CHAPTER 13 - APPRAISAL/PROPERTY VALUATION

Utility

- The ability to give satisfaction and/or excite desire for possession.

Time Value of Money

- The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Investment Value

- The specific value of an investment to a particular investor or class of investors based on individual investment requirements; distinguished from market value, which is impersonal and detached.

A town has decided to build a school and a playground in a neighborhood. Property values are increasing. Why does this occur?

In anticipation of the school and playground, more families are interested in homes.

What are the three methods for determining the cost of development?

Quantity survey method, unit-in-place method and square foot method

Special Purpose

Special purpose, or special use, real estate includes schools or churches. Special purpose means the property is characterized by the specific reason it was constructed. These are properties that are not easily converted to another application. For example, a school could not be turned into an apartment building, or a church could not become a grocery store without difficulty.

Who uses the information contained in an appraisal?

The buyer, seller, lender and insurance company.

What value is most commonly used for commercial property?

Value in use

A new employer opens up in the area and wants to hire 500 people. What happens to property values?

Values will likely increase because of the new demand for homes.

A large apartment complex collects parking fees, pet fees, and laundry fees. Are these included in gross operating income?

Yes, all fees along with rental income is taken into consideration.

An investor is looking to purchase a property for $3,000,000. If the investor is purchasing at a 5% cap rate, what is the NOI of the property?

$150,000 (Dollars) = 3 million x 5%

Scarcity

- A lack of supply.

According to the IRS, a multi-family property depreciates over how many years?

27.5

What is an appraisal?

An opinion by a professional about the value of a property.

Which method of cost of development is used least?

Quantity survey

Which valuation method is commonly used to value residential properties?

Sales comparison approach

What is the Sales Comparison Approach?

Sales comparison approach means comparing one property against recent sales of properties in a neighborhood

The cost approach is primarily used to value which of the following properties?

Schools

What property expenses are fixed?

Taxes and insurance

If three homes used for comparison all have different square footage, what does the appraiser do?

The appraiser will get the average square feet and cost per square foot for the new property.

What is the principle of anticipation?

The benefits the property may offer buyer.

What does utility mean?

The more useful a property, the higher the value.

What costs are considered in valuations based on the cost approach?

The price of the lot and all costs associated with constructing the property to specifications.

Half of the residents are employed by a large employer in a nearby city, and the employer shutters their doors. What happens to the property in the area?

Typically lower prices because people are moving out.

If a unit is not being rented, it should be classified as a/an...?

Vacancy

Does a brand new roof make a property more valuable?

Yes, the new roof should increase the value.

Do higher property taxes impact home values?

Yes, the properties will be less valuable.

Capitalization Rate Example

$30,000 (Net Income)/$300,000 (Sales Price) = 0.10 = 10% Cap Rate

Cost

- The total dollar expenditure for labor, materials, legal services, architectural design, financing, taxes during construction, interest, contractor's overhead and profit, and entrepreneurial overhead and profit (may or may not equal value).

Leverage

- The use of borrowed capital (mortgage) to increase the potential return of an investment.

Insured Value

- The value of an asset or asset group that is covered by an insurance policy; can be estimated by deducting cost of non-insurable items (e.g. land value) from market value.

If an investor purchased a property for $2,000,000 using all cash, what would be their return on investment in year one if the property yielded $260,000 in cash flow?

13 percent (Cash Flow / Initial investment = 260,000/2,000,000)

An investor is looking to purchase a property for $2,500,000. If the property has an NOI of $150,000, what is the going cap rate?

6 percent (NOI/PURCHASE PRICE = CAP RATE = 150,000/2,500,00 = 0.06)

What value is used for establishing taxes?

Assessed value

Which of the following expenses generally increases the value of a property?

Capital expenditure

What is the principle of change?

Changing market conditions such as supply and demand, interest rates, and property conditions.

Which of the following line items in the income section of a pro-forma lists the amount of unrealized income due to offering prospective tenants one months' free rent?

Concessions

What is a cost approach appraisal?

Cost of building a property to given specifications.

Net operating income does NOT take into account which of the following?

Debt service

What does the acronym DUST stand for?

Demand Utility Scarcity Transferability

What happens when a person adds on two bedrooms to an existing two bedroom home, when all the homes in the neighborhood have three bedrooms?

Diminishing returns; the property no longer conforms.

Potential gross income minus vacancies, concessions and loss to lease, plus other income equals...?

Effective gross income

The NOI plus the total expenses of a property equals which of the following?

Effective gross income

Determining value using income approach

Net Operating Income/Capitalization Rate = Market Value

What is the formula used when using the income capitalization approach?

Net Operating Income/Capitalization Rate = Market Value

The income a property produces before debt service and any capital expenditures is known as...?

Net operating income

Which of the following numbers is used to calculate the value of a property using the income capitalization approach?

Net operating income

What is the formula for capitalization rate?

Net operating income/sales price = capitalization rate

Is it necessary to have a lease agreement to determine the occupancy of a commercial property?

No, appraisers can determine whether a property will remain occupied based on average occupancy of similar properties..

This principle affirms the value is created by anticipated benefits to be derived in the future...?

Principle of anticipation

Which of the following documents is used to project the future performance of a property?

Pro-forma

Mixed Use

Properties Mixed-use is a combination of commercial and residential real estate. An example of mixed-use would be an area where there are storefronts on the ground fl oor and residential spaces above. Another possibility would be an apartment building with retail or business space included.

What types of properties are appraised using the income capitalization approach?

Property that is expected to generate income for the owner.

What happens to property values if lenders freeze lending?

Property values drop because of a lack of capital.

How does an appraiser identify properties when using the Sales Comparison Approach?

Public records such as the clerk in the county and MLS services.

The capitalization rate is equal to the net operating income divided by the...?

Purchase price

What is the principle of conformity?

The more unique new homes are, the lower the value.

A builder buys all the lots of a street abutting a neighborhood and builds mobile homes. Property values in the neighborhood drop; what principle applies?

The principle of regression applies.

A home is up for sale at $275,000. A new home that is similar can be built for $255,000. What principle applies?

The principle of substitution.

There are 100 three-bedroom homes available, and there are 200 buyers, what happens to the property value?

The property values increase because of high demand.

What is highest and best use?

When a property is used in the manner it is best suited for.

Demand

- The supply of willing and able buyers in the marketplace or lack thereof.

How often is the square foot method of valuation used?

Seldom because it is the least accurate.

What goes into a land valuation?

Shape, location, size of lot and frontage are considered

What are the four factors that influence value?

Social, economic, construction costs, governmental.

Other issues out of the control of the seller impact the value of a property. What are some of them?

Taxes, other sales and supply and demand`

What does clean, clear title mean?

The title can be easily transferred.

If the home for sale has more bathrooms or additional bedrooms than the homes sold, what does the appraiser do?

The value of the subject property will have to be adjusted upwards.

Does it matter if lenders are not offering loans when using the sales comparison approach?

Yes, it does matter; properties may be valued lower.

What is the purchase price of a property if an investor were to earn a 10% cash-on-cash return on $350,000 in cash flow after year one?

$3,500,000= 350,000/10%

Assessed Value

- A valuation placed upon a piece of property by a public authority as a basis for levying taxes on the property.

Cost Approach

- An analysis in which a value estimate of a property is derived by estimating the replacement cost of the improvements, deducting therefrom the estimated accrued depreciation, then adding the market value of the land.

Appraisal

- An estimate of the value of property resulting from an analysis of facts about the property. An opinion of value.

Vacant Land

Vacant land is land that has no improvements added to it. Sometimes called raw land, this property is usually purchased with future use in mind, therefore zoning is an important consideration. Land can be found in the city or in a rural area, and can be residential, commercial, or industrial. It can be purchased to develop a sub-division, to build a single building, for an industrial complex or offices.

What are the total expenses of a property with an effective gross income of $850,000 and an NOI of $400,000?

$450,000 (Dollars)

Sales Comparison Approach

- A valuation method which compares a subject property's characteristics with those of comparable properties which have recently sold in similar transactions.

Appraiser

- One qualified by education, training and experience who is hired to estimate the value of real and personal property based on experience, judgment, facts, and use of formal appraisal process.

Value

- Present worth of future benefits arising out of ownership to typical users/investors.

Transferability

- The ability to transfer ownership of property from one person to another.

Price

- The amount a purchaser agrees to pay and a seller agrees to accept in an arms length transaction.

Supply

- The amount of a certain good or service that is available in the market.

Reconciliation

- The final stage in the appraisal process where the appraiser reviews the data and estimates the subject property's value.

Market Value

- The highest price in terms of money which a property will bring in a competitive and open market and under all conditions required for a fair sale, i.e., the buyer and seller acting prudently, knowledgeably and neither affected by undue pressures.

Agricultural Properties

Agricultural property can be farms or ranches. These properties are generally intended to be income-producing but can be for personal use as well. They can vary greatly in size, from family farms and ranches to large commercial projects. Agricultural property is usually used to grow and harvest crops, or raise, breed, and care for livestock such as cows, horses, pigs, sheep or goats.

What is considered gross property income?

All income derived from a property including fees, rent and income from laundry rooms.

Which of the following is an example of an expense found on a pro-forma?

All of these items are expenses found on a pro-forma Management fees Property taxes Marketing expenses

What value is used during the reconciliation process?

All three values The value derived from the cost approach. The value derived from the income capitalization approach. The value derived from the sales comparison approach.

What is the effective gross income of a property that has an NOI of $400,000 and expenses totaling $520,000?

Effective gross income equals NOI plus expenses 400,000+520,000 = 920,000

An investor's down payment on a property is equal to their initial ........... in the property.

Equity

Fannie Mae loans for manufactured housing should not be done using the cost approach?

False: Fannie Mae requires the cost approach

Industrial Properties

Industrial properties can include factories or warehouses and can range from small to enormous. They can cover a wide variety of applications. In addition to assembly and production, there can be distribution, warehousing, and research and development.

Is real estate a risky investment?

No, long-term investing is rather low risk.

Are property improvements always a good idea?

No, there is the possibility of diminishing returns.

Which of the following property types are valued using a capitalization rate?

Office building

The top line in the income section of a pro-forma lists which of the following?

Potential gross income

According to this principle, it is the future, not the past, which is of prime importance in estimating value...?

Principle of Change

An appraisal comes in at $300,000, and the seller has the property listed for $350,000. What should he do?

The sales price should be reduced to be in line with the value.

What is the principle of regression?

When higher valued properties lose value because of their association to lesser valued properties.

What is the principle of contribution?

When the amenities work for the target home buyer.

Which of the following may be used to reduce the taxable income on a property?

Write-off of interest paid on the mortgage