Real Estate Notes: PSI Exam Prep: Valuation and Market Analysis Part 2

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.

An increase in value that occurs by combining adjacent parcels of land into a single parcel

The process of combing the parcels

A decline in value due to the decline in value of neighboring properties

The increase in property value from increased surrounding property values

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.

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.”

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.

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.

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.

it is caused by factors outside the property (e.g., an airport is nearby, causing noise).

it is a form of depreciation or loss in value caused by defects in design and can occur with outdated structures or systems or when a property is overbuilt for the area.

it occurs with wear and tear, damage, and improper maintenance

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.

it includes items not practical to correct

it bases value on the cost to build a functionally equivalent property.

it determines the cost to build an exact replica of the property with the same materials and deficiencies

it assumes the land is vacant and bases the opinion of value on highest and best use.

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.

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.

No, since the sales price is less than $400,000

An opinion or estimate of a property’s value as of a specific date

1. Gross Rent multiplier = GSM = Sale/Gross Monthly Rent

2. Gross income multiplier. GIM=Sale price ÷ gross annual income

3. CAP RATE. Divide net operating income by value (or sales price)

they’re an informal estimate of market value.

Transactions that are not sold to relatives or under duress

at least three comparables. More may be necessary if good comparables are difficult to find.

Check point

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.

Elements and units

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.