Real Property Rights, Deeds, and Valuation Methods in Real Estate

Rights

Claims or demands that our government is obligated to enforce

Nonrevocable

A characteristic of rights indicating they cannot be revoked

Enduring

A characteristic of rights indicating they last over time

Property Rights

Exclusive possession, use & enjoyment, disposition

Real Property

Rights in land & its permanent structures

Personal Property

Rights in any other kind of object, including intellectual matters

Fixture

Object that formerly was personal property but has become real property

Estates

Interests in real property that include exclusive possession

Freehold Estates

Fee simple absolute, fee simple conditional, ordinary life estate & remainder

Leasehold Estates

Limited in time; right of disposition is diminished because the property reverts back to the landlord

Easement

Right to use land for a specific and limited purpose

License

Permission to use another's land for a specific and limited purpose

Easements Appurtenant

Examples include driveway easement, reciprocal parking easements, drainage easement, common wall easement between townhomes

Easements in Gross

Examples include rights-of-way for roads, railroads, utility easements, billboards

General Lien

Court awarded judgements

Specific Liens

Property tax & assessments liens, CDD liens, mortgages, and mechanic's liens

Priority of Liens

Property tax, assessment and CDD liens are prioritized; others are by chronological order of lien

Deed

A legal document that conveys property interests

General Warranty Deed

A deed that provides the greatest protection to the grantee

Special Warranty Deed

A deed that warrants only against defects occurring during the grantor's ownership

Bargain & Sale Deed

A deed that implies the grantor has title but makes no warranties

Quitclaim Deed

A deed that transfers whatever interest the grantor has in the property without warranties

Bargain & Sale

None of the covenants of a warranty deed, but implies ownership and conveyance.

Statute of Frauds

Requires any contract conveying a real property interest to be in writing.

Discounting

Equating present value of future cash flows to equivalent present value.

Compounding

Future value of investment.

Cash Flow Risk

Uncertainty associated with future cash flows.

Going-in Rate of Return (RR)

Calculated rate of return based on expected cash flows of an investment.

Appraisal Going-in RR

Total yield (both current and appreciation).

Internal Rate of Return (IRR)

Calculated based on projected cash flows.

Net Present Value (NPV)

Calculated using lumpy annual cash flows.

Sales Comparison Approach

A method of property appraisal that involves comparing sales prices.

Cost Approach

A method of property appraisal that estimates value based on cost to replace.

Elements of Comparison

Factors considered when adjusting comparable sales.

Comparable Sales

Sales used to estimate the value of a subject property.

Adjusting Comparable Sale Prices

Adjust prices to approximate the subject property.

Reconcile Adjusted Sales Prices

Obtain indicated value of the subject property.

Frequency of Cash Flows

Impact on present value and future value relationship.

Interest (Discount) Rate

Rate used to convert expected cash flows to present value.

Opportunity Cost

Future benefits decline as the time the investor must wait for future benefits increases.

Transactional Adjustments

Property rights conveyed, financing terms, conditions of sale, expenditures made immediately after purchase, market conditions.

Property Adjustments

Location, physical characteristics, economic characteristics, use, nonreality items - personal property and business value.

Cost Approach Steps

Estimated cost to construct structure today, reduce by accrued depreciation, add estimated value of land.

Direct Capitalization

Value estimates are based on a ratio or multiple of expected NOI over the next 12 months.

Discounted Cash Flow (DCF)

Identify holding period, annual cash flows and terminal value for holding period, required rate of return at which to discount cash flows.

Operating Expenses

Ordinary and necessary expenditures that do not materially add value, but keep property operating and competitive in local rental market.

Capital Expenditures

Replacements and alterations to a building that materially prolong its economic life and therefore increase its value.

Overall Capitalization Rate

Cap Rate = NOI / Sales Price.

Basic Value Equation

Ro is a 'cap' rate, Ro is NOT a discount rate.

Steps in Direct Capitalization

Obtain estimates of cap rates, Ro, from market using 'direct market extraction' from the sale of a comparable property.

Weighted Average of Ro

Calculate a weighted average of the Ros abstracted from the market.

Estimate of Value

Divide subject's NOI1 by the weighted average Ro to obtain an estimate of value for the subject.

Market Definition

Defining the 'market' for comparable selection is critically important.