Valuation/Appraisal Larabee Section 4

Valuation/Appraisal Larabee Section 4

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Term Definition
Abstraction (Abstractive Method) Estimating the value of land by deducting the value of the improvements from the overall price of the property.
Accrued Depreciation (Cost Approach) The difference between a property's estimated reproduction cost (cost approach to value) and current market value. It is the sum of depreciation from all causes.
Adjusted Selling Price The price a comparable sale adjusted upwards (if it lacks a feature) or downwards (if it has more features) compared to the subject property.
Age-life Table (Depreciation) Determining depreciation based on the relationship of a property's condition & its economic life. Ex: Effective age (based on condition) = 10 yrs & estimated remaining economic life is 30 yrs. 10+30=40 yrs economic life: 10/40 =25% depreciation today.
Amenities Features that increase the value of property.
Appraisal A report that states an appraiser's opinion of a property's market value.
Assemblage Consolidating two or more parcels to create a larger building site in order to create a greater return. The resultant increase in value is known as plottage.
Book Value The value including accumulated depreciation as reflected in the financial records of the owner. Normally lower than market value.
Income (Capitalization) Approach Determination of value calculated from a property's income. Net operating income divided by the overall capitalization rate equals the value of the property. (NOI divided by % Return = Value).
Cash Concept The amount an individual would be willing to pay for the property in cash. (direct sales comparison approach)
Change Principle Changes in social and economic conditions have a constant impact on property value and must be considered in an appraisal.
Characteristics of Value Demand, Utility, Scarcity, and Transferability. (D.U.S.T.)
Comparables Similar properties in the vicinity of the subject (property being appraised) in the direct sales comparison approach to value. An appraiser will compare the comps to the subject, and make adjustments to the comparables accordingly.
Competition Principle A principle of value stating that Competition drives down profit, whereas excess Profit generates competition.
Competitive Market Analysis (CMA) Used by real estate brokers to determine a listing price by comparing recent sales, properties that are currently for sale, and those listings that expired without selling in the same vicinity as the subject property.
Contribution A value principle holding that an amenity or improvement is worth the value it adds, not what it costs.
Cost Approach An approach to determining value based on adding the cost of the land (as if vacant) (+) the current replacement cost of improvements (-) accrued depreciation.
Cost Per Square Foot The basis of comparison between sold properties in the cost approach to value.
Curable Depreciation Depreciation that is not cost-prohibitive to repair.
Deferred Maintenance Postponement of curable repairs; leads to further deterioration.
Demand A characteristic of value; having the desire and resources to possess.
Depreciation (appraisal) Loss of property value due to any physical, functional or external condition.
Depth Tables Charts intended to standardize lot values based on increase in lot depth, based on the front of a lot having greater value than the rear. Used by county assessors to assist in applying uniform assessments.
Development Method The estimated value after development less the cost of development equals the approximate value of the land.
Economic Life The approximate length of time a building can be used profitably.
External Obsolescence Loss of value due to economic or social circumstances outside the property. Usually incurable. Also known as economic or locational obsolescence. (Same as economic obsolescence)
Economies of Scale Incremental increases in production require relatively less increase in resources, resulting in overall increased earning potential.
Effective Age Age of an improvement taking into consideration all forms of depreciation. A building may be 10 years old, but due to poor maintenance have an effective age of 20 years.
Effective Gross Income Estimated income from a property after vacancy and collection loss is subtracted from gross income.
Functional Obsolescence Loss of value due to inadequacy of the building itself in today's market; i.e. age or poor/outmoded design.
Gross Rent Multiplier Rough calculation to determine value of an income producing property. GRM = average sales price of similar properties divided by the monthly gross rent. "GIM" reaches the same conclusion by dividing sales price of comps by annual income.
Heterogeneity No two are alike. Opposite of homogeneity
Highest and Best Use Principle That use determined by an appraiser of a commercial property that would bring the highest net return on investment to the owner. May not be the same as the present use, depending on development in the surrounding area.
Incurable Depreciation Loss of property value that cannot be fixed due to excessive cost or external factors.
Leverage Purchasing using borrowed funds, such that a small down-payment might lead to appreciation in value of both the investment and the funds used to purchase it.
Market Value The most probable (average, not highest) price which a property should bring in (1) a competitive/open market with (2) property on market f/ reasonable time, and (3) buyer/seller acting w/ full knowledge and no undue pressures (divorce, foreclosure)
Modification The effect on use or value of a property due to use or improvements of surrounding properties.
Net Operating Income (NOI) Projected income NOT including depreciation/ financing costs. Annual potential gross income from all sources (-) vacancy & collection loss (-) operating expenses & replacement reserves = NOI. Cost of managing IS considered an operating expense.
Observed Condition Method Method used by an appraiser to determine depreciation by subtracting observed physical deterioration, functional obsolescence and external obsolescence figures from the replacement cost.
Obsolescence Loss of value due to a functional problem (floor plan layout is poor) or an external issue (down zoned the property or next door to industrial use property).
Operating Expense Ratio The result of dividing the operating expenses by the potential gross income of an income producing property.
Operating Expenses Fixed expenses, variable expenses, and replacement reserves of operating and maintaining a property. Expenses do NOT include debt service (value is the same whether mortgaged or purchased with cash), capital improvements or depreciation.
Physical Deterioration Ordinary wear and tear, age, and breakage.
Anticipation Principle A principle of value that states that what you expect to happen in the future that affects your decision to buy (or the value of the property) now.
Supply and Demand Principle Value is affected by supply; tending higher in areas of scarcity (demand exceeds supply), and lower in a saturated market (supply exceeds demand). Often stated as a ratio. A ratio of 1/4 reflects a seller's market (four buyers for every home).
Principles of Value Economic rules that impact value of real property, including principles of anticipation, change, competition, conformity, contribution, highest & best use, increasing/diminishing returns, plottage, progression/regression, supply & demand, substitution.
Quantity Survey Method The most complex, technical, time consuming and accurate method of determining replacement/reproduction cost by considering not only materials and labor, but regulatory costs, survey, taxes, profit, etc. Applied primarily to historical structures.
Rate of Return The yield of an investment, expressed as a percentage that the investor expects to make over the term of ownership.
Reconciliation The final step in determining value in which the appraiser correlates the three approaches to value (cost, income and direct sales comparison). It is NOT an average, but gives weight to the most appropriate method for the type of property.
Replacement Cost Cost to replace a structure to similar utility using current materials and modern construction methods. Estimating replacement cost methods include square-foot, unit-in-place, quantity-survey or index.
Reproduction Cost Cost to reproduce a structure exactly, using identical original materials and methods. Sets the highest level of value.
Residual Method An appraisal process used in the income approach to estimate the value of the building by itself by deducting the value of the land as used in the cost approach.
Direct Sales Comparison Approach One of three appraisal approaches to value, based on the principal of substitution. Most appropriate for residential property, and sets the upper limit of value as it is concerned with most recent sales. Formerly known as market data approach.
Scarcity Relationship between supply and demand in which demand exceeds supply, i.e. a seller's market.
Site Valuation Determining the value of the vacant land alone.
Situs Preference for one location over another without basis in objective fact or knowledge. It is said that the most important consideration in buying real estate is location, location, location.
Subjective Value What a specific person might be willing to pay for a property because of a perceived direct benefit not shared with others. Contrasts with objective value. Example; the property is next to a friend or relative.
Substitution Principle Substitution Principle
Unit-in-Place Method A method of determining replacement cost based primarily on cost of materials per square foot or yard (or other unit of measurement) plus labor, profit etc. Less technical and involved than the quantity survey method.
Utility Value The value to a specific owner also known as subjective value.
Yield Annualized amount of return to an investor; expressed as a percentage of the original investment.
Homogeneity Similarity; Neighborhoods that have homogeneity of houses and people are generally stable in value.
Capital Improvement An improvement that extends the life of a property, as opposed to maintenance. Capital improvements are not included in computing the operating expenses of a property. Example: New siding or roofing, but not painting or ceiling fans.
Conformity Principle A property that conforms to its surrounding properties in style, age, size, appearance tends to maximize value.
Increasing & Diminishing Returns Principle The cost of improving a property increases its value (law of increasing returns) only to a certain point; over-improving an obsolete property, or improvements that do not add to value are examples of the law of decreasing returns
Progression & Regression Principle Twin principles of value holding that a property tends toward the value of those around it. The worst house in the best neighborhood will tend to be more valuable (progression); mansion in a slum will tend to be lower in value (regression)
Square-Foot Method The most common and easiest method of determining replacement cost based on cost-per-square-foot of a comparable, recently constructed building multiplied by the square footage of the subject property
Approaches to Value Primary methods of appraisal; Cost approach, Income approach, Direct Sales Comparison Approach
Objective Value The price an informed buyer might be willing to pay for a property absent a specific personal interest in the property. Contrasts with subjective value.
Straight Line Method a method of depreciation that is computed by dividing the adjusted basis of a property by the number of years of estimated remaining useful life. The cost of the property is thus deducted in equal annual installments
Appraiser is an independent person trained to provide an unbiased estimate of value
Gross Income Multiplier is an appraisal method which relates the sales price of a property to its rental income Sales Price / Gross Income = GIM
Index Method a type of cost approach used by appraisers, by computing the replacement cost of a building
Plottage ncreased value resulting from assemblage (the combining of adjacent lots into one larger lot)
Regression a principle of appraisal stating that , between dissimilar properties, the worth of the better property is adversely affected by the presence of the lesser-quality property
Arms length A term indicating parties to a transaction are acting independently and with full bargaining knowledge and position. A sale to a family member is not "arms length" and may therefore impact market value or have tax consequences.

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