ARC RA cheat sheet

USPAP applies to appraisals and appraisal reviews performed for federally related transactions and to any assignment where the appraiser states compliance; the current edition is incorporated by reference in the Ethics Rule preamble.

Competency Rule: an appraiser must have the knowledge and experience to complete the assignment competently, or disclose the lack of competency, take steps to gain it, and disclose that assistance was obtained in the report.

Jurisdictional Exception Rule: when a law or regulation of a jurisdiction conflicts with USPAP, the conflicting part of USPAP is void for that assignment only to the extent of the conflict, and the exception must be disclosed.

Scope of Work Rule requires identifying the problem, determining and performing the scope of work, and disclosing it; the scope must be sufficient to produce credible assignment results.

An appraisal must be independent, impartial, and objective; compensation contingent on a predetermined value, a value direction, or a loan approval violates the Ethics Rule (Management section).

Recordkeeping: workfiles must be retained for at least five years after delivery of the report, or two years after final disposition of a judicial proceeding in which the appraiser testified, whichever is later.

An appraiser must not communicate an assignment result in a misleading manner; a report must state the intended use, intended users, definition of value, effective date, and scope of work.

Extraordinary Assumptions are facts assumed true that, if found false, could affect the assignment results; Hypothetical Conditions are conditions contrary to fact that must be clearly disclosed and are permitted only when necessary for reasonable analysis.

Market value is the most probable price in a competitive and open market under all conditions requisite to a fair sale, with buyer and seller acting prudently and knowledgeably, price unaffected by undue stimulus, and payment in cash or equivalent.

Price is a fact (what was paid); value is an opinion of the most probable price; cost is the expenditure required to create the improvement.

Anticipation: value is created by the expectation of future benefits. Change: market conditions and property are dynamic. Supply and demand: price is set at the intersection of the two, all else equal.

Substitution: a buyer will pay no more for a property than the cost of acquiring an equally desirable substitute; this principle underlies all three approaches.

Conformity and progression/regression: value is maximized when a property conforms to its neighborhood; a superior property is pulled down by inferior neighbors (regression) and an inferior property is lifted by superior neighbors (progression).

Contribution: the value of a component is measured by what it adds to (or subtracts from) the whole, not by its cost. Balance: value is maximized when the agents of production (land, labor, capital, coordination) are in proper proportion.

Highest and best use is the reasonably probable and legal use that is physically possible, appropriately supported, financially feasible, and results in the highest value; it is analyzed as vacant and as improved.

External (economic) obsolescence is loss in value from factors outside the property; functional obsolescence is loss from within the property (deficiencies, superadequacies, layout); physical deterioration is curable or incurable deferred maintenance.

Market analysis identifies the relationship between supply and demand for a property type in a defined market area, and is the basis for the market conditions (time) adjustment and for the highest and best use conclusion.

Market area boundaries are defined by the forces that create value: social, economic, governmental, and environmental (SEGE).

Supply-side indicators: active listings, months of remaining inventory, absorption rate, new construction permits, and days on market. Demand-side indicators: population, household formation, employment, income, and mortgage rates.

Months of inventory = active listings ÷ average monthly sales (or absorption rate). Roughly 4-6 months is a balanced market; materially below signals a seller's market, materially above a buyer's market.

Absorption rate = number of sales in a period ÷ number of listings available at the start of the period; the reciprocal estimates time to absorb existing inventory.

Four tests of highest and best use: legally permissible (zoning, deed restrictions, easements), physically possible (size, shape, topography, access), financially feasible (use produces a positive return to land), and maximally productive (highest residual land value).

Highest and best use as improved considers demolition: if the value of the site as though vacant exceeds the value of the property as improved plus demolition cost, the interim use may be demolition and redevelopment.

A neighborhood in the growth, stability, decline, or revitalization phase affects the market conditions adjustment and the risk rate used in the income approach.

The sales comparison approach estimates value by comparing the subject to closed sales, listings, and pending sales, then adjusting for differences; the subject is the base, and adjustments are made to the comparable to make it equivalent to the subject.

Elements of comparison: real property rights conveyed, financing terms, conditions of sale, expenditures made immediately after purchase, market conditions (time), location, physical characteristics, and economic characteristics.

Adjustment direction rule: if the comparable is superior to the subject, subtract; if the comparable is inferior, add. The adjustment is applied to the comparable's price.

Paired sales analysis isolates the adjustment for one variable by comparing two otherwise similar sales that differ in that variable; the difference in price is the adjustment.

Adjusted price = sale price + (or −) adjustments for each element of comparison. Reconcile the adjusted values by weighing the most similar and most recent comparables.

Net adjustment = sum of all adjustments; gross adjustment = sum of absolute values of all adjustments. A large gross adjustment indicates a dissimilar comparable and less weight.

Adjusted sale price range: the indicated value should generally fall within the range of adjusted prices; outliers are explained or excluded.

Sales comparison is the most reliable approach for owner-occupied residential properties where sufficient recent, arm's-length sales exist; it is required for most residential lending assignments.

Cost approach value = land value (as though vacant) + cost new of improvements − accrued depreciation. It is most reliable for new or nearly new construction and for special-purpose properties with no income or comparable sales.

Replacement cost is the cost to construct a building of equal utility using current standards and materials; reproduction cost is the cost to construct an exact replica using the same materials and methods.

Cost new = direct costs (materials, labor, subcontractor, equipment) + indirect costs (permits, fees, financing, insurance, marketing, entrepreneurial profit) + entrepreneurial incentive.

Accrued depreciation = physical deterioration (curable and incurable) + functional obsolescence (curable and incurable) + external obsolescence. Only curable items are measured by cost to cure; incurable items are measured by loss in value.

Age-life method: depreciation = effective age ÷ total economic life × cost new. Effective age reflects condition and utility, not chronological age.

Sales comparison of depreciation: extract depreciation from comparable sales by subtracting land value from sale price and comparing to cost new.

Breakdown method (observed condition): itemize each curable and incurable component, then convert to a percentage of cost new.

Entrepreneurial profit is the market-derived incentive for the developer; it is included in cost new when using the cost approach and is not the same as developer's overhead.

Value = Net Operating Income (NOI) ÷ Capitalization Rate. The cap rate is derived from comparable sales: cap rate = NOI ÷ sale price.

NOI = Potential Gross Income (PGI) − vacancy and collection loss + other income − operating expenses. Operating expenses exclude debt service, depreciation, income taxes, and capital expenditures.

Gross rent multiplier (GRM) = sale price ÷ gross monthly rent; Gross income multiplier (GIM) = sale price ÷ annual gross income. Multipliers are used for gross-income-based valuation and are less precise than direct capitalization.

Direct capitalization converts one year's stabilized NOI into value; yield capitalization (DCF) discounts a multi-year cash flow projection at a market-derived discount rate.

Effective gross income (EGI) = PGI − vacancy and collection loss + other income. NOI = EGI − operating expenses.

Debt coverage ratio (DCR) = NOI ÷ annual debt service; lenders typically require a DCR of at least 1.20 for residential investment properties.

Operating expense ratio (OER) = operating expenses ÷ EGI; it is a quick check on expense comparability across sales.

Residential income approach is most applicable to 2-4 unit properties and to single-family rentals in investor markets; it is secondary for owner-occupied single-family homes.

Site value methods: sales comparison (most reliable), extraction (land value = improved sale price − depreciated improvement value), allocation (land-to-building ratio from comparable sales), subdivision development, and land residual (income approach to land).

Legal description types: metes and bounds (courses and distances from a point of beginning), lot and block (recorded plat), and rectangular survey (Public Land Survey System: township, range, section, quarter-section).

A section is 1 square mile = 640 acres. A quarter-section is 160 acres; a quarter-quarter-section is 40 acres.

Acre = 43,560 square feet. A square mile = 640 acres. Front foot is a one-foot-wide strip along the street; the front-foot method is used for commercial sites with similar depth.

Zoning and deed restrictions are legally permissible constraints on highest and best use; nonconforming uses are permitted to continue but not to expand in most jurisdictions.

Easements and encroachments affect site utility and marketability; a prescriptive easement arises from open, notorious, continuous, hostile use for the statutory period.

Flood zones, wetlands, and environmental contamination affect site value; a Phase I Environmental Site Assessment is a records review and site inspection, not sampling.

Site improvements (grading, utilities, driveways, landscaping) are part of the site value as improved, not the cost new of the building.

Reconciliation is the process of weighing the indications of value from each approach to arrive at a single value opinion; weight is based on appropriateness, reliability, and quantity of data.

The final value opinion must fall within the range of the indicated values, or the report must explain why it does not.

Report types under USPAP: Appraisal Report and Restricted Appraisal Report. The Appraisal Report must state the information analyzed, the appraisal methods used, and the reasoning supporting the analyses; the Restricted Appraisal Report may omit that detail but must state the intended use and that the report is restricted.

Every report must include: intended use, intended users, definition of value, effective date, scope of work, property description, highest and best use, approaches used and reasoning, and the certification.

The certification must state the appraiser's independence, that the assignment was not contingent on a predetermined value, and that the appraiser has no present or prospective interest in the property.

An extraordinary assumption must be disclosed in the report and in the certification; a hypothetical condition must be clearly labeled and is permitted only for reasonable analysis or legal purposes.

The effective date is the date of the value opinion; the report date is the date the report is signed and may differ from the effective date.

The sales comparison approach is typically given the most weight for owner-occupied residential properties; cost approach is secondary for newer homes and least reliable for older homes; income approach is used for 2-4 unit properties.

USPAP applies to appraisals and appraisal reviews performed for federally related transactions and to any assignment where the appraiser states compliance; the current edition is incorporated by reference in the Ethics Rule preamble.

Competency Rule: an appraiser must have the knowledge and experience to complete the assignment competently, or disclose the lack of competency, take steps to gain it, and disclose that assistance was obtained in the report.

Jurisdictional Exception Rule: when a law or regulation of a jurisdiction conflicts with USPAP, the conflicting part of USPAP is void for that assignment only to the extent of the conflict, and the exception must be disclosed.

Scope of Work Rule requires identifying the problem, determining and performing the scope of work, and disclosing it; the scope must be sufficient to produce credible assignment results.

An appraisal must be independent, impartial, and objective; compensation contingent on a predetermined value, a value direction, or a loan approval violates the Ethics Rule (Management section).

Recordkeeping: workfiles must be retained for at least five years after delivery of the report, or two years after final disposition of a judicial proceeding in which the appraiser testified, whichever is later.

An appraiser must not communicate an assignment result in a misleading manner; a report must state the intended use, intended users, definition of value, effective date, and scope of work.

Extraordinary Assumptions are facts assumed true that, if found false, could affect the assignment results; Hypothetical Conditions are conditions contrary to fact that must be clearly disclosed and are permitted only when necessary for reasonable analysis.

Market value is the most probable price in a competitive and open market under all conditions requisite to a fair sale, with buyer and seller acting prudently and knowledgeably, price unaffected by undue stimulus, and payment in cash or equivalent.

Price is a fact (what was paid); value is an opinion of the most probable price; cost is the expenditure required to create the improvement.

Anticipation: value is created by the expectation of future benefits. Change: market conditions and property are dynamic. Supply and demand: price is set at the intersection of the two, all else equal.

Substitution: a buyer will pay no more for a property than the cost of acquiring an equally desirable substitute; this principle underlies all three approaches.

Conformity and progression/regression: value is maximized when a property conforms to its neighborhood; a superior property is pulled down by inferior neighbors (regression) and an inferior property is lifted by superior neighbors (progression).

Contribution: the value of a component is measured by what it adds to (or subtracts from) the whole, not by its cost. Balance: value is maximized when the agents of production (land, labor, capital, coordination) are in proper proportion.

Highest and best use is the reasonably probable and legal use that is physically possible, appropriately supported, financially feasible, and results in the highest value; it is analyzed as vacant and as improved.

External (economic) obsolescence is loss in value from factors outside the property; functional obsolescence is loss from within the property (deficiencies, superadequacies, layout); physical deterioration is curable or incurable deferred maintenance.

Market analysis identifies the relationship between supply and demand for a property type in a defined market area, and is the basis for the market conditions (time) adjustment and for the highest and best use conclusion.

Market area boundaries are defined by the forces that create value: social, economic, governmental, and environmental (SEGE).

Supply-side indicators: active listings, months of remaining inventory, absorption rate, new construction permits, and days on market. Demand-side indicators: population, household formation, employment, income, and mortgage rates.

Months of inventory = active listings ÷ average monthly sales (or absorption rate). Roughly 4-6 months is a balanced market; materially below signals a seller's market, materially above a buyer's market.

Absorption rate = number of sales in a period ÷ number of listings available at the start of the period; the reciprocal estimates time to absorb existing inventory.

Four tests of highest and best use: legally permissible (zoning, deed restrictions, easements), physically possible (size, shape, topography, access), financially feasible (use produces a positive return to land), and maximally productive (highest residual land value).

Highest and best use as improved considers demolition: if the value of the site as though vacant exceeds the value of the property as improved plus demolition cost, the interim use may be demolition and redevelopment.

A neighborhood in the growth, stability, decline, or revitalization phase affects the market conditions adjustment and the risk rate used in the income approach.

The sales comparison approach estimates value by comparing the subject to closed sales, listings, and pending sales, then adjusting for differences; the subject is the base, and adjustments are made to the comparable to make it equivalent to the subject.

Elements of comparison: real property rights conveyed, financing terms, conditions of sale, expenditures made immediately after purchase, market conditions (time), location, physical characteristics, and economic characteristics.

Adjustment direction rule: if the comparable is superior to the subject, subtract; if the comparable is inferior, add. The adjustment is applied to the comparable's price.

Paired sales analysis isolates the adjustment for one variable by comparing two otherwise similar sales that differ in that variable; the difference in price is the adjustment.

Adjusted price = sale price + (or −) adjustments for each element of comparison. Reconcile the adjusted values by weighing the most similar and most recent comparables.

Net adjustment = sum of all adjustments; gross adjustment = sum of absolute values of all adjustments. A large gross adjustment indicates a dissimilar comparable and less weight.

Adjusted sale price range: the indicated value should generally fall within the range of adjusted prices; outliers are explained or excluded.

Sales comparison is the most reliable approach for owner-occupied residential properties where sufficient recent, arm's-length sales exist; it is required for most residential lending assignments.

Cost approach value = land value (as though vacant) + cost new of improvements − accrued depreciation. It is most reliable for new or nearly new construction and for special-purpose properties with no income or comparable sales.

Replacement cost is the cost to construct a building of equal utility using current standards and materials; reproduction cost is the cost to construct an exact replica using the same materials and methods.

Cost new = direct costs (materials, labor, subcontractor, equipment) + indirect costs (permits, fees, financing, insurance, marketing, entrepreneurial profit) + entrepreneurial incentive.

Accrued depreciation = physical deterioration (curable and incurable) + functional obsolescence (curable and incurable) + external obsolescence. Only curable items are measured by cost to cure; incurable items are measured by loss in value.

Age-life method: depreciation = effective age ÷ total economic life × cost new. Effective age reflects condition and utility, not chronological age.

Sales comparison of depreciation: extract depreciation from comparable sales by subtracting land value from sale price and comparing to cost new.

Breakdown method (observed condition): itemize each curable and incurable component, then convert to a percentage of cost new.

Entrepreneurial profit is the market-derived incentive for the developer; it is included in cost new when using the cost approach and is not the same as developer's overhead.

Value = Net Operating Income (NOI) ÷ Capitalization Rate. The cap rate is derived from comparable sales: cap rate = NOI ÷ sale price.

NOI = Potential Gross Income (PGI) − vacancy and collection loss + other income − operating expenses. Operating expenses exclude debt service, depreciation, income taxes, and capital expenditures.

Gross rent multiplier (GRM) = sale price ÷ gross monthly rent; Gross income multiplier (GIM) = sale price ÷ annual gross income. Multipliers are used for gross-income-based valuation and are less precise than direct capitalization.

Direct capitalization converts one year's stabilized NOI into value; yield capitalization (DCF) discounts a multi-year cash flow projection at a market-derived discount rate.

Effective gross income (EGI) = PGI − vacancy and collection loss + other income. NOI = EGI − operating expenses.

Debt coverage ratio (DCR) = NOI ÷ annual debt service; lenders typically require a DCR of at least 1.20 for residential investment properties.

Operating expense ratio (OER) = operating expenses ÷ EGI; it is a quick check on expense comparability across sales.

Residential income approach is most applicable to 2-4 unit properties and to single-family rentals in investor markets; it is secondary for owner-occupied single-family homes.

Site value methods: sales comparison (most reliable), extraction (land value = improved sale price − depreciated improvement value), allocation (land-to-building ratio from comparable sales), subdivision development, and land residual (income approach to land).

Legal description types: metes and bounds (courses and distances from a point of beginning), lot and block (recorded plat), and rectangular survey (Public Land Survey System: township, range, section, quarter-section).

A section is 1 square mile = 640 acres. A quarter-section is 160 acres; a quarter-quarter-section is 40 acres.

Acre = 43,560 square feet. A square mile = 640 acres. Front foot is a one-foot-wide strip along the street; the front-foot method is used for commercial sites with similar depth.

Zoning and deed restrictions are legally permissible constraints on highest and best use; nonconforming uses are permitted to continue but not to expand in most jurisdictions.

Easements and encroachments affect site utility and marketability; a prescriptive easement arises from open, notorious, continuous, hostile use for the statutory period.

Flood zones, wetlands, and environmental contamination affect site value; a Phase I Environmental Site Assessment is a records review and site inspection, not sampling.

Site improvements (grading, utilities, driveways, landscaping) are part of the site value as improved, not the cost new of the building.

Reconciliation is the process of weighing the indications of value from each approach to arrive at a single value opinion; weight is based on appropriateness, reliability, and quantity of data.

The final value opinion must fall within the range of the indicated values, or the report must explain why it does not.

Report types under USPAP: Appraisal Report and Restricted Appraisal Report. The Appraisal Report must state the information analyzed, the appraisal methods used, and the reasoning supporting the analyses; the Restricted Appraisal Report may omit that detail but must state the intended use and that the report is restricted.

Every report must include: intended use, intended users, definition of value, effective date, scope of work, property description, highest and best use, approaches used and reasoning, and the certification.

The certification must state the appraiser's independence, that the assignment was not contingent on a predetermined value, and that the appraiser has no present or prospective interest in the property.

An extraordinary assumption must be disclosed in the report and in the certification; a hypothetical condition must be clearly labeled and is permitted only for reasonable analysis or legal purposes.

The effective date is the date of the value opinion; the report date is the date the report is signed and may differ from the effective date.

The sales comparison approach is typically given the most weight for owner-occupied residential properties; cost approach is secondary for newer homes and least reliable for older homes; income approach is used for 2-4 unit properties.