Day 11 - Real Estate Exam

Front 1

what is an appraisal

Back 1

and ESTIMATE or OPINION of value

Front 2

an appraiser comes up with an estimate by...

Back 2

- economic factors (employment & interest rates)
- environmental factors (pollutants in the area or on the land)
- physical factors (location, size and condition)
- social factors (demand for type of housing)

Front 3

Subject Property

Back 3

is the property being appraised

Front 4

Reasons for an appraisal

Back 4

- buying
- eminent domain
- estate valuation
- exchange of ownership
- mortgage approval
- property taxes
- selling
- taxes other than property taxes
- various court proceedings

Front 5

Value Factors - when it comes to location, location, location

Back 5

- access to employment
- amenities & service
- hazards & nuisances
- nearness to transportation
- neighborhood compatibility
- safety
- schools
- traffic

Front 6

market value

Back 6

is the value that appraisers deal with most often

Front 7

assessing or appraising

Back 7

appraising is an estimate of value

assessing is a value estimate done for a specific purpose of collecting property taxes

Front 8

market value - 'arm's length transaction'

Back 8

implies no relationship exists between buyer and seller, each is acting on their own best interest

Front 9

value in use

Back 9

is value that a property holds to a specifice person (e.g. a doctor looking at a house w/a room that will be his office, he's willing to pay more than a 'typical buyer' because he has a specific use in mind)

Front 10

investment value

Back 10

is the value to a specific investor with a specific plan for the property (e.g. warehouse sold for use as a warehouse vs. warehouse being sold to renovate into movie theater)

Front 11

assessed value

ad valorem 'according to value'

Back 11

is the value placed on the property for tax purposes, associated w/the word ad valorem 'according to value'

Front 12

economic factors - anticipation

Back 12

value is created by the anticipation of the future benefits owning the property will provide

Front 13

economic factors - balance

Back 13

value of the land and the building on it. (e.g. you wouldn't want to build a $100K on land that costs $50k) - keep the balance with the existing surrounding neighborhood

Front 14

economic factors - change

Back 14

closely related to anticipation, social changes all affect property value (e.g. physical, govmnt, economic, etc)

Front 15

economic factors - competition

Back 15

supply side (developers & builders) try to meet the demand side (buyers & renters)

Front 16

economic factors - conformity

Back 16

value is created and sustained when real estate characteristics are similar

Front 17

economic factors - contribution

Back 17

in real estate a building or a faucet is worth the value the market places on it, not it's actual cost (e.g. building a $mil house in the wrong neighborhood wont be worth a $mil, but a $1k paint job would increase the value by $5k)

Front 18

economic factors - externalities

Back 18

because it stays in a 'fixed' location, it's affected by everything around it (e.g. schools, gas state on the corner, mortgage rates, etc)

Front 19

Highest & Best use - must meet four criterias

Back 19

- physically possible
- legally permitted
- economically feasible
- most (maximally) productive

Front 20

increasing & decreasing (diminishing) returns

Back 20

relates to adding improvements to a piece of real estate. Increasing is when it adds value back, decreasing occurs when an improvment gives back less that it cost to make it

Front 21

Plottage

Back 21

state that the whole is sometimes greater than sum of its parts (e.g. four pacels indiviudally $50k a piece = $200k,
vs. one full parcel that you could build a shopping mall that is now worth $300k

Front 22

Assemblage

Back 22

the act of putting individual properties together to form a large lot

Front 23

Regression & Progression

Back 23

e.g. buying the smallest house in the neighboor brings the value of your house up vs. owning the largest house in the neighborhood your value goes down due to the smaller homes in the neighborhood

Front 24

Substitution

Back 24

is when the buyer has found thre homes that meet his needs, he is going to purchase the one he can get the cheapest

Front 25

surplus productivity

Back 25

is the difference between costs to build and the selling price

Front 26

comparables or comps

Back 26

is what an appraiser uses to estimate property value, he'll analyse the sale of similar properties - also called sales comparison approach, market analysis approach or market comparison approach

Front 27

principle of substitution

Back 27

is what most people apply when the search for a house, nobody wants to pay more than is necessary.

Front 28

paired sales analysis

Back 28

is based on the idea that if two homes are similar in all respects except one, & the sale price of each home is differen, the dollar amount can be attributed to the feature in the 2nd house (e.g. 4th bedroom)

Front 29

cost approach

Back 29

is based on the idea that components of a piece of real esate or the land or bldg can be added together to arrive at it's value (e.g. figuring out the value of a church, not many comparisons)

Front 30

reproduction costs

Back 30

is the cost to construct an exact replica

Front 31

direct or hard costs

Back 31

expenses directly related to the cost of building a home

Front 32

indirect or soft costs

Back 32

the costs of pulling permits, architectural costs etc

Front 33

4 methods for estimating reproduction or replacement costs

Back 33

- sq footage method
- unit-in-place method
- quantity survey method
- index method

Front 34

depreciation

Back 34

is the loss in value to any structure due to wear & tear, age, poor location

Front 35

accrued depreciation

Back 35

menas the total depreciation of a buiding from all causes

Front 36

phyiscal deterioration

Back 36

normal wear and tear that a building experiences as it ages

Front 37

curable deterioration

Back 37

refers to a form of deterioration that is economically feasible to repair (e.g. a paint job)

Front 38

incurable deterioration

Back 38

cost of repairing an item surpasses the value it adds to the structure

Front 39

functional obsolescense

Back 39

older structures or unacceptable design in newer structures (e.g. an older home w/4 bedrooms with 1 bathroom off the kitchen) , another example would be a newer home w/2 bedrooms and an office/or large closet, most peope want 3 bedrooms)

Front 40

external obsolescene

Back 40

is a form of depreciation caused by factors external to the land itself (gas station adjacent to the land)

Front 41

straight line method
or economic age life method

Back 41

appraisers use this to estimate depreciation of wear and tear on a building

Front 42

economic life

Back 42

reflects the number of years it contributes to the value of the land

Front 43

economic age

Back 43

is an estimate of how old the building is

Front 44

income approach

Back 44

estimates the value of a piece of property by the income that the property could generate (e.g. typically done for shopping malls and apartment complexes)

Front 45

gross rent multiplier (GRM)

Back 45

technique for estimating value based on the idea the property value can be calculated as a multiple of gross rent

Front 46

gross income multiplier (GIM)

Back 46

technique for estimating value based on the idea the property value can be calculated as a multiple of gross income

Front 47

income capitalization approach

Back 47

this method converts the income of a property into an estimate of it's value

Front 48

estimating net operating income

Back 48

- estimate potential gross income
-subtract vacancy and collection loss
- estimate all building expenses
- subtract estimated expenses from effective gross income

Front 49

capitalization rate

Back 49

similar to rate of return, % that investors hope to get out of a buildin income

Front 50

reconciliation

Back 50

is the process of analyzing and weighing resulsts to various approaches as applied to an appraisal problem

Front 51

URAR - uniformed residential appriaisal report form

Back 51

is the report an appraiser will fill out hwen he's done

Front 52

4 classes of real estate appraisers in MA

Back 52

- state certified 'general' appraiser
- state certified 'residential' appraiers
- state licensed real estate appraiser
- real esate appraisal trainee

Front 53

FIRREA - financial institutions reform, recovery and enforcement Act of 1989

Back 53

all appraisals used in connection wth federally related transactions be performed by licensed or certified individuals

Front 54

gross rent multiplier (grm)

Back 54

is the monthly income of a building w/no deductions for expenses. GRM is typically used when someone is purchasing a residentail property of 1 to 4 units, to figure out its value from the rent that will be coming in.
sales price divided by monthly rent = value

example: $155,000 / $1,250 = 124 GRM

Front 55

gross income multiplier (gim)

Back 55

is the monthly income of a building with no deductions for expenses. It would be used for a building of 5 or more units for residential or any commercial building.

sales price divided by annual gross income = gross income multiplier

exampler: $155,000 /15,000 = 10.33

Front 56

the income approach

Back 56

assumes that the income generated by the property will determine the properties value. the income approach is used for such things are apartment buildings, office buildings or shopping malls.

the formula's and it variations

income / rate = value
income / value = rate
value x rate = income

example:
$18,000 (income) / 9% (rate) = $200,000 (value)

$18,000 (income) / 8% (cap rate) = $225,000

the cap rate is the rate of return and is based on other building sales that are similar