Real Estate Unit 16*

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Real Estate Appraisal

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35 Terms

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Accrued depreciation

interest that has been earned but not yet paid or received.

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Anticipation

the principle that the value of a property can be influenced by the expected future benefits it will provide.

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Appraisal

the process of evaluating a property's value based on various factors such as market trends, condition, and comparable sales.

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Appraiser

a professional who assesses the value of real estate properties through various methods, including market analysis and property inspections.

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Appraiser Independence Require (AIR)

ensures that appraisals are conducted without influence or pressure from parties involved in the transaction, promoting objective valuation based on property value.

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Assemblage

the process of combining two or more contiguous properties into one larger parcel, often to increase value and development potential.

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Broker’s price opinion (BPO)

A professional estimate of a property's value, typically used in real estate transactions, based on comparable sales and market conditions.

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Capitalization Rate

A formula used to estimate the return on investment for a property, calculated by dividing the property's net operating income by its current market value or purchase price.

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Change

in the use, structure, or ownership of a property that may affect its value or management.

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Competition

The rivalry among buyers and sellers in the real estate market that influences pricing and availability of properties.

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Conformity

The principle that property values are maximized when the properties are similar in style, size, and function within a given area.

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Contribution

The value of any part of a property is measured by its effect on the value of the whole parcel.

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Cost approach

The cost approach uses the current cost of constructing building and other property improvements and an estimate of accrued depreciation using the straight-line method (economic age-life method), or an estimate of individual items of physical deterioration functional obsolescence or external obsolescence.

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Depreciation

A loss of value for any reason

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Economic life

The period during which it is expected to remain useful for it’s original intended purpose.

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External Obsolescence

The loss of value cannot be reversed by spending money on the property.

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Functional Obsolescence

A loss in value from the markets response items.

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Highest and Best Use

The most profitable single use of a property

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Income Approach

Based on the present value of the right to future income at by these steps:

  1. Estimate annual potential gross income

  2. Deduct an allowance for vacancy and rent loss to find effective gross income

  3. Deduct annual operating expenses to find net operating income (NOI)

  4. Estimate the rate of return (capitalization rate or cap rate) for the subject by analyzing cap rates of similar properties.

  5. Derive an estimate of the subject’s market value by applying the cap rate to the property’s annual NOI using this formula: net operating income / capitalization rate = value.

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Law of Diminishing Returns

Additional improvements do not increase income or value.

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Law of Increasing Returns

Money spent on improvements produces an increase in income or value.

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Market Data Approach

Sales comparison approach a.k.a the market data approach, value is obtained by comparing the property being appraised, with recently sold comparable properties; properties similar to the subject in location and features.

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Market Value

The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale.

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Net operating Income (NOI)

Deduct the annual operating expenses from the effective gross income.

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Physical Deterioration

A curable item is one in need of repair, such as painting (deferred maintenance), that would result in an increase in value equal to or exceeding its cost.

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Plottage

The increase in value or utility of combined properties.

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Progression

The value of a modest homewould be higher if it were located among larger fancier properties.

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Property Inspection Waiver (PIW)

Some loans purchased by Fannie Mae are eligible for PIW

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Reconciliation

The act of analyzing and effectively weighing the findings from the three approaches, sales price, monthly rent and gross rent multiplier (GRM).

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Regression

The worth of a better quality property is adversely affected by the presence of a lesser quality property,

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Sales Price

The amount of money paid to a seller for a product sold.

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Substitution

The maximum value of a property tends to be set by how much it would cost to purchase an equally desirable and valuable substitute property.

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Supply and Demand

The appraisal principle that follows the interrelationship of the supply and demand for real estate.

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Uniform Standards of Professional Appraisal Practice (USPAP)

An appraiser must follow the USPAP established by the Appraisals Standard Board (ASB)

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Value

Characrteristics of value DUST

D - Demend

U - Utility

S - Scarcity

T - Transferability