Appraisal
An appraisal is an estimate of market value
Appraiser
Estimates Market Value - This persons task is to render an objective opinion or estimate of the market value of the property, not to determine or establish the value of the property. The local market establishes the value of properties in the area.
An app
Comparative Market Analysis
A report complied from research of the marketplace, primarily similar properties that have been sold
-provides information about the local market by providing the list price, time on the market and other important information about current listings, expir
Broker's Price Opinion (BPO)
When a broker, for a fee, simply drives by the property, takes a picture of it, obtains information on comparable sales and fills out a form to give to the bank or attorney.
Value
To have value in the real estate market�that is, to have monetary worth based on desirability�a property must have the following characteristics or basic elements
Demand
Utility
Scarcity
Transferability
Demand
The need or desire for possession or ownership backed by the financial means to satisfy that need
Utility
The property's usefulness for its intended purposes
Scarcity
A finite supply
Transferability
The relative ease with which the ownership rights are transferred from one person to another
Market Value
The most probable price a property should bring in a competitive and open market under the assumption that the buyer and seller acted prudently and knowledgeably, the price is not affected by undue stimulus, the property was left on the market for a reaso
The Essentials to Determining Market Value
- The most probable price is NOT THE AVERAGE or highest price.
- The buyer and seller must be UNRELATED AND ACTING WITHOUT UNDUE PRESSURE
- Both buyer and seller must be WELL INFORMED about the property's use and potential, including both its defects and
Market Price
The price a property actually sells for
Economic Principles that can affect the value of real estate
Anticipation
Change
Competition
Conformity
Contribution
Highest and Best Use
Increasing and Diminishing Returns
Plottage
Progression and Regression
Substitution
Supply and Demand
Anticipation
According to this appraisal principle, value is created by the expectation that certain events will occur. Value can increase or decrease in anticipation of some future benefit or detriment. For instance, the value of a house may be affected if rumors cir
Change
Value fluctuates as economic conditions change. This is the principle of change. Real estate is subject to natural phenomena such as tornadoes, fires and routine wear and tear. The real estate business is subject to market demands, like any other business
Competition
The interaction of supply and demand create competition. Excess profits tend to attract competition. For example, the success of a retail store may cause investors to open similar stores in the area. This tends to mean less profit for all stores concerned
Conformity
Value is created when a property is in harmony with its surrounding land uses. In single-family residential neighborhoods, for instance, buildings should be similar in design, construction, size and age
Contribution
The value of any improvement is measured by its effect on the value of the whole. Installing a swimming pool, greenhouse or private bowling alley may not add value to the property equal to the cost. On the other hand, remodeling an outdated kitchen or bat
Highest and Best Use
The most profitable single use for a property, or the use that is most likely to be in demand in the near future, is the property's highest and best use. The use must be legally permitted, financially feasible, physically possible and maximally productive
Increasing and Diminishing Returns
Improvements will add to the value of a property up to a certain maximum amount, after which they will add nothing to the value. As long as money spent on improvements produces an increase in income or value, the law of
INCREASING RETURNS
applies. At the
Assemblage
The combining of two or more adjoining lots into one large tract to increase the value of the individual lots because a larger building capable of producing a large net return may be erected on the large parcel. The resulting increase in value is referred
Plottage
Merging or consolidating adjacent lots into a single larger one produces a greater total land value than the sum of the two sites valued separately. For example, two adjacent lots valued at $35,000 each might have a combined value of $90,000 if consolidat
Progression and Regression
In general, the value of a poorer property is increased if it is located in a neighborhood of more expensive properties. This is known as the principle of PROGRESSION. Conversely, the value of a better-quality property is adversely affected by the presenc
Substitution (Market Data Approach)
An appraisal principle that states that the maximum value of a property tends to be set by the cost of replacing it with an equally desirable and valuable substitute property. The principle of substitution of the basis for the sales comparison approach (a
Supply and Demand
The value of a property depends on the number of properties available in the marketplace�the supply of the product. Other factors include the prices of other properties, the number of prospective purchasers and the price buyers will pay.
To arrive at an accurate estimate of value, appraisers traditionally use three basic valuation techniques:
The sales comparison approach,
The cost approach
The income approach
The Sales Comparison Approach
Most reliable in the appraisal of existing single family homes and raw land
The Cost approach
Most reliable in the appraisal of brand new construction and unique properties that do not produce an income and for which there are no comparable sales
The Income Approach
Most appropriate for income producing and commercial properties
The Sales Comparison Approach explain
Most Reliable approach - (also known as the MARKET DATA APPROACH or DIRECT MARKET APPROACH) is really a more sophisticated form of competitive market analysis and is the main method used for appraising single-family homes.
An estimate of value is obtained
The principal factors for which adjustments must be made include the following:
Property Rights - An adjustment must be made when less than fee simple (the full bundle of legal rights) is involved. This includes land leases, ground rents, life estates, easements, deed restrictions and encroachments
Financing Concessions - The financi
Property Rights as an Adjust
Property Rights. An adjustment must be made when less than fee simple (the full bundle of legal rights) is involved. This includes land leases, ground rents, life estates, easements, deed restrictions and encroachments.
The Cost Approach explained
The cost approach is based on the idea that the components of a piece of real estate, or the land and buildings, can be added together to arrive at an estimate of value, if they're valued separately. The cost approach is particularly useful for unique pro
Cost Approach Formula
Estimate the replacement cost of the building - depreciation + land value = Market Value
Cost - Depreciation =Value
For example: Using the sales comparison approach, an appraiser estimates that the current land value of a property is $25,000, the current
Estimating value based upon the cost approach involves five steps:
1. Estimate the value of the land as if it were vacant and available to be put to its highest and best use. (Note that the value of the land is not subject to depreciation)
2. Estimate the current cost of constructing buildings and other improvements
3. E
Reproduction Cost
The cost to construct an exact duplicate of the subject structure at today's costs including both the benefits and the drawbacks of the property
Replacement cost new
Replacement cost new is the cost to construct an improvement similar to the subject property using current construction methods and materials, but not necessarily an exact duplicate
4 Methods of Cost Approach
Square footage method: Involves calculating the cost of construction by multiplying the square footage of the structure by the construction cost for that particular type of building. For example, you'd multiply a $ 100 per square foot cost to build the ki
Cost Approach 4 methods
Square-foot method - The cost per square foot of a recently built comparable structure is multiplied by the number of square feet (using exterior dimensions) in the subject building. This is the most common and easiest method of cost estimation. For some
Depreciation
Loss of Value - A loss in value due to any cause, any condition that adversely affects the value of an improvement. - Remember Land does not depreciate
Straight - line - Method
The most common and easiest but least precise way to determine depreciation.
Depreciation is assumed to occur at an even rate over a structure's economic life, the period during which it is expected to remain useful for its original intended purpose
The p
The 3 Classes of Deppreciation
Physical Deterioration
Functional Obsolesce
External Obsolesce
Physical deterioration
Deterioration results from wear and tear and includes things such as peeling paint, a leaky roof, cracks in foundation walls, sloping floors, etc.
Curable: an item in need of repair, such as painting (deferred maintenance), that is economically feasible a
Functional Obsolence
Indicates a condition that is out of date. For purposes of your test, the easiest way to differentiate functional obsolescence from physical deterioration is to remember that functional obsolescence is a condition on the property that causes a loss in val
External Obsolescence
Anything that is not on the property that causes a loss in value is classified as external obsolescence.External obsolescence might include environmental, economic, locational or social forces that cause a loss in value. This type of depreciation is alway
The Income Approach Steps
1. Estimate annual potential gross income. An estimate of economic rental income must be made based on market studies. Current rental income may not reflect the current market rental rates, especially in the case of short-term leases or leases about to te
The Income approach to Value
An approach to the valuation or appraisal of real property as determined by the amount of net income the property will produce over its remaining economic life. The formula for calculating value based on the income approach is
income divided by capitaliza
A salesperson is preparing a market analysis of a retail shopping center. A review of several comparable properties in the area has revealed that the subject property is earning $260.00 per month less than the comparable properties. At a capitalization ra
You must use the formula IRV, but first you must convert the net operating loss to an annual figure. So: $260 x 12 = $3,120 � .09 (or 9%) = $34,667.
Amenities
Features, both tangible and intangible, that enhance and add to the value or desirability of real estate.
Capitalization
A mathematical process for converting net income into an indication of value, commonly used in the income approach to value.
Capitalization Rate (CAP rate)
The percentage selected for use in the income approach to valuation of improved property. The CAP rate is designed to reflect the recapture of the original investment over the economic life of the improvement, to give the investor an acceptable rate of re
Comparables
Recently sold or leased properties that are similar to a particular property being evaluated and are used to indicate a value for the subject property.
Contract Rent
The rental income as stipulated by the parties in a lease. Appraisers often contrast this with market rent, which is the amount of rent that the market will bear.
Economic Life
The economic life of a building reflects the number of years it contributes to the value of the land.
he estimated period over which an improved property may be profitably utilized so that it will yield a return over and above the economic rent attributab
Effective Age
The apparent age of a building based on observed condition rather than chronological age.
Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)
A comprehensive law passed in 1989 to provide guidelines for the regulation of financial institutions. One part of the law created the Appraisal Foundation and requires the use of state-certified or state licensed appraisers to appraise properties involvi
Front Foot
A measurement of property frontage abutting the street line or waterfront line. Commercial land is often priced based upon the amount of property that is visible from the street (the "front foot").
Gross Income Multiplier
A numerical factor that expresses the relationship of gross income to sales price or value. It is calculated by dividing price by gross annual income. A rule of thumb for estimating the market value of industrial and commercial properties
Gross Rent Multiplier
A useful rule of thumb for estimating the market value of income-producing residential property. The multiplier is derived by using comparable sales divided by the actual or estimated monthly rentals to arrive at an acceptable average.
Homogeneous
As used in appraisal, this term describes an area or neighborhood in which the property types or uses are similar and harmonious and the inhabitants have similar cultural, social and economic backgrounds. A homogeneous neighborhood tends to stabilize prop
Narrative Report
The most complete, comprehensive type of appraisal report in which the appraiser presents all information pertinent to the property, and the market for the property, along with his or her analysis, opinions and conclusions leading to an estimate of value.
Net Income (Also net operating income)
The sum arrived at after deducting from gross income the expenses of a business or investment, including taxes, insurance and allowances for vacancy and bad debts. Net income is what the property will earn in a given year's operation. It is generally calc
Progression
An appraisal principle which states that the worth of a lesser object is increased by being located among better objects. The opposite of regression.
Quantity Survey
A method of estimating the construction cost or reproduction cost; a highly technical process used to figure the cost estimate of new construction and sometimes referred to, in the building trade, as the price take-off method
Reconciliation
The final step in an appraisal process, in which the appraiser reconciles the estimates of value derived from the three approaches to arrive at a final estimate of market value for the subject property.
Replacement Cost
The cost of constructing a building with current materials and techniques that is identical in functional utility to the structure being appraised and that is designed in accordance with current styles and standards.
Square-Foot Method
A method of estimating a building's construction, reproduction or replacement cost whereby the structure's square-foot floor area is multiplied by an appropriate construction cost per square foot.
Unit-in-Place Method
An appraisal method of computing replacement cost, which uses prices for various building components, as installed, based on specific units of use such as square footage or cubic footage.
Incurable Obsolescence
An appraisal term meaning the external or functional obsolescence of an improvement that is not economically feasible to repair or correct.
Replacement cost vs reproduction cost
Replacement cost uses current construction methods and materials while reproduction cost uses the same methods and materials that were used when the building was originally constructed.