds 3. rectangular survey system, or government survey method
Difference between a developer and a subdivider
This could be one in the same person doing both jobs, however, you must know the difference between the two. A developer is one who attempts to put land to its most profitable use through the construction of improvements, such as commercial condominiums or subdivision projects. A subdivider is an owner whose land is divided into two or more lots and offered for disposition.
Public-owned property
Through PETE and the use of eminent domain, property may be acquired for the public good. Urban renewal, highways, national parks, and recreation areas are examples of land use by the government owning the property. State governments and the United States Government own millions of acres, all of which are dedicated to the public good. Nearly one third of the total area of the United States is owned by the Federal Government.
Public land-control use
Under the 14th Amendment of the Constitution, the United States is empowered to control land for the benefit of all citizens. This is done through Congress; then through the States; then local government through police power. The rights to make laws to control local property are called Enabling Acts. Public land use controls will be discussed in detail on the next several screens. We discussed public land use controls in the ownership section of the course. The four public land use controls that we discussed in ownership are: Police power Eminent Domain Taxation Escheat
