Real estate valuation methods

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Questions and Answers

A real estate salesperson is tasked with recommending a listing price for a property. Which of the following actions should they prioritize to determine the most appropriate price?

  • Using only historical tax assessment records to determine the property's value.
  • Gathering data on recent comparable sales and listings from the past 3-6 months. (correct)
  • Relying solely on the seller's desired price, as they know the property best.
  • Estimating the replacement cost of the property, factoring in depreciation.

When conducting a comparative market analysis (CMA), which factor is LEAST likely to be considered when comparing properties?

  • The original purchase price of the comparable properties. (correct)
  • The condition and quality of construction of each property.
  • The location of the properties in relation to amenities and schools.
  • The utility or functional aspects of the properties, such as number of bedrooms and bathrooms.

An appraiser is estimating the value of a property using the cost approach. Which of the following components would they need to include in their calculation?

  • Net operating income and capitalization rate.
  • Recent sales data of comparable properties.
  • The insured value of the property.
  • Current construction cost, accrued depreciation, and land value. (correct)

In real estate appraisal, what is the primary difference between market value and investment value?

<p>Market value is an impersonal, detached valuation, while investment value is specific to a particular investor. (A)</p> Signup and view all the answers

Which of the following appraisal approaches would be MOST suitable for valuing a church?

<p>Cost Approach (C)</p> Signup and view all the answers

A self-storage facility's value is BEST estimated using which approach?

<p>Income Approach (C)</p> Signup and view all the answers

In the context of property valuation, what does 'plottage' refer to?

<p>The increase in value resulting from combining multiple smaller parcels into one larger parcel. (A)</p> Signup and view all the answers

Which of the following factors is LEAST likely to contribute to economic obsolescence?

<p>Outdated interior design within the property. (A)</p> Signup and view all the answers

Which of the following is the BEST definition of 'insured value'?

<p>The value of a property covered by an insurance policy, typically excluding land value. (C)</p> Signup and view all the answers

What is the key distinction between direct costs and indirect costs in construction?

<p>Direct costs are specifically for labor and materials, whereas indirect costs support the project but aren't directly part of the construction. (D)</p> Signup and view all the answers

A property is located next to a newly constructed factory, leading to increased noise and traffic. This situation is MOST likely to cause:

<p>Economic obsolescence. (A)</p> Signup and view all the answers

Which of the following describes 'functional obsolescence'?

<p>A loss in value due to outdated or inadequate features within the property itself. (A)</p> Signup and view all the answers

A homeowner adds a swimming pool to their property. Which of the following could lead to functional obsolescence, even with the new pool?

<p>The cost of maintaining the pool is higher than the perceived value it adds to the property. (B)</p> Signup and view all the answers

An appraiser is tasked with finding comparable properties for a sales comparison approach. Which characteristic would make a property the LEAST useful as a comparable?

<p>Sold over two years ago. (D)</p> Signup and view all the answers

Which statement accurately describes the relationship between 'price', 'cost', and 'value'?

<p>Cost represents the expenses to create something, price is the transaction amount, and value is the perceived worth. (A)</p> Signup and view all the answers

What is the purpose of adjusting the value of comparable properties in a Comparative Market Analysis (CMA)?

<p>To account for differences between the comparable properties and the subject property. (C)</p> Signup and view all the answers

What is the term used to describe a study of the nature, quality, or utility of certain property interests in which a value estimate is not necessarily required?

<p>Evaluation (A)</p> Signup and view all the answers

Which valuation approach would be most applicable when assessing the value of a vacation home?

<p>Sales Comparison Approach (C)</p> Signup and view all the answers

Which formula demonstrates Income Approach valuation:

<p>Value = Income / Rate (C)</p> Signup and view all the answers

What is meant by 'assessed value'?

<p>A valuation placed upon property by a public officer or a board, as a basis for taxation (B)</p> Signup and view all the answers

What is meant by 'market price'?

<p>The actual selling price of a property. (C)</p> Signup and view all the answers

What is meant by 'direct cost'?

<p>The cost of labor and materials. (D)</p> Signup and view all the answers

Which of the following is the BEST description of depreciation?

<p>A loss of utility and thus value caused by physical deterioration, functional obsolescence or economic obsolescence or any combination thereof. (C)</p> Signup and view all the answers

What is the key indicator to distinguish 'Functional Obsolescence'?

<p>Impairment of useful capacity or efficiency inherent in the property itself (B)</p> Signup and view all the answers

What is meant by 'Economic Obsolescence'?

<p>A loss in value caused by influences external to the property (B)</p> Signup and view all the answers

A property is appraised, and the appraiser determines that the building has physical issues, that can be reasonably fixed. What is this called?

<p>Curable Functional Obsolescence (D)</p> Signup and view all the answers

Which of the following is the BEST definition of 'Price'?

<p>The amount a purchaser agrees to pay and a seller agrees to accept in an arms length transaction. (A)</p> Signup and view all the answers

What is meant by 'Sales Comparison Approach'?

<p>Method which compares a subject property’s characteristics with those of comparable properties which have recently sold in similar transactions. (D)</p> Signup and view all the answers

What defines the 'Mortgage Value'?

<p>The estimate worth of a particular asset used to obtain financing against that asset. (B)</p> Signup and view all the answers

What does 'Valuation' mean?

<p>The process of estimating market value, investment value, insurable value, or other properly defined value. (B)</p> Signup and view all the answers

What does 'Value-in-Use' mean?

<p>The present value of a cash flow or other benefits that an asset generates for a specific owner under a specific use. (C)</p> Signup and view all the answers

When does 'Cost Approach' valuation work best?

<p>Works best when the improvements are new and estimates of depreciation are likely to be accurate. (C)</p> Signup and view all the answers

Which of the following is NOT a factor of obsolescence?

<p>Economic strength of the property (C)</p> Signup and view all the answers

A building had an original roof placed. Over time, the roof started to leak and needed repairs. The homeowner decided to make the roof higher quality, but it was more expensive and did not add value to the home. What is this called?

<p>Curable Functional Obsolescence (A)</p> Signup and view all the answers

What is the most accurate description of 'Market Value'?

<p>The most probable price that a property should bring if exposed for sale in the open market for a reasonable period of time (D)</p> Signup and view all the answers

What is the best first step for a real estate person to take in order to recommend a sale price?

<p>Gather data on recent comparable sales and offerings (last 3-6 months). (B)</p> Signup and view all the answers

When analyzing comparable sales, which of the following is LEAST important?

<p>The year the home was constructed. (B)</p> Signup and view all the answers

Flashcards

Pricing Properties

Gathering data on recent comparable sales and offerings (last 3-6 months), analyzing sales for similarities and differences (location, condition, quality, utility), and adjusting value based on differences.

Appraisal

An estimate of a property’s value by an appraiser.

Assessed Value

A valuation placed upon property by a public officer or a board, as a basis for taxation.

Comparative Market Analysis (CMA)

A property evaluation that determines property value by comparing similar properties sold within the last year.

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Cost

The total dollar expenditure for labor, materials, legal services, architectural design, financing, taxes during construction, interest, contractor's overhead and profit, and entrepreneurial overhead and profit (may or may not equal value).

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Cost Approach

Estimating property value by calculating current construction cost, subtracting accrued depreciation, and adding land value.

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Depreciation

A loss of utility and thus value caused by physical deterioration, functional obsolescence or economic obsolescence or any combination thereof.

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Direct Cost

The cost of labor and materials.

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Evaluation

A study of the nature, quality, or utility of certain property interests in which a value estimate is not necessarily required.

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Income Approach

An appraisal technique whereby the value of an income producing property is estimating by capitalizing its net operating income using an appropriate capitalization rate.

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Indirect Cost

Costs that support a construction project, such as legal or architectural fees.

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Insured Value

The value of an asset or asset group that is covered by an insurance policy.

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Investment Value

The specific value of an investment to a particular investor based on individual investment requirements.

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Market Price

The actual selling price of a property.

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Market Value

The most probable price that a property should bring if exposed for sale in the open market for a reasonable period of time, with both the buyer and seller aware of current market conditions, neither being under duress.

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Mortgage Value

The estimated worth of a particular asset which is established for the purposes of obtaining financing secured against that asset.

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Obsolescence

The loss of desirability and usefulness caused by new inventions, changes in design, and improved processes for production, or from the influence of external factors.

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Functional Obsolescence

Impairment of useful capacity or efficiency; loss of value caused by super adequacy, inadequacy or changes in the art inherent in the property itself.

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Economic Obsolescence

A loss in value caused by influences external to the property

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Plottage

Increment in unity value of a plot of land created by assemblingsmaller ownerships into one ownership.

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Price

The amount a purchaser agrees to pay and a seller agrees to accept in an arms length transaction.

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Sales Comparison Approach

Valuation method which compares a subject property’s characteristics with those of comparable properties which have recently sold in similar transactions.

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Valuation

The process of estimating market value, investment value, insurable value, or other properly defined value of an identified interest or interests in a specific parcel or parcels of real property as of a given date.

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Value-in-Use

The net present value (NPV) of a cash flow or other benefits that an asset (real property) generates for a specific owner under a specific use.

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Market Value

The most probable price that a property should bring if exposed for sale in the open market for a reasonable period of time, with both the buyer and seller aware of current market conditions, neither being under duress.

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Cost

The total dollar expenditure for labor, materials, legal services, architectural design, financing, taxes during construction, interest, contractor's overhead and profit, and entrepreneurial overhead and profit.

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Market Price

The actual selling price of a property.

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Direct Cost

The cost of labor and materials.

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Indirect Cost

Costs that support a construction project, such as legal or architectural fees.

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Cost Approach

A method of estimating the value of real property by calculating a current construction cost, subtracting accrued depreciation and adding a land value obtained from the market.

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Sales Comparison Approach

Valuation method which compares a subject property’s characteristics with those of comparable properties which have recently sold in similar transactions.

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Income Approach

An appraisal technique whereby the value of an income producing property is estimating by capitalizing its net operating income using an appropriate capitalization rate.

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Study Notes

  • Recommending a property price involves gathering data on recent comparable sales and offerings from the last 3-6 months.
  • Analyzing sales involves looking at the location, condition, quality, and utility of the property.
  • Create a Comparative Market Analysis (CMA) by adjusting the value based on any differences that are found.

Appraisal

  • An appraisal is an expert estimate of a property’s value.

Assessed Value

  • Assessed value is a valuation placed on property by a public officer or board for taxation purposes.

Comparative Market Analysis

  • A CMA determines property value by comparing similar properties sold within the last year but is not as in depth as an appraisal.

Cost

  • Cost includes all expenditures for labor, materials, legal services, architectural design, financing, taxes during construction, interest, contractor's overhead and profit, and entrepreneurial overhead and profit.
  • It may or may not equal value.

Cost Approach

  • The cost approach estimates real property value by calculating current construction cost, subtracting accrued depreciation, and adding land value obtained from the market.
  • This method is most effective when the improvements are relatively new.

Depreciation

  • Depreciation is a loss of utility and value caused by physical deterioration, functional obsolescence, economic obsolescence, or a combination of these factors.

Direct Cost

  • Direct cost is the cost of labor and materials.

Evaluation

  • An evaluation is a study of the nature, quality, or utility of certain property interests, where a value estimate is not necessarily required.
  • Examples include highest and best use, feasibility, and market supply and demand.

Income Approach

  • The income approach is an appraisal technique that estimates the value of an income-producing property by capitalizing its net operating income using an appropriate capitalization rate.
  • Value = Income / Rate

Indirect Cost

  • Indirect costs support a construction project like legal or architectural fees.

Insured Value

  • Insured value is the value of an asset or asset group covered by an insurance policy.
  • It can be estimated by deducting the cost of non-insurable items (e.g., land value) from market value.

Investment Value

  • Investment value is the specific value of an investment to a particular investor based on individual investment requirements.
  • This is different from market value, which is impersonal and detached.

Market Price

  • Market price is the actual selling price of a property.

Market Value

  • Market value is the most probable price a property should bring if exposed for sale in the open market for a reasonable time.
  • Both buyer and seller are aware of current market conditions, and neither is under duress.

Mortgage Value

  • Mortgage value is the estimated worth of an asset for the purpose of obtaining financing secured against that asset.

Obsolescence

  • Obsolescence is a cause of depreciation and is the loss of desirability and usefulness caused by new inventions, changes in design, and improved processes for production, or external factors.
  • It may be economic or functional.

Functional Obsolescence

  • Functional obsolescence is the impairment of useful capacity or efficiency and the loss of value caused by super adequacy, inadequacy, or changes in the art inherent in the property itself.
  • Curable if the cost to cure is justified by the resulting increase in property value.

Economic Obsolescence

  • Economic obsolescence is a loss in value caused by influences external to the property, such as increasing industrial activity near a residential neighborhood.

Plottage

  • Plottage is the increment in the unity value of a plot of land created by assembling smaller ownerships into one ownership.

Price

  • Price is the agreed amount a purchaser pays and a seller accepts in an arms-length transaction.

Sales Comparison Approach

  • The sales comparison approach is a valuation method that compares a subject property’s characteristics with those of comparable properties that have recently sold in similar transactions.

Valuation

  • Valuation is the process of estimating market value, investment value, insurable value, or other properly defined value of an identified interest in real property as of a given date.

Value-in-Use

  • Value-in-use is the net present value (NPV) of a cash flow or other benefits that an asset generates for a specific owner under a specific use

Real Estate Valuation Answers

  • The most probable price that a property should bring if exposed for sale in the open market for a reasonable period of time, with both the buyer and seller aware of current market conditions, neither being under duress is known as Market Value.
  • The total dollar expenditure for labor, materials, legal services, architectural design, financing, taxes during construction, interest, contractor's overhead and profit, and entrepreneurial overhead and profit is known as Cost.
  • The actual selling price of a property is known as Market Price.
  • The cost of labor and materials is known as Direct Cost.
  • Costs that support a construction project, such as legal or architectural fees is known as Indirect Cost.

Real Estate Valuation examples

  • Church: Cost Approach is an appropriate method for estimating the value
  • Vacation home: Sales Comparison Approach is an appropriate method for estimating the value
  • Self Storage facility: Income Approach is an appropriate method for estimating the value

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