8_Valuation

BALANCE

Balance states that property values are maximized when all of the factors of production are in balance, equilibrium, or proper proportion. The factors of production are: a. capital b. management c. labor d. land

assemblage; plottage increment

Combining two or more lots into one large parcel may invest the new site with a value greater than the sum of its previous parts. The act of joining lots together is assemblage, and the resultant increase in value is designated a ______ _______.

Effective age

based on the condition of the property. For example, if two houses were both built 10 years ago and one has been well maintained and one has not, the one that has been maintained would have a lower effective age than the other.

SALES COMPARISON APPROACH

the technique of estimating the value of real estate by analyzing and comparing data of actual sales of similar, or comparable properties. Each comparable sale is adjusted to the subject property by making dollar value allowances for each significant difference.

The Five Steps in The Sales Comparison Approach:

1. Find recent comparable sales and listings. 2. Verify data. 3. Select relevant units of comparison. 4. Compare to subject property and adjust for differences. 5. Reconcile into single value or range of values.

Methods of Estimating Cost

1. Comparative Unit or Square Foot Method: This method is based on an average cost per square foot for the area. 2. Unit-in-Place Method: This method assigns an average cost for each unit, such as a bathroom, kitchen, bedroom, etc. 3. Cubic Foot Method: This method is based on an average cost per cubic foot. This method would be used for a structure with unusually high ceilings, such as a warehouse, where square foot method would not be accurate. 4. Quantity Survey Method: This method calculates the total cost for every single item that must be purchased to build the structure, plus labor costs and indirect costs. This method is the most accurate and the most time consuming.

THE SIX STEP APPRAISAL PROCESS

1. Defining the Problem 2. Conducting the Preliminary Survey 3. Gathering Data 4. Comparing, Analyzing and Classifying Data a. sales comparison approach b. cost approach c. income approach 5. Reconciliation - combining the results when using two or more of the approaches. 6. Issuing the Appraisal Report a. certificate or letter of appraisal (a simple business letter) b. checksheet (a two page legal size form); this one is most often used for residential. c. narrative report ( a lengthy written report usually for commercial properties.)

THE FOUR FACTORS WHICH CREATE VALUE - (DUST)

1. Demand 2. Utility 3. Scarcity 4. Transferability

Elements of Comparison & Order of Adjustments:

1. Property rights conveyed 2. Financing terms 3. Conditions of sale 4. Market conditions 5. Location 6. Physical characteristics

THE FOUR FORCES THAT INFLUENCE VALUE

1. Social Trends 2. Economic and Financial Factors 3. Government Controls and Regulations 4. Environmental Conditions and Physical Factors

COMPETITION

: is the active demand for real estate in short supply by two or more market participants. Prices are directly affected by the amount of demand for a property. Competition is not measured by the number of participants who want property, nor by the number who have the ability to purchase property, but by the number of participants who desire and have the ability to purchase similar properties to that of the subject property.

Social Trends

A community's social ideals and standards can shape patterns of collective behavior which in turn affect the value of real property. Among the social forces affecting the value of real property are: amenities, directional growth, behavioral growth, behavioral regulations, demographic trends, proportion of homowners and renters

HIGHEST AND BEST USE

Highest and best use is the reasonable and probable use which, at the time of the appraisal, is most likely to produce the greatest net return in terms of money or amenities to the land or improvements over a given period of time. In evaluating the highest and best use of single family residential properties, more weight is usually given to the property's utility, comfort, and other amenities than to the property's cash income, which most often is non-existent. For this reason, many single family residential properties can be said to be achieving their highest and best use even though they generate no income.

Sales Comparison Approach

In order for the __________________ to be accurate there must be sufficient market activity in the area of the subject property. This method is not normally used for properties not sold on the open market such as public holdings, churches, etc.

Master of Appraisal Institute

Residential appraisers can appraise residential property up to a 4-plex. General appraisers can appraise any property including commercial and larger residential properties. An appraiser who has completed the requirements of the Appraisal Institute may use the designation MAI which stands for ______ _______ ______.

SUBSTITUTION

Substitution states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. For example, W. E. Fargo & Co. builds garages in the $3,000 - $5,000 range. Its competitor, the Davis Garage Co. begins marketing pre-fabricated garages having a top-of-the-line price of $2,500. Because garages erected by the Davis Company have the same utility and appearance as those sold by Fargo, Fargo is forced to lower its prices to effectively compete with those of Davis. Substitution is the basis for the Sales Comparison Approach.

capitalization rate; value

The _______ ____ represents the rate of return the investor can expect to receive from his investment in the property. The capitalization rate is expressed as a percentage. The _____ is understood to represent the present value of the anticipated benefits of ownership.

income approach; principle of anticipation

The ________ _________seeks to estimate the present worth of a property's expected future income, and is used for appraising income producing properties. The ________ _______ _______ is the basis for the income approach.

STRAIGHT LINE METHOD OF DEPRECIATION

The amount of depreciation is the same each year and is found by dividing the value by the number of years over which the property is being depreciated. This method is also called the economic age-life method. For example, if a $90,000 property having a land value of $30,000 and an expected economic life of 60 years would have a depreciation of $1000 per year. ($60,000 divided by 60 years).The land is never depreciated.

CHANGE

The principle of change states that the world is in a constant state of flux, and that changes in physical, social, economic, and governmental forces continuously effect the value of property.

PROGRESSION / REGRESSION

The principle of progression and regression is an extension of the principle of conformity. Progression is the concept that the value of an inferior property is enhanced by its association with better properties of the same type. Regression is the concept that the value of a superior property is adversely affected by its association with an inferior property of the same type. However, nonconforming uses may enhance or detract from the value, depending on the property's location near either superior or inferior properties

CONTRIBUTION

The value of a particular component is measured in terms of its contribution to the value of the whole property, or as the amount that its absence would detract from the value of the whole. For example, a swimming pool may cost $20,000, but may only add $5,000 to the value of the property.

SURPLUS PRODUCTIVITY

This is the net income that remains after the costs of labor, capital and coordination have been paid. The net income accrues to the land and not the improvements. For example, two similar stores sell for $250,000 and $500,000. The second store sold for more because it is in a better location and sells more of its product. The additional value is attributable to the location of the land.

ANTICIPATION

This is the perception that value is created by the expectation of benefits to be derived in the future. Anticipation is the basis for the Income Approach to value.

EXTERNALITIES

This principle states that conditions not directly related to a parcel of property can have a positive or negative effect on the value of that property

SUPPLY AND DEMAND

This principle states that the price of real property varies directly, but not necessarily proportionately, with demand, and inversely, but not necessarily proportionately, with supply. This is a simple relationship between price and quantity. For example, after World War II, many cities experienced acute housing shortages. Because apartments and single family residences were in limited supply in relation to effective demand, rents and housing prices rose sharply.

Functional Depreciation

a loss in value due to the development of new technology or design, and is an inadequacy or a lack of functional utility, or superadequacy, due to overbuilding or overdesign. Functional depreciation is sometimes curable, depending on severe the problem is and how much work is involved to correct it.

GROSS RENT MULTIPLIER (GRM)

a number which when multiplied by a rental property's income, gives an estimate of the property's value.

four factors of production

a. capital b. management c. labor d. land

curable depreciation

any type of depreciation in which the amount of money spent on repairing the deficiency is equal to or less than the resulting increase in value.

Incurable Depreciation

any type of depreciation in which the amount of money spent on repairing the deficiency is more than the resulting increase in value.

COMPARATIVE MARKET ANALYSIS (CMA)

can help the salesperson determine a listing price for the seller, and is a comparison of the prices of properties recently sold, properties currently on the market, and properties that did not sell. Comparison properties must be similar to the seller's property in location, size, age, style and amenities. The CMA is not a formal appraisal, but it uses the same principle and many of the same methods as the sales comparison approach.

DETERMINANTS OF VALUE

demand, utility, scarcity, transferability

External Depreciation

is a loss in value caused by unfavorable economic influences occurring outside the property. It can be due to location or to economic factors. External depreciation is never curable because it is not something that is on the property itself. External depreciation is also sometimes called economic depreciation or economic obsolescence.

appraisal

is an estimate or opinion of a property's nature, quality, value, or utility. It is an estimate of specified interests in, or aspects of, identified real estate which is supported by relevant, factual evidence.

MARKET PRICE

is the amount that is actually paid, or is about to be paid, for a property's ownership rights at a specific point in time. A property's price then, is factual information. We can say that it is an accomplished or historic fact of a transaction or an artifact of a transaction, but because property may be sold for more or less than it is actually worth, and because of inflation and other forces to which real property is subject, a property's sales price, like its cost, cannot be trusted to give an entirely reliable indication of its present value. Market price always refers to the present.

Physical Depreciation

is the loss in value due to such factors as wear and tear from use, structural defects, and exposure to the elements. Physical depreciation is always "curable".

MARKET VALUE

is the power of an item to command other valuables in exchange for that item. It is also the most probable price in terms of money which a property should bring in a competitive and open market, assuming the price is not affected by undue stimuli. Both the buyer and the seller must have a reasonable knowledge of the current price commanded by items similar to the one being exchanged, and must enter into the transaction without undue influence, without pressure either to buy or sell. Market value always refers to the future.

Situs

is the term used to describe the sum of all economic aspects of a location which invest it with economic value. A property situated in an economically desirable location, that is, a location which allows it to successfully fulfill human needs, is said to benefit from positive situs.

CONFORMITY

refers to the concept that form, manner and character of structures are in harmony with one another. Conformity states that overall, the prices of an area will be maximized if structures are similar in style, size, quality, etc. Conformity is the basis for subdivision restrictions.

MARKET COST

refers to the past outlay of sufficient capital for the supervision, land, materials, labor and other valuables that are needed to bring an improvement into existence. This includes financing and the expenses incurred in selling the piece of property. Cost does not create value, nor does cost necessarily equal value. We can also say that cost is an historical concept, and because the price level of labor, materials and management rises and falls, discovering an item's past cost of production gives little, if any, indication of its present value. Market cost always refers to the past.

Economic life

the period of time over which a property may be profitably used. Forty or fifty years is the normal economic life of a building.

In the Income Approach

the rent that the subject property is likely to produce is estimated by analyzing the rents of comparable properties.

Cost Approach

the technique of estimating the value of the subject property by adding the depreciated replacement cost or reproduction cost of the improvements to the value of the land, if vacant.