Term
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Definition
Most probable selling price, assuming normal sale conditions
Value the typical market participant places on a property |
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Term
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Definition
| Value each individual places on a property |
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Term
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Definition
| Price actually paid for a specific property |
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Term
| Why estimate market value? |
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Definition
In real estate:
Every property is unique (heterogeneous)
Markets are local, illiquid, highly segmented and informationally inefficient |
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Term
| Who uses market value appraisals? |
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Definition
Buyers
Sellers
Corporate acquisitions,Mergers & dissolutions
Courts
Montage lenders |
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Term
| Uniform Standards of Appraisal Practice USPAP |
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Definition
| Maintained by the appraisal foundation, required & followed by all states and federal regulatory agencies |
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Term
| USPAP framework for appraisal processs |
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Definition
1. Identify the appraisal problem
2. Determine the scope of the work
3. Collect data and describe property
4. Perform data analysis
5. Determine value of land
6. Apply 3 approaches to valuation: Sale comparison approach, Cost approach, Income approach
7. Reconcile indicated values from 3 approaches
8.Report final value estimate |
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Term
| Three approaches of estimating value |
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Definition
| Sale Comparison approach, Cost approach, Income approach |
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Term
| Sale Comparison approach to estimating value |
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Definition
Value of property is determined by analyzing sale prices of similar properties
Assumes in competitive markets close substitutes will sell for similar prices |
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Term
| Sale Comparison approach - selecting comparables |
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Definition
Must be properties that prospective buyers would consider substitutes
Should be arms length transactions - normal conditions
Should select minimal physical and location adjustments |
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Term
| Sale Comparison approach - Adjustments to comparable sales prices |
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Definition
Sequence of adjusments:
Transactional adjustments
Property adjustments |
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Term
| Cost approach to estimating value |
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Definition
Estimated reproduction costs of improvements - estimated accrued depriciation = depreciated cost of building improvements + Estimated value of site = indicated value of cost approach
*Major assumption: the cost of creating a good equals its value |
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Term
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Definition
Replacement cost: cost to create something of equal utility
Reproduction cost: cost of an exact physical replica |
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Term
| Methods to estimate replacement cost |
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Definition
Quantity survey method
Cost per square foot
Unit in place |
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Term
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Definition
No tax depreciation
Difference between replacement cost & market value of improvements
Physical depreciation
Functional Obsolescence
External Obsolescence |
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Term
| Income approach to estimating value |
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Definition
Rationale: Value of a property is the present value of its anticipated income
Often called income capitalization |
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Term
| 2 basic approaches to income evaluation |
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Definition
1. Direct capitalization with an overall rate
2. Discount all future cash flows at required yield (discount rate) |
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Term
| Income evaluation approach - Direct Capitalization |
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Definition
Find value as multiple of first year net income
Cap rate is obtained from sales of comparable properties
Similar in spirit to valuing a stock |
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Term
| Income evaluation approach - Discounted Cash Flow |
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Definition
Forecast net cash flows for a standard holding period
Discount all future CF's at market required yield (discount rate)
Value is defined as the present value of the expected cash flows during the holding period
DCF models require: Estimate of expected holding period
Estimates of net cash flows over period
Appraiser to select appropriate yield at which to discount all future cash flows |
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Term
| Estimating Net Operating income |
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Definition
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Term
| Potential Gross Income (PGI) |
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Definition
Rental income assuming %100 occupancy
Important issue - contract rent or market rent |
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Term
| Types of commercial leases |
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Definition
Straight Lease: Level lease payments
Step up or graduated lease: Rent increases on predetermined schedule
Indexed Lease: Rent tied to an inflation index
Percentage lease: Rent includes part of tenant sales |
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Term
| Vacancy & Collection loss |
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Definition
based on
historical experience of subject property
competing properties in the market
Natural vacancy rate |
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Term
| Miscellaneous income - Commercial leases |
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Definition
Garage rentals & parking fees
Laundry and vending machines
Clubhouse rentals |
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Term
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Definition
Ordinary and regular expenditures to keep a property functioning completely
Fixed: Insurance & property taxes
Variable: Utilities & maintenance
Does not include mortgage payments tax depreciation and capital expenditures |
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