Unit 17 Real Property Valuation REX 7600 RE Pre-Licensing

Broker Price Opinion (BPO)

A broker's written opinion of the value of a particular property that may not be used in connection with the originating a federally related loan; not an appraisal. An opinion of real estate value commissioned by a bank or an attorney and provided by a broker; not an appraisal. A document prepared by approved real estate licensee that is used by a lender or relocation company to establish a listing or market price for a property (ex: repo, drive by)

Depreciation

A decrease or loss in value

straight line method

A depreciation method that allocates an equal amount of depreciation each year. Calculation: (Cost - Residual value) / Useful life. A method by which companies expense an equal amount of depreciation for each year of the asset's useful life.

functional obsolescence

A loss in value due to conditions within the structure which make the building outdated when compared with a new building. (4 bedrooms and 1 bath, insulation, narrow stairway, etc.) Losses in value of a building relative to its reproduction cost because the building is not consistent with modern standards or with current tastes of the market A loss of value to an improvement to real estate arising from functional problems, often caused by age or poor design.

economic obsolescence

A loss in value due to factors outside the subject property, such as changes in competition or surrounding land use. Also referred to as external obsolescence. A loss in value due to factors away from the subject property but adversely affecting the value of the subject property. Any loss of value due to conditions outside of the property itself. aka social obsolescence

sales comparison approach

A method for estimating the market value of a property by comparing similar properties to the subject property. Used when valuing residential homes or land. 3-5 comps are found, adjustments are made to comps. If subject property is superior, appraiser will subtract from comps. If subject property is inferior, appraiser will add to comps. Negative features = add to comp Positive features = subtract from comp The process of estimating the value of a property by examining and comparing actual sales of comparable properties.

physical deterioration

A reduction in a property's value resulting from a decline in physical condition; can be caused by action of the elements or by ordinary wear and tear.

Gross Rent Multiplier

An analysis of rental income, used roughly in sales comparison approach Price or market value divided by annual rent Gross rent multiplier (GRM) is the ratio of the price of a real estate investment to its annual rental income before accounting for expenses such as property taxes, insurance, and utilities; GRM is the number of years the property would take to pay for itself in gross received rent.

appraisal

An estimate of the current value of the property. Evaluation or estimation of worth

income capitalization approach

Capitalization rate is calculated by dividing a property's net operating income by the current market value. This ratio, expressed as a percentage, is an estimation for an investor's potential return on a real estate investment. Used when valuing income producing property, value is determined by Net Operating Income (NOI.) Potential Gross Income - Vacancy and Collection Losses = Effective Gross Income Effective Gross Income - Operating Expenses = NOI Approach to valuation or appraisal as determined by the amount of net income the property will produce over its remaining economic life. 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 ​

unit in place method

Estimating the replacement cost of a structure based on the construction cost per unit of measure of individual building components -- foundations, floors, walls, windows, ceilings, roofs, etc., including labor, overhead & builders profit. The appraisal method of estimating building costs by calculating the costs of all of the physical components in the structure, with the cost of each item including its proper installation, connection, etc.; also called the segregated cost method.

Reconciliation

If one or more of the three approaches to value are applied to the same property, reconciliation is the art of analyzing and effectively weighing the findings from the different approaches -- Cost Comparison (homes), Income Capitalization (income / investment property), Cost Approach (churches, schools, libraries, special use) The process of reconciliation is more complicated than simply taking the average of the derived value estimates

square foot method

In appraisal, a method of estimating the replacement cost of a structure; it involves multiplying the cost per square foot of a recently built comparable structure by the number of square feet in the subject structure. The appraisal method of estimating building costs by multiplying the number of square feet in the improvements being appraised by the cost per square foot for recently constructed similar improvements.

arm's length transaction

Occurs between willing buyer and willing seller with each party completely knowledgeable about the market. -- A purchaser of property between relatives (father & son) would not be an "arms length transaction". A transaction between two parties that have no relationship with each other and who are negotiating on behalf of their own best interests. A fairly negotiated transaction and reasonably representative of market value. Sale without duress on either party resulting in fair market value; an open and willing sale

comparative market analysis

Price comparison for seller's use when listing A property evaluation that determines property value by comparing similar properties sold within the last year. A comparison of the prices of recently sold homes that are similar to a listing seller's home in terms of location, style, and amenities:an estimate of market value.

comparable (comp)

Property used in an appraisal report that is substantially equivalent to the subject property.

quantity survey method

The appraiser determines the cost of the materials; labor; management fees, and profit. These are used to determine the value of improvements when using the cost approach in appraisal. The appraisal method of estimating building costs by calculating the cost of all of the physical components in the improvements, adding the cost to assemble them and then including the indirect costs associated with such construction. Estimate based on the quantities of raw materials needed to replace the subject structure as well as of the current price of such materials & their installation costs.

reproduction cost

The construction cost at current prices of an exact duplicate of the subject property.

Effective Age

The difference between the theoretical economic life of a structure and its actual remaining economic life. An appraiser's estimate of the physical condition of a building. The actual age of a building may be shorter or longer than its effective age. The age indicated by a structure's condition and utility.

Age-life method of depreciation

The easiest but least precise way to measure depreciation that uses the effective age of a building & its economic life. A method of computing accrued depreciation in which the cost of a building is depreciated at a fixed annual percentage rate; also called the straight-line method.

Economic Life

The number of years during which an improvement will add value to the land. The time period over which an improvement to land earns more income than the cost incurred in generating the income. Profitability. The period of time over which a property may be profitably used.

Substitution

The principal of Substitution states when several items -- with essentially the same amenities and utilities -- are available, the item with the lowest price will attract the most demand. In other words, the consumer will purchase what is perceived to be the best buy for the money. This principle is the cornerstone of the sales comparison approach to value

Cost Approach

The process of estimating the value of a property by adding to the estimated land value the appraiser's estimate of the reproduction or replacement cost of the building, less depreciation. A method of estimating value based on the economic principle of substitution; the value of a building cannot be greater than the cost of purchasing a similar site and constructing a building of equal utility. Appraisal technique that analyzes the cost to build

capitalization rate

The rate of return a property will produce on the owner's investment. The rate of return considered to be a reasonable return on investment - given the risk. The rate used in discounting future cash flow; also called the discount rate or opportunity cost of capital Accounting / Finance: The opportunity cost of capital is the incremental return on investment that a business foregoes when it elects to use funds for an internal project, rather than investing cash in a marketable security. ... The opportunity cost of capital is the difference between the returns on the two projects.

Replacement Cost

The total cost of replacing an asset with an essentially identical asset.

highest and best use

The use that will give the owners the greatest actual return on their investment The possible use of a property that would produce the greatest net income and thereby develop the highest value. The use of a property found to be (1) legally permissible, (2) physically possible, (3) financially feasible, and (4) maximally productive.

value

Value is an abstract word with many acceptable definitions. In a broad sense, Value may be defined as the relationship between an object desired and a potential purchaser. In terms of real estate appraisal, Value may be described as the present worth of future benefits arising from the ownership of real property The four characteristics of value can be remembered by the acronym DUST: Demand Utility Scarcity Transferability