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WA RE Fundamentals
Introduction to Appraisal
53
Real Estate & Planning
Not Applicable
06/09/2010

Additional Real Estate & Planning Flashcards

 


 

Cards

Term
Appraisal
Definition
an estimate or opinion of the value
Term
An appraisal is AKA:
Definition
A Valuation
Term
Value in Use
Definition
Is the subjective value that a particular person places on a property
Term
Value in exchange
Definition
the objective value of a property as viewed by the average person
Term
Value
Definition

"the present worth of future benefits"

 

usually measured in terms of money

Term
Market value is AKA
Definition
Value in exchange
Term
4 elements of market value:
Definition

DUST

 

1.  Demand

 

2. Utility

 

3. Scarcity

 

4. Transferability

Term
Market price
Definition
The price actually paid for a property no matter the conditions that affected the price (such as need to sell quickly)
Term
Market value
Definition
The price that should be paid for a property if it is purchased and sold under all conditions requisite for a fair sale
Term
A fair sale has 3 conditions and is often called:
Definition

Arm's length transaction

 

1. Open and competitive market

 

2.  Prudent and informed parties

 

3. No undue stimulus

Term
Principle of Highest and Best Use
Definition
the most profitable use it can be put to and provide the greatest net return to the owner over a period of time
Term
Principle of Change
Definition
Real estate values are constantly in flux in response to changes in various social, economic, and governmental forces that affect value
Term

4 phases of life of property:

 

 

& what principle of value is this associated with?

Definition

Associated with Principle of change, 4-phase life cycle includes:

 

1.  Integration

 

2. Equilibrium

 

3. Disintegration

 

4. Rejuvination

Term
Economic life
Definition

The period when the land and its improvements are profitable.

 

Usually ends before physical life of property

Term
Principal of Anticipation
Definition

Value is created by the anticipated future benefits of owning  property.

 

The future benefits of a property, not past, arouse a desire to own

Term
Principal of supply and demand
Definition
Values tend to rise as demand increases and supply decreases, and to diminish when the reverse is true
Term
Principal of Substitution
Definition

No one is willing to pay more for a property than they would have to pay for an equally desireable substitute

 

So...

 

If 2 properties for sale are alike in every respect, the least expensive will be in greater demand

Term
Principal of Conformity
Definition
The maximum value of land is achieved when there is an acceptable degree of social and economic conformity (similarity) in the area.
Term
Progression
Definition
The value of a home of much lower quality than those around it is increased by its association with higher quality homes
Term
Regression
Definition
The value of a large, expensive home in a neighborhood of small, inexpensive homes will suffer because of its surroundings
Term
Principal of Contribution
Definition

Concerns the value that an improvement contributes to overall value of the property

 

Some improvements contribute more to value than they cost; others cost more than they contribute to value

Term
Principal of Competition
Definition
Competition can have a dramatic impact on the value of property, especially income property
Term

Steps to the Appraisal process (7):

 

Definition

1. Define the problem

2. Determine what data is needed and where to find it

3. Gather and verify general data

4. Gather and verify specific data

5. Select and apply the valuation method(s)

6. Reconcile value indicatos for the final value estimate

7. Issue appraisal report

Term
General data
Definition

concerns matters outside the subject property that affect its value

 

ex: economic trends, neighborhood analysis...

Term
Specific Data
Definition

concerns the subject property itself

 

ex: title, building analysis, site analysis...

Term
Methods of appraisal (3):
Definition

1.  The sales comparison approach

 

2.  The cost approach

 

3.  The income approach

Term
Sales comparison approach is AKA:
Definition
Market data approach
Term
Sales comparison approach
Definition
The method of appraisal in which the appraiser compares the subject property to recently sold comparable properties
Term
3 steps to cost approach:
Definition

1.  estimate cost of replacing the improvements

 

2.  estimate and deduct any accrued depreciation

 

3.  add value of the lot to the depreciated value of improvements

Term
Reproduction cost
Definition
cost of constructing an exact duplicate (a replica) of the subject building at current prices
Term
Replacement cost
Definition
the current cost of constructing a building with the utility equivalent to the subject's -- that is a building that can be used in the same way as the subject
Term
Estimating replacement cost can be done in 3 ways:
Definition

1.  Square foot method

 

2. Unit-in-place method

 

3. Quantity survey method

Term
Square foot method is AKA:
Definition
Comparative cost method
Term
Square foot method:
Definition
Simplest way to estimate replacement cost.  Find average cost per square foot of construction for recently built comparables and multiply by square feet in subject property
Term
Unit-in-place method:
Definition
involves estimating the cost of replacing specific components of a building such as the roof, floors, foundation, etc. and add all the estimates together
Term
Quantity survey method:
Definition
involved detailed estimate of the quantities and prices of construction materials and labor, added to the indirect costs such as building permits, surveys, for what is generally the most accurate replacement cost estimate but also more complex and time consuming
Term
Depreciation
Definition
Loss in value due to any cause
Term
Curable vs incurable depreciation
Definition
Depreciation is curable if the cost of correcting it could be recovered in the sales price when the property is sold, and incurable if not
Term
Physical depreciation
Definition

loss in value due to wear and tear, damage, or structural defects

 

may be curable or incurable

Term
Curable physical deterioration is AKA:
Definition
deferred maintanence
Term
Functional obsolescense
Definition
Loss in value due to functional inadequacies often caused by out dated or poor design
Term
External obsolescense is AKA:
Definition
economic obsolescense
Term
External obsolescense
Definition
caused by conditions outside of property itself such as zoning changes, neighborhood deterioration, traffic problems, proximity to nuisances, etc.
Term
Income approach is AKA
Definition
Capitalization method
Term
Income approach
Definition

The method of appraising property in which net income is converted into value using a capitalization rate

 

 

Seeks to determine the present value of a property's future income

Term
Effective gross income
Definition
A property's potential gross income, minus bad debt and vacancy factor
Term
Net Income
Definition
A property's effective gross income, minut operating expenses
Term
Capitalization Rate
Definition

The rate of return an investor wants on her investment in the property

 

The relationship between the income a property enerates and its market value to an investor

 

Cap. rate = income/value

Term
Potential gross income (regarding rentals)
Definition
what a property could earn if it were fully occupied and all rents owed were collected
Term
bad debt and vacancy factor
Definition

the occasional vacancies and unpaid rents

 

often expressed as a percentage of the potential gross income

Term
Operating expenses are classified into (3):
Definition

1.Fixed expenses (ex. property taxes, hazard insurance)

 

2.Maintanence expenses (ex. utilities, employee wages)

 

3.Reserves for replacements (ex. replacing roof or refrigerator in a residential unit)

 

 

Term
Economic rent vs contract rent
Definition
Economic rent is one a property would earn on the open market if it were currently available for rent, as distinguished from the rent it is actually earning now, called the contract rent
Term
Reconciliation
Definition
the assembly and interpretation of all the facts that influence a property's value
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