Real Estate Exam Prep Chapter 3: Property valuation and financial analysis

Gross Rent Multiplier (GRM)

A factor which, when multiplied by the gross income of a property, produces an estimate of the property's value

Economic Obsolescence

A loss in value of a property due to external factors and not the condition of the property itself

Functional Obsolescence

A loss of value due to adverse factors within the structure which affects the utility of the structure, and thus its value and marketability

Return on Investment

A measure of annual income or profits on a sale in relation to capital invested; net profit after taxes divided by total assets

Loan-to-Value (LTV)

A ratio stating the outstanding mortgage balance as a percentage of the mortgaged property's fair market value; the degree of leverage

Narrative Report

A summary of all factual materials, techniques and appraisal methods used by the appraiser in establishing the value of a property; most thorough type of report

Ethics

Accepted standards of right and wrong, fiduciary conduct, behavior, or duty

Broker Price Opinion (BPO)

An agent's opinion of a property's fair market value based on comparable sales

Capitalization Approach

An appraisal method used by an appraiser to arrive at a property's value based on the present worth of a property's future net operating income

Market Comparison

An appraisal method used by an appraiser to arrive at a property's value by a comparison of recent sales prices of similar properties, adjusted for differences in the properties

Highest and Best Use

An appraisal phrase addressing the use of a property which is most likely to produce the greatest net return on the land over a given period of time

Cost Approach

An appraisal strategy where they calculate the current construction cost to replace improvements, subtract their estimate of accrued depreciation from that to get the current replacement value, and then add this to the value of the land if it was vacant; used for special use properties

Influences on Value

An aspect of the principle of change, recognizing the effect of physical, economic, government, and social changes on real estate value

Appraisal

An individual's opinion of a property's value on a specific date, documented in an appraisal report

Elements of Value

Factors that must be present for real estate to have value: demand, utility, scarcity, and transferability

Depreciation

Loss of property value brought about by age, physical deterioration, or functional or economic obsolescences

Income Approach

One of three methods of the appraisal process applied to income producing property to develop the appraiser's opinion of value; two methods: gross rent multiplier and capitalization method

Comparable Sales (Comps)

Sales of properties recently sold which have similar characteristics as the subject property being evaluated and are used for analysis

Capitalization Rate (Cap Rate)

The annual rate of return on investment produced by the operations of an income property or sought by an investor on the investment of capital; Dividing the net operating income by the price asked

Principles of Value

The applications of several appraisal principles to arrive at a final value. The basic principle is substitution

Site Valuation

The appraised valuation of the ground separate from any structure that may be on the site

Financial Analysis

The consideration of the durability, quantity, and quality of income and expenses generated and incurred by an income-produced property

Opportunity Cost

The cost of an action that is forgone when choosing to take an alternative action

Replacement Cost

The cost to replace a structure with one having utility equivalent to that being appraised, but constructed with modern materials and according to current standards, design, and layout

Reconciliation

The final step in the appraisal process. Placing weight on the alternative value conclusions, to arrive at a final value decision

Economic Life

The period of time over which a property will yield a return on capital invested to own it

Effective Age

The physical age of a property based on the condition of the structure, distinct from its chronological age

Value

The present worth stated in dollars of the future benefits arising out of the ownership of a property

Fair Market Value (FMV)

The price a reasonable, unpressured buyer would pay for property on the open market

Physical Life

The total number of years a building is presumed to potentially exist in a productive capacity