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106 Cards in this Set

  • Front
  • Back

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)

1989, this requires that a real estate appraisal used in connection with a federally related transaction be performed by a person licensed or certified by the state.

Federally Related Transaction

A real estate-related financial transaction involving a federal agency or a financial institution regulated or insured by a federal agency.

Appraiser

to certify as an _________ you must t qualify for license or certification and take courses adopted by the Appraisal Foundation. . . A national org. comprised of major appraisal orgs.

State Licensed Appraiser

less than 1,000,000 or 250,000

State Certified Appraiser

less than 250,000

Competitive Market Analysis (CMA)

This is a realtors valuation based on lots o stuff. not official or anything.

Value

This is Worth . . . as in worth of the property. it relates to the relationship between an item desired and a potential purchaser of the item, rather than the item itself.

Subjective Value (Utility value, Value in use, Investment value)

This is value related to the use for a specific user if there is no identifiable open market demand for the item. - When buyers are willing to pay more or invest more in a property than they know they would be able to realize on resale, it reflects this type of value

Objective Value (Value in Exchange, Market Value)

Value that does not relate to just a specific user. … Willing Buyer/Willing Seller Concept … the most probable price a property should bring in a competitive and open market under all conditions necessary for a fair sale.

Market Value

Value based only on buyers and sellers. not the same as price (amount paid) or cost (which is just the total amount of money, labor, materials, and services, spent to produce or develop an item i.e. can be higher or lower than ______ value) as other factors come into play to effect cost like pressure to buy or sell, mis-information, motivation, etc.

Characteristics of Value


1)Utility


2) Scarcity


3) Effective Demand


4) Transferability

Utility

Ability of a property to satisfy a need or desire of a potential buyer. (A place on main street gets more foot traffic, which may be important)

Sarcity

An item cannot have value unless there is a degree of limitedness. Property with a view sells for more than property without a view.

Effective Demand

Demand for a property from people with a desire to have it AND the purchasing power to acquire it.

Transferablilty

If the property can not be easily transferred, it has no value to a prospective purchaser.

General Forces That Affect Real Estate Value

1) Physical and Enviromental Conditions (climate, topography, schools, shopping centers)


2) Economic Conditions (employment and wage conditions, trends in interest rates, building cost) 3) Governmental or Political Regulations (Taxes, zoning)


4) Social Influences (increased values of properties catering to the needs of incoming population, and vice versa)

Unearned Increment

Any increase in value resulting from general forces, which are outside the control of the property owner (like favorable re-zoning, inflation, or population growth).

International Building Code (IBC) and Insurance Services Office (ISO)

Organizations that classify construction types based on their resistance to fire.

Frame Buildings

This is the type of construction for most homes. Buildings with exterior walls, floors, and roofs of combustable construction. Wood Frame is the most common.

Joisted Masonry Buildings

Buildings with exterior walls of masonry or fire resistant construction. (brick, concrete, cinder blocks, tile, stone)

Light Noncombustible Buildings

buildings with exterior walls of light metal or other noncombustible material, and noncombustible floors and roofs. Typically steel frame buildings.

A-Frame

This style features steeply angled sides that also serve as the roof. The roof begins on both sides of the rectangular house and meet at the top in the shape of an “A”.

Bungalow

These are typically 1 or 1 1⁄2 story homes with a sloping roof and exposed rafter tails. One might consider the bungalow as the forerunner of the ranch style.

Cape Cod

These houses originated in New England and are characterized by their 1 1⁄2 stories, steep roofs, gables and a central chimney.

Craftsman

Sometimes called the Arts and Crafts style is an American original. This style features clean lines and the use of natural materials with a usually almost square floor plan a large, sometime wraparound front porch and front and side gables. This style is found in many older neighborhoods.

Colonial

This is really almost not a style in itself, but is represented by a variety of different building styles. It date back to very early America and can be a simple home or an elaborate style such as the Dutch Colonial with its full front porch and elaborate columns.

Mid-Century Modern

This is a relatively new style that describes of lot of housing built from the 1940’s through the early 1960’s. These home are found in 1950’s neighborhoods and are usually a one level with very clean and sharp lines.

Ranch

Usually one level with a close to the ground profile. This home is found in many suburbs of cities.

Split or Tri level

These homes have floors levels that are staggered and the main level of the house is halfway between the upper and lower floors. Another variation is the Split-Entry which has the central stairway located at the front door which is halfway between the upper and lower floors.

Victorian

These homes were built during the reign of Queen Victoria (1837-1901) and are characterized by steep pitched roofs and very ornate decorative features.

Principal of Anticipation

The principal holds that value is created by the expectation of future benefits to be derived from ownership and use of property.

Principal of Substitution

When one makes comparisons, this principal is in effect. . . it holds that the value of property that is replaceable tends to be set by the cost of acquiring an equally desirable substitute property without any undue delay. (included in this approach are Sales comparison, income approach, and cost approach.

Sales Comparison Approach (Market Data Approach)

In this approach, homes and land are valued by comparing prices paid for similar properties

Income Approach

In this approach, properties which produce renal income are valued based on their anticipated net income and rate of return.

Cost Approach

This approach is most commonly used when sales data is lacking for the sales comparison approach and real data is insufficient for the income approach. In this approach, the appraiser compares the existing property to a similar building to be built. Estimates value of land, and looks at cost and depreciation of things on the land.

The Principal of Change

This principal holds that value estimates are valid only as of a specific point in time as neighborhoods and properties tend to go through a four stage life cycle 1)integration (development and growth) 2) Equilibrium (stability and Maturity 3) Disintegration (deterioration, decline or old age) 4) Revitalization and rehabilitation.

Principal of Conformity

This principal holds that maximum value is realized when there is a reasonable degree of architectural homogeneity and land users are compatible and conform to the standards for the area. (lack of this would be commercial and residential mixture, and ultra modern homes next to victorian homes.)

Regression

This concept holds that the value of better property will suffer if it is placed in an area of lesser valued homes. The value of a home built at a cost of $250,000 would suffer if placed in an area of $160,000 homes.

Progression

This concept holds that the value of a lesser property will be enhanced if it is placed in an area of better homes. The value of a home built at a cost of $250,000 would be enhanced if placed in an area of $400,000 homes.

Principal of Diminishing Returns

This principal holds that the value of property is governed by the contribution made by the four agent of production (land, labor, capital and coordination) . . . once the maximum value of the property has been reached, any further increase in these agents would not produce enough of a return to justify additional investments.

The Principal of Competition

This principal holds that profits will encourage competition, and excess profits tend to create excessive competition, which can destroy profits.

The Principal of Contribution

This principal holds that the value of an improvement is measured by its contribution to the net return of the property (i.e. whether the money spent would add value in excess of the cost and at an acceptable rate of return)

Land to building Ratio

a 10,000 square foot building site that has a 2,500 square foot home on it would have a _____ _ _____ _____ of 4:1

Highest and Best Use

The maximum value of land is achieved by putting the land to this.

Amenities

Aspects of a location or design that make the property more desirable (fireplaces, proximity to schools, etc.)

Assemblage

Putting several parcels of land under one owner (may contribute to highest and best use of land) The added value of this is called Plottage

Appraisal

An opinion of value or the act or process of developing an opinion of the value of a property, or an interest in a property, as of a specified date by an appraiser

Uniform Residential Appraisal Report (URAR)

This divides the description into the following categories: general description, exterior description, foundation, basement, insulation, room list, interior, heating, kitchen equipment, attic, amenities, car storage, and comments.

Depreciation

Defined as a loss in value from any cause.

Accrued Depreciation

The difference between the value of the building at the time of the appraisal and the current replacement cost of the structure in new condition.

Accruals of Depreciation

Looking ahead to future depreciation.

Physical Deterioration

Wear and tear or breaking down of physical structure, which takes place over time

Obsolescence

The loss in the usefulness of structures that causes them to become less desirable or less useful. It is more difficult to correct than deterioration.

Functional Obsolescence

The loss of value due to factors of inadequacy or over adequacy within the property itself, often caused by changes in construction materials, methods, equipment, and desires of people.

External Obsolescence (Economic Obsolescence)

A loss in value resulting from conditions outside the property. . . like deterioration of the neighborhood caused by changes in blight, changes in zoning, fumes from factory, etc.

Actual Age of Improvements

The length of time improvements have been standing.

Effective Age of Improvements

The age the improvements appear to be, based on their condition. (a 10 year old building that is poorly maintained might have an _______ age of 15 years)

Physical Life

The period of time between the completion of a building construction and the time when the building is no longer fit or safe to use. (the ______ life of the building is terminated by deterioration)

Economic Life

The period of time between the completion of construction and the disappearance of the buildings ability to produce services or income sufficient to offset the expenses. (the ______ life is terminated by obsolescence)


***Because physical life represents the time a building can actually stand and economic life represents the time it would be profitable to let it stand, the economic life can never be greater than the physical life. It may be, and frequently is, less.***

***Because physical life represents the time a building can actually stand and economic life represents the time it would be profitable to let it stand, the economic life can never be greater than the physical life. It may be, and frequently is, less.***

Sales Comparison Approach (Market Data Approach)

most common approach to appraise homes and land. this is a valuation of properties based on the prices paid for similar properties. Generally the best method of estimating a value of property. looks at conditions of sale, date of sale, location, physical characteristics. Purchase price is not relevant. based on the principal of substitution.

Cost Approach (Summation Approach, Replacement Cost Approach, Reproduction Cost Approach)

Appraisal approach most commonly used when a property is a single use type. the basis of this approach is that the value of improved property can be estimated by adding the value of the land to the depreciated cost of the improvements to the land. this approach can be used to appraise almost any type of improved property, but as it requires a greater degree of skill than the sales comparison approach, the ______ approach is not the preferred method when the sales comparison approach is applicable. Based on the principal of substitution.

Replacement Cost

The cost of a new building with the same functional utility. The materials used for the new building could be the same, similar or more modern, and the design and layout could be different. Taken into consideration in cost approach.

Reproduction Cost

Taken into consideration in cost approach . the present cost of constructing a substitute structure that is an exact replica of the existing structure.

Reconciliation

The weighing of different factors or affecting or methods of appraising real property, as the final step in estimating market value.

Comapritive Cost Method (Square Foot Method)

Method commonly used to estimate cost . fast, inexpensive, and easy to understand , and most commonly used. involves comparing the subject property with other similar buildings who’s costs are known.

Unit-in-place method

This is a modification of the quantity survey method. It involves combining all the costs into a unit cost for each portion of the building installed. (cost of floor, appliances, framing, stairway, heating. . . etc are based on this method

Quantity Survey Method

Method commonly used to estimate cost. the most detailed and complex method. most commonly used by contractors and builders as the basis for a bid on a construction contract. It involves a complete itemization

Straight Line (Age Life) Method

When calculating accrued depritaition, this this the simplest method. based on the presumption that the improvements depreciate at an equal rate each year until the end of their economic life, when the building would be torn down. Since the building would lose 100% of its value over its economic life, the method involved deciding 100% of economic cost by the economic life. - Total Depreciation = (annual depreciation x Effective Age) x cost

Income Approach (Capitalization Approach

This method of appraisal is used to appraise properties capable of producing rental income for the owner, i.e., apartments, office buildings, warehouses, etc. Premise is that the value is the present worth of future benefits. The formula for this approach is I = R x V. It can be remembered as IRV. IRV stands for income, rate and value

Net Income

The gross income less operating expenses.

Gross Income

Total Income

Scheduled Gross income

The total potential income from all sources

Effective Gross Income

Scheduled gross income less vacancies and collection losses

Fixed Expenses

Costs that are relatively permanent (e.g. property taxes and property insurance)

Variable Expenses

Costs that vary according to occupancy . . . fuel, utilities, decorating, repairs, advertising, management

Reserves for Replacement

Amounts set aside for replacing equipment or portions of the building that have a relatively short life expectancy.

Capitalization Rate

Quality and durability are related to this rate. It is the rate of return that converts net income to value. It is expressed in a percentage.

Gross Rent Multiplier

For smaller income properties, this method is used instead of Income Approach. While it uses the same method as the sales comparison, the _____ ______ _____ is considered the income approach for residential properties. . . . Value=Gross Rent x the Multiplier - E.g. If rental properties in the area were selling for about 127 times their rents and the subject property was renting for $920 per month, its value would be 127 x $920, or $116,840

Correlation / Reconciliation

Final step in estimation of market value. Basically taking all three appraisal methods (sales comparison, cost, and income) and using the one that works while using the others as a check. . . in other words, utilizing your resources.

Reporting

When correlation is completed, a _____ is given. most commonly a summary report or a form report. The Uniform Residential Appraisal Report is the one most often used by lending institutions.

Commercial Real Estate

Property that is owned to produce an income for the owner. Examples are office buildings, strip malls, hotels, apartments, and vacant land to be leased.

Industrial Real Estate

Property used for manufacturing. These leases are the longest of all commercial leases.

Leverage

Using financing to allow a small amount of cash to purchase a large property investment. It provides opportunity to make large investments with only a little cash

Income Taxes

Considered progressive taxes because the tax rates increase as taxable income increases. Persons earning higher incomes pay a higher percentage in taxes.

Taxable Income

The income on which tax is paid. . . gross income less certain tax deductions.

Tax Deductions

Items which can be deducted from gross income to arrive at annal taxable income. (only mortgage interest and property taxes are deductible for a personal residence . . . business and investment properties get a ton more deduction benefits)

Tax Credit

A direct deduction from the tax due, rather than a deduction from taxable income.

Short-term capital gains

Gains that are taxed at the incisors ordinary income tax rate, and are investments held for a year or less.

Long-Term Capital Gains Tax

Are gains on dispositions of assets held for more than a year, and are taxed at a loser rate then short term gains.

Adjusted Cost Basis

Capital Gains are not based on what is paid for the home, but on this.

Capital Gain

This is, for most property, the profit realized upon disposition (selling?). Taxed at regular rate if held for a year or less. And taxed up to 15% for a year or more.

Capital Loss

If the home was sold at a loss, the loss realized is referred to this. The losses may be tax deductible (except for property held as a private residence.


​***In order to determine whether there is a gain or loss and the amount of the gain or loss, an owner must compare his adjusted basis in the property and the realized selling price of the property***

​***In order to determine whether there is a gain or loss and the amount of the gain or loss, an owner must compare his adjusted basis in the property and the realized selling price of the property***

Adjusted Basis

you arrive to the ____ _____ by starting with the cost basis (purchase price of the property plus certain closing costs). Then this basis may be increased or decreased. the Basis can be increased by capital improvements (items that add value to property) or assessments of for local improvements (sidewalks and streets) . Or basis can be decreased by uninsured losses from fire, flood, etc. Original Basis +Assessments, Capital Improvements, Additions, etc, - Depreciation deductions, uninsured losses, payments for sale of rights in or part of the property = ________ _____________

Amounted Basis

The total amount received from the property. Selling price less selling expenses

Capital Gains (or Loss)

This is determined by subtracting the adjusted cost basis from the amount realized from the sale.


***A gain is realized in the tax year in which the property is sold. The gain is recognized in the tax year for which it is taxed. ***

***A gain is realized in the tax year in which the property is sold. The gain is recognized in the tax year for which it is taxed. ***

Installment Sale

When a person defers tax on a gain (so it is recognized in a different year than it is realized). This happens when he does not receieve full payment on the purchase price that year. The person pays pays tax only on the amount of capital gains he receives each year.

Primary Residence Exclusion from Capital Gains Tax

An individual may exclude, from his gross income up to $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of real property if he used it as his primary residence for two of the five years before the date of sale. The two years of residency do not have to be continuous.

Tax Deferred Exchange (Tax-Free Exchange, Nontaxable Exchange, Section 1031 Exchange)

1031 of the Internal Revenue Code (IRC). It is a common type of tax-deferred exchange. . . a like-kind exchange - an exchange of tangible kind-like properties, (e.g. real estate for real estate, or personal property for personal property.) The exchange can only involve business, income, or investment property. Neither property may be used for personal purposes, such as a home. The exchange of properties may be simultaneous or delayed. (wherein the proceeds from a sale are held by a facilitator and used to make purchase of another property. Taxes are only paid on the Boot (money in excess of property traded for) . . . To defer all taxes on an exchange, a person must, exchange for other business or investment real property, but it does not have to be the same type of property. He must identify replacement property(ies) within 45 days and close on the purchase within 180 days after the closing of the sale of his building. He must take no boot (money or reduced mortgage debt). He would have to pay tax on the amount of boot received or his capital gain, whichever is less.

Delayed Exchange

In a 1031, Proceeds from a sale are held by a facilitator and used to make a purchase of another property. To qualify for the tax deferral in a delayed exchange, the taxpayer must identify potential replacement property within 45 days and actually take title to property identified within 180 days after the date he transfers title to the property given up in the exchange.

Boot

Money received in a 1031 exchange when one trades down that arises from the difference between his equity in the property he gave up and his equity in the property received. (A boot for the entire equity is received when one sells the property)

Mortgage Relief

Money received in a 1031 exchange when one trades down that arises from the difference between his equity in the property he gave up and his equity in the property received. (A boot for the entire equity is received when one sells the property)

Mortgage Relief

Assumption of a greater mortgage balance the taxpayer has received in the 1031 exchange.

Equity

The difference between the property value and the liens encumbering the property.