Valuation Process and Pricing Properties

Exam rule

An appraisal is an independent analysis, opinion or conclusion about a stated interest or part of real estate. A valuation estimates the value of a stated property interest as of a stated date. An evaluation studies a property's nature, quality or utility. It may not estimate value. Highest and best use, feasibility, and market supply and demand are examples of evaluation work. A comparative market analysis, or CMA, is a real estate licensee's pricing analysis for a listing or sale. It uses market evidence and can state an opinion or range of value. The official salesperson syllabus says a CMA may never be called an appraisal. A broker price opinion, or BPO, is also broker work, not an appraisal. New York protects the titles State licensed real estate appraiser and State certified real estate appraiser. Article 6-E does not impose a blanket ban on all appraisal work by a person without one of those titles. A law, lender or assignment may still require a licensed or certified appraiser. An appraisal management company may use an unlicensed person for a CMA intended to list or sell real estate. It cannot use that CMA in place of an appraiser's valuation when one is required.

Exam rule

Market value is the most probable price for specified property rights on a specific date. The terms are cash, cash equivalent or clearly stated. The property has reasonable exposure in a competitive market. Buyer and seller act prudently, with knowledge, in their own interests and without undue duress. This means most probable price, not the highest possible price, the asking price or the first offer. Exposure time looks backward from the value date and asks how long the property needed to be exposed before a sale. Marketing time looks forward and estimates how long a sale may take after that date. Market price is the amount paid in one deal and may not equal market value. Investment value is the value to one specified investor under that investor's goals. Value-in-use is the value of the property's current use to its user. Insurable value usually concerns covered improvements and omits land and foundations. Insured value is the amount of insurance carried, so it need not equal insurable or market value. Assessed value is the value placed on the assessment roll. In New York, a total assessment reflects the municipality's uniform percentage of market value. Mortgage value is a lender's value for loan-security analysis and is not automatically market value.

Exam rule

Value is a supported opinion about economic worth under stated conditions. Price is a fact from a particular transaction, such as an asking price, offer price or sale price. The parties, terms or pressure in that deal can make market price different from market value. Cost is the money required to create, acquire or replace something. Building cost can include labor, materials, legal work, plans, engineering, financing, taxes during construction, interest, contractor overhead and profit, and entrepreneurial overhead and profit. Direct costs, also called hard costs, are labor and materials used in construction. Indirect costs, often called soft costs, include architectural and engineering work, other professional fees such as appraisal fees, financing, lease-up, administration and filing fees. The principle of contribution asks how much a feature adds to value, not what it cost. Cost, price and value may match, but they do not have to.

Exam rule

Highest and best use is the legal, physical and financial use that produces the greatest value. The tests are legally permissible, physically possible, financially feasible and maximally productive. Analyze the site as vacant first. Then analyze the property as improved. The present building may remain, be changed or be removed, depending on which supported use creates the most value. New York tax assessment has a current-use rule for improved property, while idle vacant land is generally valued at highest and best use. Site valuation usually starts with sales of similar vacant land. Other methods can allocate or extract a land share from improved sales. They can also analyze subdivision development, capitalize ground rent or use a land residual when the data fit. Assemblage is joining parcels. Plottage is the increase in value created when the combined site is worth more than the separate parcels. Substitution says a buyer will not pay more than a comparable alternative. Anticipation links value to expected future benefits. Contribution measures what a part adds to the whole. Conformity rewards a good fit with the market. Progression can lift a modest property among better ones, while regression can pull a superior property down. Supply and demand, change, and increasing or decreasing returns also shape value.

Exam rule

The sales comparison approach compares the subject with verified sales of similar properties. Recent closed sales show what buyers paid. For a CMA, the syllabus directs licensees to examine comparable sales from the past 12 months. It also calls for current competing listings and recent expired listings. Twelve months is an exam guideline. It does not mean every sale in that period is comparable or that an older sale can never help. Active listings show the subject's current competition. Expired listings can reveal prices or terms the market rejected. A residential market analysis also studies buyer appeal, market position, assets and drawbacks. It reviews area market conditions, recommended terms and a supportable market value range. Compare the property rights, financing or concessions, market conditions, location, physical features and income features. Adjust the comparable, never the subject. If the comparable is superior, adjust it down. If it is inferior, adjust it up. Adjustments must come from market evidence, not a memorized dollar list.

Exam rule

The cost approach is often written as RCNLD plus land. Estimate reproduction cost new or replacement cost new, subtract accrued depreciation, then add the site value. Reproduction cost prices a close copy of the existing building. Replacement cost prices a building with the same utility using current design and materials. Direct and indirect costs both belong in a complete cost estimate. Physical deterioration is wear, age or damage. Functional obsolescence is a loss caused by the building's layout, design or equipment. External obsolescence, also called economic obsolescence, comes from a condition outside the property. A depreciation item is curable when the market value gained supports the repair cost. It is incurable when the repair is not practical or costs more than it contributes. This is accrued loss in value, not the accountant's tax depreciation. The approach is strongest for new construction and special-purpose property. It also helps when sales or income data are limited. Older improvements and uncertain depreciation make it less reliable. Land is valued separately and is not depreciated in this formula.

Exam rule

The income approach converts a property's earning capacity into value. Start with potential gross income. Subtract vacancy and collection loss, then add other property income to find effective gross income. Subtract normal operating expenses and any appropriate replacement reserves to find net operating income, or NOI. Operating expenses can include taxes, insurance, utilities, management, repairs and maintenance. Mortgage payments, capital improvements, book depreciation and the owner's income taxes are not operating expenses in this calculation. Direct capitalization uses V equals I divided by R. Value equals NOI divided by the capitalization rate. Income equals value times rate. Rate equals NOI divided by value or sale price. A gross rent multiplier, or GRM, is sale price divided by gross rent. Estimated value is market rent times a supported GRM. Monthly rent must be matched with a monthly GRM and annual rent with an annual multiplier. GRM ignores expenses, so it is less precise than capitalization based on NOI. Use market rent, market expenses and rates from comparable investments. Value the real estate's income, not the value of a business operating inside it.

Exam rule

A strong CMA follows a clear workflow. Define the property and the pricing purpose. Collect and verify public records, listing data, property facts and market conditions. Inspect or confirm the subject's assets, drawbacks, condition and buyer appeal. Select comparable sales, usually from the past 12 months under the syllabus, then review current competition and expired listings. Check the rights, terms and dates. Make supported adjustments to the comparables. Reconcile the evidence into a market value range, formulate a recommended price and discuss recommended terms and market position. Reconciliation is reasoned weighting, not a plain average. Give more weight to the evidence that is most relevant and best supported. Investigate a wide spread instead of hiding it. A salesperson's role requires competence, diligence, documentation and effective communication. Work within your training, check facts, keep the records behind the conclusion, explain limits and update stale work. A CMA supports a pricing decision. It does not guarantee a sale price and should not be used as a lender's appraisal.