Real Estate Exam Prep Chapter 3: Property valuation and financial analysis
Gross Rent Multiplier (GRM)
A factor which, when multiplied by the gross income of a property, produces an estimate of the property's value
Economic Obsolescence
A loss in value of a property due to external factors and not the condition of the property itself
Functional Obsolescence
A loss of value due to adverse factors within the structure which affects the utility of the structure, and thus its value and marketability
Return on Investment
A measure of annual income or profits on a sale in relation to capital invested; net profit after taxes divided by total assets
Loan-to-Value (LTV)
A ratio stating the outstanding mortgage balance as a percentage of the mortgaged property's fair market value; the degree of leverage
Narrative Report
A summary of all factual materials, techniques and appraisal methods used by the appraiser in establishing the value of a property; most thorough type of report
Ethics
Accepted standards of right and wrong, fiduciary conduct, behavior, or duty
Broker Price Opinion (BPO)
An agent's opinion of a property's fair market value based on comparable sales
Capitalization Approach
An appraisal method used by an appraiser to arrive at a property's value based on the present worth of a property's future net operating income
Market Comparison
An appraisal method used by an appraiser to arrive at a property's value by a comparison of recent sales prices of similar properties, adjusted for differences in the properties
Highest and Best Use
An appraisal phrase addressing the use of a property which is most likely to produce the greatest net return on the land over a given period of time
Cost Approach
An appraisal strategy where they calculate the current construction cost to replace improvements, subtract their estimate of accrued depreciation from that to get the current replacement value, and then add this to the value of the land if it was vacant; used for special use properties
Influences on Value
An aspect of the principle of change, recognizing the effect of physical, economic, government, and social changes on real estate value
Appraisal
An individual's opinion of a property's value on a specific date, documented in an appraisal report
Elements of Value
Factors that must be present for real estate to have value: demand, utility, scarcity, and transferability
Depreciation
Loss of property value brought about by age, physical deterioration, or functional or economic obsolescences
Income Approach
One of three methods of the appraisal process applied to income producing property to develop the appraiser's opinion of value; two methods: gross rent multiplier and capitalization method
Comparable Sales (Comps)
Sales of properties recently sold which have similar characteristics as the subject property being evaluated and are used for analysis
Capitalization Rate (Cap Rate)
The annual rate of return on investment produced by the operations of an income property or sought by an investor on the investment of capital; Dividing the net operating income by the price asked
Principles of Value
The applications of several appraisal principles to arrive at a final value. The basic principle is substitution
Site Valuation
The appraised valuation of the ground separate from any structure that may be on the site
Financial Analysis
The consideration of the durability, quantity, and quality of income and expenses generated and incurred by an income-produced property
Opportunity Cost
The cost of an action that is forgone when choosing to take an alternative action
Replacement Cost
The cost to replace a structure with one having utility equivalent to that being appraised, but constructed with modern materials and according to current standards, design, and layout
Reconciliation
The final step in the appraisal process. Placing weight on the alternative value conclusions, to arrive at a final value decision
Economic Life
The period of time over which a property will yield a return on capital invested to own it
Effective Age
The physical age of a property based on the condition of the structure, distinct from its chronological age
Value
The present worth stated in dollars of the future benefits arising out of the ownership of a property
Fair Market Value (FMV)
The price a reasonable, unpressured buyer would pay for property on the open market
Physical Life
The total number of years a building is presumed to potentially exist in a productive capacity