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| an estimate or opinion of the value |
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| Is the subjective value that a particular person places on a property |
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| the objective value of a property as viewed by the average person |
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"the present worth of future benefits"
usually measured in terms of money |
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| 4 elements of market value: |
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DUST
1. Demand
2. Utility
3. Scarcity
4. Transferability |
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| The price actually paid for a property no matter the conditions that affected the price (such as need to sell quickly) |
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| The price that should be paid for a property if it is purchased and sold under all conditions requisite for a fair sale |
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| A fair sale has 3 conditions and is often called: |
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Arm's length transaction
1. Open and competitive market
2. Prudent and informed parties
3. No undue stimulus |
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| Principle of Highest and Best Use |
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| the most profitable use it can be put to and provide the greatest net return to the owner over a period of time |
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| Real estate values are constantly in flux in response to changes in various social, economic, and governmental forces that affect value |
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4 phases of life of property:
& what principle of value is this associated with? |
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Associated with Principle of change, 4-phase life cycle includes:
1. Integration
2. Equilibrium
3. Disintegration
4. Rejuvination |
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The period when the land and its improvements are profitable.
Usually ends before physical life of property |
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| Principal of Anticipation |
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Value is created by the anticipated future benefits of owning property.
The future benefits of a property, not past, arouse a desire to own |
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| Principal of supply and demand |
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| Values tend to rise as demand increases and supply decreases, and to diminish when the reverse is true |
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| Principal of Substitution |
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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 |
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| The maximum value of land is achieved when there is an acceptable degree of social and economic conformity (similarity) in the area. |
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| The value of a home of much lower quality than those around it is increased by its association with higher quality homes |
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| The value of a large, expensive home in a neighborhood of small, inexpensive homes will suffer because of its surroundings |
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| Principal of Contribution |
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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 |
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| Competition can have a dramatic impact on the value of property, especially income property |
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Steps to the Appraisal process (7):
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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 |
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concerns matters outside the subject property that affect its value
ex: economic trends, neighborhood analysis... |
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concerns the subject property itself
ex: title, building analysis, site analysis... |
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| Methods of appraisal (3): |
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1. The sales comparison approach
2. The cost approach
3. The income approach |
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| Sales comparison approach is AKA: |
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| Sales comparison approach |
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| The method of appraisal in which the appraiser compares the subject property to recently sold comparable properties |
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| 3 steps to cost approach: |
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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 |
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| cost of constructing an exact duplicate (a replica) of the subject building at current prices |
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| 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 |
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| Estimating replacement cost can be done in 3 ways: |
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1. Square foot method
2. Unit-in-place method
3. Quantity survey method |
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| Square foot method is AKA: |
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| 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 |
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| involves estimating the cost of replacing specific components of a building such as the roof, floors, foundation, etc. and add all the estimates together |
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| 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 |
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| Loss in value due to any cause |
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| Curable vs incurable depreciation |
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| 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 |
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loss in value due to wear and tear, damage, or structural defects
may be curable or incurable |
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| Curable physical deterioration is AKA: |
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| Loss in value due to functional inadequacies often caused by out dated or poor design |
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| External obsolescense is AKA: |
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| caused by conditions outside of property itself such as zoning changes, neighborhood deterioration, traffic problems, proximity to nuisances, etc. |
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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 |
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| A property's potential gross income, minus bad debt and vacancy factor |
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| A property's effective gross income, minut operating expenses |
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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 |
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| Potential gross income (regarding rentals) |
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| what a property could earn if it were fully occupied and all rents owed were collected |
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| bad debt and vacancy factor |
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the occasional vacancies and unpaid rents
often expressed as a percentage of the potential gross income |
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| Operating expenses are classified into (3): |
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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)
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| Economic rent vs contract rent |
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| 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 |
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| the assembly and interpretation of all the facts that influence a property's value |
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