Real Estate Chapter 7 & 8

True or false: In the direct capitalization method, net operating income is divided by the capitalization rate to arrive at an estimated value.

True

A small office building has the following characteristics: net operating income, $65,000; operating expenses and capital expenditures, $33,000; vacancy and collection losses, $5,000. What is potential gross income assuming an above-line treatment of capital expenditures?

$103,000

When analyzing the operating expenses of a small office building, which of the following is a relatively fixed operating expense?

Hazard and fire insurance premium

DCF analysis requires the appraiser to estimate

-the holding period expected by the typical market participant -the net cash generated by the sale of the property at -the end of the expected holding period future cash flows from annual operations

The accuracy of quantitative valuation techniques depends heavily on

-the quality of the appraiser's cash flow assumptions -the experience of the appraiser -the quality of the cap rate or discount rate assumptions employed

Generally, how many approaches to estimating market value are considered by the appraiser for use in a formal appraisal?

3

The rules for making adjustments to the sale prices of comparable properties include which of the following?

Adjust the sale price of the comparable toward the subject property Use market-related adjustments Make transactional adjustments in the proper order

When estimating the net operating income of a property, which of the following expenditures would be included?

Hazard and fire insurance premiums Property taxes

It is often necessary to value the site independent of the improvements to the site. Which of the following approach requires a separate site valuation?

Cost approach

True or false: The accurate valuation of income producing properties is primarily a number crunching exercise.

False

What is the relation between capitalization rates and estimated property values?

Inverse

Which of the following is most likely to be classified as a capital expenditure?

Roof replacement

Which of the following steps in the evaluation of an appraisal is the most important?

Make sure the comparables used are appropriate

"MLS" stands for

Multiple listing service

When using direct capitalization, ______ income is capitalized to obtain an estimate of value.

Net operating

______ adjustments focus primarily on the physical and locational differences between the subject and comparable properties.

Property

If you know the value of one share of common stock in Simon Property Group (SPG), you know the value of all SPG shares because

SPG shares trade in a liquid public market the share price is continuously revealed throughout the trading day one share is a prefect substitute for another

True or false: The final value number produced by reconciliation of the resulting estimates from two or more approaches to value is termed the final estimate of value.

True

Which of the following statements about market value are true?

The market price is the result of interacting forces of demand and supply. The fair market value is the most probable selling price

True or false: A poor architectural design is an example of functional obsolescence.

True

True or false: Although most appraisal assignments involve the valuation of properties with improvement (buildings) on the land, appraisers often must separately value the land.

True

True or false: DCF valuation is really a combination of DCF and direct capitalization.

True

True or false: The goal of market analysis is generally to develop an understanding of the factors that affect demand and and supply in a particular market and use that knowledge to forecast how values in that market are likely to change over time.

True

True or false: USPAP addresses the ethical obligations of appraisers and provides the minimum appraisal standards that most be followed by all appraisers

True

USPAP standards require that, when using the sales comparison approach, appraisers use how many comparables?

USPAP has no requirement regarding the number of comparable sales

The most common appraisal report is the:

Uniform Residential Appraisal Report (URAR) Form 1004.

Which of the following should be accounted for in the calculation of net operating income?

Vacancies Rental income Property maintenance

The concept of market value in formal appraisal practice includes

a competitive market buyer and seller acting prudently most probable selling price

Typically, reconciliation of final adjusted sale prices of the comparable properties involves the use of

a weighted average

Form reports are generally requested by

lenders making loans on single-family homes

Potential gross income is defined as the total income the property would produce

assuming 100% occupancy and no collection losses

The most common method used in DCF analysis to estimate the value of the subject property at the end of an expected 10-year holding period is to

capitalize NOI in year 11 into an estimated market value in year 10

Potential sources of data from public records include

cities and counties many agencies of the federal government local property tax assessors

The required number of comparable sales

decreases if those comparables already selected are very similar to the subject property increases as the reliability of comparable sale information decreases

The main models or approaches to valuing real estate using income capitalization include

direct capitalization discounted cash flow

To abstract the cap rate from the sale of a comparable property, the appraiser

divides the NOI of the comparable property by the sale price of the comparable property

Dividing the sale price of a comparable property by its annual effective gross income results in a(n) ______ which can be used to estimate the value of a subject property.

effective gross income multiplier

Potential gross income is equal to

effective gross income plus vacancy and collection losses

According to the text, the main difficulty is using the cost approach to valuation is

estimating the dollar amount of accrued depreciation

Operating expenses that are incurred yearly with relatively little change are referred to as

fixed expenses

In the cost approach to valuation, which factors of "depreciation" are considered?

functional obsolescence physical deterioration external obsolescence

Capitalization rates used to estimate the current market value of the subject property are sometimes referred to as the ______ cap rate.

going-in overall

Present values are ______ future values.

greater than

Unless the characteristics of the comparable property are ______ to the subject property, adjustments must be made to the sale price of the comparable property.

identical

The text argues that successful market analysis and research

is a process

"Income capitalization"

is the process of converting a forecast of net operating income into an estimate of current market value

Valuation of real estate is complicated by the

lack of observable transactions immobility of real estate lack of perfect substitutes

Cap rate information is often available from

local research companies brokerage firms data providers

The Appraisal Foundation

maintains the USPAP

Which of the following expenditures does not affect the calculation of net operating income?

monthly mortgage payments

The value that real estate appraisers generally estimate is market value, which is synonymous to

most probable selling price

When using discounted cash flow analysis, an appraiser will prepare a multi-year cash flow forecast, which is often referred to as a

multi-year pro forma

Physical deterioration may result from

ordinary wear and tear weathering from the elements

Other names for the cap rate used in direct capitalization include

overall capitalization rate going-in cap rate

In the presence of miscellaneous income, effective gross income is equal to

potential gross income, plus miscellaneous income, minus vacancy and collection losses

Capital expenditures generally

prolong the economic life of the structure

As the final step in arriving at the indicated value of the subject property based on the sales comparison approach, the appraiser must

reconcile the final adjusted sale prices of the comparable properties

The estimated cost to build a structure with equal functionality (utility) as the existing structure using modern methods is generally referred to as the

replacement cost

The most reliable approach to estimating land values is usually the

sales comparison approach

Conventional approaches to estimating the market value of real estate include the

sales comparison approach income approach cost approach

The economic principle of ______ implies that the value of the subject property is determined by the sale prices of comparable properties.

substitution

To calculate effective gross income in the presence of miscellaneous income, vacancy and collection losses are

subtracted from potential gross income

Most appraisals of single-family homes are

summary reports

Each required transactional and property adjustment is made to

the adjusted sale price of the comparable after the prior adjustment

Most appraisal assignments entail estimating

the current market value of a property

A cap rate is most analogous to

the dividend yield on a stock

Which of the following should be included in the identification of the appraisal problem?

the effective date of the valuation the type of value to be estimated the intended use of the appraisal

The average price-earnings multiples or ratios used to value the subject property come from

the sale prices of comparable properties

In ______, each approach to market value will produce identical estimates of value.

theory

Reproduction cost is defined as the cost

to build an exact replica of the subject property

____ adjustments focus on the terms of the deal and the motivation or bargaining ability of the participants.

transactional

Generally, a current estimate of land value plus the reproduction or replacement cost of the building will set the ______ value of the property

upper limit to the

Each approach to valuation has its strengths and weaknesses. In arriving at a final opinion of value, the appraiser should

weight the strengths and weaknesses of each approach, as well as the reliability of the data collected for each approach

The final estimate of market value is usually a ______ average of the indicated values from the different approaches.

weighted