National Practice Chapter 7 Textbook Summary
Unit 1 Summary
National Valuation: Appraisal Process
A CMA can be performed by a real estate licensees, whereas an appraisal must be performed by a licensed appraiser.
An Appraisal is an estimate or opinion of value. The goal of the appraiser is to determine:
· The market value, insurance value, salvage value or the tax value of a property.
· Compensation is based on time and effort never on the established price of the property.
National Practice Chapter 7 Textbook Summary
Appraiser’s Ground Rules
· Payment must be in cash or its equivalent
· Buyer and seller must be unrelated and acting without undue influence, menace or duress.
· The property must be marketed for a reasonable time in an open and free-flowing market.
· Both buyer and seller must be well-informed consumers.
Appraisal Process
· State the problem.
· Gather, record and verify the necessary data.
· Analyze and Interpret using:
o Neighborhood Analysis
o Neighborhood Cycle
o Site Analysis
· Estimate Land Value.
· Estimate the value of the property by:
o Market Data (sales comparison)
o Cost (or Summation)
o Income
· Reconcile estimated values for the final value estimates. Types of Appraisal Reports:
· Letter: A short business letter stating all essential data but not including supporting data.
· Short or Form: Contains all basics of a regular appraisal and is used primarily for homes.
· Narrative: The most comprehensive of all appraisal reports. Used for commercial and investors.
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Unit 2 Summary
National Valuation: Value Principles
Highest and Best Use – the possible use of a property that would produce the greatest net income and thereby develop the highest value.
Substitution – the maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property. (Comparison shopping- basis for market data approach.)
The Law of Supply and Demand – the value of a property increases when the supply is short and decreases when there is too much. Similarly, the value increases when the supply is short and decreases when there is little demand.
Conformity – the more a property or its components are in harmony with the surrounding properties or components, the greater the contributory value. (The more the properties are alike, the more they retain value.)
Regression and Progression – occur between dissimilar properties. The value of the better quality property is affected adversely by the presence of the lesser quality property, and a lesser house will benefit from a larger house.
Anticipation – property can increase or decrease in value in expectation of something in the future such as appreciation or rezoning.
Contribution – means the value of any component of a property is what it gives to the value of the whole or what its absence detracts from the whole.
Assemblage – is the combining of two or more adjoining lots into one larger tract to increase their total value.
Competition – is when one business attracts another business of similar type; together they may make more money than they would have singularly. Too much competition is ruinous.
Change – real property is constantly changing- expanded, stabilizing, declining or rebirth. We are all familiar with areas that have or may be going through these changes.
Unit 3 Summary
National Valuation: Approaches to Value
Sales Comparison Approach (Market Data Approach):
· Used for appraising residential property and vacant land.
· The principle of substitution holds that if a buyer will pay a certain price for a property,
he will pay a similar price for a ‘substitute’ property of similar characteristics.
Three steps in the Sales Comparison Approach:
1. Identify comparable sales.
2. Compare comparables to the subject and make adjustments to comparables. One always adjusts the values of the comparables – never the subject.
3. Reconcile values indicated by adjusted comparables for the final value estimate of the subject – a judgmental evaluation based on all value indicators.
Cost Approach
Used for properties with limited comparable data or income data or for properties where the original cost is particularly applicable.
Cost can be determined by:
· Square foot cost: using outside measurement, how many square feet times a cost for either replacement or reproduction of the improvement.
· Unit in place: based on the construction cost per unit of measure of individual building components.
· Quantity survey method: The quantity and quality of all materials and the labor are estimated on a unit cost basis. These factors are added to indirect costs to arrive at the total cost of the structure.
Four steps involved in the Cost Approach:
1. Estimate the value of the land alone as if vacant.
2. Determine the replacement or reproduction cost of the improvements.
3. Deduct all accrued depreciation from the replacement cost.
4. Add the estimated land value to the depreciated replacement or reproduction cost. The land never depreciates.
Depreciation is divided into three classes according to its cause:
1. Physical depreciation is a form of depreciation caused by the action of the physical elements.
2. Functional obsolescence is a loss of value of an improvement due to functional inadequacies, often caused by age or poor design.
3. Economic obsolescence is a loss of value resulting from extraneous factors that exist outside of the property itself. It is caused by environmental, social, or economic forces over which an owner has little or no control.
Chronological Age: actual age in years of the building, based on building date. It cannot be changed.
Effective Age: differs from the actual age by such variable factors as depreciation, quality of maintenance, and the like.
Physical life is the actual age or life of a structure that is considered habitable – defined by the durability of its structural components. Economic Life is the estimated period where an improved property will yield a return over and above economic rent.
The deterioration of an improvement that it is not economically feasible to repair is considered
incurable.
Income Approach to Value
Based on the present value of the rights to future income. For income generating properties.
· Estimate the annual Potential Gross Income.
· Deduct an allowance for vacancies to arrive at Effective Gross Income.
· Deduct the annual operating expenses from Effective Gross Income to derive Net Operating Income (NOI).
· Estimate the rate of return that an investor would demand for this investment –
Capitalization Rate.
· Divide the Cap Rate into the net operating income to identify the property’s value.
Formulas:
· To solve for Value: I / R = V
· To solve for Cap Rate: I / V = R
· To solve for Income: V x R = I
Unit 4 Summary
National Valuation: Real Estate Taxes
There are no federal taxes on real property.
County and local governments establish tax districts to collect funds for providing specific services.
Ad Valorem Taxation
· General property taxes are levied on an ad valorem basis, meaning that they are based on the assessed value of the property.
· Some tax jurisdictions may employ an assessment ratio where the assessed value used for taxation is a percentage of the property’s market value.
· The tax base of an area is the total of the appraised or assessed values of all real property within the area’s boundaries, excluding partially or totally exempt properties:
o Tax base = assessed values – exemptions
Homestead Exemption
· A homestead is a parcel of real property that is owned and occupied as a family home.
· A property owner qualifies for a homestead exemption by meeting two criteria:
1. Is head of a family
2. Resides on the property for a required length of time.
Taxable value is the assessed value subject to taxation after all exemptions have been taken into account. The part of the budgeted expenditures that cannot be funded from other income sources must come from real property taxes. This budgetary shortfall becomes the ad valorem tax levy.
· Tax rate = tax requirement ÷ tax base
A mill is one one-thousandth of a dollar ($.001).
Special Assessments
· A tax levied against specific properties that will benefit from a public improvement.
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· If a taxing entity initiates an assessment, the assessment creates an involuntary tax lien.
· Usually paid in installments over a number of years.
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Unit 5 Summary
National Valuation: Gross Rent Multiplier
The GRM and GIM are abbreviated forms of valuation using the income approach, but without the complications of property expenses, reserves, depreciation, and debt service.
If one is using the GRM method, one uses the property’s monthly rent. If using the GIM, one uses the property’s annual income.
The gross rent multiplier itself is a ratio number reflecting the relationship between a
property’s price or value and its income.
Gross Rent Multiplier (GRM) Formulas
· Value ÷ Monthly rent = Gross Rent Multiplier
· GRM x Monthly rent = Value
· Value ÷ GRM = Monthly rent Gross Income Multiplier (GIM) Formulas
· Value ÷ Annual rent = Gross Income Multiplier
· GIM x Annual rent = Value
· Value ÷ GIM = Annual rent
Unit 6 Summary
National Valuation: Land Use Control
Private Land-use Controls
The grantor (seller) decides how the grantee (buyer) can use the property. The grantor creates deed restrictions – encumbrances – which limit the use of the property.
· Limiting restrictions: State things you can never do. Affirmative restrictions: State things you must abide by.
· The neighbor seeking help must go to the courts for relief, rather than the police or taking action individually.
· Deed restrictions are recorded with the deed or on the deed itself.
Public Land-control use
The United States government is empowered to control land for the benefit of all citizens. The rights to make laws to control local property are called Enabling Acts.
Police Power:
Planning/Zoning
· Master Plan: both a statement of policies, and a presentation of how it will be implemented once a local government has adopted it.
· Bulk Zoning: Controls density and avoids overcrowding.
· Aesthetic Zoning: Requires that new buildings conform to specific types of architecture.
· Directive Zoning: Encourages zoning as a planning tool to use land for its highest and best use.
· Spot Zoning is the reclassification of one piece of property in an area for a specific purpose.
· Zero Lot Line: to describe the positioning of a structure on a lot so that one side rests
directly on the lot’s boundary line.
· Planned Chapter Development (PUD) produces a high density of housing Chapters, while maximizing the use of open space.
Zoning ordinances must not violate the rights of individuals and property owners.
Exceptions to Zoning:
· Buffer Zones such as landscaped parks and playgrounds to separate and screen residential areas from nonresidential areas.
· Nonconforming Use: constructed prior to the adoption of the zoning laws, and its use is one that clearly differs from current zoning.
A Variance may be sought to provide deviation from an ordinance so long as it is before the construction or reconstruction takes place.
Conditional Use Permit: for a property deemed to be in the public interest contrary to the zoning that exists.
Building Codes
· Set the standards for the types of materials to be used for construction. Most cities use the BOCA requirements for building.
· The purpose of a building permit is to control compliance with building codes and zoning ordinances by examining the plans and inspecting the work.
Subdivision Regulations
· Cities control subdivision construction as part of the master plan
Environmental Protection Legislation
· Disclosure of knowledge of Lead Paint on any sale or lease of a residential property is mandatory.
· To insure the safety of an area, a percolation test is required to test ground water for runoff.
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Unit 7 Summary
National Valuation: Legal Descriptions
A legal description of real property accurately locates and identifies the boundaries of the subject parcel to a degree acceptable by courts of law in the state where the property is located.
A legal description is required for:
· Public recording.
· Creating a valid deed of conveyance or lease.
· Completing mortgage documents.
· Executing and recording other legal documents.
Lot and Block System
· Used to describe properties in residential, commercial, and industrial subdivisions.
· In a large subdivision, lots may be grouped together into blocks for ease of reference
· The surveyor incorporates the survey data into a plat of survey.
Example: “Lot 7, Block 8 of the Grand Oaks Subdivision of the SE 1/4 of Section 35, Township T22S, R14E of the
Tallahassee Principal Meridian in Pinellas County, Florida.”
Metes and Bounds System
· A property description using the metes and bounds system must begin and end at the
point of beginning.
· Monuments are fixed objects that serve as markers for the property, and are used to establish the parcel’s boundaries.
Rectangular Survey System
This system is based on sets of intersecting lines.
· Principal Meridians run north and south.
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· Base Lines run east and west.
· Township lines are lines running east and west, parallel with the base line and six miles apart.
Range Lines are lines on either side of a principal meridian and are divided into six mile wide strips by lines that run north and south parallel to the meridian.
· A Township is a 36 square mile area formed by the intersection of a township and range lines.
· Each township square is divided into 36 Sections each one-mile square.
· One section is also equal to 640 acres.
Area is always expressed in square feet or square yards:
Area of a rectangle:
· Area = base x height Area of a trapezoid:
· Area = Average base length x height
· Average base length = (base 1 + base 2) / 2 Area of a triangle:
· Area = ½ base x height
Volume is always expressed in cubic feet or cubic yards:
A solid rectangle, or prism:
· Volume = length x width x depth A solid triangle, or pyramid:
· Volume = base area ((LxW) x height) / 3
Measurement Formulas
1 mile = 5,280 linear feet
1 square yard = 9 square feet 1 cubic yard = 27 cubic feet
1 square mile = 640 acres = 1 section
1 acre = 43,560 square feet.
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