Chapter 2: Real Estate Appraisal
Cost Approach
"Appraisal by Summation" Based on improvements of the land!
Cost Approach Math to get Appraisal
1. Calculate square footage by price per square foot as if rebuilding. 2.Subtract depreciation 3.Add the value of the land
What are the 3 C's in Comparability in the appraisal field?
1. Close 2. Current 3. Comparable
What are the 5 steps to the Cost Approach?
1. Estimate value of the land 2. Estimate current cost of improvements 3. Accrued depreciation: deduct from cost new 4. Deduct the depreciation from the estimated construction costs 5. Add the estimated land value to the depreciated cost of the building and improvements
How many hours of appraisal education is required to become a general certified real estate appraiser...?
300 hours
How many hours of appraisal education is required to become an appraiser trainee...?
75 hours
Sales Comparison Approach
A real estate appraisal method that compares a piece of property to other properties with similar characteristics that have been sold recently
Income Approach
An appraisal method in which the value of a property is derived by applying a market capitalization rate to the property's net operating income.
A value can increase or decrease in anticipation of some future benefit or detriment effecting the property. Ex: new mall going into an area, many times, the surrounding properties are effected in a positive way.
Anticipation
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 processes is referred to as a/an...?
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 processes.
Appraiser
Which of the following is the lowest real estate appraiser classification...?
Appraiser trainee
Plottage Value
Assemblage. Process of merging 2 lots under 1 owner.
No physical or economical change remains constant
Change
The income approach is used to value which type of properties?
Commercial properties such as office buildings, shopping centers, and multi-family units (5+ units)
(CMA) Considered a light variation of the sales comparison approach that's used by real estate agents to help buyers and sellers estimate a market value.
Comparative Market Analysis
Excess profits tend to attract competition.
Competition
The concept speaks to the idea that the maximum value is realized if the existing land conforms to the neighborhood standards.
Conformity
The value of any component of property is measured by the amount it contributes to the value of the whole or the amount its absence attracts from that value. Ex: cost of installing AC and remodeling an older office building maybe greater than rental increase resulting from improvement of property.
Contribution
Value based on the properties cost to reproduce the same property.
Cost Approach
When using sales data to compare to the subject property, appraisers should use sales that are...?
Current Comparable Close
What's the acronym for the 4 components of Value?
D.U.S.T.
What are the 4 components of Value?
Demand Utility Scarcity Transferability
Any condition that diminishes the value of an improvement to the property. Can be curable or incurable. Several types.
Depreciation
After the needed data has been obtained and verified, what is the next step in the appraisal process...?
Determine highest and best use
Fourth step in Appraisal Process
Determine highest and best use of the property.
Fifth step in Appraisal Process
Discuss results of Appraisal
The desire for possession or ownership backed by the financial means to satisfy that need is referred to as...?
Effective Demand
Competition
Excess profits attract this.
Externalities
External influences that can effect value
Influences outside of property can have a positive or negative effect on its value. Ex: property that backs up to a city dump would be an externality that influences the value negatively.
Externalities
Third step in Appraisal Process
Gather, record, and verify all necessary data.
The most probable use to which a property is suited that results in its highest value or highest return on the land.
Highest and best use
The most probable use to which a property is suited that results in its highest value or highest returns to the land is known as...?
Highest and best use
Income obtained from a property will (to a large extent) influence the value of that property.
Income Approach
Improvements to land and structures eventually reach a point where they no longer have a positive effect of value. As long as money spent on improvement produces an increase in income or value, the law of increasing returns is applicable. At a point where those improvements produce no income or value, then the law of diminishing returns applies.
Increasing and Diminishing returns
Square footage method
Involves calculating the cost of construction by multiplying the square footage of the structure by the construction cost for that particular type of building.
A property's highest and best use must consist of which 3 things?
Legal Possible Financially feasible
What is the second step in the appraisal process...?
List the date needed
What is the second step in the appraisal process?
List the date needed, and sources of that data.
Sales Comparison Approach is also known as
Market Data Approach
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 is referred to as...?
Market Value
The highest price in terms of money which a property will bring in 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.
Market Value
The most common objective of an appraisal is to develop an opinion of...?
Market value
What can be said about Market Value?
Most probable price
Market Value
Most probable price a property can bring.
Highest and Best Use of property
Most probable use to which a property is suited which will result in its highest value.
How much experience is needed to become a real estate appraiser trainee...?
No experience needed
How soon must appraisers be paid?
No later than 60 days.
Does market value equal market cost?
Not always
Market Cost
Original funds outlaid for land, labor, material, and profit.
Plottage value- the increased utility in value resulting from convincing/consolidating 2 adjacent or more lots into one larger lot.
Plottage
Increasing & Diminishing return
Point where improvements bring no value
Unit in Place Method
Provides the cost to construct a building by estimating the installation costs, including materials of the individual components of the structure.
Which of the following externalities can have a negative effect on home values...?
Proximity to a landfill Proximity to a power plant Proximity to a noisy highway
A single value is derived from the three appraisal methods of determining value during the ............ process?
Reconciliation
Appraisal reconciliation is taking the values indicated by the various approaches used in reconciling them to one single value.
Reconciliation
Sixth stage in Appraisal Process
Reconciliation. Create written statement for a client.
Quantity Survey Method
Requires you to break down all the components of a building and estimate the cost of the material and installation separately.
(Also known as Market Data Approach) where an indicated value is obtained by comparing a property with recently sold comparable properties.
Sales Comparison Approach
Which Approach to Value is mostly used in Residential properties?
Sales Comparison Approach
Finite supply
Scarcity
The supply of property in relation to effective demand is known as...?
Scarcity
The Cost Approach is used to value which types of properties?
Schools, places of worship, new properties.
The money the seller walks away from closing after selling a property, after commissions and closing costs and other fees associated with selling are absorbed.
Seller's Net Return
Market Price
Selling price of property
What is the first step in the appraisal process...?
State the problem
What is the first step in the performance of appraisal?
Step 1: State the problem
Change
Subject to demands of the market
The principle of substitution states the maximum value of a property tends to be set by the cost of purchasing an equally valuable/desirable substitute property.
Substitution
The principle that states that the value of a property will increase if the supply decreases and the demand either increases or remains constant and vice versa.
Supply and demand
Net Operating Income (NOI) involved in the Income Approach
The building's profit. NOI= Effective gross income - Expenses
Replacement Cost
The construction cost at current prices of a property that is not necessarily an exact duplicate of the subject property but serves the same purpose or function as the original.
Replacement cost
The cost to construct a structure with the same usefulness (utility) as a comparable structure using current materials and standards.
Reproduction Cost vs. Replacement Cost
The dollar amount required to construct an exact duplicate of the subject building at current prices.
Effective Demand
The needs or desire for possession or ownership backed by the financial means to satisfy that need.
Capitalization Rate (Cap Rate)
The percentage of the investment the investor will receive each year from the net income from the property.
Which method is More Commonly used by appraisers to estimate replacement or reproduction costs?
The square footage method
The ease of which ownership rights are transferred to one portion or another
Transferability
The relative ease with which ownership rights are transferred from one person to another is known as...?
Transferability
Real estate appraisers used to appraise a property cannot be selected by the real estate brokers involved in the transaction...?
True
The Cost Approach is also used when there is a lack of comparable sales and the property does NOT produce any income. T/F?
True
A typical residential appraisal report is issued on a...?
Uniform Residential Appraisal Report
The capacity to satisfy human needs and desires is referred to as...?
Utility
The capacity to satisfy human needs and desires.
Utility
Present worth of future benefits arising out of ownership to typical users/investors.
Value
The present worth of future benefits arising out of ownership to typical users/investors is known as...?
Value
Insured Value
Value that an insurance company places on a property.
Supply and Demand
Value will increase if supply decreases, demand will increase or remain the same.
Condemnation Value
also called eminent domain or a "taking," is the right of a government or its agent to take private property for public use, with payment of compensation. ex: road expansion
Anticipation
increase or decreasing of future benefits or detriment effecting property.
Conformity
maximum value realized if use of land of existing neighborhood standards. conformity to land use objectives contributes to economic stability in a residential community. This is why homes are built in the same style as the other properties in that same area, because the values will go up.
Market Value vs Market Price
opinion based on comparable sales vs. market data
Market Value
reasonable opinion of property value
Salvage Value
the book value of an asset after all depreciation has been fully expensed
Reproduction Cost
the cost t construct an exact duplicate of the subject structure at current costs.
Assessed Value
the dollar value assigned to a property to measure applicable taxes.
Substitution
the maximum value of a property usually is established by the cost of acquiring an equivalent substitute property that has the same use, design, and income.
Contribution
the worth of an improvement is what it adds (or contributes) to the market value of the entire property, not what it cost to add the improvement.
Mortgage Value
the worth of the mortgage on the home
