Appraisal Institute Basic Appraisal Principles

Appraisal Institute Basic Appraisal Principles Appraisal (ch.1) - ANS the act or process of developing an opinion of value What types of assignments use appraisals? (ch.1) - ANS Transfer of ownership Financing and credit Litigation Tax matters Investment Decisions The valuation process (ch.1) - ANS a systematic procedure that an appraiser employs to provide the answer to a client's question about the value of real property Steps of the Valuation Process (ch.1) - ANS Step 1 - Identification of the Problem Step 2 - Scope of Work Determination Step 3 - Data Collection and Property Description Step 4 - Data Analysis Step 5 - Land Value Opinion Step 6 - Application of Approaches to Value Step 7 - Reconciliation of Value Indications and Final Opinion of Value Step 8 - Report of Defined Value Components of Step 1 Valuation Process - Identify the Problem (ch.1) - ANS Identify client and intended users Identify the intended use Identify the purpose of the assignment Identify the effective date of the opinion Identify the relevant characteristics of the property Identify assignment conditions Components of Step 3 Valuation Process - Data Collection and Property Description (ch.1) - ANS Market Area Data Subject Property Data Comparable Property Data Components of Step 4 Valuation Process - Data Analysis (ch.1) - ANS Market Analysis Highest and Best Use Analysis Ethical appraisal practice (ch.1) - ANS - Protect Public Trust - Develop and communicate work in a meaningful manner and do not misrepresent services - Must be: impartial or neutral, objective and fair-minded, independent or autonomous and free of self-interest - Must perform assignments ethically and competently Competence (ch.1) - ANS the state of having the requisite or adequate ability or qualities to perform the specific assignment and produce credible assignment results. Competency to Complete an Appraisal (ch.1) - ANS Must be: - proficient to complete the assigned work - attain the needed proficiency to complete - turn down the engagement or stop if already underway If not competent the appraiser has three obligations (ch.1) - ANS - inform the client about the identified competency issues prior to taking the assignment - complete all tasks and procedures essential for the assignment in a competent manner. (personal study, association with another appraiser, or retain others) - disclose competency issues in the written report and identify the steps taken to satisfy the appraiser's lack of knowledge and/or experience in the assignment Sufficient Diligence - Standard A (ch.1) - ANS - be aware of and understand methods and techniques necessary to produce credible assignment results - not commit a substantial error or omission or commission that significantly affects the assignment results - not make a series of errors that, considered individually may not affect the assignment results, but which, when considered in the aggregate, establish that the appraisal is being rendered in a careless or negligent manner. Six assignment elements in the problem identification process (ch.1) - ANS 1. client and any other intended users 2. intended use 3. type and definition of value (also known as the purpose) 4. effective date of the valuer's opinions and conclusions 5. subject of the assignment and its relevant characteristics 6. assignment conditions Scope of Work (ch.1) - ANS The type and extent of research and analyses in an appraisal or appraisal review assignment The type of data and the extent of research and analyses Overall strategy for solving client's valuation problem Land (ch.2) - ANS Definition = in law, the solid surface on the earth, as distinguished from water Characteristics - immobile, each parcel is unique in its location and composition. - durable as a long-term asset but the supply of land is finite - not only and economic concept but also a valued commodity Fundamental Land Rights (ch.2) - ANS The Inverted Pyramid: Suprasurface Rights Surface Rights Sub-surface Rights Suprasurface Rights (Air Rights) - ANS The right to undisturbed use and control of designated air space above a specific land area within stated elevations Surface Rights (ch.2) - ANS includes land water, anything attached to land, things on land by human or nature Water Rights (Part of Surface Rights) (ch.2) - ANS Riparian Rights - pertaining to properties touching a body of water or a waterway Littoral Rights - pertaining to properties abutting an ocean, lake or pond with an emphasis on the use and enjoyment of the shore Landowners generally have an unrestricted right to use the water that adjoins their property. However, cannot interrupt or divert the flow of water. Riparian and Littoral rights are appurtenant (attached) to the land and cannot be retained by the seller after the property is sold Prior Appropriation - Colorado Doctrine - first in time is first in line Sub-surface rights (ch.2) - ANS Rights to use and profits of the underground portion of a designated property Right to extract coal, minerals, oil, gas, water Right to construct and maintain tunnels, subways, sewers and basements Right to drill for oil and gas - becomes personal property once it's brought to the surface Real Estate (ch.2) - ANS Land, physical raw land, and all things that are a natural part of the land such as trees and minerals Real estate includes appurtenances All real estate improvements were once personal property; when attached to the land they become real estate Appurtenance (ch.2) - ANS Something added or appended to a property that then becomes an inherent part of the property - usually passes with the property when title is transferred Personal Property (ch.2) - ANS Identifiable tangible objects that are considered by the general public as being "personal" Legal interest in anything that is subject to ownership and NOT classified as real estate Chattel and Personalty (ch.2) - ANS moveable items of property not permanently affixed to, or part of, the real estate Emblements (ch.2) - ANS annual crops and plantings such as corn, wheat and vegetables - considered personal property Fixture (ch.2) - ANS an article that was once personal property but has since been installed or attached to the land or building in a rather permanent manner so that is is regarded in law as part of the real estate Test of Fixtures (ch.2) - ANS Attachment (or annexation) - the manner in which the item is attached Adaptation - the character of the item and its adjustment or modification to the real estate Agreement - the intention of the party who attached the item Trade Fixtures (ch.2) - ANS articles places in or attached to rented buildings by a tenant to help carry out the trade or business of the tenant Personal property regardless of how affixed removable by the tenant when the lease expires unless this right has been surrendered in the lease Real Property (ch.2) - ANS the interest, benefits, and rights inherent in the ownership of real estate Bundle of Rights (ch.2) - ANS Total range of ownership interests in real property. An owner that possesses all the interests in the bundle of rights has the most complete form of ownership Possession Transfer Lease Mortgage Improve Partial Interest (ch.2) - ANS Divided or undivided rights in real estate that represent less than the whole. Estate (ch.3) - ANS A right or interest in property Estate in Land (ch.3) - ANS the degree, nature and extent of interest that a person has in land. Two types of estates (ch.3) - ANS Freehold and Leasehold Freehold Estate (ch.3) - ANS Present or future possession indeterminate duration ownership Fee Simple (inheritable) Life Estate (non-inheritable) Leasehold Estate (ch.3) - ANS Defined Duration Possessory Reversion or possessory rights Begins with lease Lessor = landlord - has leased fee interest Lessee = Tenant - has leasehold interest Estate for Years Estate from Period to Period Estate at Will Estate at Sufferance Freehold Estate - Fee Simple Estate (ch.3) - ANS Fee Simple Absolute - most complete form with unlimited duration and subject only to governmental powers Fee Simple Defeasible - subject to the occurrence or non-occurrence of a specific event. Leased Fee Interest - ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others Freehold Estate - Life Estate (ch.3) - ANS Life Estate - rights of use, occupancy, and control, limited to the lifetime of a designated party, sometimes referred to as the life tenant Life tenant - one who owns an estate in real property for his or her own lifetime, the lifetime of another person or an indefinite period limited by a lifetime Freehold Estate - Life Estate - Conventional Life Estate (ch.3) - ANS ordinary life estate with remainder or reversion. A pur autre vie esate is also with remainder or reversion but the duration of the estate is based on the life of someone other than the life tenant Remainder Interest (ch.3) - ANS a future possessory interest in property that is given to a third party and matures upon the termination of a limited or determinable fee. Leasehold Estate - Estate (Tenancy) For Years (ch.3) - ANS - tenancy is for a definite or fixed period of time - lease automatically terminates on the expiration of the rental period - consent is req'd if either party wants to terminate before the end of the contracted term - unless prohibited in lease, assignable by the tenant - does not terminate upon the death of the landlord Surrender (ch.3) - ANS termination of a lease by mutual consent Leasehold Estate - Estate (Tenancy) From Period to Period (ch.3) - ANS - tenancy is for an indefinite period of time with no specific expiration date - notice must be given to terminate the lease - typically comes about as an extension or holdover from a tenancy for years - period renewals are automatic Leasehold Estate - Estate (Tenancy) at Will (ch.3) - ANS - tenancy is for an unspecified period of time - never originated with a specific term - estate automatically renews itself unless a notice of termination is given by one of the parties - terminates upon the death of landlord or tenant Leasehold Estate - Estate (Tenancy) at Sufferance (ch.3) - ANS - estate is created when a tenant lawfully takes possession but stays after the lease expires without the consent of the property owner - tenant has no current rights to possess the property but the property owner must follow legal procedures for eviction Encumbrances (ch.3) - ANS Any claim or liability that affects or limits the title of property. An encumbrance cannot prevent the transfer of possession but it does remain after the transfer. Can be lien or Encumbrance All liens are encumbrances but not all encumbrances are liens Types of Encumbrances (ch.3) - ANS Leases Easements Encroachments Deed Restriction Reservations Encumbrances - Easement (ch.3) - ANS The right to use another's land for a stated purpose Easement Appurtenant - easement that is attached to, benefits, and passes with the transfer of the dominant estate; runs with the land for the benefit of the dominant estate and continues to burden the servient estate Easement in Gross - easement that benefits a legal person or entity and not a particular tract of land; an easement having a servient estate but no dominant estate Encumbrances - Encroachment (ch.3) - ANS trespassing on the domain of another longstanding encroachment can mature into an easement by prescription a court can order the removal of an encroachment Encumbrances - Deed Restriction (ch.3) - ANS a provision written into a deed that limits the use of land. Deed restrictions usually remain in effect when title passes to subsequent owners include restrictive covenants, subdivision restrictions and condo bylaws often have specified time limit in which they are in effect Encumbrances - Reservations (ch.3) - ANS A clause found in legal instruments and conveyances that creates a new right or interest on behalf of the grantor. While title passes to the grantee, some use or income is reserved for the grantor. Reservations may include mineral rights, rental income, or easements Licenses (ch.3) - ANS NOT encumbrances Measurements: Feet, yard, square yard, acre, mile (ch.4) - ANS 12 inches = 1 foot 3 feet = 1 yard 9 sq. ft = 1 sq. yd. 43,560 sq. ft. = 1 acre 1 mile = 5,280 ft. Metes and Bounds System - Definition (ch.4) - ANS a system for the legal description of land that refers to the parcel's boundaries, which are formed by the point of beginning (POB) and all intermediate points (bounds) and the courses or angular direction of each point (metes) Metes and Bounds - History Etc. (ch.4) - ANS - oldest method of surveying land - primary method used in original 13 colonies - begins and ends at designated POB - monuments may be used to establish boundaries - metes are measures that include direction and distance - bounds are the terminal points that in some cases are landmarks or monuments Monument (ch.4) - ANS A stone or other fixed object used to establish real estate boundaries Rectangular Survey Method - definition (ch.4) - ANS a land survey system used in Florida, Alabama, Mississippi, and all states north of the Ohio River or west of the Mississippi River; except Texas; divides land into townships and ranges approximately 6 miles square, each normally containing 36 one square mile sections of 640 acres, except when adjusted for the curvature of the earth. Also called the government survey system Rectangular Survey System - History, etc. (ch.4) - ANS - government created as US expanded West - Principal Meridians - north/south - Baselines - east/west - 35 principal baselines in the US - meridians and baselines = longitude and lattitude Township lines (ch.4) - ANS survey lines that run east and west at six-mile intervals north and south of a baseline and from the north and south boundaries of townships Range Lines (ch.4) - ANS One of a series of gov't survey lines that extend due north and south at six-mile intervals and are numbered east or west from the principal meridian. Range lines form the east and west boundaries of townships Township (ch.4) - ANS area between two township lines and two range lines; normally contains 36 sections of approximately 640 acres each Range (ch.4) - ANS vertical column of townships Tier (ch.4) - ANS horizontal row of townships Section (ch.4) - ANS one of the 36 designated areas of land, each approximately one mile square, into which each township is divided Township Section by the Numbers (ch.4) - ANS 1 section = 640 acres 1/2 section = 320 acres 1/4 section = 160 acres 1/4 of 1/4 = 40 acres 1/4 of 1/4 of 1/4 = 10 acres 1/4 of 1/4 of 1/4 of 1/4 = 2.5 acres 1 acre = 43,560 feet Government lot (ch.4) - ANS land areas that are not divided into quarters of a quarter due to location or size; usually lie along the northern and western borders of a township and along the edges of rivers or lakes, and extend from the border or waterline to the first quarter of a quarter Lot and Block System (ch.4) - ANS a system for the legal description of land that refers to parcels lot and block numbers which appear on recorded maps and plats of subdivided land; may also be used for assessment maps Also known as recorded plat Three groupings of ownership (ch.5) - ANS Ownership in Severalty Co-Ownership Trust Ownership in Severalty (ch.5) - ANS - sole ownership by an individual or single entity - no restrictions on how the property is transferred REIT (ch.5) - ANS a corporation or trust that combines the capital of many investors to acquire or provide financing for all forms of real property. Much like a mutual fund, shares area freely traded, often on a major stock exchange. 90% of taxable income from of a REIT must be distributed among its shareholders, who must number at least 100 investors, no fewer than five investors can own more than 50% of the value of the REIT during the last half of each taxable year. Ownership in severalty - the REIT has sole ownership of the properties the entity posesses even though it can have 100 or more investors Syndication (ch.5) - ANS a private or public partnership that pools funds for the acquisition and development of real estate projects or other business ventures. can operate as partnership, LP, corp or REIT not a recognized legal entity Co-Ownership - 4 types (ch.5) - ANS Property is held by two or more individuals Tenancy in Common Joint Tenancy Tenancy by the Entirety Community Property Tenancy in Common (ch.5) - ANS - each owner possesses an undivided fractional interest in the property - co-owners are entitled to the possession of the whole property - each co-owner holds a separate interest and can sell, mortgage, or transfer without consent of the other co-owners - no co-owner can transfer the ownership of the entire property - upon the death of a co-owner, the undivided interest passes in accordance with the will of that owner Joint Tenancy (ch.5) - ANS - involved two or more people holding real estate with right of survivorship - when a tenant dies the interests are passed to the other surviving tenant and not to the heirs or according to a will - created by intentionally writing specific language into the conveying deed - joint tenancy is never assumed when title is transferred, it must be specifically written in - termination can be accomplished by agreement, partition or severance Tenancy by the Entirety (ch.5) - ANS - unique form of co-ownership for married couples in which each spouse has an equal, undivided interest in the property - husband and wife have rights of survivorship - upon the death of one spouse, the title automatically transfers to the surviving spouse, creating an estate in severalty - avoids probate for the surviving spouse - to convey title, the signatures from both parties are required Community Property Rights (ch.5) - ANS - used by nine states for property owned by husband and wife - each spouse has an undivided 1/2 interest in property acquired during the marriage - when one spouse dies, the survivor is entitled to 1/2 of the community property, the other 1/2 is distributed according to the will of the deceased Classifications of property within Community Property (ch.5) - ANS Separate Property - property that was solely owned by either spouse before marriage. Spouse can mortgage or convey his/her separate property without signature of the other spouse Community Property - property acquired by either spouse during their marriage. Requires the signature of both spouses before it can be encumbered or conveyed Trusts (ch.5) - ANS - real estate can be transferred to another person (fiduciary) to hold or manage for the benefit of 3rd party - beneficiary receives from the trustor any proceeds less operating exp Types of Trusts (ch.5) - ANS Living Trust - created while property owner is alive Testamentary Trust - established by the will of the property owner after his or her death Land Trust - real estate is only asset. Property title is conveyed to a trustee, but trustor is also beneficiary. Beneficiary maintains management and control of the property and has the right of posession and right to income or proceeds. Designed to provide tax and privacy advantages for the beneficiary. Condominium Ownership (ch.5) - ANS - owner holds a fee simple title to an individual condo unit - owners also hold an undivided interest in the remaining condo real estate known as common elements - individual owners can sell to anyone unless the condo assoc has the right of first refusal Cooperative Ownership (ch.5) - ANS - a corporation owns the real estate - the corporation offers shares of stock to prospective tenants - apartment price = stock price - stock is personal property and the tenants do not own real estate - tenant obtains proprietary lease to the apartment for the life of the corporation Timeshare Ownership (ch.5) - ANS - fee simple interest in condominium ownership with accompanying rights - ownership rights are limited to a specific time period, but owner can still mortgage, lease, sell, or bequeath the rights Planned Unit Developments (PUDs) (ch.5) - ANS - not a type of ownership - a type of building development designed as a grouping of complimentary land uses, such as housing, schools, recreation, retail, office and industrial parks, contained within a single master development - combination of higher dwelling density with a greater amount of open spaces Sustained Development (ch.5) - ANS development that seeks to meet the needs of the present without compromising the ability of future generations to meet their needs de minimus PUD (ch.5) - ANS one in which the common elements owned by the association have little or no effect on the individual's property value. Four Government Controls on Ownership (ch.6) - ANS Taxation Eminent Domain Police Power Escheat Taxation (ch.6) - ANS - the right of gov't to raise revenue through assessments on valuable goods, products and rights - forms = property taxation and special assessments Ad valorem tax (ch.6) - ANS - used in property taxation because it is levied in proportion to the value of the property to which the tax applies - revenue is estimated and paired against anticipated expenses. The difference is assessed in a tax levy against the properties within the tax district - taxable property in the district is valued by an assessor who determines the assessed value of each parcel Redemption (ch.6) - ANS the right given to the property owner to reclaim the property within a specified time period if the owner does not redeem the property by the end of the redemption period, the owner will be removed and the property will e offered at public sale or auction to satisfy the amount owed Special Assessment (ch.6) - ANS an assessment against real property levied by a public authority to pay for public improvements. also called a betterment tax Eminent Domain (ch.6) - ANS the right of government to take private property for public use upon the payment of just compensation. the 5th amendment, also known as the takings clause, guarantees payment of just compensation upon appropriation of private property the acquisition process is called condemnmation Police Power (ch.6) - ANS the inherent power of gov't to regulate property in order to protect public health, safety, and general welfare Four Guiding Principles of Police Power (ch.6) - ANS Protect Nondiscriminatory Constitutes Confiscation Benefit Comprehensive Plans (ch.6) - ANS - a form of police power used to control growth and development - includes the following elements: --general guidance of land use --housing needs --transportation --community initiatives --energy conservation Zoning (ch.6) - ANS public regulation of the use of private land through application of police power; accomplished by establishing districts or areas with uniform requirements relating to lot coverage, setbacks, types of improvement, permitted activities, signage, structure height, minimum lot area, density, landscaping and other aspects of land use and development Buffer Strip (ch.6) - ANS open spaces, landscaped areas, fences, walls, berms or any combination thereof used to physically separate or screen one use or property from another so as to visually shield or block noise, lights or other nuisances; often associated with a change of land use or density Spot Zoning (ch.6) - ANS an exception to the general zoning regulations; permits specific, usually small, parcels of land to be zoned for a use that is not permitted in the surrounding area Zoning Variance (ch.6) - ANS - legally authorized modification in the use of property at a particular location that does not conform to the regulated use set forth in the zoning ordinance for the surrounding area; not an exception or change in the legally applicable zoning - some states call it use variance - others call it development standard variance because it deviates from the codified standard of the zoning ordinance Legally Non-Conforming (ch.6) - ANS use that was lawfully established and maintained, but not longer conforms to the use regulations of its current zoning also known as a grandfathered use Forms of Police Power (ch.6) - ANS Comprehensive Plans Zoning Building Codes Escheat (ch.6) - ANS the right of government that gives the state titular ownership of a property when its owner dies without a will or any ascertainable heirs affects both real and personal property when a property owner dies intestate and there are not heirs to be found, the property escheats to the state the intent is to prevent real property from being abandoned with no owner in title Testate and Intestate (ch.6) - ANS Testate = the condition of dying with a valid will Intestate - the condition of dying without leaving a valid will Lien (ch.6) - ANS a charge against property in which the property is the security for payment of the debt lien transfers with the property a lien runs with the land and binds subsequent owners until the lien is paid and the owner's title is cleared Categories of Liens - General and Specific (ch.6) - ANS General lien binds all the assets of the individual debtor to the lien Specific lien is levied against or attaches to a specific piece of property Voluntary and Involuntary Liens (ch.6) - ANS Voluntary liens are created intentionally by the property owner's actions. I.e. a mortgage Involuntary liens are created by law rather than by choice. i.e a property tax lien Specific Liens (ch.6) - ANS Government Lien Mechanic's Lien Mortgage Lien General Liens (ch.6) - ANS Judgement Liens Government Liens (ch.6) - ANS include property tax liens and special assessment liens as well as liens from other forms of taxation Property tax lien attaches to the taxed property on the first day of the year in which the tax is due Special assessment lien attaches to each of the properties identified by the gov't entity as benefiting from the proposed public improvements If the property taxes are not paid the state can foreclose and sell the property to collect the unpaid property taxes Specific Lien Mechanics' Lien (ch.6) - ANS can arise when someone provides labor, skill, equipment, or materials while improving, repairing, or maintaining the property Specific Lien Mortgage Lien (ch.6) - ANS voluntary and of the most common types of liens created by a contract btwn the property owner and a lender. The owner (mortgagor) gives a lien against the property to the lender (mortgagee) to secure repayment of the loan Specific Lien Judgement Lien (ch.6) - ANS typically results from a lawsuit in which a monetary judgement is awarded General lien Lien priority (ch.6) - ANS generally first come first served property taxes and special assessments are high priority mortgage liens are NOT high priority Lis pendens (ch.6) - ANS legal term signifying pending litigation that can affect the ownership title to real estate. Not a lien; simple the notice of a potential lien in the near future Attachment (ch. 6) - ANS a lien that allows a creditor with an interest in an otherwise unsecured property to prevent the debtor from conveying title while the dispute is being decided in court. creditor files a write of attachment allowing the court to retain custody of the property until the suite is concluded seizure of property by court order Basic Elements of a Contract (ch.7) - ANS 1. Consent - entered into voluntarily 2. Offer and Acceptance - meeting of the minds 3. Legally competent parties 4. Consideration 5. Legal purpose Express v. Implied Contract (ch.7) - ANS Express contract is an agreement put into words, written or spoken Implied contract is an agreement that is presumed to exist because of the parties' actions Unilateral and Bilateral Contracts (ch.7) - ANS Unilateral contract - only one of the parties to the contract is legally obligated to perform (option agreement is unilateral) Bilateral contract - each party makes a binding agreement to perform according to the contract (most real estate contracts are bilateral) Forbearance (ch.7) - ANS a lender's agreement to postpone foreclosure proceedings, allowing a debtor an opportunity to explore financing alternatives when contract agreement is to NOT perform in a particular manner Contract definition (ch.7) - ANS A legally binding agreement between two or more persons that represents their promise to do or not to do a particular thing. In many jurisdictions, statutes of frauds or their equivalent, may render a real property contract voidable if it does not consist of a signed, written agreement Enforceability of Contracts - three categories of contract's legal status (ch.7) - ANS 1. Valid contract - an agreement in which all the elements of a contract are present and; therefore, legally enforceable 2. Void contract - no legal effect and cannot be enforced in a court of law. May be due to the absence of one or more specific contract elements 3. Voidable contract - technically valid but gives one or more parties the power to legally void the agreement and thus cancel performance Types of contracts (ch.7) - ANS Real Estate Sale Contract Option Contract Land Contract Sale Contract Definition (ch.7) - ANS a written document signed by a buyer and a seller who agree to the transfer of ownership of real property; also called an agreement of sale or earnest money contract Two functions of a sale contract (ch.7) - ANS 1. receipt for the buyer's earnest money deposit that is made with the offer to purchase 2. it becomes the contract of sale once it is executed with the signatures of the seller(vendor) and buyer (vendee) Earnest Money definition (ch.7) - ANS a good faith deposit made by a purchaser as the consideration component of a binding contract. In real property transactions, this deposit is frequently applied to the buyer's down payment Essentials of a sale contract (ch.7) - ANS - sale price and terms - contract date and potential closing date - legal description of the land - identification of title and form of deed to be conveyed - contingencies, if any - seller's disclosure statement - signature of all parties to ensure a valid contract Option (ch.7) - ANS a legal contract, typically purchased for a stated consideration, that permits, but does not require the holder of the option (known as the optionee) to buy, sell, or lease real estate for a stipulated period of time in accordance with specified terms; a unilateral right to exercise a privilege in essence an agreement (or contract) to make a contract Unilateral contract Land Contract (ch.7) - ANS a contract in which a purchaser of real estate agrees to pay a small portion of the purchase price when the contract is signed and additional sums, at intervals and in amounts specified in the contract, until the total purchase price is paid and the seller delivers the deed; used primarily to protect the seller's interest in the unpaid balance because default can be exercised more quickly than it could be under a mortgage; also called contract for deed or installment (sale) contract Leased fee interest (ch.7) - ANS the ownership interest held by the lessor, which includes the right to receive the contract rent specified in the lease plus the reversionary right when the lease expires Leasehold interest (ch.7) - ANS the right held by the lessee to use and occupy real estate for a stated term and under conditions specified in the lease. Lease (ch.7) - ANS a contract in which the rights to use and occupy land, space or structures are transferred by the owner to another for a specified period of time in return for a specified rent Two bases used to set up leases (ch.7) - ANS 1. Gross Rental Lease - the lessor pays some or all of the operating expenses. When a landlord pays most, but not all of the operating expenses, this may be referred to as a modified gross rental lease 2. Net Rental Lease - the tenant pays all the operating expenses Flat Rental Lease (ch.7) - ANS a lease with a specified level of rent that continues throughout the lease term Graduated Rental Lease (ch.7) - ANS A lease that provides for specified changes in rent at one or more points during the lease term, e.g., step-up and step-down leases, or leases with a set percentage adjustment. Graduated Rental Lease - Step-Up Lease (ch.7) - ANS the payments increase at specified intervals Graduated Rental Lease - Step-Down Lease (ch.7) - ANS the payment decrease at specified intervals Revaluation Lease (ch.7) - ANS a lease that provides for periodic rent adjustments based on the market rental rate of the space Index Lease (ch.7) - ANS a lease, usually for a long term, that provides for periodic rent adjustments based on the change in an economic index Percentage Lease (ch.7) - ANS A lease in which the rent or Some Portion of the rent represents a specified PERCENTAGE of the Volume of business, productivity, or use achieved by the tenant Most frequently used for retail properties Overage Rent - the percentage rent paid over and above the guaranteed minimum rent or base rent; calculated as a percentage of sales in excess of a specified breakpoint sales volume Sandwich Lease (ch.7) - ANS A lease in which an intermediate, or sandwich, leaseholder is the lessee of one party and the lessor of another. The owner of the sandwich lease is neither the fee owner nor the user of the property; he or she may be a leaseholder in a chain of leases, excluding the ultimate sublessee. Solar Photovoltaic Leases or Power Purchase Agreements (PPAs) (ch.7) - ANS vary widely in terms but are generally for 20 years. The leases usually state that the solar photovoltaic system is personal property and the property owner is responsible for paying personal property tax (if any). The appraiser must verify ownership and seek a copy of the lease. Title (ch.7) - ANS the combination of all elements that constitute proof of ownership Deed (ch.7) - ANS a written , legal instrument that conveys an estate or interest in real property to someone else, assuming it is executed and delivered Parties in a Deed (ch.7) - ANS Grantor and Grantee Elements of a Deed (ch.7) - ANS - identification of the parties - grantor who is legally competent - words of conveyance (granting clause) - legal description of the real estate - consideration received by the grantor - executed by means of a written document signed by the grantor - delivery by the grantor and acceptance by the grantee General Warranty Deed (ch.7) - ANS a covenant of warranty inserted in a deed that binds the grantor and heirs to defend the title conveyed to the grantee and his or her heirs against the lawful claims of all persons Special Warranty Deed (ch.7) - ANS The grantor provides two covenants: 1. the grantor received title to the property 2. the grantor and his heirs will defend title to the lands against legal claims created by the actions or omissions of the grantor or his heirs Bargain and sale deed (ch.7) - ANS the grantor conveys the property but does not guarantee clear title; this is used by court officials and fiduciaries to convey property they hold by force of law but to which they do not hold title. It is also used in foreclosure and tax sales. Quitclaim Deed (ch.7) - ANS the grantor conveys any interest held in property to the grantee without warranty of title. A quitclaim deed offers the least protection to the buyer. It is often used to clear a defect in the title when someone is through to have an interest or right in a particular property. Involuntary Transfer of Title (ch.7) - ANS - person dies intestate - eminent domain - liens - adverse possession - prescriptive easement Adverse Possession (ch.7) - ANS Involuntary transfer of property which takes place when a party makes a property claim by taking possession over a period of years, and the owner fails to contest the possession. Requirements for this type of transfer: - open - notorious - continuous - hostile - adverse Prescriptive Easement (ch.7) - ANS the right to use another's land, which is established by exercising this right openly, hostiley, and continuously over a statutory period of time. without the owner's permission Cost (ch.8) - ANS the amount required to create, produce, or obtain a property the total dollar expenditure to develop an improvement Components of Construction Cost (ch.8) - ANS 1. Direct (hard) costs 2. Indirect (soft) costs 3. Entrepreneurial incentive Development Cost (ch.8) - ANS identified with the overall project and includes the construction costs plus acquisition costs an all the other expenditures required to bring a property into an operating state Cost - Misc (ch.8) - ANS Cost is a fact Cost is independent of value but has a significant influence on value to the degree that on some occasions, value might coincide with cost Price (ch.8) - ANS the amount asked, offered or paid for a property may or may not have any relation to the value attributed to a particular property Value (ch.8) - ANS the monetary relationship between properties and those who buy, sell or use those properties the present worth of the future benefits that accrue to real property ownership an opinion of the present worth of the future benefits that accrue to real property ownership Never a fact Four Factors of Value (ch.8) - ANS 1. Utility (supply factor) 2. Scarcity (supply factor) 3. Desire (demand factor) 4. Effective Purchasing Power (demand factor) Utility (ch.8) - ANS the ability of a product to satisfy a human want, need, or desire Utility is found in design features called amenities Limitation on utility can impact value in a positive or negative manner Amenity (ch.8) - ANS a tangible or intangible benefit of real estate that enhances its attractiveness or increases the satisfaction of the user. Natural amenities may include a pleasant location near water or a scenic view of the surrounding area; man-made amenities include swimming pools, tennis courts, community buildings, and other recreational facilities Scarcity (ch.8) - ANS the present or anticipated undersupply of an item relative to the demand for it. Conditions of scarcity contribute to value. Desire (ch.8) - ANS a purchaser's wish for an item to satisfy human needs, or individual wants beyond essential life support needs Perception is an aspect of desire Effective Purchasing Power (ch.8) - ANS the ability of an individual or group to participate in a market, i.e., to acquire goods and services with cash or its equivalent Types of Value (ch.8) - ANS - market value - use value - investment value - going concern value - insurable value - assessed value - fair value Use Value (ch.8) - ANS the value a specific property has for a specific use comes into play with: - Limited-market properties: Large mfg plant or research and development property - Special-Use properties: religious facility, museum, library, school, hospital, post office use value may differ from market value value in use is a subset of use value - the value of a property assuming a specific use, which may or may not be the property's highest and best use on the effective date of the appraisal. Investment Value (ch.8) - ANS the value of a property to a particular investor or class of investors based on the investor's specific requirements Not market value Going-concern value (ch.8) - ANS the market value of all tangible and intangible assets of an established and operating business with an indefinite life,k as if sold in aggregate. Insurable Value (ch.8) - ANS for insurance purposes based on the cost of physical items subject to loss generally based on the building improvements not the site or land Assessed Value (ch.8) - ANS the value of a property according to the taxx rolls in ad valorem taxation Fair Value (ch.8) - ANS the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date Market Value (ch.9) - ANS a type of value, stated as an opinion, that presumes the transfer of property (i.e. right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in the appraisal Characteristics of Market Value (ch.9) - ANS 1. Based on the economic concept of exchange value 2. Market value is a stated opinion Components of Market Value (ch.9) - ANS 1. Expressed as the most probable price 2. As of a specified date (effective date) 3. In cash or cash equivalent terms 4. Reasonable exposure in a competitive market under conditions requisite to a fair sale 5. Buyer and seller each acting: prudently, knowledgeably, for self-interest, unaffected by undue stimulus 6. Self-test - combine all the components of market value - Market value is the most probably price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely related terms, for which the specified property right should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under undue duress Cash equivalency analysis (ch.9) - ANS an analytical process in which the sale price of a transaction with nonmarket financing or financiang with unusual conditions or incentives is converted into a price expressed in terms of cash or its equivalent Comparables (ch.9) - ANS a shortened term for similar property sales, rentals, or operating expenses used for comparison in the valuation process. In best usage, the thing being compared should be specified, e.g. comparable sales, properties or rentals. Cash equivalency adjustments are made to the comparable sales, not the subject Concessions (ch.9) - ANS a financial payment, special benefit, or non-realty item included in the sale contract or rental agreement as an incentive to the sale or lease. Discount Points (ch.9) - ANS a percentage of the loan amount that a lender charges a borrower for making a loan; may represent a payment for services rendered in issuing a loan or additional interest to the lender payable in advance. One discount point equals 1% of the mortgage amount Exposure time (ch.9) - ANS the time a property was available for sale in the market and always presumes to occur prior to the effective date of the appraisal includes not only sufficient and reasonable time but also reasonable effort to sell the property Might not meet market value criteria = Liquidation, forced sale (sheriff's auction), excessive or limited time on the market Marketing Time (ch.9) - ANS an opinion of the amount of time it might take to sell a real or personal property interest at the concluded market value level during the period immediately after the effective date of the appraisal. Four Agents of Production (ch.10) - ANS 1. Land - cost of acquiring, how improved an utilized 2. Labor - cost to construct market improvements on a site. Included project coordination and supervision 3. Capital - physical capital such as equipment and buildings and infrastructure that can produce other goods 4. Entrepreneurial Coordination - costs associated with the entrepreneur's ability to combine land, labor and capital in a real property development project. Investment of time, expertise, and equity Four agents combine to create value in the property Four Forces that Influence Value (ch.10) - ANS 1. Government and legal 2. Economic 3. Social 4. Environmental and geographic LEED Green Building Rating System (ch.10) - ANS Leadership in Energy and Environmental Design (LEED) encourages global adoption of sustainable green building and development practices through the creation and implementation of universally understood and accepted tools and performance criteria CERCLA - Superfund Law (ch.10) - ANS Comprehensive Environmental Response Compensation and Liability Act (enacted 1980) Landowner of record had a potential liability when a release of hazardous materials occurred on the property even if the owner did not cause or was not responsible for the contamination In 2002 the Small Business Liability Relief and Brownsfields Revitalization Act was signed into law and expanded the EPA Brownsfield Program. Law also clarified Superfund liability for prospective purchasers, innocent landowners and contiguous property owners. Economic Principles in Real Estate (ch.11) - ANS 1. Change 2. Anticipation 3. Supply and Demand 4. Competition 5. Substitution 6. Balance 7. Externalities Change definition (ch.11) - ANS the result of the cause and effect relationship among the forces that influence real property value Anticipation Definition (ch.11) - ANS the perception that value is created by the expectation of benefits to be derived in the future always focused on the future, never on the past or present Supply and Demand Definition (ch.11) - ANS the economic principle as applied within real estate states that the price of real property varies directly, but not necessarily proportionately, with demand inversely, but not necessarily proportionately with supply the interaction of buyers and sellers affects value directly the interaction of landlords and tenants affects value indirectly Market Equilibrium Definition (ch.11) - ANS the theoretical balance where demand and supply for a property, good, or service are equal... over the long run, most markets move toward equilibrium, but a balance is seldom achieved for any period of time. Supply (ch.11) - ANS dependent on the four agents of production works in conjunction with scarcity changes in supply generally lag behind changes in demand property values vary inversely with changes in supply Demand (ch.11) - ANS Effective Purchasing Power - the ability of an individual or group to participate in a market Effective Demand - the desire to buy coupled with the ability to pay. Typically presumed in real estate analysis Competition (ch.11) - ANS 1. Between purchasers or tenants, the interactive efforts of two or more potential purchasers or tenants to secure a sale or lease 2. Between sellers or landlords, the interactive efforts of two or more potential sellers or landlords to secure a sale or lease 3. Among competitive properties, the level of productivity and amenities or benefits characteristic of each property considering the advantageous or disadvantageous position of the property relative to the competitors Competition is the interaction of supply and demand Substitution (ch.11) - ANS the appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution assumes rational, prudent market behavior with no undue cost due to delay Opportunity Cost (ch.11) - ANS sub-principle of substitution the cost of option foregone or opportunities not chosen Retrofit - to furnish with new or modified parts or equipment not available or considered at the time of manufacture. Principle of Balance (ch.11) - ANS The principle that real property value is created and sustained when contrasting, opposing or interacting elements are in a state of equilibrium focuses on land and improvements sub-group = increasing and decreasing returns and contribution Increasing and Decreasing Returns (ch.11) - ANS - subgroup of balance - the concept that successive increments of one or more agents of production added to fixed amount of the other agents will enhance income or value (in dollars, benefits, or amenities) at an increasing rate until a maximum return is reached. Beyond a certain point, each additional unit will add less income or value than the unit before it. - also called the law of increasing returns or law of decreasing returns Contribution (ch.11) - ANS the concept that the value of a particular component is measured in terms of the amount it adds to the value of the whole property or as the amount that its absence would detract from the value of the whole subgroup of balance Surplus Productivity (ch.11) - ANS the net income that remains after the costs of various agents of production have been paid Conformity (ch.11) - ANS the appraisal principle that real estate value is created and sustained when the characteristics of a property conform to the demands of its market external conformity - the compatibility btwn. a property and its surroundings internal conformity - when labor, capital, coordination and land are appropriately combined in a property Subprinciples of Conformity (ch.11) - ANS Principle of Progression - concept that a lower-priced property will be worth more in a higher-priced neighborhood than it would in a neighborhood of comparable properties Principle of Regression - concept that a higher-priced property will be worth less in a lower-priced neighborhood than it would in a neighborhood of comparable properties Externalities (ch.11) - ANS the principle that economies outside a property have a positive effect on its value while diseconomies outside a property have a negative effect on its value. positive = infrastructure (roads, highways, bridges) negative = inconveniences imposed on property owners by the action of others Highest and Best Use (ch.11) - ANS The reasonably probable use of property that results in the highest value. The four criteria required are: 1. Legal Permissibility 2. Physical Possibility 3. Financial Feasibility 4. Maximum Productivity Interim Use (ch.11) - ANS the temporary use to which a site or improved property is put until a different use becomes maximally productive Consistent Use (ch.11) - ANS The concept that land cannot be valued on the basis on one use while the improvements are valued on the basis of another use Excess Land v. Surplus Land (ch. 11) - ANS Excess Land - not needed to serve or support the existing use. Has the potential to be sold separately and is valued separately Surplus Land - not needed to support the existing use but cannot be separated from the property and sold off for another use All excess land could be surplus land but surplus land is never excess land. Supply and Demand (ch.13) - ANS Demand for money is a function of economic forces Supply of money is largely a function of the Federal Reserve as it regulates the money supply Supply and demand relationships set the price (or cost) of money Competition works with the supply and demand of money Market (ch.13) - ANS a set of arrangements in which buyers and sellers are brought together through the price mechanism; the aggregate of possible buyers and sellers and the transactions between them a gathering of people for the buying and selling of things; by extension, the people gathered for this purpose Competition, the interaction of supply and demand, takes place within a market Money Market (ch.13) - ANS the interaction of buyers and sellers who trade short-term money instruments when $ is plentiful, the price of $ declines, when $ is scarce the price rises the price of $ is expressed as an interest rate - that is, the cost to borrow funds Short-term money instruments (ch.13) - ANS 1. Federal Funds - US funds available at Federal Reserve Bank for member banks 2. Treasury Notes - In the US, intermediate securities with maturities of 1-10 yrs 3. CDs - time deposit fin'l instrument with a banking organization 4. Commercial paper - corporation's promissory notes used to borrow short-term funds 5. Municipal Notes - short-term, federally tax-exempt obligations of local gov'ts 6. Eurodollars - US dollars that are held in banks outside the US Capital Market (ch.13) - ANS the interaction of buyers and sellers trading long- or intermediate-term money instruments includes: bonds or debentures, stocks, REITs, mortgages, deeds of trust/land contracts Mortgage (ch.13) - ANS a pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions a mortgage is a loan secured by the collateral of some specified real property which obliges the borrower to make a predetermined series of payments Amortization (ch.13) - ANS the repayment of a loan by installments. the process of retiring debt through a systematic repayment of principal together with interest on the outstanding principal balance. Types of Mortgages (ch.13) - ANS 1. Guaranteed Mortgage - Dept. of Veteran Affairs 2. Insured Mortgage - HUD's FHA, PMI for conv. 3. Conventional Mortgage 4. Energy-Efficient Mortgage (EEM) 5. Balloon Mortgage Real Estate Market (ch.13) - ANS buyers and sellers of particular real estate and the transactions that occur among them divided into categories based on property types and their appeal to different market participants The Federal Reserve (ch.13) - ANS - central bank of US, founded by Congress in 1913 to provide nation with safe, flexible and stable monetary and fin'l system - carry out nation's monetary policy - supervise and regulate banking institutions and protect the credit rights of consumers - maintain the stability of the fin'l system - provide certain services to U.S. gov't, public, fin'l institutions and foreign official institutions - composed of 12 regional banks and a number of member banks - independent of the U.S. president and Congress U.S. Department of the Treasury (ch.13) - ANS - implements fiscal policy through decisions guided by the U.S. Congress regarding the federal budget, expenditures, and revenues - raises funds and pays bills - generates currency, collects taxes, and borrows money Inflation (ch.13) - ANS an erosion of the purchasing power of currency characterized by price escalation and an increase in the volume of money inflation rate is the rate of change in the price level which is reflected in the consumer price index (CPI) Appreciation (ch.13) - ANS an increase in the price or value of a property or commodity resulting from an excess demand over supply or other factors Nominal Interest Rate v. Real Interest Rate (ch.13) - ANS Nominal interest rate is a stated or contract rate Real interest rate is a nominal interest rate that has been adjusted for expected inflation. Primary Market (ch.13) - ANS where borrowers and mortgage originators come together and the mortgage lenders include banks, thrifts, mortgage companies and credit unions Secondary Market (ch.13) - ANS where lender mortgages are assembled and packaged into pools of mortgage-backed securities to be traded to investors Floor area ratio (FAR). (ch. 15) - ANS The relationship between the above-ground floor area of a building, as described by the zoning or building code, and the area of the plot on which it stands; in planning and zoning, often expressed as a decimal, e.g., a ratio of 2.0 indicates that the permissible floor area of a building is twice the total land area. FAR is the reciprocal of the land-to-building ratio Land-to-building ratio (ch. 15) - ANS The proportion of land area to gross building area; one of the factors determining comparability of properties Perimeter (ch.16) - ANS linear distance around an area or structure - sum of all sides For circle = 3.14d, d=diameter Area of a Rectangle (ch.16) - ANS length x width Area of a Triangle (ch.16) - ANS 1/2 * (base x height) Area of a Trapezoid (ch. 16) - ANS 1/2 * (sum of the bases) * height Econometrics (ch. 16) - ANS application of mathematics and statistics to the interpretation of economic data, testing of economic theories, and solution of economic problems. Quantitative Data (ch. 16) - ANS numbers that can be measured and compared with a certain degree of objectivity and precision building size, acreage, parking spaces, rentable area, building age, proximity Qualitative Data (ch. 16) - ANS more subjective, represented by words rather than numbers. building style, condition, quality, vie amentity Population (ch. 16) - ANS the complete set of all items in a specific category. Also referred to as the universe Sample (ch. 16) - ANS a subset of a population selected for analysis Variable (ch. 16) - ANS a characteristic or attribute of an item, service, or individual that can change from observation to observation a specific value of a variable is sometimes referred to as a vairate Measures of central tendency (ch. 16) - ANS Mean Median Mode Mean (ch. 16) - ANS average Median (ch. 16) - ANS positional average number in the middle Mode (ch. 16) - ANS most frequently occurring number in a distribution Measures of dispersion (ch. 16) - ANS quantify the extent to which data vary from the average Range, Standard Deviation Range (ch. 16) - ANS difference between the highest and lowest value in the data set Standard Deviation (ch. 16) - ANS measure of the variance in the data away from the mean. Simple Interest (ch. 18) - ANS interest in each period calculated based on the original deposit or investment. The interest does not compound Compound Interest (ch. 18) - ANS interest earned on the original investment amount and on previously earned interest Periodic Rate (ch. 18) - ANS the rate applied to the investment from period to period Annual nominal rate (ch. 18) - ANS the periodic rate multiplied by the number of periods in a year Annual effective rate (ch. 18) - ANS the rate that includes the effect of compounding Mortgage Capitalization Rate (ch. 18) - ANS - also called mortgage constant - the capitalization rate for debt; the ratio of the annual debt service to the principal amount of the mortgage loan. Equivalent to the periodic mortgage constant times the number of payments per year on a given loan on the day the loan is initiated Time Value of Money (ch. 18) - ANS the concept of underlying compound interest that holds that $1 received today is worth more than $1 received in the future due to opportunity cost, inflation, and the certainty of payment Amount of One (ch. 18) - ANS the compound interest that indicates the amount to which $1 will grow with compound interest at a specified rate for a specified number of periods. The amount of one is one of the six functions of one found in standard financial tables. also called future value of one Amount of one per period (ch. 18) - ANS the compound interest factor that indicates the amount to which $1 per period will grow with compound interest at a specified rate for a specified number of periods also called sinking fund accumulation factor or future value of one per period Annuity (ch. 18) - ANS a contact providing for regular payments of predictable amounts. Regular payments are those that occur at a constant periodic rate, such as monthly, quarterly, or annually. Sinking Fund Factor (ch. 18) - ANS the compound interest factor that indicates the amount per period that will grow, with compound interest, to $1 Present Value of one (ch. 18) - ANS a compound interest factor that indicates how much $1 due in the future is worth today Discounting (ch. 18) - ANS conversion of benefits received in the future to present value Present Value of one per period (ch. 18) - ANS a compound interest factor that indicates how much $1 paid periodically is worth today. also called present worth of one per period or ordinary level annuity factor Installment to amortize one (ch. 18) - ANS the compound interest factor that represents the installment needed to repay one unit of currency with interest at a specified rate for a specific number of periods; the reciprocal of the level annuity factor. Also called the partial payment factor or amortization factor. Market Area (ch. 19) - ANS the geographic region from which a majority of demand comes and in which the majority of that competition is located focused on the behavior of buyers and sellers of properties that directly compete with the subject of the appraisal assignment Neighborhood (ch. 19) - ANS a group of complimentary land uses; a congruous grouping of inhabitants, buildings, or business enterprises emphasis on land use characteristics District (ch. 19) - ANS a neighborhood characterized by homogeneous land use Characteristics of Market Areas (ch. 19) - ANS Geographical Boundaries Change and Transition Life Cycle of Subject Neighborhood Gentrification Transition (ch. 19) - ANS changes in neighborhood use Change can be short-term or long-term, but transition usually has a long duration Life Cycle of the Subject Neighborhood (ch. 19) - ANS 1. Growth - gain public favor and acceptance 2. Stability - equilibrium without marked gains or losses 3. Decline - diminishing demand 4. Revitalization - renewal, modernization and increasing demand Gentrification (ch. 19) - ANS a process of community change in which middle- and upper-income persons purchase properties in a neighborhood and renovate or rehabilitate them, causing property values to rise and often displacing earlier, usually poorer residents Value Influences on Market Areas (ch. 19) - ANS Government and Legal Economic Social Environmental and Geographic Linkage (ch. 19) - ANS Time and distance relationship between a particular use and supporting facilities, e.g. between residences and schools, professional services, shopping, and employment The movement of people, goods, services or communications to and from the subject site, measured by the time and cost involved Central Business District (CBD) (ch. 19) - ANS the core, or downtown area, of a city where the major retail, financial, governmental, professional, recreational, and service activities of the community are concentrated Regional Shopping Center (ch. 19) - ANS a shopping center that offers a variety of general merchandise, apparel, furniture, home furnishings, services and recreational facilities and is built around one or more full department stores. Community Shopping Center (ch. 19) - ANS typically a shopping center that offers a wider range of apparel and other soft goo