Evaluation and market analysis
You own land worth $40,000 in your building has a replacement cost of $160,000. What would be the value if the appraiser used a depreciation rate of 30%?
$152,000, 160,000×30% = $48,000. 160,000-48,000 = 112,000+40,000 = $152,000.
The annual net income for an office building is $20,000. If an owner realized a 9% return on her investment, the value of the building would be:
$222,222, income/rate = value
A comparable property sold for 250,000 End it has 200 more square feet in the subject property. If square-foot contribute $30 per square foot, what is the adjusted value of the comparable?
$244,000, 200 ft.² times $30 equals $6000. $250,000 -$6000 = $244,000.
If the house you are appraising has central condition air conditioning valued at $2500 in your comparable does not, you will adjust the sale price of the comparable by
+2500 S. B. A. Subject better add. The subject property is better than the comparable: that you add the value of the air conditioning to the sales price of the comparable price.
An office building recently sold for 600,000, with a monthly rental income of 5,000. The GIM for the property was:
10, 5,000 monthly X 12= 60,000 annual gross income 600,000 Selling price / gross annual income 60,000 = 10
M was appraising a three bedroom house. M had a comparable with four bedrooms that sold for 160,000. M makes an adjustment of $5000 to the comparable for the difference in the number of bedrooms. The adjusted sales price of the comparable will be:
155,000, C. P. S. Comparable better subtract 160,000-5000 = 155,000
an appraiser is estimating the value of the building that has a net income of $5,000 per quarter and a capitalization rate of 8%. What is the value of the property?
250,000: 5000X4= 20,000 annual net income 20,000/.08= 250,000 value
You purchased an apartment building for 600,000 nearly 6 years ago. the building accounted for 80% of the purchase price. If the building's economic life is estimated to be 60 years, what is the current total depreciation of the property?
48,000: 600,000X.8= 480,000/60 = 8000X6= 48,000
An appraiser is using the gross-rent-multiplier (GRM) method to estimate the market value of a single family home. The home has an annual gross income of $7,200, with quarterly expenses of $900. The recognized GRM for the neighborhood is 110. The appraiser's estimate of value is likely to be?
66,000. 7,200 gross/ 12= 600X110= $66,000 value
R purchased an office building with an annual effective gross income of $208,000 and expenses of $74,000. What capitalization rate was used by R to arrive at a value of 1,576,470?
8.5%, $208,000 annual effective gross income -$74,000 expenses = $134,000 divide symbol $1,576,470 =.085 = 8.5%
Market approach or sales comparison or Direct sales
A value estimate is obtained by comparing the subject property with recent sales of comparable properties through adjustment of sale prices of comparables. Comparable properties used analysis should be close or a normal market transaction involving willing buyers and willing sellers, as opposed to foreclosure sales, an auction, or a sale to a relative
Three steps to an adjustment
Adjust the price of the comparable for any difference between the comparable in the subject property. Comparable better subtract from the comparable the difference between the comparable in the subject property. Subject better add to the comparable the difference between the comparable in the subject property
A homes value is increased because of it's proximity to schools, parks, and transportation lines. These neighborhood sites are referred to as: 1. Features. 2. Benefits. 3. Amenities. 4. Attachments.
Amenities, amenities are neighborhood facilities and services that enhance a homes value but are always outside of the property. Swimming pools, three-car garage is, decks, etc. that are on the property called features
A bike trail that enhances the value of a neighboring home is called: 1. A feature. 2. benefit. 3. amenity 4. None of the above
And amenity, and amenity is always outside the confines of the property, but it adds value because of it's proximity
The appraiser profession is regulated at the national level by: 1. Congress 2. FDIC 3. national real estate commission 4. Appraisal Foundation
Appraisal Foundation.
Income capitalization approach
Based on present value of the rights to future income
Replacement cost
Construction cost at current pieces of property that would not necessarily be an exact duplicate of the subject property but would serve the same purpose or functioning as the original
Reproduction Cost
Construction cost at current prices of an exact duplicate of the subject property
3 approaches to value
Cost approach, market data approach, income capitalization approach
In appraising a special purpose building such as a post office, the most reliable approach to an indication of its value would generally be: 1. cost approach. 2. Market data approach. 3. Income approach. 4. Sales comparison approach.
Cost approach, the cost approach is most applicable to the appraisal of A special purpose building.
Outmoded plumbing is an example of: 1. curable physical deterioration 2. curable functional obsol. 3. incurable physical deterioration 4. Curable external obsol.
Curable functional obsolescence
For areas of adjustment in sales comparables
Date of sale, location, physical characteristics, terms of sale
D.U.S.T
Demand: need supported by purchasing power Utility: capacity to satisfy human wants and needs Scarcity: finite supply Transferability: transfer of ownership rights with relative ease
The characteristics required for a property to have value include all of the following except: 1. effective demand. 2. Scarcity. 3. Depreciation. 4. Transferability.
Depreciation, is used in the cost approach to value
External Obsolescence
Economic, environmental, or locational. Loss of value due to factors outside of the property always in curable
Steps in the income approach
Estimate the annual potential growth income, deduct the vacancy and rent loss to arrive at the effective gross income, deduct the annual operating expenses to arrive at the annual net operating income, estimate the capitalization rate, apply the capitalization rate to the annual net income net income divided by capitalization rate equal value
D lived in a house with a well. The ground water entering the homeowner's well became contaminated and lessened the value of D's home. The loss in value is an example of:
External obsolescence
Which of the following laws require that appraisals performed as part of a federally related transaction must comply with federal standards and be performed by a state certified or state licensed appraiser? 1. FIRREA 2. Regulation Z 3. RESPA 4. Statute of Frauds
FIRREA, became effective in 1989
Reconciliation
Final step in the appraisal process, in which the appraiser reconciles the estimate of value received from the different approaches to arrive at a final estimate of the market value for the property being appraised. Most relevant approach receives the greatest weight in determining the opinion of value.
The 4 stages through which a neighborhood passes (in order)
Growth, stability, decline, and revitaliztion
Principles evaluation: competition
High levels of profits attract competitors into an industry; increase in competition result in decreased profits throughout the industry
Principles of evaluation
Highest and best use, substitution, supply and demand, conformity, increasing and decreasing return, competition, change, contribution, anticipation, plottage, regression, progression.
Principles of evaluation: increasing and decreasing return
Improvements to land and structures produce a proportionate increase in value until some point beyond which the impact of improvements begin to decrease, until improvements cause virtually no change in the property value
Appraisal
In opinion of value; a detailed estimate of a properties value by a professional appraiser.
Which of the following is an example of locational obsolescence? 1. Termite damage. 2. Negligent care of property. 3. zoning ordinance allowing a decrease in the minimum lot size. 4. Poor architectural design.
Is zoning ordinance allowing a decrease in minimum lot size, decreasing lot size is locational obsolescence. Termite damage and negligent care or physical deterioration. Poor architectural designs represent functional obsolescence.
What phase describes in neighboring property that was sold to a relative for 75% of its market value? 1. Arm's-length. 2. Less than arm's-length. 3. Comparable property. 4. Reconciliation property.
Less than arms length, arm's-length transaction describes those that mirror the definition of a market value. Less than arm's-length transactions do not reflect market value and, therefore, are not included in the appraisers analysis.
Which of the following does not apply to the definition of market value? 1. Both buyer and seller must be well-informed. 2. Market value is the average price that a property will bring. 3. Both buyer and seller must act without undue pressure. 4. Payment must be made in cash or it's equivalent.
Market value is the average price that a property will bring, appraisers do not average to determine market value. Appraisers work from comparable transactions to arrive in an estimate of market value for the subject property.
Capitalization
Mathematical process for estimating a properties value using a proper rate of return on investment and anticipated annual net income
Principles of evaluation: conformity
Maximum value is realized if the land conforms to existing neighborhood standards
Market value
Most probable price a property will bring in a competitive market, allowing for a reasonable time to find a knowledgeable purchased her.
Principles Of valuation: highest and best use
Most profitable use to which a property may be adapted, given legal constraints
Cost approach
Most reliable approach for special purpose buildings like churches or schools. Estimate the land value, estimate the replacement cost of the improvements, estimate the depreciation, deduct the depreciation from the replacement cost, add the land value to the depreciated cost of improvements
Principles of valuation: Change
No economic or physical condition remains constant
An appraiser is told by a lender that if he can appraise a house for $250,000, he will be given the assignment. The appraiser should: 1. Accept 2. not accept
Not accept the assignment because it violates his professional ethics, and in appraisers comparison cannot be dependent upon the reporting of a predetermined opinion of value.
Functional Obsolescence
Outdated items, poor design, curable or in curable.
Economic obsolescence does not result from: 1. Adverse zoning changes. 2. A cities leading industries moving out. 3. In harmoniously and use in a neighborhood. 4. Outdated kitchens.
Outdated kitchens, economic obsolescence is a loss in value due to factors outside the property. Functional obsolescence is a loss in value due to the efficiency in the floorplan or design of a building.
Financial institutions reform, recovery Act and enforcement Act (FIRFA)
Passed in 1989, appraisals performed as part of a federally related transaction must come on comply with state standards and must be performed by state certified or state license appraiser. Must meet minimum levels set by the appraisal standards board and appraisal qualifications board of the appraisal foundation.
Home valuation code of conduct (HVCC)
Promotes the accuracy of appraisals by shielding appraisers from undue influence, and ensuring the bar wars receive a copy of their appraisal report no less than three days prior to the closing of their loan absent a borrower waiver of this requirement; lol came into effect May 1, 2009
Broker price opinion (BPO)
Similar to a CMA, but different in that it is usually more detailed because it is used by third-party to provide a basis for negotiation of a purchase price or a buyout in the case of a company employee being transferred to another city. More detailed because the third-party knows very little about the neighborhood in which the property is located. Real estate brokers are paid to complete BPO 's.
Comparables
Sold properties listed in the appraisal report generally equivalent to the subject property
Steps in the appraisal process
State a problem, list the types of data needed and the sources, gather record and verify: general data, specific data, data for the valuation approach needed, analyze and interpret the data, reconcile the data with the final value estimate, prepare the appraisal report
You look at four similar houses for sale in the same area and you choose the house with the lowest asking price. You probably are basing your decision off the principle of: 1. highest and best use. 2. Substitution. 3. Contribution. 4. Conformity.
Substitution, the principle of highest and best use deals with the most profitable use. Contribution refers to cost and benefits of a particular improvement. Conformity is a factor in the stability of property values; zoning is an example of conformity
A builder developed a subdivision in which the demand for homes was great. He sold the last lot in his subdivision for a much higher price that he had sold the first lot in the area. this illustrates the principal of: 1. Highest and best use. 2. Substitution. 3. Conformity. 4. Supply and demand.
Supply and demand, a limited supply combined with a great demand will result in a higher price for lots
Amenities
Tangible and intangible neighborhood benefits beyond the properties boundary description. EX: proximity to schools, transportation, parks, etc.
Which of the following statements does not correctly describe the home valuation code of conduct (HVCC): 1. The HVCC became effective in May 2009. 2. HVCC shields appraisers from undue influence. 3. HVCC ensures that borrowers have sufficient notice of a praise all content. 4. HVCC requires that borrowers receive a copy of their appraisal reports no less than five days prior to the closing unless they waive that requirement.
The HPCC requires that borrowers receive a copy of their appraisal report no less than three days prior to the closing unless they waive the requirement.
Depreciation generally applies to: 1. the building only. 2. The land only. 3. Both of the land in the building. 4. The net income of the building.
The building only, land is not depreciated; it is assumed that the land value will be recovered at the end of the economic life of the building
What was the result of a surge in to unsound investments?
The collapse of many savings and loan associations, And was at least partly the consequence of questionable property appraisals.
The market conditions addendum requires that the appraiser: 1. uses overpriced properties as comparable. 2. Provide conclusions regarding why a market is experiencing declining property values over at one. 3. Provide conclusions regarding why am market is experiencing an over supply of properties over nine months. 4.Provide conclusions regarding white in market is experiencing market time it's over six months
The market conditions addendum requires that appraisers provide their conclusions regarding regarding why am market is experiencing declining property values, and over supply of properties or marketing times over six months.
Value
The present worth of future benefits arising from the ownership of real property
Principles of evaluation: supply and demand
The price of the property will increase if the supply decreases and will decrease if the supply increases
Principles of evaluation: regression
The principal between Deas similar properties: the worth of the better property is affected adversely by the presence of the lesser quality property
Principles of valuation: plottage
The principle of combining contagious property, and, by doing so, increasing the value of the new property. The greater efficiency of land use allows the new value to exceed the combined values of the individual parcels. For example a strip mall was created from three parcels of vacant land each word $50,000. After these contingent properties were combined, the land value became $200,000. The process of combining is called assemblage
Capitalization rate
The rate of return a property will produce on the owner's investment.
Principles of evaluation: substitution
The value of a property tends to be set by the cost of purchasing and equally desirable and similar property
Principles of valuation: contribution
The value of any component of property consist of what it's addition contributes to the value of the whole property
Principles of valuation: progression
The worth of a lesser property tends to increase if it is located among the better properties
An appraiser tell the lender that she will reduce her appraisal fee if the lenders loan fails to close. The appraisers offer of a reduced fee would be: 1. Acceptable 2. Unethical
Unethical, it is unethical for an appraiser to have an arranged for compensation that is contingent upon a subsequent event
Gross Income Multiplier (GIM)
Used as a quick way to appraise commercial and industrial properties. Most reliable approach for income producing property. Sales Price divide annual rental income = GIM
Gross Rent Multiplier (GRM)
Used as a substitution for the income approach in appraising a single-family home. Sale price divide monthly rental income equal Monthly rental income X GRM= estimated market value
Competitive market analysis (CMA)
Used by the broker or the sales person to help the seller determine a listing price for the property; basically, a comparison of prices of recently sold in currently for sale properties that are similar in location, style, and amenities to the property of the listing seller. Estimate market value as likely to fall within a range of figures. Guides a purchaser in formulating an offer.
Principles of valuation: anticipation
Value can increase or decrease the anticipation of some future benefit or detriment that will affect the property
Physical deterioration
Where, tear, pour maintenance. May be curable or in curable
What is the first step an appraiser would take to arrive at an estimated value using the income approach? 1. Determine annual potential gross income 2. Determine operating expenses 3. Determine effective gross income 4. Determine the vacancy rate
annual potential gross income, is based on 100% of economic or market rent plus other income such as income from vending machines. effective gross income is annual potential gross income minus vacancy and rent loss. Operating expenses include fixed expenses such as real estate taxes and variable expenses such as management expenses. The vacancy rate is used to calculate effective gross income.
Which of the following factors would be considered in the market/data or sales comparison approach to value? 1. Conditions under which property was sold 2. Annual gross income 3. Replacement cost 4. Original cost
conditions under which property was sold. cost would be used in the cost approach. annual gross income in the income approach
In the income approach to appraisal, if the net income was 42,000 and the capitalization rate was 12%, to find the value of the property the appraiser would?
divide the net income by the capitalization rate
In determining the value of a 20-unit apartment building, the appraiser has established the gross income from rents. After deducting the loss for vacancies and collection losses from this gross income, the appraiser would have established the: 1. net income 2. spendable income 3. gross income 4. effective gross income
effective gross income, the gross income would be reflected in the first step of the operating statement. annual net income is the bottom line in the operating statement and serves as the basis for capitalization of the income steam
An airport routing was changed, with the result being that airplanes flew over a residential area. the subsequent loss in value caused by the airplane noise would best be described as: 1. physical depreciation 2. functional obsolescence 3. external or economic obsolescence 4. eminent domain
external or econ obsol., loss in value from factors external to the property
The GRM is used in the: 1. Market/data approach 2. income approach for office buildings 3. Cost approach 4. Income approach for single family homes
income approach for single families
Gross rent multipliers are generally used in appraising: 1. forms 2. shopping centers 3. single family homes 4. hotels
single family homes
A principle factor for which adjustments must be made in using the market/data approach is: 1. Depreciation 2. the date of the sale 3. the amount of real estate taxes 4. the cost of replacement
the date of sale: time, location, physical characteristics, and terms of sale are factors considered in the market or sales comparison approach