California Real Estate Principles(13Th Ed.) Ch. 11

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Appraisal

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An unbiased estimate or opinion of the property value on a given date.

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Value

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The present and future anticipated enjoyment or profit from the ownership of a property.

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Appraisal Report

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A written statement wherein the appraiser gives his or her professional, neutral opinion of the value.

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The Purpose of The Appraisal

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Helps define how the appraisal process will be laid out.

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Intended Use

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Helps the appraiser decide which type of report will be most appropriate for communicating the results of the appraisal process.

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Cost

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Represents expenses in money, labor, material, or sacrifices in acquiring or producing something.

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Market Price

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The actual sales price of the property, not the price for which it SHOULD sell.

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Fair Market Value

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The price the property would bring if listed on the open market, with both a willing buyer and a willing seller.

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Objective Value

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The same thing as market value, but also called this because it's value can be determined by actual data.

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Value In Use or Utility Value

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The value of something based on its utility to any one specific person, which may differ from person to person. Also called subjective value for this reason.

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Demand
Utility
Scarcity
Transferability

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DUST
The four elements of value.

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Demand

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The desire to buy or obtain a commodity.

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Effective Demand

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Desire to buy coupled with the ability to buy(purchase power).

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Utility

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The ability ability of a property to satisfy a demand, such as shelter, income, or amenities.

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Amenities

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Features that raise the value of a property.

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Functional Utility

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The ability of a property to be useful and perform the functions of its intended use according to current market tastes and standards. Determined by its marketability.

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Scarcity

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Availability of a commodity in the market place. An oversupply or low demand lowers value, whereas an undersupply(or increased demand) raises it.

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Transferability

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Describes whether the property's title is unclouded and marketable or not.

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Environmental Forces

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Climate, soil, topopgraphy, oceans, and mountains. One of the forces influencing value.

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Physical Characteristics

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Quality of conveniences, which includes availability of schools, shopping, transport. One of the forces influencing value.

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Location

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Possibly the most important factor influencing value. Another term used to describe this would be Situs.

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Size

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Dictates the use of a property, determined by this quality, which describes the width and depth of the land.

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Depth Table

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Estimates the value of commercial property in relation to their distance from the street.

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Corner Influence

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Describes exposure and frontage. Usually considered desirable for commercial properties which benefit from visibility.

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Thoroughfare Condition

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Width of streets, traffic congestion, and condition of pavement all affect the value of properties on those streets.

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Front Foot

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Defines the width of a property along a street.

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Exposure

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Often used to describe which side of the street a storefront is on. Example: Shopkeepers generally prefer the shady side of the street(south and west sides).

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Orientation

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The placement of a building on its lot in relation to exposure to sun, prevailing wind, traffic, and privacy from the street.

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Assemblage

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When several smaller, less valuable parcels are put together, under one ownership causing the value of the parcels to increase.

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Blighted Areas

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Refers to a section of a city(generall inner) where most of the real estate has become run-down and property values are low. One of the economic influences affecting property value.

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Unearned Increment

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When forces beyond the owner cause the value of a property to increase, such as a favorable shift in the neighborhood or population. One of the economic influences affecting property value.

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Business Climate

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The presence and relative location of shopping areas, offices, medical suites, as well as financial, wholesale, industrial businesses. One of the economic influences affecting property value.

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Obsolescence

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May be caused by external or economic changes. Decreases the usefulness of property or causes deterioration. One of the economic influences affecting value.

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Directional Growth

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Determined by how the area or city a particular property is located in expands. Generally property in a growth area increases in value.

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Utility

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A property's ability to be used for the purpose it was intended to fulfill. Building restrictions and zoning ordinances affect this. One of the four elements of value.

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Demography

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The study of population.

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Physical forces
Economic forces
Political Forces
Social Forces

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The four main forces influencing value. PEPS

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Valuation

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The process of estimating market value for real property as of a specific time.

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Neighborhood Life Cycle

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The seasonal changes occurring over the life of a neighborhood. Principle of valuation.

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Principle of Supply and Demand

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The first step in how market prices are determined. Principle of valuation.

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Principle of Substitution

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Principle which states that a buyer will not pay more for a property than the cost of a similar one. One of the principles of valuation.

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Principle of Conformity

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Principle stating that the more that structures exist in harmony with one another, the more valuable each of those structures will be.

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Principle of Highest and Best Use(HBU)

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A principle based on which (reasonable)use of the property will produce the greatest return to the land and/or building over a given length of time. The most important principle used to determine a property's value.

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Principle of Progression

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Principle which states a property of lesser value will increase in the presence of greater valued properties.

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Principle of Regression

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Principle which states that a property of greater value will be worth less in the presence of lower valued properties.

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Principle of Balance

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A principle stating that the value of real estate is created and maintained when contrasting elements are in a state of equilibrium with each other.

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Principle of Anticipation

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A principle stating that the value of a property relies on the expectations of future benefits to the property. An appraiser may estimate the present worth of future benefits when he or she assigns a value to a property based on these anticipated returns.

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Principle of Contribution

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What a given improvement is worth, as well as what it adds to the entire property's market value. The cost of the improvement is irrelevant.

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Appraisal Process

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An orderly, systematic method of arriving at an estimate of value.

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General Data

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Information about where the surrounding area of the property and how it affects it's values.

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Regional Data

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Information about the region's economic health and amenities a property is located in. Obtained from government agencies, bank summaries, and regional planning commissions.

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Community Data

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Data about the town or city where the property is located. Obtained from city halls etc.

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Market Data

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Data such as the sales and listing prices of property.

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Specific Data

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Data relating to the specific location being appraised such as location, type of lot, improvements, etc.

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Legal Data

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Data consisting of legal description, taxes, zoning, general plan, and any restrictions or easements.

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On-Site Improvements

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Improvements attached to the land and add value such as swimming pools, fences, saunas etc.

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Off-Site Improvements

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Items that border the site and add value such as sidewalks, greenbelts, street lights.

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Reconciliation

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The final step in the appraisal process in which an appraiser examines the values derived by the various appraisal approaches and arrives at a final estimate of value.

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Self Contained Appraisal Report

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An appraisal report which discloses the identity of the client and includes descriptions.

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Summary Appraisal Report

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An appraisal report covering the same categories as the Self Contained but replaces descriptions with summaries.

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Restricted-Use Appraisal Report

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An appraisal report covering standard categories with the following exceptions: Only the client is named because there are no other users; the use of the report is limited to the client; the report refers to the appraiser's work file for sources.

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Sales Comparison Approach

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Appraisal approach which uses the principle of substitution to compare similar properties. This approach takes the selling price of one similar to it and adjusts it for any differences to arrive at the fair market value.

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Comps

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Comparable properties. Used when talking about appraisal.

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Cost Approach

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Appraisal approach in which the appraiser estimates the cost of the parcel as if it were vacant, and the cost to rebuild any structures existing on the parcel, minus the accrued depreciation.

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Replacement Cost

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The cost of restoring a property to its previous condition or replacing it with something of equal kind and quality.

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Reproduction Cost

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The cost of replacing an improvement with an exact replica, having the same quality of workmanship, design, and layout.

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Square Foot Method

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The most common way an appraiser estimates the cost of construction. The size of a building is compared, by square foot, to other buildings in the same area having the most similar workmanship.

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Cubic-Foot Method

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Same as the square foot method except that height is taken into account as well as square footage.

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Depreciation

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Loss in value from any cause. Measured by estimating the difference between the current cost to replace new and the estimated value of the property as of the date of appraisal.

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Functional Obsolescence

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Depreciation attributable to an item or feature within the property that is no longer useful or functional. Example: 4 bedroom home with one bathroom.

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Curable Depreciation and Incurable Depreciation

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Two opposite types of depreciation. One type refers to a loss in value that will cost less to fix than its loss in value. The other refers to a loss in value that is illogical to fix because its repair will cost more than its value.

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Economic Obsolescence

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A type of depreciation occurring due to forces outside the property such as changes in the social or economic demographics of the neighborhood, zoning, over/under supply, recession etc. Usually incurable.

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Straight Line Method

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A method used to determine accrued depreciation in which the appraiser assumes a building will decline in value the same amount each year, until nothing is left.

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Actual Age

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The real age of a building.

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Effective Age

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The age of a building as determined by its condition and usefulness.

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Economic Life

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The life of a building in regards to its ability to be profitably used.

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Book Value

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The original cost of the property plus the cost of any improvements and minus accumulated or accrued depreciation. Used for tax purposes.

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The Income Approach(or Income-Capitalization Approach)

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Estimates the current worth of the future benefits one would receive by owning a property. The value of the property in this approach is based on its capacity to produce an income.

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Contract Rent

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The amount of rent a renter actually pays.

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Economic Rent

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The potential amount of rent a rental could get on the open market.

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Capitalization

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The process of calculating a property's present worth based on its capacity to continue producing an income stream.

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Effective Gross Income

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The total annual income from the property minus any rental losses or vacancies. One of the five steps to appraising an income stream.

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Market Rent

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The rent the property should bring in the open market.

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Fixed Expenses

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Expenses such as property taxes, insurance, and utilities. Used to determine the operating expenses of a rental property when appraising an income stream.

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Variable Expenses

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Expenses such as management and maintenance. Used to determine the operating expenses of a rental property when appraising an income stream.

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Taxes
Insurance
Management
Maintenance
Utilities
Reserve

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The mnemonic TIMMUR for Operating Expenses.

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Net Operating Income(NOI)

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The income on a rental property after all expenses, including a maintenance reserve, have been paid. Does not include the principal and interest on a loan.

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Debt Service

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The principal and interest paid on a loan.

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Capitalization Rate(Internal Rate of Return)

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A percentage signifying the return of invested capital plus a return on the investment. Found by dividing the NOI by the sales price. One of the five steps in appraising the income stream of an investment property.

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Gross Rent Multiplier

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Used to convert gross rent into market value. An easy way to get a rough estimate of the value of rental units.

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Gross Rent

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Income, either annual or monthly, received before any expenses are deducted.

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Office of Real Estate Appraisers(OREA)

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The organization responsible for licensing appraisers in California.