MN Real Estate Express Course 3

Why are appraisal reports always dated?

Because the real estate market is always changing

What type of policy concerns how the government collects revenue and makes expenditures on various services?

Fiscal policy

What type of cost refers to the cost associated with buying a replacement copy of the item?

Replacement cost

Define the principle of substitution.

A buyer will pay no more for a property than the buyer would have to pay for an equally desirable and available substitute property.

What does an appraisal take into account?

A variety of factors, including the property's historic, current, and future values, the interests and equity in the property and any other considerations that can influence the property's current or future value

The property being appraised must be what?

Adequately and accurately described

What does replacement cost include?

All the costs of building a house or other real estate improvement from the ground up and having the same utility as the one being valued, but with a modern design, new materials and current standards of workmanship.

What is an appraisal?

An estimate of the current value of the property.

What is the meant by the term illiquid investment?

An investment that is durable, fixed in location, and oftentimes a long time in development.

What is the term given to some of the most recognized economic principles that figure directly in the appraisal process?

Appraisal principles

Which of the following statements is TRUE?

Appreciation is not absolute; it remains a universal catalyst for residential real estate purchasers.

Property that does not conform to these requirements loses value in that a new owner will have to expend funds to bring it into compliance.

Area preference (situs)—market appeal of location and environment Availability—relative scarcity or abundance Improvements—quality and suitability for use Permanence of investment—stability of value over time

Why is government influence at the state level less extensive than at the federal and local levels?

Because state governments delegate many of their constitutionally-granted powers to the county and municipal levels of government

How does the government require citizens to contribute to the cost of government services?

By way of taxation

Cultural norms, by influencing the personal values of individuals, influence what?

Choices made in the marketplace

What describes how a city is organized, used and developed?

City layout

What geographical and environmental issues affect value?

Climate, soil, water, air quality, wind patterns, and environmental hazards

Which economic principle is a direct result of the supply and demand principle?

Competition

What is not an economic characteristic of land?

Consumer impact

What is the definition of cost?

Cost is the expense associated with improving property

Which social force is most influential on a person's values and the choices they make in the marketplace?

Cultural norms

What is the first step in the appraisal process?

Define the problem and the scope of work

What type of inflation is caused by a seller's market (too many purchasers wanting too few available goods)?

Demand Inflation

The study of population trends and statistics is defined as what?

Demography

What does the appraiser do after he or she decides which value approaches to use?

Determine the type of data needed and the sources to be consulted, and then collect the data

What is it called when the cost for a property's improvement exceeds the improvement's contribution?

Diminishing marginal return

List and describe three techniques used to value a land component. (See screen 12 for other correct answers.)

Direct sales comparison—sales of comparable vacant parcels are analyzed and adjusted to indicate a value for the subject land. Allocation—a typical ratio of land value to total value is derived from comparable properties and applied to the subject. Extraction— land value is estimated by deducting the depreciated cost of improvements on a property from the total sale price of the property.

What is it called when land value is estimated by deducting the depreciated cost of improvements on a property from the total sale price of the property?

Extraction

What type of programs affect development in coastal and wetland areas?

Federal flood insurance programs

List the four basic sources of influence on all aspects of human activity.

Governmental controls and regulations Economic conditions and circumstances Physical and environmental conditions Social trends

What are the four phases of standard market cycles?

Growth, Peak, Decline, Recovery

What principle holds that there is a single use for a property that produces the greatest income and return?

Highest and best use

What value type is most commonly utilized in foreclosures and bankruptcies?

Liquidation value

What are the three physical characteristics of land?

Immobility, indestructibility, and heterogeneity

Real estate markets are considered to operate at what level of effectiveness?

Inefficient in operation.

What term describes a rise in the cost of commodities?

Inflation

What happens when an appraiser simply averages the values reached by using different approaches of value to arrive at the final value estimate?

It gives equal weight to all the approaches.

Which statement is TRUE about data collection?

It is comprised of an orderly set of procedures that establish the precise manner in which data is collected and analyzed.

For appraisers, the most important use of market analysis is what?

Its role in the appraisal process

What type of laws affect the activities of employers, workers and labor unions?

Labor laws

According to the balance principle, the correct combination of what four production agents results in economic stability?

Land, labor, capital, and entrepreneurial coordination, or management

What is the most common type of value sought in an appraisal?

Market Value

Which of the following is NOT a criteria used when formulating highest and best land use?

Minimally productive

Explain what happens to a property that does not conform to zoning and/or building codes.

Property that does not conform to these requirements loses value in that a new owner will have to expend funds to bring it into compliance.

What elements that immediately "surround" a property can impact its value?

Public Transportation Access by Car Abutting and Nearby Streets and Traffic Flow

What are the two classifications of property?

Real property and personal property

What is the term given to periods of growth that are followed by periods of stagnation or decline?

National business cycles

What term describes the fact that no two parcels of land are exactly the same?

Non-homogeneous

What term describes ownership of anything that is not real estate and the rights associated with owning the item?

Personal property

What is the term for excess value created by assemblage?

Plottage value

What distinguishes a real estate asset market?

Properties are bought and sold, not for their utility in use, but for investment purposes.

Which comparison is usually the most reliable method for estimating land value?

Sales

Which approach is considered the most reliable if adequate comparable sales exist?

Sales Comparison Approach

What is the difference between sales price and market value?

Sales price is a fact; market value is an opinion

What forms can appraisal reports take?

Short- or Long-Form Narrative Reports Form Reports Letter or Oral Report

Where can the book value of a property be found?

The owner's accounts

Describe the difference between specific and general data.

Specific data is information and details about the subject property and the comparables. General data is information about the property's location - its country, region, city, and neighborhood.

What are three investment vehicles that real estate competes with?

Stocks, Bonds, Commodities

What is the most important condition to be met in a purchase agreement?

The appraisal

What evaluation process is an ordered, specific set of steps that must also follow an established, predetermined path to arrive at an accurate value estimate?

The appraisal process

What must an appraiser do when comparable sites are in different neighborhoods?

The appraiser must conduct a detailed analysis of the two properties based not only on the typical elements of comparison, but on the neighborhood characteristics as well.

What appraisal approach is not considered reliable for valuing older structures?

The cost approach

What is the general definition of real estate value?

The current worth of the benefits and rights associated with real property ownership and use

What is the definition of highest and best use?

The definition of highest and best use is that use that is Legally permissible Physically possible Financially feasible Maximally productive

Describe market value.

The highest price that a buyer would pay and the lowest price that the seller would accept for the property.

How does the income approach work?

The income approach capitalizes a single year's income or discounts a projected income stream to derive an indication of the property's value.

Which of the following statements best defines potential gross income (PGI)?

The maximum gross revenue of an income property assuming no vacancy or collection loss

List three ways environmental hazards can affect property value.

The presence of such hazards can: Modify or destroy land use Make a buyer change his mind about purchasing real estate or moving to the area at all (decrease demand) Cause physical damage to property or medical damage to owners and occupants Leave a stigma on the real estate and community even after the hazard has been removed

What is opposite of the principle of assemblage?

The principle of subdivision

What principle states that the division of a single property into smaller properties can result in a higher total value?

The principle of subdivision

What does the legal concept of land encompass?

The surface area of the earth Everything beneath the surface of the earth extending downward to its center. All natural things permanently attached to the earth The air above the surface of the earth extending outward to infinity.

What principle is concerned with how readily or easily title or rights to real estate can be conveyed?

The transferability principle

What does the principle of transferability indicate about properties that are encumbered?

The value of such properties is impaired, since buyers do not want unmarketable title.

What is mortgage value?

The value of the property as collateral for a loan

What does the economic principle of anticipation indicate about real estate value?

The worth of a commodity or service is associated with its future profitability and benefits.

What is not a characteristic of an efficient market?

There is no formal mechanism to bring buyers and sellers together.

Why do banks and mortgage lenders order and review a real estate appraisal?

To determine whether a property meets certain underwriting standards

What is the primary purpose of an appraisal?

To estimate a type of market value

Appraisal reports must include a signed certification, according to

USPAP guidelines.

The majority of today's single-family appraisals are made on the

Uniform Residential Appraisal Report (URAR).

Define the principle of increasing and decreasing returns.

When improving a property, there is a point where the property's maximum current market value has been realized. Further improvements do not repay their cost by any increase in market value.

Because values change over time, appraisals must refer to

a specific date.

A swimming pool located on a residential property would be classified as a(n)

amenity.

The first step in the appraisal process is to

determine the problem and the scope of work.

What does the legal concept of real estate encompass?

land all man-made structures that are "permanently" attached to the land

What are requirements to qualify as the highest and best use?

legal Physically possible financially possible

Appraisal Reports take what forms

long or short narrative URAR Form Letter;oral

Property that does NOT conform to code requirements

loses value.

Dependence on a single industry

makes an entire economy vulnerable.

Highest and best use of a property is determined by

market forces.

An item is not considered property if it is not

owned.

Permits for septic systems require

percolation tests.

The excess value created by assemblage is called

plottage value.

If a property is surrounded by properties with higher values, its value will tend to rise. This is known as which of the following?

progression.

The two types of cost used in appraising are

replacement cost and reproduction cost.

Specific data pertains to

the appraised property.

One accepted definition of market value is

the highest price a buyer would pay that a seller would agree to.

Economic balance occurs when

the ideal state of any industry or market is achieved.

The difference between sales price and market value is

the sales price is a fact and market value is an opinion.

Property that is encumbered is said to have

value impairment.