Real Estate Appraisal Test 3

John Smith has a savings account that just paid $200 annual dividend. If the declared interest rate is 5%, how much is on deposit?

$4,000 = $200 / 0.05%

What is percentage lease?

A lease where the rent is defined as a percent of the tenant's sales volume.

In an appraisal what does the reconciliation process involve?

The process of reducing a range of value indications into an appropriate conclusion for that analysis. 1. How appropriate is each? (accurate and relevant) 2. Evaluate the data (relevant, reliable, and adequate) 3. Develop a value range

The applicability of any approach is said to be dependent upon?

The type of property and the quality and quantity of evidence considered.

Know what USPAP is.

Uniform Standards of Professional Appraisal Practice - It is a set of standards and ethics, maintained and published every two years by the appraisal standards board of the appraisal foundation

What is hypothecation?

Using an investment as security for a loan. It provides a practical substitute for investment liquidity

The net income attributed or residual to the land is estimated to be $34000. Land value is estimated to be stable. What is the value of the land if the yield rate is 8%?

V= $34000/.08 V=$425000

In the appraisal of income property, know the common operating expense categories

Variable expenses (day to day, out of pocket), Fixed expenses (more stable, like insurance and taxes), and Reserves for replacements

When is the appraiser's opinion of highest and best use required?

When the appraiser has to use a market value opinion

The income approach is generally relied upon when?

When the primary benefit of real estate ownership is in the form of monthly or annual income

What should be considered when selecting a gross income multiplier from comparable sales?

1. Make an adequate search for comparable sales (at lease 3, with sale dates close to date of value) 2. Estimate the market rents for each comparable as of the time of sale and add other income if any 3. Divide the selling price for each comparable by its gross income

The reconciliation process weighs the ________?

Applicability of each approach, Adequacy and reliability of data, Range of Value indicated

Know the two types of USPAP reporting options

Appraisal Report and Restricted Appraisal Report

The URAR is best for which one of these two reports?

Appraisal report

Discounted cash flow is an example of? Yield capitalization? Ratio Capitalization? Neither? Both?

Both?

Contract rent in relation to market rent? Can they be the same? Or can contract rent be more or less than market rent?

Contract rent: Rent actually being paid under contract. Market rent: Rental income the property would most probably command for rent on the open market as of the effective date of value. If market is less than contract, then the difference is known as excess rent.

Which income capitalization technique is considered to be the simplest and most reliable?

Direct capitalization

USPAP requires each written or oral report to: State who inspected the property? Disclose any extraordinary assumptions or hypothetical conditions?

Disclose any extraordinary assumptions or hypothetical conditions

In the income approach, the net income is defined as?

Effective gross income minus operating expenses

Which capitalization technique analyzes the net income after debt service, rather than the total net operating income?

Equity Residual

The URAR or Uniform Residential Appraisal Report is what type of report? Narrative? Form? Letter?

Form

The Uniform Residential Appraisal Report is what kind of report? Form? Narrative? Letter?

Form

If an income property has a scheduled annual income of $100,000 and a vacancy and collection loss of $5,000 and a net operating income of $30,000 what is the net income ratio? Problem solve: Gross Income $100,000 Less: Vacancy/loss - 5,000 Equals: Effective Gross Income $95,000 $30,000/$95,000= 31.58% Net income ratio= effective gross divided into net income

Gross Income $100,000 Less: Vacancy/loss - 5,000 Equals: Effective Gross Income $95,000 $30,000/$95,000= 31.58% Net income ratio= effective gross divided into net income

Income Capitalization often applies what formula?

Income / Rate = Value Rate X Value = Income

If the appropriate risk or interest rate for a property is 8%, what yield is available to the equity investor, with a loan at 7% interest covering 70% of the property value?

Loan: .70 x .07= 0.049 Equity: .30 x ER= WE weighted average: .08 (given as risk rate) Step 1: WE=.08-.049= .031 Step 2: ER= .031/.30 = 10.3%

Effective Gross income is defined as the?

Market income from all sources minus losses from uncollected rents, vacancies, and evictions. It is a projection of the total income receipts of the property before payment of normal operating costs and capital recover

When deriving gross income multipliers from recent sales, what should be used if no rent control is in effect? Actual rent? Effective Gross Income? Average rent? Or Market rent?

Market rent

In real estate finance, recapture of the investment capital is that portion of the loan payment that is earmarked for what?

Payoff of principal

If the annual gross income multiplier is 8.0 and monthly rents are $4000, what is the indicated value of the subject property?

Problem solve: $4000 x 12monthsx 8 GIM= $384000

Your 12 unit property has a gross income of $85000. What is its probable value if the GIM is 9.0 based on comparable sales?

Solve: $85000 x 9.0=$765000

What are the three commonly recognized methods of explicitly providing for capital recovery?

Straight-Line Method - Assumes equal annual recapture from net income • Used in several capitalization methods Sinking Fund Method - Assumes "safe rate" earnings • Rarely used in appraisals Annuity (Inwood) Method - Provides capital recovery in same way as loan amortization - Assumes recapture amounts earn interest • An older form of yield capitalization

Know the difference in the types of leases straight (flat), Step-up (graduated) or percentage lease

Straight: Monthly or annual rent is a fixed amount that stays the same over the life of the lease Step-Up: More popular, provides the landlord some protection from inflation while giving the tenant certain or fixed rents Percentage: Fixes rent as a stipulated percentage of the tenants economic activity (gross sales of goods and services)

Know tangible versus intangible differences.

Tangible Benefits • Return on Investment (Interest, Net Income) • Return of Investment (Recapture) • May be Enhanced by Tax Shelter and Appreciation Intangible Benefits • Live in One Unit and Rent Out Others • Pride of Ownership • Sense of Security • Opportunity to Develop/Apply Management Skills

The appraiser should check for consistent use and interpretation of data throughout the appraisal. Such a procedure is part of the _______?

Technical Review

Know what overage rent is.

The amount of rent paid under a percentage lease that is over the base rent amount

Sinking fund factor is used to estimate _________?

The annual reserve expense needed in order to be able to replace some time at a date in the future. It is also called the periodic payment to create a future lump sum value

Cash flow is defined as?

The income or loss arising from an investment in a specific time period. (Net operating income minus debt service)