Unit 11: Valuation and Appraisal

What is the square-foot method?

The size of the building in question is compared, by square foot, to other buildings with the same area. The square-foot method is the most common, used by appraisers and real estate licensees to estimate the cost of construction.

What is demography?

The study of population.

What is the vacancy rate?

The vacancy rate is the number of vacant units expressed as a percentage

What are the three main appraisal approaches?

There are three main approaches to appraising property to arrive at a market value estimate: (1) sales comparison approach, (2) cost approach, and (3) income approach.

What political forces can affect value?

These forces include building codes, zoning laws, public health measures, fire regulations, rent controls, environmental legislation, and the community economic base.

What is the quantity-survey method?

This method is a detailed estimate of all labor and materials used in the components of a building; items such as overhead, insurance, and contractor's profit are added to direct costs of building. This method is time-consuming but very accurate.

What is subjective value?

When value decreases due to the subjective nature of the user's preference regarding amenities.

What is the principal of substitution?

Value is set by the cost of getting an equally desirable substitute, therefore an owner cannot expect to sell for more than someone would ordinarily pay for a similar property, under similar conditions.

What is value?

Value is the present worth of rights to future benefits that come from property ownership.

What are variable expenses?

Variable expenses include management and maintenance.

What is Thoroughfare Condition?

Width of streets, traffic congestion, and condition of pavement affect the value of properties fronting on those streets; the term front foot defines the width of a property along a street, and the front foot of a commercial property is usually the most valuable.

What is the neighborhood life cycle?

(1) growth (development), (2) maturity (stability), (3) old age (decline), and (4) revitalization (renaissance).

What are the two questions an appraiser must be able to answer at the end of an appraisal?

1. "What is the highest and best use of the property?" 2. "What is this use worth?"

What are the four elements of value?

1. Demand 2. Utility 3. Scarcity 4. Transferability

What are the Methods to Estimate the Cost of a New Building?

1. Square-Foot Method 2. Cubic-Foot Method 3. Quantity-Survey Method 4. Unit-In-Place Cost Method

What is the appraisal process?

1. State the problem. 2. Gather the data needed and the sources. 3. Use the appraisal approaches to estimate value 4. Reconcile the estimated values for the final value estimate. 5. Write the appraisal report.

What is the purpose of an appraisal?

1. Transfer of property ownership 2. Financing and credit 3. Taxation 4. Insurance 5. Condemnation purpose of the appraisal helps define how the appraisal process will be laid out.

What is capitalization?

Capitalization is the process of calculating a property's present worth on the basis of its capacity to continue producing an income stream.

Where can community data be obtained?

Community data can be obtained from the Chamber of Commerce, City Planning Commission, city government agencies, banks, and real estate boards.

What are comparables (comps)?

Comparables are properties that are similar to a subject property and are used in the appraisal process.

What is competition?

Competition is another of the economic principles effecting valuation; i.e seller's pricing their homes competitively or buyers pricing their offers competitively.

What is contract rent?

Contract rent is the amount actually paid by a renter for use of the premises.

What is corner influence?

Corner influence: Commercial properties benefit from more exposure, while residential parcels may lose privacy and incur higher maintenance costs from increased frontage.

What approach is used for new or unusual buildings?

Cost approach

What is the unit-in-place cost method?

Cost of units in the building as installed is computed and applied to the structure cost. The total costs of walls in place, heating units, and roof are figured on a square-foot basis, including labor, overhead, and profit. This is the most detailed method of estimating value.

What is cost?

Cost represents expenses in money, labor, material, or sacrifices in acquiring or producing something.

What is curable depreciation?

Curable depreciation refers to a loss in value that is economically feasible to correct.

What is demand?

Demand is the desire to buy or obtain a commodity.

What are amenities?

Features that add value to a property are called amenities.

What is obsolescence?

Obsolescence: This may be caused by external or economic changes and decreases the usefulness of property or causes deterioration.

What are off-site improvements?

Off-site improvements are items in areas that border the site and add to its value, such as streetlights, sidewalks, greenbelts, and curbs.

What are on-site improvements?

On-site improvements are structures permanently attached to the land, such as buildings, swimming pools, and fences.

What is orientation?

Orientation is the placement of a building on its lot in relation to exposure to sun, prevailing wind, traffic, and privacy from the street.

What is scarcity?

Scarcity refers to the availability of a commodity in the marketplace.

What is shape?

Shape: Irregular-shaped lots are more difficult and expensive to develop.

What is site specific data?

Site specific data is information that has to do with the specific location being appraised.

What is size?

Size: The use of a property may be determined by the width and depth of the land; a depth table is used to estimate the value of commercial properties.

What are some economic influences that affect value?

Some of these forces are: natural resources, industrial and commercial trends, employment trends, wage levels, availability of money and credit, interest rates, price levels, tax loads, regional and community economic base, new development, and rental and price patterns.

What are the five basic steps of Using Capitalization of Income?

Step 1. Calculate the Effective Gross Income Step 2. Determine Operating Expenses Step 3. Calculate Net Operating Income Step 4. Select a Capitalization Rate Step 5. Calculate the Market Value

What is a seller's market?

A seller's market is created because there is more demand than supply.

What is a T-intersection Lot?

A T-intersection lot is one that is fronted head-on by a street.

What is a buyer's market?

A buyer's market is created because there is more supply than demand.

What is a corner lot?

A corner lot is found at the intersection of two streets.

What is a cul-de-sac lot?

A cul-de-sac lot is found at the end of a dead-end street.

What are the types of lots?

A cul-de-sac lot, a corner lot, a T-intersection lot, an interior lot, a flag lot, and a key lot are all types of lots that can affect a property's value.

What's a flag lot?

A flag lot looks like a flag on a pole; the pole represents the access to the site, which is usually located to the rear of another lot fronting a main street.

What is a key lot?

A key lot, so named because it resembles a key fitting into a lock, is surrounded by the backyards of other lots.

What is actual age?

Actual age is the real age of a building.

What is an Appraisal?

An appraisal is an act or process of developing an opinion of value; it usually is for a specific property's value on a given date.

What is the legal data an appraiser must evaluate?

An appraiser must evaluate all legal data connected with the site, including the legal description, any taxes, the zoning, general plan, and any restrictions or easements.

What is an appraisal report?

An appraiser's opinion of value in a written statement.

What is an improvement?

An improvement is a valuable addition made to property to enhance value or extend useful remaining life.

What is an interior lot?

An interior lot is one that is surrounded by other lots, with frontage on the street.

What is a blighted area?

Blighted area: This refers to a section of a city, generally the inner city, where most of the buildings are run-down and the property values are extremely low.

What is book value?

Book value is the current value (for accounting purposes) of a property, calculated as the original cost plus capital improvements and minus accumulated or accrued depreciation of the improvement. It is important to remember that book value and book depreciation are used only to figure income tax and are not particularly relevant to an appraiser.

Do building restrictions and zones increase or depress values?

Building restrictions and zones: These may increase or depress values.

What affects utility?

Building restrictions and zoning ordinances affect utility.

What is business climate?

Business climate: The presence of shopping areas, offices and medical suites as well as financial, wholesale, industrial, and other consumer-friendly businesses is important to establishing value.

What is depreciation? How is depreciation measured?

Depreciation means loss in value from any cause. It is usually measured by estimating the difference between the current cost to replace new and the estimated value of the property as of the date of appraisal.

What is directional growth?

Directional growth: This is determined by how the area or city expands. Property in a growth area tends to increase in value.

What is economic life?

Economic life is the estimated period over which a building may be profitably used. Economic life is usually shorter than physical (actual) life. For example, if the subject property was really 25 years old, but was as well maintained and would sell for as much as nearby 20-year-old properties, it would be said to have an effective age of 20 years.

What is economic rent?

Economic rent is the amount the rental could bring in an open market An appraiser valuating a property looks at the economic rent, rather than the contract rent, in order to discover the fair income of the property.

What is effective age?

Effective age is not determined by the actual age of a building but by its condition and usefulness. For example, a property with an estimated effective age of 50 years would be said to depreciate at an equal rate of 2% per year (2% x 50 years equals 100% depreciation). In using this method of calculating accrued depreciation, the appraiser probably will not use the actual age of the building, rather the effective age, which is determined by its condition, not the number of years since it was buil

What is effective demand?

Effective demand is desire coupled with purchasing power.

What are environmental forces?

Environmental forces may be climate, soil, topography, oceans, and mountains.

What is exposure?

Exposure: The south and west sides of business streets are usually preferred by shopkeepers because customers will seek the shady side of the street and window displays will not be damaged by the sun. The north and east sides are less desirable.

What are fixed expenses?

Fixed expenses include property taxes, insurance, and utilities.

What is functional utility?

Functional utility is the ability of a property to be useful and perform the function for which it is intended according to current market tastes and standards.

What is general data?

General data is information about the area where the property is located that affects the value of the property.

What is gross rent?

Gross rent is income (calculated annually or monthly) received before any expenses are deducted. Generally, gross multipliers will be somewhere between x5 and x10, depending on the market, the condition, and the location of the property. In other words, a property with a gross annual income of $36,000, when multiplied by the current gross multiplier of 10, will be valued roughly at $360,000. So when you hear property values described as ten times gross, five times gross, or seven times gross, it means the value is shown by whatever multiplier is used, times the gross income. This is only a quick estimate of value, and does not take the place of a professional appraisal.

What approach is used for rental properties?

Income approach

What is incurable depreciation?

Incurable depreciation refers to items of depreciation that either are physically impossible to cure or are too expensive to be worth curing.

What is inflation?

Inflation is an unearned increment that affects property values. An unearned increment is an increase in real estate value that comes about from forces outside the control of the owner, such as a favorable shift in population.

What is interim use?

Interim use is a short-term and temporary use of a property until it is ready for a more productive highest and best use.

What is location?

Location: This may be the most important factor influencing value, as far as highest and best use; another term used to describe where the physical location of property is situs.

What is the vacancy factor?

Loss of income because of a vacant unit is known as the vacancy factor.

What is market price?

Market price is the actual sales price of the property, whereas the price for which the property should sell is its market value.

What are the purposes of an appraisal?

Market value for a sale Value for inheritance purposes Value for mortgage loan purposes Value for Internal Revenue Service purposes Value for insurance purposes Value for property tax purposes Value for condemnation proceedings Value for liquidation purposes

What is objective value?

Market value is sometimes called the objective value, since it may be determined by actual data.

What is neighborhood data?

Neighborhood data is concerned with the neighborhood's condition and amenities. Neighborhood data can be obtained from personal inspections, real estate licensees, or area builders.

What will cause an imbalance in the principle of balance?

Over-improvement or under-improvement will cause imbalance.

What are physical characteristics?

Physical characteristics are also called external characteristics; these characteristics include: quality of conveniences, availability of schools, shopping, public transportation, churches, and similarity of land use.

What is plottage increment?

Plottage increment: By putting several smaller, less-valuable parcels together, under one ownership through the process of assemblage, the value of the parcels will be increased.

What social ideals and standards affect value?

Population growth and decline, age, marriage, birth, divorce, and death rates, all combine to cause changes in social patterns.

What is regional data?

Regional data is information about the region's economic health and amenities. Regional data can be gathered from monthly bank summaries, regional planning commissions, and government agencies. Governmental agencies such as the Association of Bay Area Governments (ABAG) in the San Francisco Bay area, the San Diego Association of Governments (SANDAG), or the Southern California Association of Governments (SCAG) are also excellent sources for regional information.

What approach is used for single-family homes?

Sales comparison approach

What is the principal of supply and demand?

Supply refers to the total amount of a given type of property for sale or lease, at various prices, at any given point in time. Demand refers to the desire and ability to acquire goods and services through purchase or lease.

What is the capitalization rate?

The capitalization rate, more accurately called the internal rate of return (IRR) in the financial community, provides for the return of invested capital plus a return on the investment.

What is the restricted appraisal report?

The Restricted Appraisal Report is the briefest presentation of an appraisal and contains the least detail.

What is the straight-line method?

The appraiser assumes a building will decline in value the same amount each year, until nothing is left.

What is the cost approach?

The cost approach estimates the value of the land as if vacant and adds that to the depreciated cost of new improvements to determine an estimate of value for the entire property.

What is the cubic-foot method?

The cubic-foot method is very similar to the square-foot method, but it takes height as well as area into consideration.

What is the effective gross income?

The effective gross income is the total annual income from the property minus any vacancy or rental losses.

What is reconciliation?

The final step in an appraisal examining the values derived by the various approaches.

What is fair market value?

The price a property would bring if freely offered on the open market, with both a willing buyer and a willing seller, is known as market value, or fair market value.

What are the four tests of highest and best use?

The four tests to determine the HBU of a property are: (1) physically possible, (2) legally permitted, (3) economically feasible, and (4) maximally productive.

What is the income approach?

The income or capitalization approach calculates the potential net income of the property considered and then capitalized into value.

What is the intended use?

The intended use helps decide which report type is most appropriate for communicating the results of the process

What is the net operating income?

The net operating income (NOI) is the income after paying all expenses including a maintenance reserve.

What is appreciation?

The opposite of depreciation is appreciation, or an increase in value, usually as a result of inflation or some special supply and demand force relating to that specific property.

What is the principle of regression?

The opposite of progression, the principle of regression states that the value of a superior property will be worth less because of the presence of lower-valued properties nearby.

What is the principle of anticipation?

The principle of anticipation expresses that value is created by the expectation of future benefits.

What is the principal of balance?

The principle of balance states that real estate value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium.

What is the principal of conformity?

The principle of conformity states that the more that structures are in harmony with one another, the more valuable each of those structures.

What is the principle of contribution?

The principle of contribution is the worth of an improvement as well as what it adds to the entire property's market value, regardless of the actual cost of the improvement.

What is the principal of highest and best use?

The principle of highest and best use is based on the reasonable use of real property at the time of the appraisal, which is most likely to produce the greatest net return to the land and/or the building over a given period of time.

What is the principle of progression?

The principle of progression states that the value of an inferior property will be worth more because of the presence of greater-valued properties nearby.

What is market data?

The sales and listing prices of property in the neighborhood is the neighborhood's market data.

What is the sales comparison approach?

The sales comparison approach depends on recent sales and listings of similar properties in the area and are evaluated to form an opinion of value.

What is value in use?

Value in use (also known as utility value) is the usefulness of the property to a specific user.

How does one gather data?

To determine the property's value, data can be obtained from government publications, newspapers, magazines, the Internet, and personal observation.

What is topography and soil?

Topography and soil: Construction costs will be affected by the terrain and soil condition; limited irregularity in the contour is best for residential property.

What is transferability?

Transferability means that title to the property is unclouded and marketable.

What is utility?

Utility is the ability of a property to satisfy a need or desire, such as shelter, income, or amenities.

What is valuation?

Valuation is the process of estimating market value for real property as of a specific time.