Real Estate 306 Final Exam
professional appraisal practice - -imperfect information
-reliable data & analysis applies
-an appraisal is only as good as the appraiser & data available
-OPINION of value
-UNBIASED opinion of a 3rd PARTY with no direct interest in the property
-Uniform Standards of Professional Appraisal Practice (USPAP)
-Code of Ethics
sales comparison (market) approach - -value of RE can be determined by analyzing the sale prices
of similar properties
-in a competitive market, close substitutes should sell for similar prices
-difficulty: how many truly close substitutes exist & how many of these have sold recently?
-"one price" rule (i.e. equivalent goods sell for equivalent prices)
*arbitrage not available in RE (can't buy & sell RE quickly)
estimated reproduction cost of improvements - estimated accrued depreciation = depreciated cost of
building improvements
+estimated value of site
= indicated value by cost approach
-assumption: cost of creating a property is related to its market value
income approach - -"income capitalization"
-theory of anticipation
-value in investment property is a function of the income it is expected to produce (& inherent risk)
,-mimics analytics B&S use
value = PV of expected future CFs (PV of anticipated income
-2 methods: ratio models (direct capitalization & gross rent multiplier) & discounted cash flow (DCF)
assessed value - -value assigned by local government for property tax purposes
-WI: the assessor's opinion of "market value"
when are value calculations required? - -property acquisition is contemplated
-structure is: modernized, renovated, abandoned, demolished
-site is developed
-property is used for collateral for a loan
appraisal - -more narrow definition, estimation of value
market value - -most probable selling price, assuming normal sales conditions
-may not be fundamental value
-typical buyer/seller interaction in a typical market
3 approaches to value - 1. sales comparison (market) approach
2. cost approach
3. income approach
investment value - -value to a particular individual (investor)
transaction price - -price actually paid for a specific property
, cost - -amount paid to build, create
why do we have to estimate market value? - -in markets with perfect competition, all transactions
take place at true market value
-in such markets, no need for B&S to search for true market value of an asset (revealed by transaction
prices of perfect substitutes)
-RE markets do not exist within perfectly competitive conditions
what about private RE markets? - -every property is unique
-traded in: illiquid, highly segmented, & inefficient markets
-search costs with matching B&S are significant
-even the few transactions of comparable properties that we do observe may not be indicative of the
value of the "subject" property
-"fee appraisers" needed to estimate market value of RE assets
who uses market value appraisals? - -buyers
-sellers
-corporate acquisitions, mergers or dissolutions, tax & accounting
-courts (divorce, eminent domain, settlement of estates, bankruptcy)
-mortgage lenders
licensing & certification - -Federal legislation passed in response to collapse in RE markets in late
1980s
-requires appraisals to be state licensed or certified if they prepare federally related appraisals
-General Certified, Residential, Licensed
>each has min. education requirements, experience, & examination requirements
>all have continuing education requirements
professional appraisal practice - -imperfect information
-reliable data & analysis applies
-an appraisal is only as good as the appraiser & data available
-OPINION of value
-UNBIASED opinion of a 3rd PARTY with no direct interest in the property
-Uniform Standards of Professional Appraisal Practice (USPAP)
-Code of Ethics
sales comparison (market) approach - -value of RE can be determined by analyzing the sale prices
of similar properties
-in a competitive market, close substitutes should sell for similar prices
-difficulty: how many truly close substitutes exist & how many of these have sold recently?
-"one price" rule (i.e. equivalent goods sell for equivalent prices)
*arbitrage not available in RE (can't buy & sell RE quickly)
estimated reproduction cost of improvements - estimated accrued depreciation = depreciated cost of
building improvements
+estimated value of site
= indicated value by cost approach
-assumption: cost of creating a property is related to its market value
income approach - -"income capitalization"
-theory of anticipation
-value in investment property is a function of the income it is expected to produce (& inherent risk)
,-mimics analytics B&S use
value = PV of expected future CFs (PV of anticipated income
-2 methods: ratio models (direct capitalization & gross rent multiplier) & discounted cash flow (DCF)
assessed value - -value assigned by local government for property tax purposes
-WI: the assessor's opinion of "market value"
when are value calculations required? - -property acquisition is contemplated
-structure is: modernized, renovated, abandoned, demolished
-site is developed
-property is used for collateral for a loan
appraisal - -more narrow definition, estimation of value
market value - -most probable selling price, assuming normal sales conditions
-may not be fundamental value
-typical buyer/seller interaction in a typical market
3 approaches to value - 1. sales comparison (market) approach
2. cost approach
3. income approach
investment value - -value to a particular individual (investor)
transaction price - -price actually paid for a specific property
, cost - -amount paid to build, create
why do we have to estimate market value? - -in markets with perfect competition, all transactions
take place at true market value
-in such markets, no need for B&S to search for true market value of an asset (revealed by transaction
prices of perfect substitutes)
-RE markets do not exist within perfectly competitive conditions
what about private RE markets? - -every property is unique
-traded in: illiquid, highly segmented, & inefficient markets
-search costs with matching B&S are significant
-even the few transactions of comparable properties that we do observe may not be indicative of the
value of the "subject" property
-"fee appraisers" needed to estimate market value of RE assets
who uses market value appraisals? - -buyers
-sellers
-corporate acquisitions, mergers or dissolutions, tax & accounting
-courts (divorce, eminent domain, settlement of estates, bankruptcy)
-mortgage lenders
licensing & certification - -Federal legislation passed in response to collapse in RE markets in late
1980s
-requires appraisals to be state licensed or certified if they prepare federally related appraisals
-General Certified, Residential, Licensed
>each has min. education requirements, experience, & examination requirements
>all have continuing education requirements
