ARC RA flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Market Value
- 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, and price unaffected by undue stimulus.
- Price versus Value
- Price is a historical fact: the amount actually paid. Value is an opinion of the most probable price. Cost is the expenditure required to create the improvement. The three are not interchangeable.
- Principle of Substitution
- A buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. This principle underlies the sales comparison, cost, and income approaches to value.
- Contribution
- The value of a component is measured by what it adds to or subtracts from the whole property value, not by its cost. A swimming pool may cost $60,000 but contribute only $20,000.
- External Obsolescence
- A loss in value caused by factors outside the property itself, such as a nearby highway, declining neighborhood, or adverse zoning. It is generally incurable because the owner cannot change the cause.
- Highest and Best Use Tests
- Four sequential tests: legally permissible, physically possible, financially feasible, and maximally productive. The use must pass all four to be the highest and best use of the site.
- Months of Inventory
- Active listings divided by average monthly sales. About four to six months indicates a balanced market; materially fewer months signals a seller's market and more months a buyer's market.
- Absorption Rate
- The number of sales in a period divided by the listings available at the start of the period. Its reciprocal estimates the time needed to absorb existing inventory in the market area.
- Market Area Forces (SEGE)
- Social, economic, governmental, and environmental forces create and change value and define market area boundaries. They drive the market conditions adjustment in the sales comparison approach.
- Adjustment Direction Rule
- Adjust the comparable, not the subject. If the comparable is superior to the subject, subtract; if inferior, add. The adjustment is applied to the comparable's sale price.
- Paired Sales Analysis
- Two otherwise similar sales that differ in one variable are compared; the difference in price isolates the adjustment for that variable. It is the preferred method for market-derived adjustments.
- Elements of Comparison
- Real property rights conveyed, financing terms, conditions of sale, post-purchase expenditures, market conditions, location, physical characteristics, and economic characteristics. Each is adjusted in sequence in the sales comparison approach.
- Net and Gross Adjustment
- Net adjustment is the sum of all adjustments; gross adjustment is the sum of their absolute values. A large gross adjustment indicates a dissimilar comparable and warrants less weight.
- Gross Rent Multiplier
- Sale price divided by gross monthly rent. The GRM derived from comparable sales is multiplied by the subject's monthly rent to indicate value. It ignores expenses and is less precise than direct capitalization.
- Net Operating Income
- Effective gross income minus operating expenses. It excludes debt service, depreciation, income taxes, and capital expenditures. NOI divided by the capitalization rate indicates value.
- Direct Capitalization
- A single year's stabilized net operating income is divided by a market-derived capitalization rate to indicate value. The cap rate is extracted from comparable sales as NOI divided by sale price.
- Debt Coverage Ratio
- Net operating income divided by annual debt service. Lenders commonly require a ratio of at least 1.20 for residential investment properties, meaning NOI exceeds debt service by twenty percent.
- Operating Expense Ratio
- Operating expenses divided by effective gross income. It is a quick comparability check across sales and helps identify expense outliers in the income approach.
- Effective Gross Income
- Potential gross income minus vacancy and collection loss, plus other income such as laundry or parking. Operating expenses are then subtracted from EGI to derive net operating income.
- Replacement versus Reproduction Cost
- Replacement cost is the cost to build equal utility using current standards and materials. Reproduction cost is the cost to build an exact replica using the same materials and methods.
- Age-Life Method
- Depreciation equals effective age divided by total economic life, multiplied by cost new. Effective age reflects condition and utility, not chronological age, and can be less than actual age.
- Accrued Depreciation
- The difference between cost new and value at the effective date. It comprises physical deterioration, functional obsolescence, and external obsolescence, each measured as curable or incurable.
- Entrepreneurial Profit
- The market-derived incentive a developer expects for undertaking a project. It is included in cost new in the cost approach and is distinct from developer overhead and indirect costs.
- Site Value by Extraction
- Land value is estimated by subtracting the depreciated value of improvements from an improved sale price. It is used when vacant land sales are scarce or unreliable.
- Rectangular Survey System
- The Public Land Survey System describes land by township, range, section, and quarter-section. A section is one square mile, or 640 acres; a quarter-section is 160 acres.
- Acre and Square Mile
- One acre equals 43,560 square feet. One square mile equals 640 acres. A quarter-quarter-section is 40 acres and a quarter-section is 160 acres.
- Metes and Bounds
- A legal description that identifies a parcel by courses and distances from a point of beginning, returning to that point. It is common where no recorded plat or survey grid exists.
- Scope of Work Rule
- The appraiser must identify the problem, determine and perform the scope of work, and disclose it. The scope must be sufficient to produce credible assignment results.
- Competency Rule
- An appraiser must have the knowledge and experience to complete an assignment competently, or disclose the deficiency, take steps to gain competency, and disclose in the report that assistance was obtained.
- Workfile Retention
- Records 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.
- Extraordinary Assumption
- A fact assumed true that, if found false, could affect the assignment results. It must be clearly disclosed in the report and in the certification, and used only when necessary.
- Reconciliation
- Weighing the value indications from each approach to reach a single value opinion. Weight depends on the appropriateness, reliability, and quantity of data supporting each approach.