Handbook for Real Estate Examinations and Practice - Chapter 9 - Appraisal of Real Estate - MA Real Estate

a warehouse nets $7,600 after expenses of $5,000 per year. Capitalized at 8.5% what is its value estimate? a. $89,412 b. $23,529 c. $30,588 d. $58,824

(net)I / R = V $7600/.085=$89,412 a. $89,412

Special Forces Influencing Value

1) social ideals and standards (education/population/recreation) 2) economic adjustments (income levels, interest rates, taxes, employment trends) 3) government regulations (zoning laws, building codes, fire regulations, rent controls) 4) physical characteristics (climate, topography, flood control, soil conditions, sub-surface conditions)

a property with a gross income of $15,000 and a net of $10,000 has a useful life of 40 years. If current rate of return on investment is 7%, estimated value of the improvements is: a. $105,263 b. $158,623 c. $106,263 d. $160,263

100/40 = 2.5% 2.5% + 7% = 9.5% $10,000 / .095 = a. $105,263

a loan on property A is 75% of its appraised value. The interest rate is 12% per annum. The first semi-annual interest payment is $1500. What is the figure closest to the appraised value of A? a. $17,900 b. $35,800 c. $25,600 d. $33,300

33,300 x .75 = 24,975 24,975 x .12 = 2997 3000 / .12 = 25,000 25,000 / .75 = 33,333 d. $33,300

substitution

A "rule" that says an informed buyer will not pay more for one home than for a comparable one.

quantity survey

A highly technical process in arriving at cost estimate of new construction and sometimes referred to in the building trade as the "price take-off" method. It involves a detailed estimate of the quantities of raw material (lumber, plaster, brick, cement, etc.,) used as well as the current price of the material and installation costs. These factors are all added together to arrive at the cost of a structure. It is usually used by contractors and experienced estimators. typically used for reproduction (not used often)

Law of supply and demand

A law which states that when supplies of goods and services become plentiful, prices tend to drop. When supplies become scarcer, prices tend to rise.

unit-in-place method

A method for finding the reproduction cost of a building in which the construction cost per square foot of each component part of the subject building (including material, labor, overhead, and builder's profit) is multiplied by the number of square feet of the component part in the subject building.

Gross Monthly Rent Multiplier

A rate of return, stated as a factor or multiplier, used to derive a value opinion from the anticipated monthly rent a property could generate. The technique takes a single month's gross rent and multiplies it by the GMRM to indicate a value conclusion: Monthly gross rent * GMRM = Value.

ad valorem taxation

A tax based "according to valuation." Property taxes are based on the value of the property being taxed.

market approach

An appraisal technique in which comparative estimates are made between price

depreciation

Any decrease or loss in value caused by age, wear, or market conditions 1. physical deterioration 2. functional obsolescence (layout is no longer desirable) 3. economic obsolescence (causes outside the property)

land residual method

Applicable only to income producing properties combines the income & cost approaches to determine the vale of the improved land alone

Competitive Market Analysis

CMA Compare prices of properties similar to the seller's property that recently sold, those that are currently on the market and those that did not sell. determine market value under normal market conditions. Analysis of market activity among comparable properties; not an appraisal

How often do Appraisers need to take ethics training?

Every 2 years Part of training

Gross Living Area

GLA square feet of living space, measured from outside the building, above ground, enclosed, heated, habitable space

Income Approach

Gross Annual income (rent, rental washers/dryers, parking, other fees) operating costs (not mortgage... all other costs) Net Income (Gross Income - Operating costs) NI/Cap Rate = Value I/R = V

Economic Principles

Laws of Supply and Demand - (scarcity, desire) Change - (in cities, neighborhoods, etc) Substitution - value of a comparable property highest and best use - most probably use... greatest return conformity - the right size, condition, age, style for that location / neighborhood

arms length transaction

Negotiated between 2 independent and unrelated parties, each working to protect his own best interest, without one being under the infuence or control of the other; affects market value.

risk rate

Rate of return that will attract investor is called the _______.

scarcity

The condition that results from society not having enough resources to produce all the things people would like to have land cannot be manufactured and that influences supply

highest and best use

The possible use of a property that would produce the greatest net income and thereby develop the highest value.

cost approach

The process of estimating the value of a property by adding to the estimated land value the appraiser's estimate of the reproduction or replacement cost of the building, less depreciation. insurance typically values property using cost approach

income approach

The process of estimating the value of an income-producing property through capitalization of the annual net income expected to be produced by the property during its remaining useful life. for commercial properties that generate income

safe rate

The rate of return on an investment (the yield), for an investment with no material risk.

Uniform Residential Appraisal Report

URAR, residential appraisal form required by many government agencies, illustrates the types of detailed info required of an appraisal and highlights the extensive list of certifications required of the appraiser form required by many government agencies (freddie mac, VA, FHA etc)

Property Value

What a property is estimated to be worth Determined by (4) primary factors: 1. Utility 2. scarcity 3. demand 4. transferability (5. location)

capitalization rate

_____________________ - the percentage rate applied to the income a property is expected to produce to derive an estimate of the property's value; includes both an acceptable rate of (yield) and return of the actual amount invested (recapture). ROI

Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)

a bank, trust company, insurance company, credit union, building and loan association, savings and loan association, place for deposit of funds or medium of savings or collective investments.

two appraisers make an appraisal of the same property using the income approach. A uses a remaining economic life of 25 years. B estimates it to be 20 years. Which statement is correct? a. A's value would be higher than B's b. B's value would be higher than A's c. There would be a 1% difference in value d. There would be a 2% difference in value

a. A's value would be higher than B's

The difference between reproduction cost and current value is: a. accrued depreciation b. assessed value c. cost to cure d. physical deterioration

a. accrued depreciation

A residence located close to an airport where there is smoke and noise suffers from: a. economic obsolescence b. functional obsolescence c. physical depreciation d. violation of the bundle of rights

a. economic obsolescence

a lack of desirability because of outmoded design would be: a. functional obsolescence b. economic obsolescence c. physical deterioration d. physical depreciation

a. functional obsolescence

A broker is often called upon to list an recommend the selling price for a property. He should: a. make a CMA b. Make an educated guess c. make an appraisal d. tour the neighborhood first

a. make a CMA

which approach to value are most residential appraisals primarily based on? a. market data b. cost less depreciation c. income d. replacement less depreciation

a. market data

the highest and best use of a property is determined by one that: a. produces the highest net yield over the longest period of time b. represents fair market price c. produces the best use of property at the highest price d. produces the highest use of property at the best price

a. produces the highest net yield over the longest period of time

There are three methods of estimating reproduction cost. They are: a. quantitative, unit-in-place and comparative b. cost less depreciation, obsolescence and deterioration c. cost plus cost to cure less incurable cost d. cos plus land less depreciation from all causes

a. quantitative, unit-in-place and comparative

conformity

acting according to certain accepted standards similar economic and social status dwellings are similar size/style

anticipation

an appraisal term and economic principal which applies to future benefits a property owner may expect to receive

progression

an appraisal theory which considers that the presence of higher value properties favorably affects the value of a lesser property

regression

an appraisal theory which considers that the presence of lesser value properties adversely affects the worth of a better property

change

an economic principle that real estate constantly undergoes the process of change

using a risk rate of 3% and a safe rate of 10% what would be the capitalization rate on a property with a remaining economic life of 25 years? a. 14% b. 17% c. 11% d. 13%

b. 17%

The before and after technique of determining value is used in: a. cost approach less depreciation b. condemnation c. comparing market and effective rent d. correction of functional obsolescence

b. condemnation before eminent domain can occur

a capitalization rate is composed of: a. interest rate and gross rent multiplier b. interest rate and 100 divided by remaining economic life c. interest rate and economic life d. interest rate and 100 multiplied by remaining economic life

b. interest rate and 100 divided by remaining economic life

Homogeneity in a neighborhood: a. increases prices b. stabilizes values c. decreases values d. decreases prices

b. stabilizes values

value is defined as: a. an intangible thing b. the present worth of all future benefits c. the price paid for the property d. the future worth of all present benefits

b. the present worth of all future benefits

What is the purpose of the appraisal process? a. to make a professional appraisal b. to allow the appraiser to make an appraisal in an efficient manner c. to require an interpretation in terms of money d. to solve a problem

b. to allow the appraiser to make an appraisal in an efficient manner

the continuing education requirement for recertification of an appraisers license is: a. 12 hours every 2 years b. 20 hours every 3 years c. 45 hours every 3 years d. 30 hours every 2 years

c. 45 hours every 3 years

the appraisal method used mostly for raw land is: a. comparative b. distribution c. development d. land residual

c. development

highest and best use is determined by: a. restrictions b. probable permitted use c. legal permitted use d. neighborhood conformity

c. legal permitted use

remaining economic life of residence may be described as: a. deterioration at its present rate b. total economic life c. period of time house will contribute economic value to property d. remaining life based on rehabilitation

c. period of time house will contribute economic value to property

Capitalization is based on: a. the measure of gross income during remaining life b. comparison of investments of similar type c. the measure of net income during remaining life d. remaining economic life alone

c. the measure of net income during remaining life

Utility

concept that a property must have a use or it is not valuable

comparative methods

cost per square foot in a particular region

a 3 family house sold one month ago for $87,500. Rent on the 1st, 2nd and 3rd floors is $400, $375 and $350 per month, respectively. What is the GMRM? a. 77 b. 76 c. 78.76 d. 77.77

d. 77.77 $1125 / month $87,500 / $1125 = 77.77

appraiser A has identified a comp sold 6 months ago for $72,000. Inflation rate was 4% for the last year. What adjustment should A make? a. adjust to $76,320 b. increase indicated value by 4% c. decrease indicated value by 2% d. adjust to $73,440

d. adjust to $73,440

In the cost approach land value is obtained by: a. quantitative survey b. assessed value c. cost estimating d. market comparison

d. market comparison

physical depreciation is generally associated with: a. changing function b. obsolescence c. unusual design d. ordinary wear and tear

d. ordinary wear and tear

Market value would be: a. the value currently in the market b. the highest price a comparable property has brought on the open market c. market price d. the highest price a property should bring in a competitive open market

d. the highest price a property should bring in a competitive open market

distribution, abstraction or allocation method

determines what part of the total market value is attributable to improvements (buildings/fixtures) and what part is the land's contribution

The Massachusetts Board of Registration of Real Estate Appraisers

establishes education, experience and examination requirements for each category of state certification and licensing and the continuing education requirements of 45 hours every three years or recertification

condemnation

first step in eminent domain The legal process by which the government takes private land for public use, paying the owners a fair price. See EMINENT DOMAIN. Also called APPROPRIATION.

over-improvement

improvement not in keeping with the property's "highest and best use" or in the excess of local conditions. Owner may not get a comparable return on their investment

contribution

increased value due to addition or improvements

anticipated use / developmental method

is generally applied to raw land ripe for development for its highest and best use

Real Estate Appraisal Process

real estate appraiser has to gather and evaluate all available facts affecting a propertys value Given to: Lenders/Buyers and sellers/Courts an Appraisal is an opinion (of the appraiser) orderly procedure for estimating the value of property

Uniform Standards of Professional Appraisal practice

required and followed by all states and federal regulatory agencies. Imposes both ethical obligations and minimum appraisal standards that must be followed by all professional appraisers

comparables (comps)

the most similar properties recently sold

value

what you get

Price

what you pay