Real Estate Exam 2

Example abstraction and extraction method problem all improvement cost less depreciation ($129,000) are deducted from the sale price ($178,000) and the remaining value is

$49,000 is considered the land value.

Four test for highest and best use analysis

1.) Physically possible 2.) legally permitted 3.) Financially (or economically) feasible 4.) Maximally productive

Two basic facts that affect all real estate appraisals:

1.) land value is the primary determinant of overall real estate value 2.) Land value is determined by market demand

Cost approach definition

1.) the appraiser estimates the value of any improvements to the land (such as structures) in terms of their reproduction or replacement cost as though new. 2.) The appraiser then subtracts any loss in value owing to the depreciation of the improvements. 3.) Finally the appraiser adds an estimate of the value of the site itself, usually found by the sales comparison approach.

When a landowner leases land to a tenant who agrees to erect a building or other improvement on the land, the lease is usually:

A ground rent they often run 50-100 years

When an area is first developed

Property values usually increase until few vacant building sites remain. at that point, the houses in the neighborhood tend to stabilize at their highest monetary value, and prices rarely fluctuate downward.

Accrued depreciation is calculated as the effective age divided by the total economic life of the improvements.

How to calculate accumulated depreciation in extraction method

Cost Approach formula

Reproduction or replacement cost of improvements - Depreciation on improvement(s) + site value = property value

Land that has been prepared for it's intended use by the addition of such improvements as grading, utilities, and road access. These improvements do not include structures, even though the same term can be used to include both.

Site defined

Condition of the sale, things that make the deal better like first 3 months free rent

Special concessions

Property rights to be appraised

Typical appraisal assignment values the highest interest in real estate recognized by law-referred to as fee simple ownership, but can also value lessor ones like leaseholds, easement or right-of-way.

Ground lease is determined

by dividing the ground rent by an appropriate cap rate.

The appraiser who is asked to consider the entire range of uses to which a property could be put must consider the value of the land separately from the value of any particular structure that can be erected on it. The property will be valued both with and without structures. The appraiser willl consider not only the most valuable present and prospective use of the site, but also weather a zoning change or other approval necessary for a particular use is likely.

What appraiser need to do when considering highest and best use

the process of combining adjacent lots

is Assemblage

The absence or inadequacy of features in the design, layout, or construction of the building that are currently desired by purchasers, or the presence of features that have become unfashionable or unnecessary.

is Functional obsolescence

Is there zoning in regard with Permitted use, Minimum lot size requirments, types of structures permitted, limitations on building size and height. Any proposed changes in zoning? These questions must be answered in what step of highest and best use?

The second step: The use must be legally permitted.

Ground rent

payment made by the tenant under a ground lease to be paid, will vary according to the desirability of the land and the relative negotiating strengths of the parties.

Fannie Mae and Freddie Mac

are the major government-sponsored enterprises (GSEs) that purchase mortgages from primary lenders (such as banks), package the mortgages, and sell the resulting securities on publicly traded exchanges as part of the secondary mortgage market.

Any special limiting conditions are used

appraisals include a statement of qualifying and limiting conditions to protect the appraiser and to inform and protect the client and other users of the appraisal.

Sales comparison approach

the appraiser finds three to five (or more) properties that have sold recently and are similar to the subject property.

Economic base

the level of business activity in a community- particularly activity that brings income into the community from surrounding areas.

Sales comparison approach is

the most widely used appraisal method for valuing residential property and vacant land.

Form an opinion of land value

the subject site excluding the building are compared with those of similar nearby by sites having the same highest and best use.

What is the Ground Lease capitalization method Example: assume that a site is on a long-term lease with a ground rent of $100,000 per year. If the appropriate rate for capitalization of ground rent is 10 percent, the estimated value by direct capitalization is

$100,000 ÷ 0.10=$1,000,000

Cost approach example: A retail store, built 15 years ago, has depreciated about 30 percent overall. It would cost $230,000 to build today, and similar sites are now worth $52,000. What is the market value of this store using the formula for the cost approach?

$230,000-(30% x $230,000) + $52,000 = Property value $230,000- $69,000 + $52,000 = $213,000 Property value is $213,000

Example of sales comparison approach House X, the subject property, is 15 years old. A comparable property, house Y, is 15 years old and sold for $270,000 one year prior to this appraisal. Because of changes in market conditions since the sale of house Y, the appraiser has determined that 10 percent added to the sales price is an accurate reflection of the increase in property values over the year. In this case, using the formula for the sales comparison approach.

$270,000+(10% x $270,000)= Value of Subject property. $270,000 + $27,000 = $297,000 House X is valued at this.

Three types of depreciation

1.) Physical Deterioration 2.) Functional obsolescence 3.) External Obsolescence

Income capitalization approach example: An apartment building provides a net annual rental income of $64,500. Investors are expecting a 9 percent return on this type of investment. What will the asking price be if it is the same as the market value found by the formula for the income capitalization approach?

$64,500 ÷ 9%= $716,667 income capitalization

Sales comparison approach example: House X, in an Arizona community in which swimming pools are highly desired, is being appraised. It is very similar to house Y, but house Y has an In-ground swimming pool and spa valued at $27,000. House Y sold two months ago for $778,000. What is the market value of house X using the formula for the sales comparison approach?

$778,000- $27,000= $751,000 (value of House X) the subject property

Example for Cost approach. a warehouse that would cost $850,000 to construct today has depreciated 25 percent in its lifetime and is on land valued at $440,000. What is the property's total estimated value by the cost approach?

$850,000 - (25% x $850,000) + $440,000 = Property value $850,000 - $212,500 +$440,000= $1,077,500 The value based on the cost approach is $1,077,500.

Neighborhood (GEDR) four distinct periods in a neighborhoods life:

1.) Growth 2.) Equilibrium (also called stability) 3.) decline 4.) revitalization (also called rehabilitation)

What are the steps in the Appraisal process

1.) Identify the problem 2.) Determine the scope of work 3.) Gather, Record, and verify the necessary data 4.) Analyze data 5.) Form opinion of land value 6.) reconcile values for a final opinion of value 7.) Report final opinion of value.

In income Capitalization approach what is the IRV formula

1.) Income/Property value= Capitalization Rate 2.) Property value x Cap rate= Income 3.) Income / Cap rate= Property value

when the sales price of a property is known, the cost of all improvements can be substracted from it to find land value

Abstraction Method

though imprecise may be useful in appraising property when there are few sales for comparison. This is often the case with rural properties, particularly for larger parcels with improvements that represent a relatively small portion of the property's total value.

Abstraction method used

Land value is treated as a percentage or proportion of the total value of an improved property. Often a consistent relationship exists between land and building values.

Allocation method

Every comparable property must have been sold at what? In which neither buyer nor seller is acting under duress, the property is offered on the open market for a reasonable time, and both buyer and seller have a reasonable knowledge of the property, its assets, and its defects

Arm's- length transaction.

Fannie Mae and other government entities conditions you are aware or not aware of as an appraiser requires

Assumptions and limiting conditions

Purchase a property with buyer/ investor to leverage more money. it is the use of leverage

Creative financing

Limitations, restrictions, etc. placed by a developer or owner that influences allowable use of a property by future owners. Deed restrictions are typically more restrictive than zoning laws. EX - City had a law that said 1000 sq ft, developer said 1400 Most restrictive rule, code, law, etc. will normally prevail provided it is a legal restriction.

Deed restrictions

is the length of time during which a piece of property may be put to profitable use, usually less than its physical life.

Economic age or life

is the age of a property based upon its condition, not its actual age.

Effective age

Land that is not needed to serve or support the existing improvement. The highest and best use of the excess land may or may not be the same as the highest and best use of the improved parcel. Excess land may have the potential to be sold separately and is valued separately."

Excess land

Abstraction method is also called

Extraction method

Subdivision development method relies heavy on

Forecast absorption (the rate at which properties will sell) Projected gross sales (total income that the project will produce).

The most critical step in the appraisal process is

Gather, record, and verify the necessary data.

Allocation method calculation

If a total property value is $200,000, $40,000 will be allocated to the land and $160,000 to the structure. - as a rough rule of thumb, such a ratio will serve as a very broad indicator of what buyers in the marketplace are likely to expect.

Vacant land is valued the same way as sales comparison approach just some adjustments may be

Installation of utilities, composition of soil, terrain, shape, zoning, and favorable location.

Some properties are appraised at a time when they are not yet at their expected highest and best use. The present use in such case is considered an

Interim use

A feature made undesirable or unnecessary because of conditions outside the property. Example: a change of zoning from residential to commercial might make a single-family house obsolete if such usage does not fully utilize (take full monetary advantage of ) the site

Is an external obsolescence (formerly called environmental, economic, or locational obsolescence).

The earths surface and everything under it or on it, is considered

Land

Example problem for allocation method - In a high income suburban residential area, the ratio of building value to land value approximates three-to-one. What is the land value of a typical property valued at $347,000, using the allocation method?

Land value is $347,000 ÷ 4, or $86,750

An existing property improvement is termed what if it would not be allowed under the site's present zoning. - A building that represents this use may still be a legal use of the property, however, if the structure was in conformance with applicable zoning at the time it was erected.

Nonconforming use

Major types of adjustments in sale comparison approach

Physical features Locational(of site) influences\ Conditions of sale (buyer-seller motivation and financing terms), and time from date of sale.

The increase in value that may result from ownership of the larger parcel from assemblage is

Plottage

Formula for Land Residual Method

Property net income- Building net income= Land net income. Land net income÷ Land capitalization rate= Land value

For properties that do not have an economically viable reproduction cost, the appraiser will calculate

Replacement cost of structures instead

How the roads are drawn out

Road boring

Sales comparison approach is calculated

Sale price of Comparable property ± Adjustments = Indicated value of subject property.

Data for each approach

Sales data on comparable properties Cost data on the construction of a like property income and expense data based on the property's history.

Typically put in the report to protect the appraiser and inform the intended user or users what has or has not been completed. The appraiser is not an engineer it can point out that there is a crack in the wall and it needs to be examined but can not say it is a structural problem. This is written in what part of the report and is what?

Statement of Assumptions and Limiting conditions.

A site near an airport may be designated by zoning as suitable for either a hotel or a light manufacturing complex. If the area already has a relatively large number of hotels in the vicinity, resulting in a very low percentage rate of hotel-room occupancy, another hotel may not be advisable from an investment perspective. What step in highest and best use can not be met?

Step 3: the use must be financially feasible

A vacant site in an almost completely developed suburban area that is zoned for limited commercial uses could be used for either a department store or a theater, and the terrain of the site would allow development of either. Using the income capitalization approach, the appraiser deducts from the expected net operating income for each type of structure an amount that represents the expected rate of return for property of that type. The income remaing is then divided by the capialization rate assigned to the land to estimate the market value of the property for each purpose. The higher figure indicates what in the steps for highest and best use?

Step 4: The use must be maximally productive.

Land that is not currently needed to support the existing improvement but cannot be separated from the property and sold off. Surplus land does not have an independent highest and best use and may or may not contribute value to the improved parcel."

Surplus land

economic base helps determine a community's

Tax base: from which the community can draw financial support for establishment and maintenance of infrastructure (roads, Bridges) and services essential to both business and residents.

In the appraisal process define determine scope of work

That is required will depend on the property, client, purpose of the appraisal, type and definition of value, effective date of the appraisal, and any conditions to the appraisal assignment.

Does the site have sufficient access for development? Are utilities present or avaliable? If they must be brought in, what cost is involved? Would the site be more promising as part of a larger parcel? These question must be answered in what step of highest and best use?

The first step: The use must be physically possible.

General data is

The geographic and economic feature of the nation, region, city, and neighborhood.

What is the Land Residual Method and how is it calculated

The net income earned by the building is deducted from the total net income of the property; the balance is attributed to the land. the residual or leftover income is then capitalized to indicate the land value.

Art of mapping the physical features of a region. The topography describes the characteristics of an are, such as its contours, flatness, maintainousness.

Topography

Example problem for subdivision development -A 40-acre subdivison is expected to yield 160 single- family homesites after allowances for streets, common areas, and so on. Each site should have an ultimate market value of $30,000, so that the projected sales figure for all the lots is $4,800,000 (160 x $30,000) - Based on an analysis of comparable land sales, it is concluded, that lots can be sold at the rate of 60 in year 1, 70 in year 2, and 30 in year 3. - Engineers advise that the cost of installing streets, sewers, water, and other improvements will be $10,000 per lot. Other costs (sales expenses, administration, accounting, legal, taxes, overhead, etc.) are estimated at 20 percent and developer's profit at 10 percent of gross lot sales. -Assume that the highest and best use of the land is for subdivision development and that there is an active demand for home sites. what price should a developer pay for this acreage based on a sales program taking three years to complete?

Total projected Sales: 160 lots at $30,000 per lot= $4,800,000 Total projected development costs: Street grading and paving sidewalk, curbs, gutters, sanitary and storm sewers for 160 lots at $10,000 per lot= $1,600,000 Other costs, 20% of $4,800,000 = $960,000 (total projected sales) Developers profit, 10% of $4,800,000 (total projected sales) $480,000 Total development costs . $3,040,000 estimated value of raw land . $1,760,000 Raw land value per lot , ($1,760,000 ÷ 160) $11,000

A ground leases are

When a landowner leases land to a tenant who agrees to erect a building on it, the lease is usually called.

If a property owner is unfairly burdened by a zoning restriction, what may be granted?

Zoning variance

Subdivision development method

also called land development method, all probable costs of development, including the developer's profit and cost of financing, are subtracted from the total projected sales prices of the individual units.

Classic example of an interim use is

farmland in the path of development. like all the farmland in bossier city limits slowly being sold off but still being farmed.

Identification and location of real estate

identified by a complete legal description as well as a street address.

the income capitalization approach is most reliable with

income producing properties

A building on it but is being valued separately from the building.

is a site

Productivity market analysis

is extra step added in the appraisal flow chart for Highest and best use study.

Reproduction cost for the cost approach

is the dollar amount required to construct an exact duplicate of a building at prices current as of the date of the appraisal. the appraiser must take into account the expense of finding materials of the same design, manufacture, and quality as the subject property, constructed with the same technique.

Depreciation for cost approach

may occur through either deterioration (effects of wear and tear or the elements) or obsolescence.

The cost approach is most reliable with

non-income producing properties having a limited market or with special purpose properties

Specific data is

on the subject property (including a detailed physical description) must be obtained. Particularly when comparables properties are not found, the physical description should include all items likely to affect market value.

Purpose and intended use of the appraisal

purpose of an appraisal relates to the type of value that is sought. It is to give an opinion of market value. However, it can be used for other reasons for example, to find a property's replacement cost or its insurable value.

Sales comparison approach is the most reliable approach with

single-family residences

replacement cost is

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

The intended use or function of an appraisal is concerned with

the reason an appraisal is being made.

Definition of value to be estimated

the type of value sought should always be defined so the client fully understands the basis for the reported value

Analyze the data means

virtually every appraisal, the appraiser will begin this part of the appraisal process by conducting highest and best use analysis that considers the market forces that influence the subject property to determine the property's most profitable use on which to base the final opinion of value.