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Ch. 13

Vocab: Property Valuation

TermDefinition
Anticipation In valuing property, value based on the present value of anticipated future benefits of ownership
Appraisal An estimate of property value based on factual data.
Broker Price Opinion (BPO) The analysis of sales of similar recently sold properties in order to derive an indication of the probable sales price of a particular property by a licensed broker. Same things as Competitive Market Analysis (CMA)
Capitalization The process of converting future income into an indication of the present value of a property by applying a capitalization rate to net annual income.
Capitalization Formula Investment or value of real estate x capitalization rate = annual net income of the real estate.
Cash Flow Regular income produced by a rental property after deducting operating expenses and debt service.
Chronological Age Actual age of a structure.
Comparable A property that is similar to a property being appraised by the direct sales comparison approach.
Comparative Market Analysis (CMA) Presentation and analysis of the competition in the marketplace for a particular property for the purpose of arriving at a market price or list price. Same as Broker Price Opinion (BPO)
Competition The principle stating that when the net profit generated by a property is excessive, the result will be to create very strong competition.
Conformity The homogeneous uses of land within a given area, which results in maximizing land value. Ex: home in predominantly commercial area will decrease the home's value when compared to home near other homes (subdivision).
Contribution The principle that for any given part of a property, its value is the result of the contribution that part makes to the total value by being present or the amount that is subtracts from total value as a result of its absence.
Cost A measure of expenditure of labor and material made sometime in the past.
Cost Approach An appraisal method whereby the cost of constructing a substitute structure is calculated, depreciation is deduced, and land value is added.
Curable A condition of property that exists when correction is physically possible and the cost of correction is less than the value increase.
Debt Service Principal and interest payment son a debt.
Demand Describes a consumer's desire &willingness to pay a price for a specific good/service. -When supply increases and demand remains the same, prices go DOWN -When demand goes down and supply remains the same, prices go UP
Appreciation An increase in property value.
Depreciation Loss in value from any cause.
Economic (External) Obsolescence A loss in value caused by such things as changes in surrounding land use patterns and failure to adhere to the principle of highest and best use. Always associated with things located outside the boundaries of the property.
Effective Age the age of a property as it appears to be based on its appearances.
Effective Demand A desire for property accompanied by the financial ability to satisfy the desire by purchasing the property.
Functional Obsolescence A loss in value resulting from such things as a faulty design, inadequacies, overadequacies, and out-of-date equipment.
Gross Effective Income Gross potential income less deductions for vacancy and credit losses plus other income. GPI-Vacancy & credit losses + Other income = GEI
Income (capitalization) Approach / Appraisal by Capitalization The primary method of estimating the value of properties that produce rental income (like apartments, # of units x monthly rent $= building's capitalization appraisal income). -Also called Appraisal by Capitalization.
Incurable That which is not physically correctable or not economically practical to correct.
Market Value The value in terms of money agreed upon by a willing buyer and seller, neither being under undue pressure and each being knowledgeable of market conditions at the time.
Net Operating Income (NOI) Gross income - operating expenses. -Also called net income.
Operating Exspenses The costs of operating a property held as an investment.
Physical Deterioration A loss in value caused by unrepaired damage or inadequate maintenance.
Potential Gross Income Income that'd be produced if every apartment were rented 100% of time. Not realistic. PGI must be reduced by an allowance for vacancies & losses due to tenant unpaid rent/bad checks. Vacancy means the scheduled income isn't received, not prop. is vacant.
Price The amount of money paid for a property.
Probable Sales Price Estimating price of property being listed.
Quantity Survey Method A method for estimating replacement or reproduction costs.
Replacement Cost The amount of money required to replace a structure with another structure of comparable utility.
Replacement Reserve The amount of money required to replace a structure with another structure of comparable utility.
Reproduction Cost The amount of money required to build an exact duplicate of a structure.
Scarcity In short supply in comparison with demand.
Square-Foot Method A technique to estimate the total cost of construction in which the total number of square feet to be constructed is multiplied by a cost per sq. ft. to derive total cost. Estimate total cost to build= # of sq. ft x cost of 1 sq. ft
Substitution The principle providing that the highest value of a property has a tendency to be established by the cost of purchasing or constructing another property of equal utility & desirability, provided the substitution could be made w/o unusual delay.
Supply and Demand The principle stating that the greater the supply of any commodity in comparison to demand, the lower the value. Conversely, the smaller the supply and the greater the demand, the higher the value.
Transferability The ability to transfer property ownership from seller to buyer.
Unit-in-Place Method The technique used in appraising real estate under the cost approach, in which the cost of replacement or reproduction is grouped by stages of construction.
Utility Capable of serving a useful purpose.
Value The amount of money (or goods) considered of equal worth to the subject property. There are many types of value (like market value, book value, assessed value, etc.).
Value in Use A subjective value that is not market value, derived from the usefulness of the property.
Capitalization Rate The rate of interest appropriate to the investment risk as a return on and return of the investment.
Economic Life The period of time during which a property is economically beneficial to the owner.
Capital Improvement An item that adds value to the property, adapts the property to new uses, or prolongs the life of property. Maintenance=not considered this.
Approaches to Value Methods of estimating real property value: 1. Market data [estimate prop. w/ comparative properties nearby, like homes in subdivision] 2. Cost [unique buildings w/ no comparatives nearby, like schools, churches] 3. Income Approaches [apartments]
Direct Sales Comparison Approach (Market Data Approach) The primary approach in estimating the value of vacant land and single-family owner-occupied dwellings. Also called Market Data Approach.
Effective Gross Income Scheduled gross income minus (-) allowances for vacancy & other non-payment of rent by the tenant.
Fair Market Value Price for property agreed upon between buyer and seller in a competitive market with neither party being under undue pressure.
Gross Rent Multiplier (GRM) / Gross Income Multiplier A number used to estimate the value of income property. GRM= Comparable's sale price/Rent Subject's Rent x GRM = Estimate of subject's value
Income Property Property that produces rental income.
Obsolescence A loss in property value caused by external or functional factors.
Rate of Return The percentage of the net income produced by a property or another investment.
Reconciliation The process of weighted evaluation of the estimate derived from the 3 approaches to determine a single reliable estimate of value.
Replacement Reserve A fund to replace assets when they wear out.
Residual Income The income allocated to the land under the principle of highest and best use.
Scheduled Gross Income Income that would be obtained if all units were fully rented for 100% of the time.
Straight-Line Depreciation A depreciation method whereby the property is depreciated in equal annual installments over the years of useful life.
Useful Life The period of time that a property is expected to be economically useful.
Value in Exchange The amount of money a property may command for its exchange. This is the market value and is a negotiated value.
Weighted Average In the direct sales comparison method of appraisal, reconciliation by giving more weight to comparables most similar to subject property.
Created by: laurenk1996