RE 415 Final Exam

Three approaches to value

1. cost approach 2. income capitalization approach 3. sales comparison approach

Three types of Data collection

1. market area data (characteristics of neighborhood, region, city) 2. subject property data (characteristics of land use and improvements, personal property, business assets) 3. comparable property data (cap rates, sales, listings, offerings vacancies, costs, depreciation, incomes, expenses)

3 Principle property rights

1. possession 2. use 3. disposition

Involuntary conveyance by deed (5 things)

1. probate (distribution of estate) - occurs when the owner dies 2. bankruptcy 3. divorce settlement 4. condemnation - police seizes for eminent domain 5. foreclosure - due to default on mortgage payments

Levels of lien priority on a personal residence

1. property tax and assessment lien 2. mortgages and mechanics lien 3. judgement liens

Three reasons why conveyance of Real Property is Complicated

1. real property is a complex bundle of rights and the interests must be described carefully 2. Since land rights are enduring, any prior transaction can affect the bundle of rights 3. since all land parcels adjoin, an error in description of land represents a loss to some owner. Thus, descriptions of land must be accurate

Unacceptable forms of property descriptions

1. street address 2. tax parcel number

Three conditions of market value

1. the relationship, knowledge and motivation of the parties 2. terms of the sale (cash or cash equivalent) 3. the conditions of the sale (reasonable exposure to the market)

Transfer effective nominal annual rate (nominal annual rate) to Effective annual rate (EAR)

(1+r/n)^n - 1

Exceptions and Reservations Clause

- Deed restrictions - clauses withholding mineral or oil rights

Quitclaim Deed

- Has none of the covenants of the warranty deed - Implies no claim to title, only used to convey what interests the guarantor actually has, if any - Questionable conveyance of title - Puts a cloud over the title that must be cleared in order to obtain a fully marketable title

General Warranty Deed

- Includes the full set of legal promises the guarantor can make. - Warrants against any and all competing claims that may arise from the chain of title that are not spelled out in the deed

Valuation Process (7 steps)

1. Identification of the problem 2. Scope of work determination 3. Data collection and Property Description 4. Data Analysis 5. Application of approaches to value 6. reconciliation of value indication and final option of value 7. report of defined value

Categories of depreciation (3 things)

1. Physical deterioration (deferred maintenance) 2. functional obsolescence (curable and in-curable) 3. external obsolescence (locational/economic)

Acknowledgement

Confirmation that grantor acted voluntarily - notarized or equivalent

Public Interest Value

Covers a family of value concepts that relate highest and best uses to non-economic uses. Analysis focuses on social, political and public policy goals rather than economic principles. Ex. Scenic value, intrinsic value

Identification of the problem (7 steps)

Identify: 1. client 2. the intended use 3. purpose (type/definition of value) 4. effective date of the opinion 5. relevant characteristics of the property (legal description, property rights, 6. assignment conditions (extraordinary, hypothetical assumptions) 7. Limiting conditions and assumptions

Intended Use

Identifying the intended user and intended use of an assignment is essential for the determination of the scope of work. Examples of intended use: 1. financing 2. litigations 3. condemnation 4. divorce proceedings 5. buy/sell decisions 6. tax reporting 7. portfolio valuations 8. arbitration 9. partnership value 10 . estate value 11. charity 12. financial reporting Helps the appraiser identify the appropriate level of detail to provide the intended user

Guarantor (3 requirements)

Person conveying the real property interest 1. must be of legal age 2. must be legally competent 3. Must sign the deed

Salvage Value

Price expected for the property as a whole (house) or a part of the property that is removed from the premises usually for use elsewhere

Valuation process

A systematic set of procedures an appraiser follows to provide answers to a client's questions about real property value. Ultimate goal is a well-supported value conclusion that reflects all of the pertinent factors that influence the market value of the property being appraised.

Description of Market Value by USPAP

A type of value, stated as an opinion, that presumes the transfer of a property (bundle of rights) as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser

Data Collected should be meaningful and relevant

All pertinent values, influences, facts and conclusions about trends should be clearly indicated in the report and related specifically to the property. An explanation of the significance should be included as data selection is subjective and up to the appraiser

Principal definition of real estate

Rights to land its permanent structures that: 1. government is obligated to enforce 2. non-revocable (cannot be canceled, ignored, or lessened) 3. Enduring - do not fade with time *Government can diminish our rights for the purposes of public safety, health and welfare, but there is a limit to their diminishment before it becomes considered taking

Bond Equivalent Yield (BEY) to EAR

Since bonds pay interest semi-annually (1+BEY/2)^2 - 1

Mortgage Equivalent Yield (MEY) to EAR

Since mortgages pay interest 12 times per year: (1+MEY/12)^12 - 1

Segmentation of Space markets

Space markets are highly segmented as: 1. real estate is immobile 2. Users require a specific type of space 3. real estate markets are local and not national. 4. real estate space is immobile Because of segmentation, rental prices for physically similar space can differ widely from one location to another or from one building to another.

Law of one price

States that the same thing cannot trade at different prices as no one would pay the higher price and no one would sell at the lower price. However, this only holds true in well integrated markets and does not hold true for real estate due to the barriers between market segments.

Supply function

Supply function starts out as a vertical line because the quantity of supply is inelastic (fixed) in the short/medium run. If demand were volatile, space cannot be reduced or created in the short/medium run due to the longevity of space

Market Value

The most probably price, as of a specified date, in cash or in terms equivalent to cash, or in other precisely revealed terms for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale with the buyer and seller each 1. acting prudently 2. knowledgeably 3. for self-interest 4. neither is under undue duress Forming an opinion of market value is the purpose of many real property appraisal assignments. Assumes highest and best use of the asset by market participants considering the use is physically possible, legal and financially feasible Market value is described, not defined, in the Uniform Standards of Professional Appraisal Practice (USPAP)

Rent

The price of the right to possess and use space for a specific temporary period of time. Can be quoted per square foot or per apartment. Can be monthly or annually. Determined in the space market by supply and demand forces.

Fair Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants must be knowledgeable and willing and acting in their best interests.

Evidence of Title

a contract for sale of real estate call for the seller/guarantor to provide evidence of title as a requisite to completing the sale, which can be met by: 1. Title abstract - with attorney opinion 2. title insurance commitment

Data on prior sales of the subject property

always relevant/pertinent. When a professional opinion of market value is being developed, professional standards require the appraiser to analyze all sales of the subject property within the past 3 years

Highest and Best Use Analysis

appraiser interprets the market forces that affect the subject property and identifies the use of uses on which the final opinion of value is based. Highest and best use must be addressed to appropriately analyze the property

General Lien

arises out of action unrelated to ownership of the property. Primarily from court judgements, which, when awarding damages will place a lien on the property to ensure payments. Also occurs out of unpaid federal taxes.

Limiting conditions and assumptions

assumptions made by the appraiser beyond their level of expertise or scope that may have an impact on the value of property is different than assumed Limitations on the use or reliance of the report

Time-share

buyer can acquire fee simple or leasehold interest for a fixed period.

Central business district (cbd)

central downtown submarket tends to deviate significantly from a suburban submarket.

Marketable Title

claim to title regarded as free of reasonable doubt.

Net present value

comparison of the PV of an investment's cash flows with an initial purchase price. NPV Rules: If buying - Value of the property - price paid If selling- Price obtained minus value of property Where value is the present value of the future cash flows. *Goal is to maximize the difference between the value and the price paid/received*

title insurance commitment

deemed satisfactory as a title insurance company would not make a commitment before conducting a title search process and assuring a good title beyond reasonable doubt. This has become the primary form of proof as an abstract with an attorney's opinion cannot protect against certain risks - (forgeries, defective deeds, flaws due to incorrect marital status)

Accretion

deposit soil

Scope of Work (7 things)

encompasses all aspects of the valuation process, including 1. which approach to value will be used 2. how much data is to be gathered 3. from what sources 4. from which geographical area 5. over what time period. 6. The extent of the data verification process 7. extent of property inspection

Title Search

examine public records for evidence to construct a title chain - a set of deeds and other documents that traces the conveyance of the fee and any interests that could limit the title from the earliest recorded time

IRR

given a purchase amount and cash flow projections, does the IRR exceed the required threshold investment return. *Goal is to maximize the difference between the IRR and the required rate of return* Never do a deal where the IRR is less than your required rate of return.

Covenant of seizin

grantor has good title and right to convey it

Liquidation value

most probable price that a specified interest in real property should generate under the following conditions: 1. sales within a short time period 2. property subject to market conditions prevailing as of the date of valuation 3. buyer/seller acting prudently and knowledgeably 4. seller under extreme compulsion to sell 5. buyer typically motivated 6. buyer/seller acting in their best interests 7. Normal marketing effort not possible 8. payment made in cash or cash equivalent

Deed of bargain and sale

no covenants, implies claim of ownership, used by businesses

Tenancy in Common

normal form of direct co-ownership and is as close to the fee simple absolute estate as possible. Each co-owner retains full rights of disposition and is free to mortgage or to convey his/her ownership share to a new owner.

Cooperative

not a form of true direct co-ownership, but rather it is a proprietary corporation that owns real estate as a single owner. Each owner holds a proprietary lease for some designated space. Can own a specific room, but cannot take out a mortgage with out putting others at risk .

Fixture (4 rules to determine if it is a fixture)

object that was formerly personal property, but has since become a function of the real property. 1. manner of attachment 2. character of the article 3. intention of the parties 4. Relation of the parties

Delivery (plus examples of failure)

observable, verifiable intent that deed is to be given to grantor Examples of failure of delivery 1. Deed found in a desk/safety deposit box and handed to named grantee 2. Grantor's attorney hands deed to named grantee without explicit instructions to do so

Condominium

ownership form that combines single person ownership with tenancy in common. Owner holds fee simple interest to a certain space, but join or tenancy in common with the community elements. Important distinction is that each owner can mortgage his/her aspect independently of other owners. Entails a cost in ownership complexity and restrictions on owner discretion as it necessitates the creation and management of an owner association

land descriptions (legal land descriptions)

parcel description is challenging because land parcels are defined on a continuous basis and are adjacent to other land parcels 1. metes and bounds - oldest form that measures the identifiable boundaries of the property (compass directions). most difficult to interpret and should be made only by surveyors. 2. Plat lot and Block # - surveyed map of the subdivision that is placed in public records with each parcel identified by plat lot and block number 3. government rectangular survey - divides lands into townships (6x6 miles) base baseline (runs east/west) and the principal meridian (runs north/south)

Definition of value

precise wording that describes the type of value and specifies certain conditions that must be met for the assignment results to be credible and meaningful

Income Capitalization Approach (2 methods)

present value of anticipated future benefits of property ownership. Income and inflow from reversion. 1. direct capitalization - relationship between one years income and value is reflected in the cap rate 2. Yield capitalization - future cash flows converted into a present value using a yield rate. most applicable when it reflects the buyers/sellers analysis and it is an income producing property.

metropolitan statistical area (MSA)

primary units of space market segmentation that encompasses a central city and its surrounding suburbs. Tends to be integrated economically, culturally and socially and built on the same economic base, but has submarkets.

title insurance

protects a guarantee against the legal costs of defending the title and against loss of property if the case is unsuccessful

A rising supply function after the kink

results when the development cost of new buildings is greater as more total stock of rental space is added. Rising cost is primarily the result of the cost of land caused by land scarcity in the presence of growing demand usage. Real cost of construction does not typically increase over time or from one site to another. This results in location rent as space users are willing to pay more each year for use of the same location

Easement in Gross

right to use unrelated to adjacent parcel. Servient parcels, but no dominant parcel (Ex. Power lines)

Life Estates

rights of disposition are unbundled and separated. Owner holds the right of use and possession.

Extraordinary assumptions

something that is believed to be true for the sake of the appraisal, but that may or may not be trued in reality. Ex. appraisal assignment may require estimating the value of the property upon completion. The appraiser would assume that construction would be completed as planned at a specific date.

Hypothetical conditions

something that is known to be contrary to fact, but that is taken to be true for the purposes of the appraisal. Ex. may require estimating the value of a property if an adjacent property were constructed

Deed

special form of contract, distinguished by a group of clauses, used as the primary means for conveying interests in real property. 1. Determine the exact property interests being conveyed 2. Vary in quality by strength of covenants that they contain 3. cannot convey the rights that the seller does not have

Definition of value

statement specifying the type of value to be estimated; must be identified in every appraisal assignment and included or referenced in every report.

Market Analysis

study of market conditions for a specific type of property. Provide background for local and neighborhood market influences that have a direct bearing on the value of the subject property. 1. provides the background against which local developments are considered. 2. provides knowledge of the broad changes that effect supply and demand , which gives the appraiser indication of how values change over time Conclusions determined are factored into each valuation approach (cost approach, income capitalization, and sales comparison)

reliction

subsiding of wate

marginal cost in real estate

the cost of developing new space including the site acquisition costs as well as the construction costs and the developer fee

Joint Tenancy

the distinctive feature is the "right of survivorship." The interest of a dead co-owner divide equally among the surviving co-owners and nothing passes to the heirs of the decedent

Condominium declaration

three dimensional descriptions of the space occupied by each unit, a description of common areas, determination for proportion of common area assigned to each unit, provision for expansion of property. - Defines the basic rights, procedures and restrictions in leasing. - Sets the groundwork to create and enforce bylaws

Special warranty deed

time limit on no encumbrances

Value in Use (under IFRS)

value in use is the discounted present value of estimated future cash flows expected to arise from continued use of an asset and its disposal

Cost Approach

value of a property is derived by adding the estimated value of the land to the current cost of constructing a reproduction or replacement from the improvements and then subtracting the depreciation Most applicable when it is a unique property that is non-income producing and does not have any sales comparisons (church) Cost New - Accrued Depreciation + land value

Title

- collection of evidence that points to some person as the holder of the fee titled interest - given the complexity and length of ownership, no single document can prove ownership of land

Effective date of opinion value

Can be past, present or future based on clients needs.

Title Abstract

Each relevant document summarized and compiled into chronological order. Since documents can be subject to expertise, only a competent legal expert can draw a final conclusion about the chain of title.

Value of Going Concern

Market value of all tangible and intangible assets of an established and operating business with an indefinite life, as if sold in aggregate; more accurately termed the market value of the going concern. May be required and difficult to separate market value of tangible assets (real property) from intangible assets (legal rights)

Covenant against encumbrances

No encumbrances expect as noted in deed

Covenant of Quiet Enjoyment

No one with a better claim to title

PV of a constant growth annuity into perpetuity

PMT / (r-g)

Present value of a constant annuity into perpetuity

PV = PMT / r

Guarantee

The recipient of the real property interests 1. No need to be of legal age 2. no need to be competent 3. only needs to be identifiable

Business Enterprise Value (BEV)

The value contribution of the total INTANGIBLE assets of a continuing business enterprise such as marketing and management skills, working capital, intellectual property, contracts, leases, customer base

Assessed Value

The value of a property according tax rolls in ad valorem taxation; may be higher or lower than market value or based on an assessment ratio that is a percentage of market value

Use Value (value in use)

The value of a property for a specific use, which may or may not be the properties highest and best use. May or may not equal market value

Investment Value

The value of a property to a particular investor or class of investors based on the investor's specific requirements. May differ from market value as investment value depends on criteria that are not necessarily typical of the market.

Why is $1 not equivalent to $1 a year from now?

Time value money 1. inflation 2. opportunity cost 3. uncertain future cash flows (risk)

Transaction vs. Appraisals

Transactions - buyers and sellers set values/prices through competitive bidding Appraisals - estimate value through forensic investigation and analysis of data

Insurable Value

Value of an asset covered by an insurance policy. Can be estimated by deducting costs of non-insurable items from the depreciated cost. Objective of an insurance policy - return the insured party to the same position occupied prior to the loss

Land value opinion

land value can be a major component of total property value. Appraisers develop an opinion of land value separately as land value and building value change at different rates Cost approach requires separation of land value Separating land may be necessary to estimate land value in sales and income approach in order to understand how the value of the land contributes to the overall property.

reconciliation

last phase of any valuation assignment. Two or more value indications derived from market data are resolved into a final value opinion. Professional standards require the appraiser to consider the quality and quantity of data available in the reconciliation.

replacement cost

level of rent that is just sufficient to stimulate profitable new development

Owner Association

makes and enforces the condominium by-laws. They: 1. levy and collect owner assessments 2. must use fair and orderly procedures for meetings, elections, budgeting process and revisions or by-laws

Space market

market for the usage (right to use) real property (land and built space) - referred to as the real estate usage market or the rental market.

market

mechanism through which goods and services are voluntarily exchanged among different owners.