Ohio University Spring 2014 Real Estate Appraisal Final Exam Study Guide

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  • USPAP

    Uniform Standards of Professional Appraisal Practice

    AQB

    Appraiser Qualifications Board

    ASB

    Appraisal Standards Board

    Appraiser Qualifications

    3,000 hours of residential experience, no fewer than 30 months, 1500 non residential appraisal hours

    Freehold Estate (legal Description #1)

    highest form of ownership of a piece of property.

    Fee Simple Estate (legal Description #2)

    Most common type of ownership, right to use land now and for an indefinite period

    Life Estate (legal Description #3)

    a present, possessory interest that lasts only as long as you are alive, and then ownership is returned to the person who sold it to you.

    Easement

    real property interest that conveys a limited right of use or enjoyment, such as the right to travel over a parcel of land.

    License

    a temporary permission to come onto the land of another for a specific purpose. it is non exclusive to one person, meaning once they are enacted the public has open access.

    Encroachment

    when part of an improvement or addition on a piece of land reaches beyond the property lines/boundaries onto an adjoining parcel.

    Condominium

    the absolute ownership of a unit in a multiunit building based on a legal description of the airspace the unit actually occupies, along with a specified share of the undivided interest in the common areas within the development.

    P.U.D.

    Planned Unit Development - type of development, as we;; as a zoning classification, that features individually owned parcels together with shared common areas.

    Personal Property vs. Real Estate

    Personal property can be any movable object that is yours. Real Estate is immobile.

    Public Restrictions (list)

    Taxation, Eminent Domain, Escheat, Police Power to establish zoning laws, etc.

    Private Restrictions

    Liens, subdivisions

    CCR

    Conditions, Covenants, Restrictions - a restriction put on a building before people move in.

    HOA

    Home Owner Association - sort of like a neighborhood governing system, really has no power.

    Elements of a Legal Contract

    an agreement between the buyer and seller, must be of legal age and mental capacity

    Deed (definition)

    a written instrument by which the owner of real estate intentionally conveys to a purchaser interest in a parcel of real estate (must have a granting clause)

    Market Value (definition)

    Book - value in exchange. USPAP - a type of value, stated as an opinion, that presumes the transfer of a property as of a certain under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal.

    Cost of Credit

    Interest paid on a loan used to buy real estate

    Mortgage

    creates a lien in favor of the mortgagee (lender) on the property of the mortgagor (property owner). The lien is enforced if the owner fails to meet payments, and the enforcing is usually stated prior in the contract.

    Value Principles (list)

    Anticipation, balance, change, competition, conformity progression & regression, contribution, externalities, factors of production, life cycle property, highest & best use, law of increasing returns, law of decreasing returns, opportunity cost, substitution, supply & demand, surplus productivity

    Substitution

    the way to determine the value of real property, the price someone is willing to pay is determined by a similar property and its respective price.

    Effective Date

    the date in which the client requests the appraisal is done for, a value is needed

    How long is an appraisal valid for ?

    One day, the day that it is dated.

    Sales Comparison Approach

    aka market data approach, the appraiser finds 3-5 (or more) properties that have recently sold and are similar to the subject property.

    Sales Comparison Formula

    Sales Price of Comparable Property +/- adjustments = Indicated value of subject property

    Cost Approach

    The appraiser estimates any improvements to the land (such as structures) on terms of their reproduction or replacement cost as though new.

    Cost Approach Formula

    Reproduction/Replacement Costs - Depreciation on Improvements + Site Value = Property Value

    Income Approach

    based on net income, or investment return, that a buyer expects from the property. The price the buyer will pay is determined by the probable return the property will yield from the investment.

    Income Formula

    Net Operating Income / Return (capitalization rate) = Property Value

    GLA

    Gross Living Area - the amount of finished, year-round habitable above-grade space, measured along the building's outside perimeter. DOESNT COUNT - attics, basements, crawlspaces. DOES COUNT - typically everything else.

    Manufactured Homes

    Should have steel beams in the frame of the home. Look underneath. Won't have a foundation so dont look there.

    Market Analysis

    subject property, contract and listing info, neighborhood data & demographics, urban vs. suburban vs. rural, site data,

    Arm's Length Transactions

    neither the buyer nor the seller is are acting under duress (greater duress, that is, than what is felt by the buyer and seller in the average transaction), the property is offered on the open market for a reasonable time, and both buyer and seller have reasonable knowledge of the property, its assets, and its defects.

    Data Sources (book list)

    Appraisers own records, official records of deeds, real estate assessor's office, records of sales, newspapers, internet valuation services.

    Highest & Best Use

    one must consider an entire range of uses for the land and determine which is most economically feasible, usually it will be valued with and without structures on the land.

    Zoning

    an example of a police power, can set rules and ordinances on properties and their owners.

    Reproduction Cost

    The amount of $$ required to construct an EXACT duplicate at current prices

    Replacement Cost

    The amount of $$ required to construct a similar rebuilding.

    3 Types of Depreciation

    Physical Deterioration (wear and tear, curable and incurable, usually obvious), Functional Obsolescence (currently undesirable, dated features, curable or in curable) External Obsolescence (caused by external factors that bring value down)

    Age Life Method (Calculating total physical deterioration)

    Effective Age / Total Economic Life = Total Deterioration

    Remaining Economic Life

    the DIFFERENCE between the effective age of the subject and its estimated economic lifespan.

    Most common way to calculate the cost of improvements is called the __________-___________ method.

    Square-foot

    Strengths of Cost Approach

    It can be used when no others are available, provides an upper limit for property value, useful for finding the value of newly built homes and buildings, useful for special purpose buildings.

    Weaknesses of Cost Appoach

    It assumes Value=Cost, builders cost may vary drastically , its not accurate for old buildings.

    Comparable

    a property that has sold and is similar to the subject, up to 12 months old but preferably less than 6, must have actually transferred ownership, avoid older sales because the market fluctuates so much, same neighborhood if possible, location is so important because it is immobile. Usually 3-6 comparables are used if possible.

    Room Count (definition)

    rooms, bedrooms, and bathrooms. Ex: 6-6-1.1 = 6 rooms, 3 Bedrooms, and 1 and 1/2 bathrooms

    Matched-Pair Analysis

    The method used to determine the amount of any single adjustment. Accomplished by comparing similar properties to isolate the value of a particular feature. **If the comparable is inferior, the adjustment is positive. vice versa.

    Gross Adjustmets

    ADD all adjustments together for one number. "+" and "-" signs are not cared for.

    Net Adjustments

    Calculate the running total for all adjustments. "+" and "-" signs are cared for.

    Line Adjustments

    Any single adjustment made to any single comparable, can't exceed 10%.

    Bracketing

    the idea that the subject must fall in range of comparables, must fall within adjusted percentage as well, final value should be with a comparable price range.

    Quality & Condition

    Properties are typically adjusted for overall quality and condition using a rating system of 1-6 with 1 being new and 6 being old and unihabitable

    Advantages of Sales Comparison Approach

    Reflects the activity of the marketplace, relatively simple to understand and use, considered reliable and objective, preferred whenever we have comparable sales.

    Disadvantages of Sales Comparison Approach

    doesn't work unless there are comparables, making accurate and credible adjustments can be difficult

    Single-Family Homes (cost approach)

    shows the value of the home if rented out to the single family

    2-4-Family Homes (cost approach)

    primarily income-producing homes, (multi-family)

    3 Types of Rent

    Contract Rent - tenant pays a landlord, amount stated in lease.
    Market Rent - potential rent on a property based on others in the area. Appraisers typically use this because they are looking for a typical market value.
    Historical Rent - Shows trends and rent rates over a long period of time. Also shows vacancy rates, rent increases, etc.

    GRM

    Gross Rent Multiplier - to determine what a value of a single family property we use GRM.
    **Sales Price / Yearly Rent = GRM
    -compare rent of other homes that sold and their sales prices. ( Sales Price = GRM x Rent)

    Gross Income (formula)

    Gross Rent + Additional Income = Gross Income

    Effective Gross Income (formula)

    (Gross Income) - (Vacancy + Credit losses) = EGI

    Vacancy/Credit Losses

    Money lost when the property is not being rented. Collection losses is any money that is not collected for some reason. V & C losses are usually expressed as a percentage.

    Operating Expenses (3 types)

    Variable expenses - can change dependant on a variable.
    Fixed expenses - flat rates that will not change.
    Reserves For Replacement - basically paying insurance for things.

    Reconciliation

    The process of the weighing the different approaches in order to make one estimate of the value for the subject.

    4 Factors of Reconciliation.

    1. defn of value sought (usually market value)
    2. amount and reliability of data
    3. inherent strengths and weaknesses of each approach
    4. relevance of each approach to subject

    Reconciliation is NOT...

    -it is NOT averaging the approaches, because that would imply that all approaches are equally valuable which isn't the case.
    -it is NOT correcting errors in the report
    -it is NOT narrowing the range of valuables for the subject

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