Real Estate, Chapter 10

Functional Obsolescence

A loss of value due to adverse factors from within the structure which affect the utility of the structure, value and marketability.

Principle of Anticipation

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

Highest and Best Use

An appraisal phrase meaning that use which at the time of an appraisal is most likely to produce the greatest net return to the land and/or buildings over a given period of time; that use which will produce the greatest amount of amenities or profit. This is the starting point for appraisal.

Under improvement

An improvement which, because of its deficiency in size or cost, is not the highest and best use of the site.

Remaining Economic Life

Equals the economic life minus the effective age.

Principle of Change

Holds that it is the future, not the past, which is of prime importance in estimating value. Change is largely the result of cause and effect.

Principle of Conformity

Holds that the maximum of value is realized when a reasonable degree of homogeneity of improvements is present. Use conformity is desirable, creating and maintaining higher values.

Principle of Supply and Demand

In appraising, a valuation principle stating that market value is affected by the intersection of supply and demand forces in the market as of the appraisal date.

Capitalization Rate (equation)

NOI / Purchase Price

Income approach is used to value...

Office buildings, multi-family buildings (5+ units), shopping centers

Income Approach (2)

One of the three methods of the appraisal process generally applied to income producing property, and involves a three-step process - (1) find net annual income, (2) set an appropriate capitalization rate or "present worth" factor, and (3) capitalize the income dividing the net income by the capitalization rate.

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.

USPAP

Rules and guidelines that must be followed by any professional conducting an appraisal (Uniform Standards of Professional Appraisal Practice)

Depreciation

The ability to deduct expenses on improvements made to income producing property.

Effective Gross Income

The amount of income produced by a piece of property, plus miscellaneous income, less vacancy costs and collection losses.

Net Operating Income

The annual income generated by an income- producing property after taking into account all income collected from operations, and deducing all expenses incurred from operations.

Law of Progression

The worth of a lesser valued residence tends to be enhanced by association with higher valued residences in the same area.

subjective value

What s.th is worth to an individual person without regard to market conditions.

Objective Value

What s.th is worth when there is a reasonably prudent seller and a reasonably prudent, willing and able buyer, and all else remains equal without coercion and transacted at arm's length.

Law of Regression

Where a property is "over improved" relative to other surrounding properties in the area that are of lesser value.

Scarcity

a lack of supply

M1

currency, demand deposits, traveler's checks, and other checkable deposits

Economic Characteristics of Land (1)

employment, wages, affordability, industry

federal funds rate

the rate at which member banks charge each other for borrowing short-term money (overnight loans)

demand

the supply of willing and able buyers in the marketplace or lack thereof

residential properties (depreciation period)

27.5 years

Cost Approach is used to value ...

Specialty properties such as schools, places of worship, new properties, or when there's a lack of comparable sales and the property does not produce any income

quantitative easing

when the Fed buys longer-term government bonds or other securities

commercial properties (depreciation period)

39 years

Principle of Contribution

A component part of a property is valued in proportion to its contribution to the value of the whole. Holds that maximum values are achiever when the improvements on a site produce the highest (net) return, commensurate with the investment.

Economic Obsolescence

A loss in value due to factors away from the subject property but adversely affecting the value of the subject property.

straight line depreciation

A method of depreciation under which improvements are depreciated at a constant rate throughout the estimated useful life of the improvement.

appraisal

A written statement, independently and impartially prepared by a qualified appraiser setting forth an opinion in a federally related transaction as to the market value of an adequately described property as of a specific date. It is supported by the presentation and analysis of relevant market information. An estimate of the value of property resulting from an analysis of facts about the property. An opinion of value.

Principle of Substitution

Affirms that the maximum value of a property tends to be set by the cost of acquiring an equally desirable and valuable substitute property, assuming no costly delay is encountered in making the substitution.

Over Improvement

An improvement which is not the highest and best use for the site on which it is placed by reason of excess size and cost.

M2

M1 + savings accounts, certificates of deposit, and other liquid assets

Cost Approach

One of 3 methods in the appraisal process. An analysis in which a value estimate of a property is derived by estimating the replacement cost of the improvements, deducting therefrom the estimated accrued depreciation, then adding the market value of the land.

Sales Comparison Approach

One of the 3 major valuation methods, which compares a subject property's characteristics with those of comparable properties which have recently sold in similar transactions.

Federal Reserve System

The federal banking system of the US under the control of central board of governors (Federal Reserve Board) involving a central bank in each of 12 geographical districts with broad powers in controlling credit and the amount of money in circulation.

Fair Market Value

This is the amount of money that would be paid for a property offered on the open market for a reasonable period of time with both buyer and seller knowing all the uses to which the property could be put and with neither party being under pressure to buy or sell.

Gross Income

Total income from property before any expenses are deducted.

Affirmative Waste

Waste caused by voluntary conduct, which causes a decrease in value

Passive Waste

neglect

value

present worth of future benefits arising out of ownership to typical users/investors

Sales Comparison Approach is used to value _____

residential properties (1-4 family)

Utility

the ability to give satisfaction and/ or excite desire for possession. An element of value

chronological age

the actual age of a building

Economic Life

the amount of years a building can produce an income

Effective Age

the conditional age of a building

Physical Obsolescence

the loss in value due to the actual wearing out of the improvements

discount rate

the minimum interest rate set by the Federal Reserve for lending to other banks. It is usually a percentage point above the FFR because the Fed wants to discourage excessive borrowing.

reserve requirement

the percentage of deposits that banking institutions must hold in reserve

Ameliorative Waste

unauthorized improvements to the property

Principle of conformity (2)

value is created when properties tend to be similar in a particular neighborhood

Capitalization Rate

· The rate of interest which is considered a reasonable return on the investment, and used in the process of determining value based upon net income.