Unit 4 - Valuation and Financing (9 Hours)
I. Appraisal, Valuation, and Evaluation
In New York, these terms are often used interchangeably in casual conversation, but they have distinct legal definitions under the NYS Department of State guidelines.
Appraisal: A formal, unbiased estimate or opinion of the nature, quality, value, or utility of a specific interest in real estate. Only a NYS Licensed or Certified Appraiser can perform a legal appraisal.1
Valuation: The broad process of estimating the value of an identified interest in a property as of a specific date.
Evaluation: A study of a property’s utility or marketability (like a "Highest and Best Use" study) where a specific dollar value isn't necessarily the end goal.
The CMA Rule: A Comparative Market Analysis (CMA) is an opinion of value prepared by a real estate licensee.2 By law, a licensee may never refer to a CMA as an "appraisal."
II. Understanding Market Value
Market Value is the most probable price a property should bring in a competitive and open market.3
The "Arms-Length Transaction" Requirements:
Reasonable Exposure: The property has been on the market for a sufficient amount of time.4
Knowledgeable Parties: Both buyer and seller are well-informed about the property’s uses and defects.5
No Undue Duress: Neither party is being forced to act (e.g., a "fire sale" or a foreclosure is NOT market value).6
Cash Equivalency: The price is expressed in terms of U.S. dollars.
Value vs. Price vs. Cost:
Value: What the property is "worth" (an opinion).
Price: What a specific buyer actually paid (a fact).
Cost: The total dollars spent to build the structure (labor + materials). Cost does not always equal Value.
III. The Three Approaches to Value
Appraisers use one or more of these methods to arrive at a final "reconciliation" of value.
Sales Comparison Approach (Market Data Approach):
Used primarily for residential property and vacant land.
Compares the subject property to 3–5 "Comps" (comparable properties) that sold recently.
Adjustments: If a comp is better than the subject, you subtract value from the comp. If the comp is inferior, you add value to the comp. Never adjust the subject property.
Cost Approach:
Used for special-purpose properties (schools, churches, hospitals) or new construction.7
Formula: $Replacement Cost - Depreciation + Land Value = Property Value$.
Income Approach:
Used for income-producing properties (apartments, office buildings).8
Uses the Capitalization Rate (Cap Rate) to convert income into value.9
Formula: $Net Operating Income (NOI) / Cap Rate = Value$.
IV. Comparative Market Analysis (CMA)
A Salesperson’s primary tool for pricing is the CMA. It helps a seller set a listing price and helps a buyer decide on an offer.10
Elements of a Residential Market Analysis:
Recently Sold: Properties that closed within the last 6–12 months.11
Current Competition: Properties currently "Active" on the MLS.
Expired Listings: Properties that failed to sell (usually a sign of overpricing).12
Adjustments: Accounting for differences in square footage, number of bathrooms, and condition.13
Highest and Best Use:
The most profitable, legally permitted, and physically possible use of a property. An appraiser always considers if a property is currently at its "Highest and Best Use" (e.g., is a single-family home sitting on land now zoned for a high-rise?).14
⚠️ EXAM ALERT: QUICK FACTS
DUST: The four elements of value are Demand, Utility, Scarcity, and Transferability.15
Substitution: This basic economic principle states that a buyer will not pay more for a property than the cost of an equally desirable substitute.16 This is the basis for the Sales Comparison Approach.
Depreciation in Cost Approach: Only the improvements (buildings) depreciate; land never depreciates.
CMA Statement: Every written CMA provided to a client must include a disclaimer: "This is a comparative market analysis, not an appraisal."
Insurable Value: This value excludes the cost of the land and the foundation, as these items are generally not destroyed by fire or wind.
KEY TERMS
Appraisal: An estimate or opinion of value as of a specific date, supported by objective data and prepared by a qualified professional.
Assessed Value: The value placed on a property by a public tax assessor for the purpose of calculating property taxes.
Comparative Market Analysis (CMA): A comparison of the prices of recently sold homes that are similar to a listing seller's home in terms of location, style, and amenities; typically prepared by a real estate agent to help determine a listing price.
Cost: The total dollar amount required to bring a property into existence, including land, labor, materials, and profits.
Cost Approach: A method of estimating value by determining the current cost of replacing or reproducing the improvements, minus depreciation, plus the estimated land value.
Depreciation: A loss in value from any cause, including physical deterioration, functional obsolescence, or external obsolescence.
Direct Cost: Expenditures for labor and materials used in the construction of an improvement, also known as "hard costs".
Evaluation: A study of the nature, quality, or utility of a property or interest in a property, often without reference to a specific value.
Income Approach: A method of estimating value based on the present value of the future income the property is expected to generate; used primarily for commercial or investment properties.
Indirect Cost: Expenditures for items other than labor and materials, such as architect fees, financing charges, and legal fees, also known as "soft costs".
Insured Value: The cost of replacing or reproducing a structure in the event of a total loss, used to determine the amount of insurance coverage needed.
Investment Value: The value of a property to a specific investor based on their individual requirements, such as tax position or target rate of return.
Market Price: The actual price at which a property is sold.
Market Value: The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale.
Mortgage Value: The value of a property used as collateral for a loan, determined by the lender’s appraisal.
Obsolescence (Functional/External): Functional Obsolescence is a loss in value due to outdated features or poor design within the property. External Obsolescence is a loss in value caused by factors outside the property lines, such as neighborhood decline or environmental changes.
Plottage: The increase in value or utility resulting from the consolidation (assemblage) of two or more adjacent lots into one larger parcel.
Price: The amount of money a buyer asks or a seller pays for a property.
Sales Comparison Approach: A method of estimating value by comparing the subject property to similar properties that have recently sold in the same market.
Valuation: The process of estimating the market value, investment value, or other defined value of a specific interest in a property.
Value-in-Use: The value of a property to its current owner for a specific purpose, regardless of its highest and best use or market value.
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