Accounting /Real Estate Notes PSI Exam Prep: Valuation and Market Analysis Part 2
Real Estate Notes PSI Exam Prep: Valuation and Market Analysis Part 2
This deck covers key principles and approaches in real estate valuation and market analysis, including concepts like the principle of contribution, sales comparison appraisal, and different types of depreciation.
The value of any given change to the property is dependent on the value of the property as a whole. Because of this, the same improvement to different houses may result in an increase in value in one, while the other sees no appreciable change.
The principle of contribution
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Key Terms
Term
Definition
The value of any given change to the property is dependent on the value of the property as a whole. Because of this, the same improvement to different houses may result in an increase in value in one, while the other sees no appreciable change.
The principle of contribution
An increase in value that occurs by combining adjacent parcels of land into a single parcel
The principle of plottage
The process of combing the parcels
The principle of assemblage
A decline in value due to the decline in value of neighboring properties
The principle of regression
The increase in property value from increased surrounding property values
The principle of progression
Changes in value may be caused by the expectation of events. A suburban residential property that is located near the site of a proposed public transportation facility may see an increase in value before the actual benefit is realized.
The principle of anticipation
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| Term | Definition |
|---|---|
The value of any given change to the property is dependent on the value of the property as a whole. Because of this, the same improvement to different houses may result in an increase in value in one, while the other sees no appreciable change. | The principle of contribution |
An increase in value that occurs by combining adjacent parcels of land into a single parcel | The principle of plottage |
The process of combing the parcels | The principle of assemblage |
A decline in value due to the decline in value of neighboring properties | The principle of regression |
The increase in property value from increased surrounding property values | The principle of progression |
Changes in value may be caused by the expectation of events. A suburban residential property that is located near the site of a proposed public transportation facility may see an increase in value before the actual benefit is realized. | The principle of anticipation |
is based on the principle of substitution and uses the prices for which similar properties have sold recently to estimate the subject property’s market value. The similar properties are referred to as “comps” or “comparables.” The property being appraised is called “subject property.” | The sales comparison appraisal approach |
it is a process in which an appraiser uses both superior and inferior units of comparison such as age, transaction price, etc., to determine a probable range of values for a property. | Bracketing |
Appraisers will make adjustments for a number of factors, applying the elements of comparison in this specific order, including: | Financing terms and cash equivalency; Conditions of sale; Market conditions ; Location; Physical characteristics |
it is based on the concept that the entire property is worth the sum of the value of the land and the value of the improvements on that land. | The cost approach |
Appraisers use and rely on this approach when the property is unique and is not being used to generate rental income. A movie theater, hospital, church, or school fall into this category. It is also used in newly constructed or unique high-value homes. | The cost approach |
it is caused by factors outside the property (e.g., an airport is nearby, causing noise). | External depreciation, also known as economic obsolescence |
it is a form of depreciation or loss in value caused by defects in design and can occur with outdated structures or systems or when a property is overbuilt for the area. | Functional obsolescence |
it occurs with wear and tear, damage, and improper maintenance | Physical deterioration |
it refers to an item of physical deterioration or functional obsolescence where the cost to cure the item is less than or the same as the anticipated increase in the property’s value after the item is cured. | Curable depreciation |
it includes items not practical to correct | Incurable depreciation |
it bases value on the cost to build a functionally equivalent property. | The replacement cost approach |
it determines the cost to build an exact replica of the property with the same materials and deficiencies | The reproduction cost approach |
it assumes the land is vacant and bases the opinion of value on highest and best use. | The cost approach |
This approach bases the current property value on potential income that the property can generate for residential investment rental properties, such as single-family homes or residential buildings that comprise two- to four-family units. | Income analysis approach |
This is the most reliable approach to value when the property being appraised is primarily used to generate rental income, which includes shopping centers, apartment buildings, and office buildings. | Income analysis approach |
Your client is purchasing a single-family home with a conventional loan. The listing price is $150,000. Does this situation require a licensed or certified appraiser? | No, since the sales price is less than $400,000 |
What is an appraisal? | An opinion or estimate of a property’s value as of a specific date |
There are three different methods for estimating value within the income approach: | Gross Rent multiplier = GSM = Sale/Gross Monthly Rent; Gross income multiplier. GIM=Sale price ÷ gross annual income; CAP RATE. Divide net operating income by value (or sales price) |
they’re an informal estimate of market value. | comparative market analyses (CMAs) |
What are arm’s length transactions? | Transactions that are not sold to relatives or under duress |
How many comparable a licensee should do? | at least three comparables. More may be necessary if good comparables are difficult to find. |
If a comparable is inferior to the subject property (e.g., next to a busy street), adjust upward. If it's superior (e.g., in a secluded, quiet neighborhood), adjust downward. | Check point |
When appraisers look past how a property is being used to determine a more optimal function, what are they determining? | Highest and best use looks past the current use (if there is one) to determine if there is another use that provides a higher value. |
What are the two categories of comparison when evaluating comparables to a subject property in the market comparison approach? | Elements and units |
What's the estimated value by cost approach for a property if the site value is $25,000, the new cost of improvements is $100,000, and the total depreciation estimate is $15,000? | To estimate value using the cost approach, an appraiser adds the site value to the cost to replace improvements, then subtracts the amount of depreciation. Here, that gives us $100,000 + $25,000 - $15,000. |