chapter 16 --> 8 questions
Cost
is the actual or estimated amount required to create, produce, or obtain a property. It includes labor, materials, financing expense, land, management and overhead, and the contractor's profit necessary to bring the finished product to the market. Cost may be more than, or less than, the market value of the property.
Highest and best use
is the most profitable use of a property. The use must be legally permissible, physically possible, and financially feasible.
Market value
is the value to a typical buyer and a typical seller. This is the most common type of value that is estimated by appraisers. Both buyer and seller are well informed and acting in their own self-interest. --> Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, with the buyer and the seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.
over-improvement
occurs when an owner invests more money in a structure than can reasonably be expected to be recaptured.
Principle of substitution
recognizes that no one would pay more for a property than the amount necessary to acquire an acceptable substitute. This principle is the basis for all mathematical methods that are used by appraisers to estimate value.
Appraisers are typically paid a fee that is based on
the amount of time and the anticipated degree of difficulty not on the basis of the value of the property.
types of value
- Assessed value - Insurable value - Investment value - Liquidation value - Market value --> amount that should be paid - Salvage value - Plottage value - Value-in-use --> (1) assessed value, used for tax purposes when calculating property taxes. (2) Insurance value, used for insurance purposes for when a property gets damaged. (3) Investment value, used by investors when calculating the value of an income producing property. (4) Liquidation value, used for a business going under. (5) Going-concern value, used to derive the value of a business with a significant operating history. (6) Salvage value, used to find the value of the physical assets left after the building is no longer of value.
Principles of value (approaches to estimating value)
- Principle of anticipation - Principle of change - Principle of competition - Principle of conformity - Principle of contribution - Principle of highest and best use - Principle of progression - Principle of regression - Principle of substitution
Gross Multiplier Technique (from income approach)
A gross multiplier technique uses gross rent or income instead of net operating income to estimate the value of one- to four-family rental properties. A gross rent multiplier (GRM) is applied for monthly rental properties. A gross income multiplier (GIM) is applied for properties with annual gross rental income. Most markets use a monthly GRM, but some areas prefer to use an annual GIM. Either a monthly (GRM) or annual (GIM) multiplier can be used and the resulting value will be the same. The nature of the income stream and preferences in the local market dictate whether monthly or annual computations should be used. Gross rent multiplier (GRM) is used for monthly rental properties and is derived from comparable properties which are rented at the time of sale by using the following formula: Comparable sales price / Gross monthly rent = Gross rent multiplier (GRM) The subject property gross monthly rent is multiplied by the GRM to estimate the value of the subject: Subject property gross monthly rent x GRM = Subject property value Example: A residence sold for $78,000 and rented for $600 per month. The subject residence rents for $650 per month. What is the estimated value of the subject residence by using a GRM? Solution: $78,000 Comparable sales price / $600 Gross monthly rent = 130 GRM (monthly) $650 Subject residence monthly rent x 130 Gross Rent Multiplier (GRP) = $84,500 Subject residence estimated value Gross income multiplier (GIM) is similar to the GRM and is calculated in exactly the same manner but uses annual gross rental income rather than gross monthly rent. By using an annual gross rental income, distortion is prevented in the estimate due to seasonal fluctuations in income during the year. Comparable sales price / Annual gross rental income = Gross income multiplier (GIM) Subject property annual gross rental income x GIM = Subject property value Example: A property sold for $78,000 and rented for $7,200 per year ($600 x 12). The subject property rents for $7,800 per year. What is the estimated value of the subject property by using a GIM? $78,000 Comparable sales price / $7,200 Annual gross rental income = 10.83 GIM (annual) $7,800 Subject property annual gross rental income x 10.83 Gross Income Multiplier (GIM) (annual) = $84,474 Subject property estimated value (round to $84,500)
Characteristics of Value
Demand. Real estate, like any other product or service, has no value unless someone has a need or desire for it. From an economic viewpoint, demand has two components: - Desire for the item or service, and - The financial ability to pay for it Utility. Real estate must serve a purpose or be useful in order to have value. Scarcity. Real estate that is in short supply relative to the demand for it has value. Transferability. The ability to convey a marketable title is paramount to the value of real estate. Although a property with a defective title can be conveyed, it is risky and a purchaser may substantially discount the price if they feel they would incur time and expense in curing the defect.
The three approaches to estimating value are
(1) sales comparison approach, (2) cost- depreciation approach, and (3) income approach. The principle of substitution is the basis for all three approaches.
A residence has a living area measuring 42 ft by 38 ft and a garage that measures 24 ft by 22 ft. An appraiser feels that today's cost to reproduce the living area would be $63.00 per square foot and to reproduce the garage would be $19.00 per square foot. The home, which is 5 years old, is estimated to have a useful life of 50 years. Based on this information, what is the depreciated cost of the property?
Hint: Start by calculating the current reproduction cost of the property. 42*38*63=100,548 24*22*19 = 10,032 100,548+10,032= 110,580 5/50 = 0.1 110,580*0.1= 11,058 Accrued depreciation amount after 5 years 110,580-11,058 = 99,522 Depreciated cost of the main improvement
direct capitalization technique (from income approach)
Direct capitalization (or capitalization rate) is a mathematical process in which future income is converted into a present value. This technique is not used to value one-to four-family rental properties. Step 1: Forecast the potential gross income (PGI), which is the total annual income for the coming year. The two types of gross income that must be considered are contract rent and market rent. Contract rent. Contract rent is the rent amount that is specified in a lease. It is used if the existing tenants have excellent credit and long-term leases. Market rent. Market rent, or economic rent, is the rent amount that is estimated for vacant or owner-occupied space, and space occupied by tenants with short-term leases or those who have questionable credit. Market rent is based on rents charged in the market for properties that are comparable to the subject property. Step 2: Vacancy and collection losses (V&C) must be estimated. This represents income that the owner will not receive. The amount of vacancy and collection losses is estimated from the history of the subject property and competitive properties in the same market. It is normally expressed as a percentage of the PGI. Step 3: Subtract the V&C from the PGI. The remaining income is called the effective gross income (EGI). If there is any other income (OI) from miscellaneous sources, such as carport rentals, vending machines, and so on, add this amount after the V&C are subtracted. This is the actual amount the owner can expect to receive from operation of the property for one year into the future. Step 4: Estimate operating expenses. There are three types of operating expenses: Fixed expenses (FE). Fixed expenses do not change with occupancy levels. Examples of fixed expenses are property taxes and hazard insurance. Variable expenses (VE). Variable expenses change with occupancy levels. Examples of variable expenses are maintenance, utilities, trash removal, janitorial expenses, and management fees. Management fees are usually based on a percentage of the EGI. Reserves for replacements (R). Reserves for replacements are funds that are set aside annually to replace short-lived items. Short-lived items are those components that wear out and must be replaced before the end of the economic life of the building. These include items, such as stoves, refrigerators, carpets, roof covers, and so on. Operating expenses do not include mortgage payments, tax depreciation, capital improvements, personal expenses unrelated to the operation of the property, and income taxes. These are ownership charges, not property operating expenses. --> water bill is an operating expense Step 5: Subtract all three types of operating expenses from the EGI to calculate the net operating income (NOI). The first five steps can be illustrated with the following equation: PGI Potential gross income - V&C Vacancy and collections losses + OI Other income = EGI Effective gross income - OE Operating expenses (FE + VE + R) = NOI Net operating income Step 6: Select an overall capitalization rate. The overall capitalization rate is a rate that is adequate to provide the investor with a return on the investment, and a return of the investment over the ownership period. This rate is derived from comparable properties in the same market. Step 7: Estimate the value of the subject property by dividing the NOI by the overall capitalization rate. Value (V) = Net operating income (I) / Capitalization rate ® Example: An investment property has five units which each rent for $1,000 per month. THe vacancy and collection losses are 4%. Property taxes are $6,000, insurance is $4,500, and variable expenses total $8,000. Additional reserve for replacements is $3,500. Using a capitalization rate of 5%, what is the estimated value of the property? Solution: PGI= 5 units x $1,000 rent x 12 months = $60,000 V&C = 4% of PGI, or $60,000 x 0.04 = $2,4000 OE = $6,000 Taxes + $4,500 Insurance + $8,000 VE + $3,500 Reserves = $22,000 $60,000 PGI - $2,400 V&C + $0 OE = $57,600 EGI - $22,000 EGI = $35,600 NOI Value = $35,600 NOI - 0.05 Cap rate = $712,000 --> If income remains constant and the capitalization rate is reduced, what is the effect on value?- the value increases If net operating income is $4,000 and the capitalization rate is 16%, what is the value of the investment property? 4,000/0.16 = 25,000
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)
In response to the savings and loan crisis, Congress adopted Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 (Title XI). Title XI was adopted to address the problem of unregulated persons performing incompetent and/or fraudulent appraisals for federally regulated financial institutions.
cost-depreciation approach: step 3
Step 3: estimate the accrued depreciation (in the main improvement) Accrued depreciation is the total loss in value the improvement may have incurred over its lifetime, measured against the cost of new. There are three categories of depreciation: Physical deterioration. Physical deterioration is any loss in value due to normal wear and tear from use, negligence, or aging of the building. Examples include broken windows, deteriorated roof shingles, faded or peeling paint, worn carpeting, and so on. Physical deterioration can be either curable or incurable. Whether something is curable or incurable is based on economic feasibility. If repairing an item adds as much or more value than the cost of the repair, it is curable. Otherwise, it is incurable. Functional obsolescence. - Functional obsolescence can be caused by either a deficiency or an over-improvement (or super adequacy). A structural deficiency or excess affects consumer preferences, which in turn affects value. --> ex: A well-maintained property has decreased value due to an outdated kitchen, outdated bathrooms, and insufficient lighting. - Functional obsolescence due to a deficiency is a loss in value due to the failure of a property to meet current consumer preferences due to changes in building design or standards. For example, a home with structural deficiencies, such as inadequate lighting, outdated fixtures, lack of central heat or air-conditioning, one bathroom in a four-bedroom home, or an inefficient floor plan all affect demand and, consequently result in decreased value. - An over-improvement is an investment made to a property that does not make the best use of the property or is excessive in comparison with the improvement of similar properties. An over-improved property may suffer functional obsolescence since it will not sell in the market for the amount invested. - Example 1: A swimming pool that costs $50,000 to construct but the market is only willing to pay $10,000 for the pool. Functional obsolescence may also be categorized as curable (added value exceeds cost) or incurable (cost exceeds added value). - Example 2: It may be economically feasible to install a second bath (curable), but not economically feasible to add a third bedroom (incurable). --> ex: A homeowner visited a resort which contained a beautiful pool with caves and a lazy river. The homeowner then spent $100,000 to create a similar setting in their own yard. When the property was appraised for financing purposes, the appraiser only allocated $10,000 for the pool. - External obsolescence. External obsolescence, or economic obsolescence, is a loss in value caused by factors beyond the boundaries of the subject property. External obsolescence is considered to be incurable on the part of the owner since the problem is beyond the property's boundaries. A property located near a landfill, wastewater treatment plant, or blighted area may suffer a value loss, but the problem is beyond the control of the property owner. --> ex: A subject property is located in close proximity to a planned airport runway expansion. What category of depreciation would apply to this property if there is a loss in value when the runway it built? external obsolescence. Economic age-life method. There are several methods used by appraisers to estimate the amount of the accrued depreciation. The simplest is called the economic age-life method. The appraiser estimates the total economic life of a building, which is the number of years it will contribute value above the value of the land; this is 100% of its useful life. The appraiser then estimates the percentage of the total life lost or used up by depreciation. This is called its effective age. - Effective age is the age a property appears to be, due to extensive updates, or excessive wear and tear (condition). Actual age is the true age of the property. When presented with both ages in a problem, use effective age for any calculations. Formulas and calculations. The effective age is divided by the total economic life to obtain the percentage of accrued straight-line depreciation over the total economic life of the building. This figure is multiplied by the reproduction cost to obtain the dollar amount of the accrued depreciation for the whole time period. - Effective age / Total economic life = Total depreciation rate for entire time period - Total depreciation (%) x Reproduction cost ($) = Total accrued depreciation amount for entire time period ($) Example: A building has a total economic life of 50 years, and the appraiser estimates its (current) effective age to be ten years. If the reproduction cost is $100,000, what total amount should be estimated for the accrued depreciation over the expected life of the building? Solution: 10 years / 50 years = .20 (or 20%) Depreciation rate over 10 years $100,000 Reproduction cost x .20 Total accrued depreciation rate = $20,000 Accrued depreciation amount after 10 years The yearly depreciation rate can also be calculated by dividing the total depreciation rate for the entire time period by the effective age. In this example: .20 Total depreciation rate / 10 years (Effective age) = .02 (2%) Yearly depreciation rate Accurately estimating the accrued depreciation is the most difficult aspect of the cost depreciation approach. If a residence is over 15 years old, the amount of depreciation may be difficult to estimate, and this method may lose reliability. In some cases, components of a building may be depreciated at different rates. For example, an air conditioner, carpet, or a roof may need to be replaced, resulting in 100% depreciation on those items, while the rest of the building may only be 20 or 25% depreciated. In this case, the components must be depreciated separately, and then thedepreciation on each item would be added to arrive at the total accrued depreciation on the building.
Appraiser Licensing and Certification
The 1991 Florida legislature passed legislation that divided F.S. 475 into Parts I and II. Part I regulates real estate brokers, sales associates, and real estate schools; Part II regulates real estate appraisers who perform appraisals in federally related transactions. The purpose of Part II is to regulate real estate appraisers in the interest of the public welfare. [F.S. 475.610] Part II of F.S. 475 created the Florida Real Estate Appraisal Board (FREAB) to administer and enforce that section of the law.
VALUATION PROVIDED BY REAL ESTATE LICENSEES
Real estate licensees may provide certain valuation services to give an opinion of the value of real estate in connection with the listing or sale of property, including: - A valuation in a non-federally related transaction a real estate licensee must always remember that although they can perform limited valuation duties, they cannot use the term appraiser or appraisal unless certified or registered to do so. - A comparative market analysis (CMA) A comparative market analysis (CMA) is developed by using the same basic steps as an appraiser uses with the sales comparison approach, but employs less stringent methods. - A broker price opinion (BPO) A broker price opinion (BPO) is an estimate of a property's value, determined by a real estate broker or sales associate. Although BPOs can be requested for many reasons, they are often requested by lenders who either own real estate that they have foreclosed on (REO or Real Estate Owned), or who may be considering a short sale transaction.
Six steps of the appraisal process
Step 1: Define the problem Step 2: Determine the scope of work Step 3: Perform data collection and analysis - Market analysis. - Highest and best use analysis. The property is analyzed to determine the highest and best use of the site as if vacant and the property as improved. The highest and best use as vacant is used to establish the value of the site based on how the site should be used rather than how it is being used. The property is analyzed again, thereby considering any improvements that are presently on the site. This assists in determining whether the present use is the best use, or if an alternative should be considered to maximize the value of the land and improvements of the property (property value). Alternatives include renovation or possible removal. Step 4: Apply the three approaches to value. - Appraisers can utilize three mathematical methods to estimate the value of a subject property. All three are employed to the extent that they are applicable, unless the assignment does not require one or more of them to be used. The three methods are: - Sales comparison approach - Cost-depreciation approach - Income approach Step 5: Reconcile the value indications and estimate a final opinion of value. - After the three approaches have been applied and each has resulted in a value estimate, the three estimates are compared. The appraiser's confidence in the data and the appropriateness of the approaches to the assignment are weighed. Greater weight is given to the approach that the appraiser feels best reflects the value of the subject, and then a final value is estimated. Weighing the evidence and arriving at a final value conclusion is based on the appraiser's knowledge, experience, and training. It is not accomplished by averaging the values or using a mathematical process. Step 6: Prepare a report of defined value opinions.
cost-depreciation approach: step 1
Step 1: estimate the site value as if vacant The estimated value of the land must be determined as if it were vacant since land does not depreciate. The comparable sales approach is used to estimate the land value. This estimated site value as if it were vacant will be added later (in Step 6) to the depreciated cost of reproducing or replacing the building.
VALUATION: SALES COMPARISON APPROACH steps
Step 1: locate comparable properties A comparable property is a property that is competitive with the subject property (the property being appraised) and similar to it in terms of design, size, location, age, and condition. To be comparable, the property should be a recent sale, preferably within the last six months. The sale must have been an arm's-length transaction in which the seller and the buyer were unrelated and each was attempting to get the best price possible. A minimum of three to five comparable properties is required, but eight to ten are preferable. Step2: Adjust the comparable sales prices. The comparable properties are not exactly the same as the subject property. Adjustments to the sales price of the comparable properties are made to allow for differences between the comparable and the subject property. Adjustments are always made to the comparable property, but never to the subject property. The subject property sets the standard for comparison. The price of comparable properties must be adjusted to reflect the characteristics of the subject property. The price at which a comparable property was sold is a known fact. The value of the subject property is unknown and cannot be adjusted. If the comparable property is superior to the subject property, the comparable sales price is adjusted downward by the value of the superior features; superior means subtract. If the comparable property is inferior to the subject property, the comparable sales price is adjusted upward by the value of the inferior features; inferior means increase. Step 3: Reconcile the adjusted sales price Examples Example 1: The subject property has a garage. The comparable property has no garage. If a garage has a value of $14,500, and the comparable property sold for $149,000, what adjustment should be made? Answer: add a $14,500 adjustment to the comparable property. Explanation: an adjustment must be made for the physical difference of the absence of a garage in the comparable property. Adjustments are always made to the comparable property; never to the subject property. Since the comparable property has no garage, and therefore is inferior in value to the subject property, you increase (add) the $14,500 adjustment to the comparable property's value. Example 2: A comparable property recently sold for $429,000. The comparable property is built of superior materials valued at $25,000 but has less square footage than the subject property, valued at $35,000. What is the adjusted sale price of the comparable property? Solution: adjust the comparable property by subtracting the value of its superior feature (building materials) and increasing the value for its inferior feature (square footage). Adjusted sale price = ($429,000 - $25,000) + $35,000 = $439,000 The adjusted sale price of the comparable property is $439,000
cost-depreciation approach: step 2
Step 2: estimate the cost to replace or reproduce Estimate the cost to replace or reproduce the main improvement by using one of following three different methods: - Quantity survey method. - Unit-in-place method. - Unit-of-comparison method.
cost-depreciation approach: step 4
Step 4: calculate the depreciated cost Subtract the accrued depreciation from the reproduction cost of the main improvement to derive its depreciated cost. Example: In the economic age-life example shown in Step 3, the reproduction cost was stated to be $100,000 and the total accrued depreciation over 10 years was determined to be $20,000. Using this information, what is the depreciated cost? Solution: $ 100,000 Reproduction cost - $20,000 Total accrued depreciation over 10 years = $80,000 Depreciated cost of the main improvement
cost-depreciation approach: step 5
Step 5: Estimate depreciated site improvements Estimate the cost to construct any site improvements, such as driveways, landscaping, fences, and so on, and subtract any depreciation in these items.
cost-depreciation approach: step 6
Step 6: add the vacant site value Add the vacant site value, the depreciated cost of the main improvement, and the depreciated site improvements. The total is the value of the subject property estimated by the cost-depreciation approach. Vacant site value (step 1) + Depreciated cost of main improvement (step 2) + depreciated site improvements (step 3) = Estimated value of the subject property
Using the IRV Formula to Derive Capitalization Rates
The IRV formula provides a simple way to derive capitalization rates from comparable sales by using the estimated value of a subject property and the estimated net operating income required from an investment property. In this formula: I = net operating Income R = capitalization Rate V = estimated Value Example 1: If the net operating income is forecast to be $12,000 and the overall capitalization rate is 10%, what is the estimated value of the property? Solution: Since we are looking for the estimated value, we use the V = I/R form of the formula. Value (V) = net operating Income (I) / capitalization Rate (R) Value (V) = $12,000 (I) / 0.10 (R) = $120,000 (V) Example 2: If the net operating income is forecast to be $12,000 and the estimated value of the property is $120,000, what is the capitalization rate? Solution: Since the unknown value is the capitalization rate (R), we cross out "R" and perform the division with the values for "I" and "V" that are remaining. --> Potential gross income (PGI) is the total annual income a property would produce if it were fully rented and no collection losses were incurred. Effective gross income (EGI) is calculated by subtracting vacancy and collection losses from the PGI. Net operating income (NOI) is the income remaining after subtracting operating expenses from EGI. The three categories of operating expenses are; (1) fixed, Insurance and other recurring costs. (2) variable, power and other items that vary based on usage and occupancy. (3) reserve for replacements, money set aside to fix bit ticket items such as the roof.
VALUATION: COST-DEPRECIATION APPROACH
The cost-depreciation approach, or cost approach is used to estimate the current cost of reproducing or replacing a building, minus an estimate for depreciation, plus the value of the land. This approach is also based on the principle of substitution. No one would pay more for an existing property than the cost to purchase land and have comparable improvements constructed on that land, assuming no unusual time delay. The value of the subject property can be estimated by using either replacement cost or reproduction cost. - Replacement cost. the amount of money required to replace a structure having the same use and functional utility as the subject property but using modern, available, or updated materials. - Reproduction cost. The reproduction cost is the estimated cost to construct at current prices an exact duplicate or replica of the building that is being appraised by using the same materials, design, and layout as the subject property. Reproduction cost is preferred in appraisals of historic properties. The cost-depreciation approach is best used to estimate the value of: - newer properties, - property proposed for renovation, - insurance purposes, - and properties infrequently exchanged or sold in the real estate market. ---> ex: calculate the reproduction cost of the following property using the Cost/Depreciation Approach to Value: the lot measures 100' x 100', and land in the area sells for $40 per square foot. The structure measures 50' x 90' and construction costs in the area are estimated to be $90 per square foot. The building is 10 years old and has a useful life of 50 years.--> Reproduction Cost = Length of property x Width of property x Cost per sq. ft. So, the reproduction cost is 50 ft. x 90 ft. x $90 per sq. ft. = $405,000. The cost-depreciation (cost depreciation) approach may be the only approach available to estimate the value of special-purpose (special purpose) properties, such as schools, churches, and government buildings.
Appraiser License Levels
The statute provides for three levels of appraiser. These are: Registered trainee appraisers, who are qualified to perform appraisal services only under the direct supervision of a certified appraiser. Certified residential appraisers, who are qualified to issue appraisal reports for residential real property of one-to four-residential units, without regard to transaction value or complexity, or as authorized by federal regulation Certified general appraisers, who are certified by the DBPR to issue appraisal reports for any type of real property classification as well as personal property appraisals and business valuations.
sales comparison approach
also referred to as the comparable sales approach, is used to estimate the value indicated by the recent sales of comparable properties in the market. --> Principle of substitution. --> Active market. The sales comparison approach requires an active market. If no sales have occurred, this method is not applicable. Conversely, this method is appropriate for any type of property where sales have occurred. Residential properties and vacant land. This approach is usually the most applicable method for appraising residential properties and vacant land. It is the basis for the value estimates that are used by real estate brokers and sales associates in listing and selling real estate. A sales associate should focus much of their attention on this approach, as it will be used virtually every day in the practice of their profession. --> The sales comparison approach compares similar properties to the subject property. The comparable properties' sale prices are adjusted upward or downward to reflect differences between each comparable and the subject property. If a comparable is superior to the subject property on a given feature, a downward adjustment is made to the comp. If a comparable is inferior to the subject property, an upward adjustment is made to the comp. The adjusted sale prices of the comparables are reconciled using a weighted average to estimate the market value of the subject property.
Principle of regression
applies when a higher-priced property is constructed or an existing property is over-improved in an area that consists of lower-priced properties. The higher-priced property will regress (decrease) in value toward the level of the less expensive properties in the area. - This principle, like the principle of progression, tends to create price conformity within an area.
automated valuation models
are not appraisals. They do not conform to USPAP standards. --> are electronic services that can provide an estimate of a property's valuation very quickly. These models typically use electronic databases to compare the subject property to other properties in the area. Although AVMs may be faster and easier than appraisals or BPOs, they do not take into account property condition, neighborhood characteristics, and recent transactional data. As a result, AVMs are a tool that may be used, but are often followed up with a site visit or an actual appraisal.
Real estate licensees who conduct real estate appraisals are required to
comply with USPAP. Appraisal reports involving a federally related transaction must be prepared by a state-certified or licensed appraiser.
Value
is an opinion of the worth of a property at a given time in accordance with a specific definition of value. It is the monetary relationship between properties and those who buy, sell, or use those properties. There are many types of value, each of which has a different definition. In appraisal practice, value must always be qualified (e.g., market value, liquidation value, or investment value). --> (Value is determined by what consumers are willing to pay in the marketplace. Price refers to the amount of money actually paid. Cost is the total expenditure to create the improvement.)
The age-life method of estimating depreciation
is based on a ratio of the property's effective age to its economic life. Effective age is the age indicated by a structure's condition and utility. Total economic life is the total estimated number of years that a structure is expected to contribute to the property's value.
Price
is the amount that is actually paid in a real estate transaction. It is not necessarily the asking amount (list price) or amount offered, and may not represent the actual market value of the property. It may be more than, or less than, the market value. Nonetheless, it is the amount that the buyer is willing to pay and the amount the seller is willing to accept.
Plottage value
is the increase in value resulting from an assemblage, or combining, of two or more adjacent parcels of land under one owner. Typically, the value of the whole parcel will be greater than the sum of the individual smaller parcels. --> Assemblage is the combining of two or more adjoining properties into one tract. The added value. Plottage is the added value as a result of assembling (combining) two or more properties into one large parcel. For example, two adjacent lots, each valued at $35,000, might have a combined value of $90,000 if consolidated. The extra $20,000 is called plottage.
Depreciation
is the loss in value. Accrued depreciation is the total depreciation that has accumulated over time. Depreciation is curable when a building component has been added or repaired and the owners are able to get their money back in added value. If the owners are not able to recoup the cost of the repaired or added item, it is said to be incurable depreciation. The three major causes of depreciation are (1) physical deterioration, the breaking down of items over time. (2) functional obsolescence, items that work and function just fine but are not optimized or have poor layout. (3) external obsolescence, items that lay beyond the boundaries of a property that devalue it but cannot be fixed by the owner.
Investment value
is the value of a particular property to a particular investor. Potential purchasers of income-producing properties commonly request investment value appraisals. Investment value is the highest price an investor will pay for a property and the lowest price the seller will accept. Investment value is the value to a specific individual, while market value is the value in a typical transaction to a typical buyer.
VALUATION: INCOME APPROACH
is used to estimate the value that a property's net earning power will support. This approach is used to estimate the value of income-producing property and for the valuation of a business. The income approach is based on the assumption that the value of a property is related to the amount of income that it can produce in the future. It is based on the appraisal principles of substitution and anticipation. The principle of anticipation states that the present value of a property is based on the benefits it can produce and its future income. --> ex: Which appraisal approach would be given greater weight when appraising an apartment complex?- income approach --> develops an estimated value based on the present worth of future income from the subject property. The approach capitalizes net operating income into value. The two techniques that can be applied for the income approach are direct capitalization and gross multiplier.
Principle of anticipation
states that the value of a property today is the sum of its future benefits. When a potential buyer considers the purchase of a property, the benefits it will provide during that owner's period of ownership forms the basis for the decision to buy, and at what price. Value today is measured in terms of future benefits.