ECONOMIC CHARACTERISTICS THAT INFLUENCE VALUE
There are four basic economic characteristics of land that will influence its value:
Relative scarcity: TOTAL SUPPLY OF RE IS FIXED
Improvements: mprovement on one parcel of land has an effect on the value of neighboring parcels or on whole communities.
P
PHYSICAL CHARACTERISTICS OF LAND
Immobility (land is nonmovable ):Because land is immobile, real estate laws and markets tend to be local in character.
Indestructibility (land is permanent)
Nonhomogeneity (each parcel of land is unique)
VALUE
can be defined as the amount of goods or services that will be offered in the marketplace in exchange for any given product. It also has been described as the present worth of future benefits attributable to a property.
the concept of cost (the price or p
7 PRINCIPLES THAT CONSTITUTE VALUE
1. The principle of supply and demand emphasizes pricing's direct relationship to the availability and demand for a product.
2. Substitution refers to the reality that any informed investor would not pay more for a property than it would cost to purchase
SUPPLY
The amount of goods available in the marketplace to be sold at a specific price.
DEMAND
The desire for economic goods people are willing and able to buy at a given price at a specific time.
FACTORS AFFECTING SUPPLY
Product availability. Inventory or lack thereof; vacancy and/or absorption rates
Potential for new inventory. New construction; renovations or conversions of existing product (for example, conversion from an antiquated office building to a new residential
APPRAISAL
An estimate of a property's valuation by an appraiser who is usually presumed to be expert in this work.
EVALUATION
An analysis of a property and its attributes in which a value estimate is not required. The study may consider any aspect of the property, including the nature, quality, and utility of an interest in the real estate.
VALUATION
Estimated worth or price. The act of valuing by appraisal.
FEDERALLY RELATED TRANSACTION
Any transaction in which a loan is originated by any financial institution or lender regulated by the federal government.
FIRREA
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 regulates financial institutions and requires that either a licensed certified or general appraiser must be used to conduct any appraisal involving a federally related transaction.
COMPARATIVE MARKET ANALYSIS
A study, intended to assist an owner in establishing listing price, of recent comparable sales, properties that failed to sell, and parcels presently on the market.
FEE APPRAISER
An appraiser who works as an independent contractor, performing appraisal services for various clients.
STAFF APPRAISER
A professional appraiser employed in-house to perform appraisals solely for the employer.
TYPES OF VALUATION
Market value is the most common subject of the valuation process.
Assessed value applies specifically to the process of real property taxation. It should be noted that assessed valuation may or may not resemble the property's actual market value.
Liquidat
INSURED VALUE
Used to determine the amount of insurance carried on the property.
MORTGAGE VALUE
Normally established by appraisal, it represents the amount or value that the lender is willing to commit to the loan. It is also the difference between the buyers initial equity investment (down-payment) and the purchase price or appraised value of the p
MARKET VALUE
the probable price a property will bring in a competitive and open market, offered by an informed seller, and allowing a reasonable time to find a purchaser who buys the property with knowledge of all the uses to which it is adapted, neither buyer nor sel
ARMS LENGTHS TRANSACTION
A transaction between relative strangers, each trying to do the best for himself or herself.
KEY POINTS IN A MARKET VALUE ANALYSIS
Market value is the most probable price a property will bring.
Payment must be made in cash or its equivalent.
Both buyer and seller must act without undue pressure.
A reasonable length of time must be allowed for the property to be exposed in the open ma
MARKET PRICE
is what a property actually sells for�its selling price. Theoretically, the ideal market price would be the same as the market value.
MARKET VALUE
s an estimate based on an analysis of comparable sales and other pertinent market data.
COST CONSIST OF TWO COMPONENTS
s an estimate based on an analysis of comparable sales and other pertinent market data.
REAL ESTATE IS APPRAISED 3 WAYS
Sales comparison approach
Cost approach
Income capitalization approach
SUBJECT PROPERTY
The property being appraised.
SALES COMPARISONS APPROACH
The process of estimating the value of a property by examining and comparing actual sales of comparable properties.
COMPARABLE PROPERTIES
Properties listed in an appraisal report that are substantially equivalent to the subject property. Also called comps.
TRANSACTIONAL DIFFERENCES
financing at the time of the comparable's sale, conditions at the time of sale, and market conditions adjustment from the date of sale to present
Location differences
Physical characteristics
COST APPROACH
The process of estimating the value of property by adding to the estimated land value the appraiser's estimate of the reproduction or replacement cost of the building, less depreciation.
appropriate for non-income-producing buildings that cannot easily be
DEPRECIATION
In appraisal, a loss of value in property due to any cause, including physical deterioration, functional obsolescence, and external (locational) obsolescence.
PHYSICAL DETERIORATION
Decline in some physical aspect of the property, resulting in a loss of value.
FUNCTIONAL OBSOLESCENE
A loss of value to an improvement to real estate due to functional problems, often caused by age or poor design.
EXTERNAL OBSOLESCENE
Reduction in a property's value caused by factors outside the subject property, such as social or environmental forces or objectionable neighboring property.-NON CURABLE HAPPENS OUTSIDE PROPERTY LINE
ECONOMIC OBSOLESCENE
A form of external obsolescence, a reduction of property value resulting from a change in the economics of the area in which the property is located.
LOCATIONAL OBSOLESCENE
A form of external obsolescence, a reduction of property value resulting from conditions outside the property.
REPRODUCTION COST
The construction cost at current prices of an exact duplicate of the subject property.
REPLACEMENT COST
The construction cost at current prices of an exact duplicate of the subject property.
INDIRECT COST
Construction expenses for items other than labor and materials (e.g., financing costs, taxes, administrative costs, contractor's overhead and profit, legal fees, interest payments, insurance costs during construction, and lease-up costs).
DIRECT COST
The expenditures necessary for the labor and materials used in the construction of a new improvement, including contractor's overhead and profit.
INCOME CAPITALIZATION APPROACH
The process of estimating the value of an income-producing property by capitalization of the annual net income expected to be produced by the property during its remaining useful life.
GROSS INCOME MULTIPLIER
The figure used as multiplier of the gross annual income of a property to produce an estimate of the property's value.
GROSS RENT MULTIPLIER
A figure used as a multiplier of the gross rental income of a property to produce an estimate of the property's value.
OVERALL CAPITALIZATION RATE
A figure that estimates value by comparing capitalization rate to income.
POTENTIAL GROSS INCOME
The gross rent roll or gross receipts attributable through rental activities if a property is 100 percent leased.
VACANCY & COLLECTION LOSS
by examining the leasing and vacancy history. On existing property, you must determine average vacancy rates; on new construction, this figure is determined by analyzing market condition studies in conjunction with neighboring property vacancy rates. This
EFFECTIVE GROSS INCOME
The income attributable to a property, after deducting vacancy and collection losses, while adding in any other income derived from that property.
FIXED EXPENSES
consist of only two items: property taxes and property insurance
VARIABLE EXPENSES
Maintenance
Repairs
Payroll
Utilities
Trash removal
Management fees
RESERVES OR REPLACEMENTS
is available cash on hand meant to pay for any anticipated or unanticipated major capital improvement to the property. Examples might include a new roof, new mechanical equipment, or fa�ade restoration.
PLOTTAGE
The increase in value or utility resulting from the consolidation (assemblage) of two or more adjacent lots into one larger lot.
ASSEMBLAGE
The merging of two separate parcels under one owner.