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Exam Prep - Ch 3
National Exam Prep Content
Question | Answer |
---|---|
Market value | The most probable price. Appraised value is market value |
There are four basic characteristics of value: (DUST) | • Demand – there must be a demand for the item and the purchasing power to acquire it. • Utility – needed or wanted. • Scarcity – limited supply. • Transferability – the item must be able to be sold – ownership rights must be transferable |
An appraisal | An appraisal is an opinion. Reconciliation is the final step in the appraisal process and determines an exact value for the property. |
Principles of value | Appraisers use principles of value to help them arrive at their final opinion |
Principles of value | Highest & Best Use Principle of Substitution " " of Conformity " " of Increasing & Decreasing Returns " " of Contribution Principle of Regression Principle of Competition Principle of Change Principle of Anticipation Principle of Balance |
The concept of cost/value added | - Appraisers and real estate professionals may sometimes apply the concept of cost/value added. - There is an increase in property value as a result of fixing a problem. |
FIRREA - the Financial Institutions Reform, Recovery, and Enforcement Act | Passed to regulate the appraisal industry nationwide. Requires the use of a state-licensed or state-certified appraiser to perform any appraisal used in connection with a federally related transaction of property valued above the statutory limit. |
METHODS OF ESTIMATING VALUE AND BROKER PRICE OPINIONS (BPO) | There are three basic approaches to appraisal: market data or sales comparison, income or capitalization method, and replacement or reproduction cost approach. |
The market data approach (residential) | The appraiser should have 3-5 comparables no more than 6 months old - add to the value of comparables when the subject property has more amenities (is better) & deduct from the comparables when the subject property has less |
The cost approach | Used for unique properties, such as churches or government buildings. It is also used when there are no comparables for a particular property. Land Value + Building Replacement Cost - Depreciation = Value |
The appraiser considers three types of depreciation in the cost approach - | Physical deterioration, Functional obsolescence, and economic or external obsolescence. |
Physical deterioration | Ordinary wear and tear. It is curable. This has the least impact on the appraisal because all buildings have it (chipped paint, worn flooring). |
Functional obsolescence | is brought about by factors in the property. It is often or mostly curable (inferior materials to cut costs, curb appeal, not enough baths/bedrooms, an unpopular floorplan, property that lacks updating for modern technology). |
Economic obsolescence | is a loss of value due to outside factors. This is also called external obsolescence and is incurable (zoning, air pollution, noise, traffic, jobs, crime rates, etc.) It is also called environmental obsolescence. |
The income approach or capitalization method | is used for income-producing properties. The highest weighted criteria for an appraiser using this approach is the Net Annual Income, which may also be called the Net Operating Income or NOI. Net Annual Income/ Cap rate/rate of return x Market Value |
There are three steps to calculate the Net Income: | 1. Calculate the potential gross rent – the rent received if the building is 100% occupied. 2. Calculate the actual gross rent by deducting for vacancies and uncollected rents. 3. Actual gross rent – expenses = net annual income or net operating income |
The GRM aka Gross Rent Multiplier | Used for residential properties is a factor based on location and rent – a price per rent. (monthly rent) To determine a neighborhood GRM use the average price divided by the average monthly rent. (GRM x rent = price) Price = value of the property |
GIM aka Gross Income Multiplier | For commercial properties is based on annual rent rather than monthly rent. |
A Comparative Market Analysis (CMA) | Aa tool used by licensees to help sellers determine a realistic price for their property. A CMA compares a subject property to current listings, recent sales, and even expired listings of unsold properties |
A BPO or Broker’s Price Opinion | Is basically the same as a CMA |
Assessed value | Is the value of your property for tax purposes The tax rate times the assessed value will tell you the yearly taxes. |
A special assessment tax | May be levied against only those property owners who benefit from the improvement (example curbs and sidewalks) |
Municipal improvement Districts aka Property Improvement District | If property is located in a municipal improvement district, aka a property improvement district, the property owner will receive a tax bill, like a special assessment until the improvement is paid for or the improvement district designation is removed |
Highest and Best Use | - the legal use that gives the greatest return in money and/or amenities. Highest and best use can be considered the most important detail by an appraiser |
Principle of Substitution | sets an upper limit on price |
Principle of Conformity | states that maximum value is found when properties are the same or have a reasonable degree of similarity. |
Principle of Increasing and Decreasing Returns | The result of over-improving a property is also referred to as the Law of Diminishing Returns. |
Principle of Contribution | the value of a part is determined by its contribution to the total value of the property rather than by its cost. |
The Principle of Regression | Presence of lower-valued or declining-valued properties in the neighborhood leads to a decline in the value. Conversely, the presence of higher-valued properties will increase the value of your property, and this is called the Principle of Progression. |
The Principle of Competition | an increase in competition will result in decreased profits for current providers. Competition lowers prices |
The Principle of Change | Appraisers must make adjustments for changes in market conditions and for time. An appraisal is only considered to be good for six months. |
The Principle of Anticipation | purchase price is affected by the expectation of future appeal and benefits. |
The Principle of Balance | mixed land use should result in maximum value for all properties involved (master-planned communities demonstrate this principle). |
Uniform Standards of Professional Appraisal Practice (USPAP) | All appraisers must adhere to the Uniform Standards of Professional Appraisal Practice (USPAP), outlining how appraisals are developed and communicated |