FINANCE - Real Estate Appraisal and Investments

Delayed Exchange

A 1031 exchange, in which a sale is made by a taxpayer, and the sale proceeds are held by a facilitator until they are used to pay for replacement property, identified within 45 days and actually purchased within 180 days after the date of the transfer of title to the property sold

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)

A federal law that requires that a real estate appraisal use in connection with a federally-related transaction meet standards set by the appraisal Foundation and be performed by a person licensed or certified by state

Scheduled Gross Income

A property's total potential income from all sources. i.e. rental income, income from vending machines, parking, etc.

Taxed-deferred Exchange

A transaction involving an exchange of like-kind properties, authorized by Section 1031 of the Internal Revenue Code (IRC) to result in a deferral of taxes on any gain except for the amount of boot realized from the transaction

IRV

Income, rate and vale Income is the anticipated annual net income to be produced by the property rate is the capitalization rate Value is the present worth of the property

Tax Deductions

Items which can be deducted from gross income to arrive at annual taxable income

Obsolescence

Loss in usefulness of structures that causes them to become less desirable

Functional Obsolescence

Loss of value due to factors of inadequacy or over-adequacy within the property itself, often caused by changes in construction materials, methods, equipment and the desires of people

Boot

Money, unlike property or an assumption of a greater mortgage balance (mortgage relief) the taxpayer has received in the exchange of real property the amount in the exchange subject to tax

Objective Value

The Value resulting from the actions of a willing buyer and willing seller in an open marketplace

Correlation/reconciliation

The final step in estimating the market value weighing the data from different appraisal approaches

Taxable Income

The income on which tax is paid gross income less certain tax deductions

Leverage

Using financing to allow a small amount of cash to purchase a large property investment

Regression

a concept that holds the value of better property will suffer if it is placed in an area of lesser-valued homes the value of a home built at a cost of $250,000 would suffer if placed in an area of $160,000

Progression

a concept that the value of a lesser property will be enhanced if it is placed in an area of better homes the value of a home built at a cost of $250,000 would be enhanced if placed in an area of $400,000 homes

Quantity Survey Method

a detailed method used to estimate construction cost, involving itemization of all direct costs (e.g. hours of labor, cubic yards of concrete, etc.) and indirect costs (e.g. office overhead, insurance, interest, permits, contractors profit, etc.)

Tax Credit

a direct deduction from the tax due, rather than a deduction from taxable income

External Obsolescence (economic obsolescence)

a loss in value resulting from conditions outside the property, such as deterioration of the neighborhood caused by changes in uses of neighboring properties, blight, changes in zoning and legislative restrictions, or fumes from a factory

Capital Loss

a loss realized upon disposition of property the amount by which the adjusted cost basis exceeds the net sale proceeds

Straight-line (age life) method

a method of calculating accrued depreciation based on the presumption that the improvements depreciate at an equal rate each year, until the end of their economic life, when the building would be torn down. the simplest, though least accurate description method

Nontaxable Exchange

a method of deferring taxes owed in the sale of real estate also called a 1031 exchange

Gross Rent Multiplier

a number by which gross income of a property can be multiplied to produce an estimate of value of the property Ex. if gross monthly ret income from a rental house is $1,200 and an appraiser uses a gross rent multiplier 0f 150, based on the gross rent multiplier the value of the building is $180,000

State Certified General Appraiser

a person certified to make appraisals of all types of real property, regardless of value

State Certified Residential Appraiser

a person certified to make appraisals of all types of residential property of 1-4 units without regard to transaction value or complexity and nonresidential property having a value of less than $250,000

State licensed Appraiser

a person licensed to make appraisals of noncomplex 1-4 family residential units having a value of less than $1,000,000, complex 1-4 family residential units having a value of les than $250,000, and non-residential property having a value of less than $250,000

Federally related Transaction

a real estate-related financial transaction involving federal agency or a financial institution and certification requirement at the state level to apply to any real estate appraisal even if its not for a federally related transaction

Income Taxes

a tax on income earned considered progressive taxes because the tax rates increase as taxable income increases

Supply and Demand

a valuation principle stating that market value is affected by interaction of supply and demand forces in the market as of the appraisal date

Installment Sale

a way to defer tax on gain, so it is recognized(taxed) in a different year that it is realized

Recapture Rate

added to the return on the investment to provide for return of the investment(or accruals for depreciation)

Plottage

added value resulting from assemblage

Principal of Anticipation

affirms that value is created by anticipated benefits to be derived in the future

Reserves for Replacement

amounts set aside for replacing equipment or portions of the building that have a relatively short life expectancy, e.g. setting aside enough money each year to replace ranges and refrigerators in ten years

Like-Kind Exchange

an exchange of tangible like-kind properties, e.g. real estate for real estate or personal property for personal property, but not real property for personal property partners take no part in the management of the partnership, but have no liability of the debts of the partnership in excess of their investment capital. Most common type of tax-deferred exchange

Appraisal

an opinion of value or the act or process of developing an opinion of the value of property, or an interest in a property, as of a specified date by a person skilled in the analysis and valuation of real estate ( an appraiser)

Unearned Increment

any increase in value resulting from general forces, which are outside the influence and control of the property owner

Capital Gain

at resale of a capital item, the amount by which the net sale proceeds exceed the adjusted cost basis(book value) used for income tax computations. Gains are called short or long term based upon length of holding period after acquisition. usually taxed at lower rates than ordinary income

Scarcity

because of scarcity, value is influenced by supply and demand factors

light noncombustible

buildings with exterior walls of light metal or other noncombustible material and noncombustible floors and roofs. Typically steel framed

Joisted Masonry Buildings

buildings with exterior walls of masonry or fire-resistive construction -brick -concrete -hollow concrete blocks -tile -stone

Variable expenses

costs that vary according to occupancy, such as fuel, utilities, decorating, repairs, advertising and management

Effective Demand

demand for an item from those who have a desire or need for it and purchasing power to acquire it

General Forces

effect real estate values physical and environmental characteristics, which can encourage or prevent development economic conditions, which cause property values to increase or decline Government or political regulations Social Influences

Comparative Cost Method

estimate of the replacement cost of a subject property based on cost per square foot or per cubic foot also known as the square foot method or cubic foot method

Fixed Expenses

expenses that do not vary based on the level of occupancy, such as property taxes and insurance

Operating Expenses

fixed expenses, variable expenses and reserves for replacement

Long-term capital Gains

gains on dispositions of assets held fro more than a year, and are taxed at a lower rate than short-term gains

Net Income

gross income less operating expenses

Principal of Competition

holds that profits tend to breed competition and excess profits tend to breed ruinous competition

Principal of Conformity

holds that the maximum of value is realized when a reasonable degree of homogeneity of improvements is present

Principle of Increasing and Diminishing Returns

holds that the value of property is governed by the contribution made by the four agents of production (land, labor, capital and coordination)

Principal of Change

holds that value estimates are valid only as of a specific point in time as neighborhoods and properties tend to go through a four-staged life cycle : -integration (Development and growth) -equilibrium (stability or maturity) -disintegration (deterioration, decline or old age) revitalization or rehabilitation

Replacement Cost

is the present cost of constructing a substitute structure equal to the existing structure in quality and utility but using current construction methods, materials, design and layout

Actual Age

length of time improvements have been standing

Depreciation

loss of value of property brought about by age, physical deterioration or functional or economic obsolescence. also, the decrease in value of an asset that is allowed as an expense for income tax purposes

Cost Approach

one of the three methods in the appraisal process estimates value based on the replacement cost of the improvements, less estimated accrued depreciation, plus the market value of the land also called the summation approach, replacement cost approach or reproduction cost approach

Competitive (comparative) Market Analysis (CMA)

opinion of real estate agent on value of property. It relates the subject property to similar properties that have recently sold and properties that are currently for sale

Principal of Substitution

principal that if a property is replaceable, its value tends to be set by the cost of acquiring, by purchase or construction, an equally desirable substitute property without any undue delay

Assemblage

putting several parcels of land under one ownership

Land to Building Ration

ratio of the land to the building area

Amenities

satisfaction of enjoyable living to be derived from a home

Effective Gross Income

scheduled gross income less vacancies and collection losses

Short-term Capital Gains

taxed at the investors ordinary income tax rate, and are investments held for a year or less before being sold

Highest and Best Use

that use most likely to produce the greatest net return to the land and/or buildings over a given period of time the maximum value of land

Utility

the ability to satisfy a need or desire of a potential buyer

Valuation

the act or process of developing an opinion of value

Price (market Price)

the actual amount paid for a property

Effective Age

the age of a similar and typical property of equal usefulness, condition and future life expectancy. The age the improvements appear to be, based on condition

Adjusted cost basis

the cost basis decreased due to such items as allowable depreciation and property losses, and increased by the cost of improvements and special assets

Unit-in-place Method

the cost of erecting a building by estimating the cost of each component part, i.e. foundations, floors, walls, windows, ceilings, roofs, etc. (including labor and overhead)

Accrued Depreciation

the difference between the value of an item at the time of the appraisal and the current replacement cost of the item in new condition

Transferability

the fact that benefits relating to an item are capable of being transferred to a new owner if they are not transferable, the item has no value to a perspective purchaser e.x. life estate

Market Value

the most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, assuming that the buyer and seller are each acting prudently and knowledgably and that the price is not affected by undue stimulus (special Financing or sales concessions)

Physical Life

the period of time between completion of building construction and the time when the building is no longer fit or safe to use (terminated by deterioration) time the building can actually stand

Economic Life

the period of time between the completion of construction and the disappearance of the buildings ability to produce services or income sufficient to offset the expenses ( terminated by obsolescence) time the building would be profitable to let it stand

Reproduction Cost

the present cost of constructing a substitute structure that is an exact replica of the existing structure, i.e. with the same materials, quality of workmanship, design and layout.

Cost Basis

the purchase price of the property plus certain closing costs, such as legal fees and title insurance

Capitalization Rate

the rate which is considered a reasonable return on the investment, and used in the process of estimating value based upon net income. the rate necessary to attract the average investor to a particular kind of investment

Value

the relationship between an item desired and a potential purchaser for the item

Amount Realized

the selling price less selling expenses, such as commissions, advertising, legal fees, loan placement fees or discount points paid by the seller

Cost

the total amount of money, labor, material and services spent to produce or develop the item

Sales Comparison Approach (Market Data Approach)

the valuation of properties, particularly homes and land, by comparing prices paid for similar properties

Sales Comparison Approach

the valuation of properties, particularly homes and land, by comparing prices paid for similar properties also called a market date approach

Subjective Value

the value of an item might have for a specific use or to a particular investor, even if there is no identifiable open market demand for the item also called utility value, value in use or investment value

Principal of Contribution

the value of any component part of a property is what it contributes to the value of the whole

Physical Deterioration

the wear and tear or breaking down of the physical structure, which takes place over time. it is caused by natural forces and by use, and may be evidenced by decay, dry and wet rot, insect damage, wear and tear, and vandalism a major contributing factor is deferred maintenance

Frame Buildings

type of construction used in most homes. Buildings with exterior walls, floors and roofs of combustible construction. wood frame is most typical in residential

Uniform Residential Appraisal Report (URAR)

used by appraisers to divide a description of real property into the following categories: general description, exterior description, foundation, basement, insulation, room list, interior, heating, kitchen equipment, attic, amenities, car storage and comments

Income Approach

used to appraise properties capable of producing rental income for the owner a real estate appraisal approach in which the estimate of value is based on the anticipated net income to be obtained from a property, such as office buildings, apartments and commercial properties, and the rate of return a new owner should desire on his investment also called the capitalization approach