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comparables

A comparable property is one that is similar to the subject property and has recently been sold under normal conditions.

potential gross income

A property's potential gross income (also called its economic rent) is the amount it would rent for if it were available for rental in the current market.

balance

A property's value is maximized when the agents in production are in balance. The agents in production are labor, coordination, capital, and land. When a property is serving its highest and best use, neither too much nor too little of its earnings are attributable to the land.

anticipation

According to the principle of anticipation, people buy property in anticipation of receiving benefits from it in the future. An appraiser must consider not only the present state of the property, but how it may change in the future.

progression and regression

According to the principle of progression, an inexpensive home is generally worth more in a neighborhood of better homes than it would be worth in a neighborhood of similar homes. The principle of regression holds that a valuable property surrounded by less expensive properties will tend to be worth less than it would be worth surrounded by similar homes.

substitution

According to the principle of substitution, the maximum value of a property is set by how much it would cost to obtain another property that is equally desirable. The principle of substitution is the basis for all three of the methods of appraisal we will discuss later on.

supply and demand

According to the principle of supply and demand, as the demand for a certain type of real estate in a certain location exceeds the supply, the market value of properties in that category tends to rise. Likewise, as the supply exceeds the demand, the market value of that type of property tends to fall.

apraisal

An appraisal is an estimate or opinion of a property's value.

Highest and best use

An appraiser doesn't just consider how the property is currently being used, but also what its highest and best use would be. The highest and best use is the use which, at the time of appraisal, is most likely to produce the greatest net return from the property.

gross income multiplier method

An appraiser uses the gross income multiplier method to estimate the value of a single-family home used as a rental property. The appraiser locates comparable rental properties that have recently sold, then analyzes the relationship between the sales price and the rental rate of each comparable.

contribution

An improvement may contribute less or more to the value of the property than it costs. The principle of contribution requires an appraiser to distinguish between the cost of an improvement and its contribution to value.

An opinion or estimate value

Appraisal. An appraisal is an opinion or estimate of value, not a determination of value. Buyers and sellers determine value.

A sale between unrelated parties.

Arms length Transactions. An arms length transaction is one in which the parties don't have an existing personal or business relationship. The price paid in a sale that wasn't an arm's length transaction isn't a reliable indication of market value.

licensing or certification

California doesn't require all appraisers to be licensed or certified, but it offers licensing and certification for those who need them to comply with federal law. An appraiser must be licensed or certified to perform an appraisal in a federally related loan transaction if the loan amount is greater than $250,000.

The process of converting net income into a meaningful value

Capitalization. The property's net income is divided by the selected capitalization rate to determine the property's value.

The rent that is actually being paid on property that is currently leased.

Contract rent. As lease ages, the contract rent usually differs from the market rental rate.

Any depreciation that can be corrected by the property owner at a cost that could be recovered in the sales price if the property were sold.

Curable depreciation. Deferred maintenance and certain types of functional obsolescence are classified as curable depreciation.

The amount of money required to make the periodic payments of principal and interest on an amortized debt, such as mortgage.

Debt service. The mortgage payment is called the debt service. Although the debt service is an expense for the property owner, it is not considered an operating expense and would not be subtracted to determine property's net income.

depriciation

Depreciation is a loss in value due to any cause. The three categories of depreciation are physical deterioration, functional obsolescence, and external obsolescence.

effective gross income

Effective gross income is the property's potential gross income minus a vacancy factor.

a measure of a rental property's capacity to generate income, calculated by subtracting the vacancy factor from the economic rent.

Effective gross income. The vacancy factor is subtracted from the property's gross income to determine the effective gross income, which is the amount the property owner can realistically expect to collect.

elements of comparison

Elements of comparison are the primary elements an appraiser evaluates when choosing comparables, including date of sale, location, physical characteristics, terms of sale, and conditions of sale.

External obsolescence

External obsolescence is also called economic obsolescence. It is depreciation caused by forces outside the property, such as neighborhood decline or proximity to a nuisance. External obsolescence is always incurable.

Industrial land is usually valued in temrs of frontage; that is, it is worth a certain number of dollars per front foot.

False. Commercial land is valued by front foot; industrial land is valued by square footage or acreage, depending on its size.

A lot with greater depth than the surrounding lots will always be worth more.

False. Greater depth can mean higher value, but it doesn't always.

if a comparable property sold more than six months ago, the appraiser could not use it when applying the sales comparison method of appraisal.

False. If a particular market has been inactive in recent months, the appraiser could use comparables that sold more than six months ago. However, she would have to make adjustments for inflation or other economic developments that have affected prices in the area.

The appraiser will be certain to research the assessed value of the subject property.

False. The appraiser wont be interested in the property's assessed value, since the assessed value may be an old figure that doesnt accurately indicate the market value. The appraiser will be more interested in the prices of recently sold comparable properties.

A site analysis will usually include an investigation into the percentage of homeownership in the neighborhood.

False. The appraiser would gather information about the percentage of homeownership in the neighborhood when conducting a neighborhood analysis.

the first step in the appraisal process is to gather and verify the specific data.

False. The first step of appraisal process is to define the problem, which includes identifying the subject property and determining what function the appraisal is to serve.

Plottage refers to how the improvements on a property are situated in relation to views, privacy and exposure to wind and sunlight

False. orientation refers to how the building is situated on the site. Plottage refers to the increase in value that occurs when the value of several lots joined together is greater than the sum of the values of the individual lots.

A self employed appraiser

Fee appraiser. That is someone who performs appraisals for a fee, as opposed to an appraiser who works for an institutional lender or a government agency.

Functional Obsolescence

Functional obsolescence is depreciation caused by functional inadequacies or outmoded design. Functional obsolescence may be curable or incurable.

a type of depreciation that would result if a property had inadequate electrical and water heating systems.

Functional obsolescence. It is a loss in value due to inadequate or outmoded equipment, or as a result of a poor or outmoded design.

General data

General data is information concerning matters outside the subject property that have an impact on its value, such as the economic situation in the community. An appraiser performs a neighborhood analysis to evaluate how the neighborhood affects the subject property's value.

normal sale conditions

Generally, a sale can be considered to have taken place under normal conditions if it was an arm's length transaction (a sale between unrelated parties); the property was offered on the open market for a reasonable length of time; both parties acted prudently and knowledgeably; and neither party was subject to any undue stimulus or urgent pressure.

the rent that a property would generate if it were currently available for lease on the open market is called the:

Gross rent

Income Approach

In the income approach to value, an appraiser changes net income into value by using a capitalization rate.

A method if site valuation that is based on the income approach to appraisal

Land residual method, the appraiser finds how much of the property's income is attributed to the land, than calculates the value of the land by multiplying the land's income by an appropriate capitalization rate.

the price actually paid for a property.

Market price. Market price is the price actually paid for a property, regardless of whether the parties to the transaction were well informed and acting free of unusual pressure.

market value

Market value is the most probable price the property should bring under all conditions needed for a fair sale. Market value is also called value in exchange.

Also referred to as exchange value.

Market value. Market value is the most probably price that a property should bring in a competitive and open market under all conditions requisite to a fair sale. It is also known as exchange value.

Net income

Net income is calculated by subtracting operating expenses from effective gross income.

The income that is left when operating expenses are deducted from effective gross income.

Net income. It is calculated by subtracting the property's operating expenses from the effective gross income. It is the income that is capitalized to estimate the property's value.

physical deterioration

Physical deterioration is depreciation resulting from wear and tear, damage, or structural defects. It may be curable or incurable. Curable physical deterioration is often called deferred maintenance.

If two properties for sale are alike in every respect, the least expensive will be in greater demand.

Principal of substitution. The principle of substitution states that no one will pay more for a piece of property than they would have to pay for an equally desirable substitute property.

profits tend to encourage competition, and excess profits tend to result in ruinous competition.

Principals of competition. Competition may have dramatic impact on the value of the property, specially income property.

Some improvements will add more value to a property than the expense of making them. Other improvements will cost more than they add to the property's value.

Principle of contributions. The principle of contribution holds that the value of real property is greatest when the improvements produce the highest return commensurate with their cost.

Value is the present worth of the rights to all prospective future benefits accruing to ownership and use of real property.

Principles of anticipation. The principal of anticipation holds that value is created by the expectation of benefits to be received in the future.

Reconciliation

Reconciliation is the process of assembling and interpreting the value indicators in order to arrive at a final value estimate.

The assembly and interpretation of all the facts that influence a property's value.

Reconciliation- is the final step in an appraisal when the appraiser assembles and interprets the data in order to arrive at a final value estimate.

specific data

Specific data is information about the subject property itself. The appraiser gathers specific data in a site analysis and a building analysis.

the easiest method of estimating replacement cost.

Square foot method- this method of estimating replacement cost involves multiplying the structures footage by the construction cost per square foot of comparable structures.

A way of selecting a capitalization rate

Summation method- the appraiser assigns value to each of the four components of the capitalization rate and then adds them together.

capitalization methods

The building residual technique is used to value a building. The land residual technique is used to value land. The property residual technique is used to value an entire property.

Capitalization

The capitalization rate is the rate of return an investor wants on his or her investment in a property. To arrive at a value estimate using the income approach, an appraiser divides the subject property's net income by an appropriate cap rate.

Replacement cost ( as opposed to reproduction cost)

The current cost of construction a building with the same utility as the subject building.

Appraisal process

The eight steps in the appraisal process are: 1) Define the problem. 2) Determine the scope of the work. 3) Collect and verify the data. 4) Analyze the data. 5) Determine the site value. 6) Select and apply the valuation methods. 7) Reconcile the value indicators for the final value estimate. 8) Issue the appraisal report.

Estimate Depreciation

The indirect methods of estimating depreciation are the capitalization method and the market data method. The direct methods are the straight-line method and the engineering method. The straight-line method is the most widely used, while the engineering method is viewed as the most reliable.

site valuation

The methods used to value land include the sales comparison method, the land residual method, the distribution method, and the development method.

property values are in state of flux, increasing and decreasing in response to social, economic, government and environmental forces.

The principals of change. It also recognizes that a property has a four stage life cycle (integration, equilibrium, disintegration and rejuvenation.)

change

The principle of change states that a property's value changes constantly, in response to changing social, economic, governmental, and environmental conditions, and in response to changes in the property itself. Every property has a four-phase life cycle: integration, equilibrium, disintegration, and rejuvenation.

conformity

The principle of conformity states that a reasonable degree of conformity among the properties in a neighborhood has a positive effect on their value.

replacement cost

The replacement cost is the cost of building improvements with the same utility as those on the subject property, using modern materials and construction methods.

reproduction cost

The reproduction cost is how much it would cost to build an exact replica of the building. Since this is usually not a reliable indicator of a building's value, it is generally not used in the cost approach.

value indicators

The results of the different appraisal methods are referred to as value indicators. The appraiser reconciles the value indicators to arrive at a final value estimate.

sales comparison approach

The sales comparison approach relies on the recent sales prices of comparable properties to estimate the market value of a property. It is also called the market data approach because it uses information gathered about recent transactions in the local real estate market.

competition

The value of property is affected by competition. Every property competes with other properties of the same type. A profitable business will attract competitors to the area, which will tend to lower its profits and, therefore, its value.

elements of value

To have value, an item must have four characteristics called the elements of value. These are utility, scarcity, demand, and transferability.

if a comparable sale involved seller financing, the appraise would have to investigate the circumstances to determine if the noninstitutional financing had any impact on the price paid for the property.

True. In a seller financed transaction, the seller may offer the buyer attractive financing terms, such as a small downpayment or below market interest rate. The buyer may pay a higher price to get those terms, thus distorting the true value of the comparable property.

A property's location has a greater effect on its value than any other characteristic.

True. Location is the primary consideration when selecting comparables to be used in the sales comparison approach to value.

this would include the age and condition of the structure, its interior layout, and its energy efficiency.

True. The building analysis is an evaluation of the condition and functionality of any improvements to the site.

The sales comparison approach to value is the most reliable appraisal method when the property being appraised is vacant land or an older home.

True. The sales comparison approach to value is the most reliable appraisal method when the property being appraised an older house, and its also the most commonly used method for appraising vacant land.

A retail store is often worth more if it is located on a corner, because it enjoy more exposure and its customers have access from two different sides.

True. This is sometimes called corner influence.

cost approach

Using the cost approach, the appraiser estimates the replacement cost of the building, deducts depreciation, and adds the value of the site.

The value of property to its owner or user

Utility value. Also called value in use, utility value is the value placed on the property by a particular person, such as its owner.

value

Value can be defined as the present worth of future benefits. It can also be defined as an item's ability to command other items in exchange. Another definition of value is the relationship between a desired thing and the person who desires it.

value in use

Value in use reflects how useful the property is to a particular person, the owner. Value in use is also called utility value.

The income a rental property could be expected to earn in today's market place

economic rent, also called market rent. it is the amount that a property would rent for it it were available for lease in the current market.

after carefully analyzing three comparable properties, the appraiser will average the prices paid for the comparable in order to arrive at a reliable estimate value.

false. the appraiser will usually weight her value estimate in favor of the comparable most likely the subject property (the one with the fewer adjustments). Averaging isn't part of the process.

when a comparable property has a feature, such as a formal dining room, that the subject property lacks, the appraiser will subtract the value of that feature from the ultimate value estimate for the subject property.

false. The appraiser will subtract the value of the formal dinning room from the comparable sales price. The result will indicate what the comparable would have sold for without the dining room.

A figure that is multiplied by a rental property's gross income to arrive at an estimate of the property's value.

gross income multiplier is multiplied by the property's rental income to arrive at a rough value estimate.

Maximum values is realized when a reasonable degree of architectural similarity exists and land uses are compatible.

principals of conformity. According to this principal, the maximum value of land is achieved when there is an acceptable degree of social and economic conformity between neighboring properties.

That use which, at the time of the property's appraisal, is most likely to produce the greatest net return for the property owner.

principals of highest and best us= refers to the most profitable use of a property, the one that will provide the greatest return over a period of time.

values tend to rise as demand increases and supply decreases, and diminish when supply increases and demand decreases.

principals of supply and demand. Value varies directly with demand and inversely with supply. That is, the greater the demand, the greater the value; and the greater the supply, the lower the value.

the sales comparison method is less reliable in a period where economic conditions are rapidly changing.

true. Rapidly fluctuating economic conditions make it more difficult to make adjustments to the price of the comparable properties.