Overview
This lecture covers essential real estate appraisal and valuation concepts, focusing on types of value, depreciation, the appraisal process, appraisal approaches, and key appraisal principles important for real estate exams.
Concepts of Value
- Market value is the estimated selling price in an open market.
- Market price is the actual sales price of a property; both terms are often used interchangeably.
- Appraised value is determined by a licensed appraiser for lending purposes and may differ from market value.
Appreciation & Depreciation
- Appreciation is an increase in a property’s value over time.
- Depreciation is a decrease in property value over time due to any cause.
- Three types of depreciation: functional obsolescence (design flaws), economic obsolescence (external factors), and physical deterioration (wear and tear).
- Physical deterioration can be curable (fixable) or incurable (not economically feasible to fix).
Real Estate Appraisal Process
- Appraisals are required for mortgage, business, inheritance, and other financial purposes.
- Only licensed appraisers can perform appraisals; appraisals must be unbiased.
- An appraisal is an opinion of value supported by analysis, not an exact measure.
Factors Influencing Appraisals
- Location, building materials, age, renovations, style, layout, size, and comparable sales all impact appraisals.
Inspection vs. Appraisal
- Inspections assess the physical condition and identify issues.
- Appraisals estimate market value, considering inspection findings.
Appraisal Approaches
- Market Data (Sales Comparison) Approach compares the property to recent sales of similar properties (common for residential).
- Cost Approach estimates value by calculating land value plus cost to replace improvements minus depreciation (useful for new/special properties).
- Income Approach determines value based on the income the property generates, mainly for commercial properties, using the formula: Value = Net Operating Income Ă· Capitalization Rate.
Appraisal Principles
- Substitution: Buyers pay no more than for a similar, desirable property.
- Conformity: Value is maximized when the property matches neighborhood standards.
- Highest and Best Use: The use that yields the greatest net return over time.
- Contribution: Value added by an improvement may differ from its cost.
- Progression: Lower-value property increases in value when surrounded by higher-value properties.
Key Terms & Definitions
- Market Value — The probable price a property would sell for under normal conditions.
- Appraised Value — Value determined by an appraiser for lending or official purposes.
- Appreciation — An increase in property value over time.
- Depreciation — A decline in property value over time due to various factors.
- Functional Obsolescence — Loss of value due to outdated design/features.
- Economic Obsolescence — Loss of value from external factors beyond the property.
- Physical Deterioration — Loss of value due to wear, tear, or decay.
- Curable Deterioration — Damage that is economically feasible to repair.
- Incurable Deterioration — Damage too expensive to repair relative to value added.
- Appraisal — Professional estimation of a property's market value by a licensed appraiser.
- Inspection — Examination of property condition to identify defects.
- Net Operating Income (NOI) — Income from property after operating expenses, used in income approach.
Action Items / Next Steps
- Review the three main appraisal approaches and five appraisal principles for the exam.
- Understand key terms and be able to distinguish between types of value and depreciation.
- Check assigned readings or supplemental videos for further examples and deeper explanations.