Basic Appraisal Procedures Set 1

Example: Comparable 1 sold for $240,000 and Comparable 2 sold for $228,000. They were very similar except that Comparable 1 had a three-car garage and four acres of land whereas Comparable 2 had a two-car garage and three acres of land. Through a paired data analysis we are able to ascertain that the contributory value of a three-car garage versus a two-car garage is

$4,000. The difference in sale price between the two properties is $12,000. If $4,000 is accounted for by the difference in garage spaces, the remaining $8,000 must be attributed to the one acre of additional land. NOTE: Finally, remember the caveat that we are only supposed to make adjustments for significant differences. For example, the market may not recognize the difference between 3.6 acres and 3.8 acres. If a typical purchaser would not be willing to pay more for the slightly larger lot, then we should not make an adjustment.

A 12 year old roof with an expected life of 20 years would have experienced depreciation of $______ if the cost new of the roof is $8,000.

$4,800

The deterioration in short-lived items is measured by an age-life ratio applied to the cost of each item. A 15-year-old boiler with an expected life of 25 years will have experienced depreciation of 15 / 25 or 60%. If the replacement cost of the boiler is $8,000, the amount of short-lived depreciation attributable to the boiler would be:

$4,800 $8,000 x .60 = $4,800

The subject property has plenty of trees, and it is very similar to Sale #3 except that Sale #3 has no trees. Sale #3 sold for $40,000. In comparison, the subject property is worth how much?

$44,000. The sale is inferior to the subject, so the subject should be worth more. First, we use our paired sales (Sales #1 and #2) to extract the adjustment. $5,000/$50,000 = 10%. That is the percentage adjustment factor we will use. We then apply a positive 10% adjustment to Sale #3. $40,000 X .10 = $44,000.

A property sold for $120,000. An old building on the property has a cost new of $300,000 and it is 75% depreciated. What is the indicated site value by extraction?

$45,000

Now consider the difference when a straight-line adjustment and the equivalent compound time adjustment are applied to another comparable sale that is two years old and sold for $1,500,000. Straight-line adjustment will result in an adjusted price of

$499,200, but compound monthly adjustment will result in an adjusted price of $594,922, nearly $100,000 and 20% higher.

Example: A property is listed for $95,000 and is to be sold "as is." Let's assume it will cost $5,000 to replace the roof. The purchaser might offer $90,000 for the property, knowing full well that as soon as he buys the property he will have to spend

$5,000 to make it livable. In this case, an adjustment should be made for the $5,000 that the purchaser will be obliged to spend. This assumes that most comparable houses would have an adequate roof.

When a property is income-producing, the external obsolescence may be estimated by capitalizing the loss in income attributed to that factor. Here's an example: assume a house that would rent for $1,200 per month in a normal market. In this market that has experienced overbuilding, it can only bring $1,150 per month. The appropriate GRM is 120.

$50 (rent loss) x 120 = $6,000 (external obsolescence)

Let's assume that a property is worth $100,000. If it is assessed at $100,000 and the rate per thousand is $5, the taxes would be

$500

A 2,800 square foot new home recently sold for $660,000. The site value was $180,000. The subject home has 2,945 square feet. What was the indicated cost of the subject home?

$504,861 Solution: $660,000 - $180,000 = $480,000 $480,000 / 2,800 = 171.428 (round up) = 171.43 171.43 x 2945 = $504,861 (you're welcome)

Effective age————————— X total cost = depreciationTotal economic life Here's a quick example. Let's assume a 20 year old building that would cost $220,000 to build new today. It is in good condition, and you estimate the effective age to be 15 years. Your estimate of total economic life is 60 years, based on analysis of similar properties. What is the cost of depreciation?

$55,000 15/60 = .25 x $220,000 = 55,000

Comparable 1 sells for $222,000 and contains 1,900 SF. Comparable 2 is similar in all aspects, except it contains 2,100 SF, and it sells for $234,000. How much should we adjust another comparable sale, per square foot?

$60 Solution: 2100 - 1900 = 200 SF $234K - $222K =$12K 12,000/200 = $60 per SF

Gross Annual Rental (Potential Gross Income, or PGI) + Other Income - Vacancy/Credit Loss (V&C) = Effective Gross Income (EGI) - Operating Expenses (TOE) = Net Operating Income (NOI) In the income capitalization approach, the net operating income (NOI) is then capitalized into value by dividing by a rate. For Example: You are appraising a 12-unit apartment building. These are the figures you came up with for income, vacancy, and operating expenses. Potential Gross Income $129,600 Other Income + 4,800 Vacancy and Credit Loss - 7,750 equals Effective Gross Income $126,650 Operating Expenses - 50,660 equals Net Operating Income $ 75,990 If you then went to the market and determined the appropriate overall capitalization rate was 9.5%, you would divide that into the net operating income.

$75,990/.095 = $799,895, rounded to $800,000. This would be the indication of value by direct capitalization.

Example: Let's suppose we have a property that produces an income stream of $10,000. Let's multiply that by 8. What do you get? Now take that same $10,000 and divide it by 1/8 or .125. What do you get?

$80,000 the math works either way

Gross income is simply the total of the rents for the whole year, plus any other income from the property operation. If I rented an office for $2,000 a month, the gross income would $24,000 per year. If I rented each unit of a six-unit building for $800 a month, the gross income would be

$800 x 6 x 12 = $57,600.

Which of these is an appropriate way to express a value conclusion in an appraisal report?

"$220,000" "Between $200,000 and $220,000" "Not less than $200,000" Any of these would be appropriate (Correct Answer)

Principle of Contribution

"1. The amount a component of a property adds to the total value of the property. Contribution may or may not be equivalent to the cost to add the component. 2. The concept that the value of a particular component is measured in terms of the amount it adds to the value of the whole property or as the amount that its absence would detract from the value of the whole."

Tenancy, by the way, is defined as

"1. The holding of property by any form of title. 2. The right to use and occupy property as conveyed in a lease." Individuals may own property in differing legal forms. One might own 100% of the interest in a trust or own 100% of the stock of a corporation. For many years, my appraisal company was a corporation. I was the only stockholder as well as being the President, Vice President, Secretary and Treasurer.

Vacancy and collection loss is defined as

"A deduction from potential gross income (PGI) made to reflect income reductions due to vacancies, tenant turnover, and nonpayment of rent; also called vacancy and credit loss or vacancy and contingency loss."

neighborhood

"A group of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises."

The gross monthly unfurnished rent of the subject property is $760. The appraiser reconciles the GRM at 115. What is the indicated value of the subject property by income approach?

$87,400 760 * 115 = 84,000

Do not use descriptors such as

'brick,' '2 stories,' 'average,' 'conventional,' or 'typical' as these are not architectural styles

a property may be found to sustain $10,000 in external obsolescence because of nearby environmental pollution. However, let's assume that 75% of the value is in the improvements and 25% is in the land. Therefore, 25% or $2,500 is attributable to the land. This means that 75%, or $7,500 is attributable to the improvements. The total loss in value

($10,000) should be properly allocated between the two components.

Let's assume that a property is worth $100,000. If it is assessed at $100,000 and the rate per thousand is $5, the taxes would be $500. If it was to be assessed at 50% of value, or $50,000, then the rate would likely be $10 per thousand of assessed value. Multiplying 50 (thousands of dollars) by $10 would equal the same $500 in property taxes. (No answer, just general info)

(No answer, just general info)

In your sales grid, you made adjustments of +$4,000, +$3,500, - $1,500, + $7,000, and - $2,000. How much is your net adjustment?

+$11,000

We locate another sale, Comparable 3, which is very similar to Comparable 1, except that it is not located on an arterial. Comparable 1 sold for $208,000, and 3 sold for $214,000. The adjustment we will make for the arterial location will therefore be

+$6,000; because if Comp 1 was NOT on an arterial, it could be expected to sell for $214,000.

A comparable sale required the following adjustments: +8,000, -4,500, +5,000, -2,000, -1,000. What is the net adjustment?

+5,500

buydown is defined as:

"A lump-sum payment (or series of payments) to the lender that reduces the interest payments of the borrower. The cost of the buydown is usually reflected in the price paid and be expressed as a percentage of principal." Suppose the current prevailing interest rate for mortgages is running about 7%. In order to sell the property more quickly, a seller may be willing to pay a sale concession in which they would make a lump sum payment of $5,000 in order to buy down the interest rate from 7% to 5% for the first three years of the loan. In this example, you would need to make an adjustment for that sale concession, if you used it as a comparable sale. Assume the property sold for $200,000, but that out of that sale price the seller gave $5,000 for a buydown. You would likely subtract $5,000 to equate it to a market value sale of $195,000.

The mode is defined as:

"A measure of central tendency consisting of the numerical value or categorical characteristic that occurs most frequently in a sample or population. For example, the mode of the data set (2, 4, 5, 6, 6, 7, 7, 8, 8, 8, 8, 10, 12) is 8, and the mode of (poor, poor, below average, average, average, average, average, good, good, excellent) is average." With a set of numbers, there is always a mean and a median, but there may or may not be a mode. If no number repeats itself in a set of numbers, there is no mode.

The median is defined as

"A measure of central tendency identified as the middle value in an ordered array of numerical values, e.g., 7 is the median of (1, 4, 6, 6, 7, 9, 11, 22, 41 ). If the ordered array contains an even number of values, then the median is the mean of the two values on either side of the middle." The median is the number in the middle. Think of how a median divides a highway.

The definition of mean is:

"A measure of central tendency. The sum of values for a variable in a sample or population divided by the number of items in the sample or population. The arithmetic average." The mean is what we commonly think of as a simple average. We add up the numbers and divide by the number of numbers.

Direct capitalization is defined as:

"A method used to convert an estimate of a single year's income expectancy into an indication of value in one direct step, either by dividing the net income estimate by an appropriate capitalization rate or by multiplying the income estimate by an appropriate factor. Direct capitalization employs capitalization rates and multipliers extracted or developed from market data. Only one year's income is used. Yield and value changes are implied but not explicitly identified."

Yield capitalization is defined as:

"A method used to convert future benefits into present value by 1) discounting each future benefit at an appropriate yield rate, or 2) developing an overall rate that explicitly reflects the investment's income pattern, holding period, value change, and yield rate."

Guaranteed mortgage:

"A mortgage in which a party other than the borrower assures payment in the event of default, e.g., a VA-guaranteed mortgage or a SBA-guaranteed mortgage." For example, if the borrower of a VA-guaranteed mortgage defaults and the property cannot be sold for an amount sufficient to pay off the loan, the VA would reimburse the lender for any losses.

Insured mortgage

"A mortgage in which a party other than the borrower assures payment on default by the mortgagor in return for the payment of a premium, e.g., FHA-insured mortgages, private mortgage insurance (PMI)."

Conventional loan is defined as:

"A mortgage that is neither insured nor guaranteed by an agency of the government, although it may be privately insured." Many conventional loans do have private mortgage insurance (PMI) covering part of the loan (that exceeds 80% loan-to-value).

district

"A neighborhood characterized by homogeneous land use, e.g., apartment, commercial, industrial, agricultural."

Quantitative adjustment

"A numerical (dollar or percentage) adjustment to the indicated value of a comparable property to account for the effect of a difference between two properties on value."

Discount points are defined as:

"A percentage of the loan amount that a lender charges a borrower for making a loan; may represent a payment for services rendered in issuing a loan or additional interest to the lender payable in advance; also called points. Each discount point is 1% of the original loan amount."

Chapter 11 Reconciliation is defined as:

"A phase of a valuation assignment in which two or more value indications are processed into a value opinion, which may be a range of value, a single point estimate, or a reference to a benchmark value."

Ranking Analysis

"A qualitative technique for analyzing comparable sales; a variant of relative comparison analysis in which comparable sales are ranked in descending or ascending order of desirability and each is analyzed to determine its position relative to the subject."

Relative comparison analysis is defined as:

"A qualitative technique for analyzing comparable sales; used to determine whether the characteristics of a comparable property are inferior, superior, or similar to those of the subject property. Relative comparison analysis is similar to paired data analysis, but quantitative adjustments are not derived."

Paired Data Analysis

"A quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties are analyzed to isolate a single characteristic's effect on value or rent. Often referred to as paired sales analysis."

In the income approach formula (V = I/R) the R is a capitalization rate(R), which is defined as

"A ratio of one year's net operating income provided by an asset to the value of the asset; used to convert income into value in the application of the income capitalization approach." So, I would d

Arm's-length transaction is further defined as:

"A transaction between unrelated parties who are each acting in his or her own best interest."

The definition of room count is

"A unit of comparison used primarily in residential appraisal. No national standard exists on what constitutes a room. The generally accepted method is to consider as separate rooms only those rooms that are effectively divided and to exclude bathrooms."

What does the RECORD KEEPING RULE say about workfile custody, access and retrieval?

"An appraiser must have custody of his or her workfile, or make appropriate workfile retention, access, and retrieval arrangements with the party having custody of the workfile. This includes ensuring that a workfile is stored in a medium that is retrievable by the appraiser throughout the prescribed record retention period.

SCOPE OF WORK RULE states: (Don't memorize, just be familiar with the back of the card)

"An appraiser must properly identify the problem to be solved in order to determine the appropriate scope of work. The appraiser must be prepared to demonstrate that the scope of work is sufficient to produce credible assignment results. Comment: Scope of work includes, but is not limited to: the extent to which the property is identified; the extent to which tangible property is inspected; the type and extent of data researched; and the type and extent of analyses applied to arrive at opinions or conclusions."2

How long does an appraiser keep their work file?

"An appraiser must retain the workfile for a period of at least five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last."2

STANDARD 1 of USPAP states, in part,

"An appraiser must...correctly complete research and analyses necessary to produce a credible appraisal."1

The definition of expenditures made immediately after purchase is:

"An element of comparison in the sales comparison approach; comparable properties can be adjusted for any additional investment (e.g., curing deferred maintenance) that the buyer needed to make immediately after purchase for the properties to have similar utility to the subject property being valued."

Conditions of sale is defined as:

"An element of comparison in the sales comparison approach; comparable properties can be adjusted for differences in the motivations of either the buyer or a seller in a transaction."

is flexible and permitted for cold water use only.

"Black Plastic" polyethylene It should not be utilized for distribution lines within the house, but works well to bring in the water from the supply, i.e., from the well or the public water system.

In the 2020-2021 edition of USPAP the Comment to the definition of Appraisal says:

"Comment: An appraisal is numerically expressed as a specific amount, as a range of numbers, or as a relationship (e.g., not more than, not less than) to a previous value opinion or numerical benchmark (e.g., assessed value, collateral value)."1

General Data

"Data that relates to the four forces that affect real property values—social, economic, governmental, and environmental forces. This type of data is usually not specific to any particular property but is applicable in many assignments of similar types of properties. Also known as macro-level data."

Specific Data

"Details about the property being appraised, comparable sale and rental properties, and relevant local market characteristics."

Standards Rule 1-2(h) on page 17 of the 2020-2021 USPAP says an appraiser must:

"Determine the scope of work necessary to produce credible results in accordance with the SCOPE OF WORK RULE."

In Handbook 4000.1, it says:

"Report the type of financing such as Conventional, FHA, or VA. etc. Report the type and amount of sales concessions for each comparable sale listed. If no concessions exist, the appraiser must note "none." The appraiser is required to make market-based adjustments to the comparable sales for any sales or financing concessions that may have affected the sales price The adjustments for such affected comparable sales must reflect the difference between the sales price with the concessions and what the prop

A life interest (sometimes called a life estate) is defined a

"Rights of use, occupancy, and control, limited to the lifetime of a designated party, sometimes referred to as the life tenant." A typical example would be an elderly person transferring ownership of a property to another party, perhaps a relative, but retaining the right to live in the property for the rest of his or her life. Upon their death the property transfers to the person named when the life interest was created (called the remainderman). During the life of the holder of the life interest, the interest is called an Estate in Remainder.

FHA addresses the topic of sales and financing concessions in more general terms. In HUD Handbook 4000.1, it states:

"Sales or Financing Concessions. Account for and adjust for any special sale or financing terms, including sales concessions, nonmarket financing terms, points, buydowns, closing terms and swaps/exchanges. The most common scenario involves the seller paying points in the form of settlement help to the buyer. To reflect the amount, adjust the sales price of the comparable sale downwards. Typically this amount will not exceed six percent of the sales price for typical transactions."

The income capitalization approach is defined as

"Specific appraisal techniques applied to develop a value indication for a property based on its earning capability and calculated by the capitalization of property income."

Net operating income (NOI) is defined as

"The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted. Note: This definition mirrors the convention used in corporate finance and business valuation for EBITDA (earnings before interest, taxes, depreciation, and amortization)."

Deficit rent is defined as

"The amount by which market rent exceeds contract rent at the time of the appraisal; created by a lease favorable to the tenant, resulting in a positive leasehold, and may reflect uninformed parties, special relationships, inferior management, a lease executed in a weaker rental market, or concessions agreed to by the parties." This is the flip side that is created by a lease that is favorable to a tenant. It could result from uninformed parties or a swing in the rental market since the lease was executed.

Principle of Substitution

"The appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the cost and sales comparison approaches are based."

This is what Fannie Mae has to say in B4-1.4-16, Appraisal Report Review: Sales Comparison Approach of its Selling Guide:

"The appraiser must perform a neighborhood analysis in order to identify the area that is subject to the same influences as the property being appraised (based on the actions of typical buyers in the market area). The results of a neighborhood analysis enable the appraiser not only to identify the factors that influence the value of properties in the market area, but also to define the area from which to select the market data needed to perform a sales comparison analysis."

term reconciliation criteria is defined as:

"The criteria that enable an appraiser to form a meaningful, defensible conclusion about the final value opinion. Value indications are tested for the appropriateness of the approaches and adjustments applied, the accuracy of the data, and the quantity of evidence analyzed."

Market Area

"The geographic region from which a majority of demand comes and in which the majority of competition is located. Depending on the market, a market area may be further subdivided into components such as primary, secondary, and tertiary market areas, or the competitive market area may be distinguished from the general market area."

It is important that you carefully measure the GLA of residences. Fannie Mae says in its Selling Guide, Section B4-1.4-14:

"The most common comparison for one-unit properties is the above-grade gross living area. Appraisers must be consistent when calculating and reporting finished above-grade room count and square footage for the gross living area above-grade.

the definition of market value says:

"The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress." [emphasis added] End of

Market rent is defined as

"The most probable rent that a property should bring in a competitive and open market reflecting all conditions and restrictions of the lease agreement, including the rental adjustment and revaluation, permitted uses, use restrictions, expense obligations, term, concessions, renewal and purchase options, and tenant improvements (TIs)." Market rent is a lot like market value. Most of the concepts that are inherent in the definition of market value apply to market rent. It assumes that there will be willing parties on both sides, typically motivated, etc. that will negotiate a fair price (in this case, the price is the amount of rent) for the property. The better the property is in terms of quality, condition, utility and location, the more value it will have in both the sale market and the rental market.

Operating expenses are defined as

"The periodic expenditures necessary to maintain the real estate and continue production of the effective gross income, assuming prudent and competent management. See also total operating expenses."

Discounted cash flow analysis is defined as:

"The procedure in which a discount rate is applied to a set of projected income streams and a reversion. The analyst specifies the quantity, variability, timing, and duration of the income streams as well as the quantity and timing of the reversion and discounts each to its present value at a specified yield rate."

Comparative analysis

"The process by which a value indication is derived in the sales comparison approach. Comparative analysis may employ quantitative or qualitative techniques, either separately or in combination."

Qualitative Analysis

"The process of accounting for differences (such as between comparable properties and the subject property) that are not quantified; may be combined with quantitative techniques."

sales comparison approach

"The process of deriving a value indication for the subject property by comparing sales of similar properties to the property being appraised, identifying appropriate units of comparison, and making adjustments to the sale prices (or unit prices, as appropriate) of the comparable properties based on relevant, market-derived elements of comparison. The sales comparison approach may be used to value improved properties, vacant land, or land being considered as though vacant when an adequate supply of comparable sales is available."

Range is defined as:

"The region or area over which something is found, is distributed, or occurs."

Overall capitalization rate (Ro) is defined as

"The relationship between a single year's net operating income expectancy and the total property price or value (RO = IO /VO)."

Gross income multiplier (GIM) is defined as:

"The relationship or ratio between the sale price or value of a property and its gross annual rental income."

A gross rent multiplier (GRM) is defined as:

"The relationship or ratio between the sale price or value of a property and its periodic gross rental income." When performing an income approach on a single unit residential property, we employ gross rent multiplier analysis. GRMs are derived by dividing the sales price by the gross monthly unfurnished market rent at the time of sale.

Leased fee interest is defined as

"The right held by the lessee to use and occupy real estate for a stated term and under the conditions specified in the lease." If a property is leased, the value of the leasehold may be calculated separately from the leased-fee ownership of the property itself. The appraiser would account for the terms and also factor in the length of time remaining on the lease.

Potential gross income (PGI) is defined as

"The total income attributable to property at full occupancy before vacancy and operating expenses are deducted." PGI is square one - that is, our starting point. It constitutes the most money we could possibly get if we rented all units on the property for every day of the year, at market rent. The income should never exceed that, but it certainly could be less.

Potential gross income (PGI) is defined as:

"The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted." PGI is the most possible rent a property could produce. It assumes the units are rented every day of the year at market rent.

On page 4 of the URAR form, it states:

"This report form is designed to report an appraisal of a one-unit property or a one-unit property with an accessory unit; including a unit in a planned unit development (PUD). This report form is not designed to report an appraisal of a manufactured home or a unit in a condominium or cooperative project."

Gross living area (GLA) is defined as

"Total area of finished, above-grade residential space; calculated by measuring the outside perimeter of the structure and includes only finished, habitable, above-grade living space. (Finished basements and attic areas are not generally included in total gross living area. Local practices, however, may differ.)"

Effective rent is defined as

"Total base rent, or minimum rent stipulated in a lease, over the specified lease term minus rent concessions; the rent that is effectively paid by a tenant net of financial concessions provided by a landlord."

Standards Rule 1-4(e) of USPAP addresses this issue when it states:

"When analyzing the assemblage of the various estates or component parts of a property, an appraiser must analyze the effect on value, if any, of the assemblage. An appraiser must refrain from valuing the whole solely by adding together the individual values of the various estates or component parts. Comment: Although the value of the whole may be equal to the sum of the separate estates or parts, it also may be greater than or less than the sum of such estates or parts. "1

Long-lived items are often referred to as part of the

"bone structure" of the building. They may be wearing out, but you typically don't jack up the house and replace the foundation, unless it has sustained severe damage due to an unusual event (e.g., a flood).

Ch. 4 - Building Styles and Construction introduced from about 1910 to 1930, The first one-story homes for the masses were the

"bungalow" homes

When you've done all of your research, you will have a jumble of notes. The notes are practically useless until you find a way to organize them. Most appraisers organize their data in a systematic fashion by putting it all into a

"grid" - a chart that compares the subject and comparables by line item. This makes it easy to see where differences lie and to make adjustments for those differences. The grid also helps ensure that you don't overlook any important differences or steps in your appraisal.

Standards Rule 1-2(e) of the 2020-2021 USPAP says an appraiser must:

"identify, from sources the appraiser reasonably believes to be reliable, the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal, '.. including: (ii) the real property interest to be valued (iii) any personal property, trade fixtures, or intangible assets that are not real property but are included in the appraisal; (iv) any known easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, or other items of a similar nature; and (v) whether the subject property is a fractional interest, physical segment, or partial holding;"1

We are not expected to be absolutely perfect, but appraisers are expected to exhibit due diligence and, as it says in Standards Rule 1-1(c) of the 2020-2021 USPAP,

"not render appraisal services in a careless or negligent manner..."1

The URAR form is completed, in its entirety, by the appraiser. Once the report form is completed and transmitted to the lender/client, the appraiser must retain a copy in the workfile. This workfile copy can be an electronic copy or a paper copy, but it must be a

"true" copy, i.e., an exact replica of the report that was transmitted to the client, including signature(s).

we have a ground rent of $135,000 and a market derived rate of 9%. What is the value of the land?

$1,500,000. $135,000 divided by .09 = $1,500,000. That's all there is to it at this point but again it's not that easy to find the appropriate rate. We also need to investigate the terms of the ground lease to see if the contract rent represents market.

Assume that a house needed a new roof and siding. A buyer has a contractor's estimate of $10,000 to install the roof and siding. An offer of $110,000 for the property was accepted. The work was done immediately after the closing and it wound up costing $12,500. How much should you adjust the sale if you use it as a comparable?

$10,000

Let's examine a property where the net operating income (NOI) is $100,000. In direct capitalization, we would divide the $100,000 by an appropriate rate to arrive at value. For simplicity's sake, let us assume a capitalization ("cap") rate of 10% or 0.10.

$100,000 / .10 = $1,000,000 - a nice round one million dollars. However, in this example let us assume that through research and analysis we were able to determine that the appropriate cap rate to be applied to the building improvements only was 11%, and the building value is $800,000.

Assume the GRM 130. We investigate the market and conclude that the market rent of the subject property is $775 per month. The indicated value of the subject property by gross rent multiplier is

$100,750. 130 X $775 = $100,750.

Example 2: Now it's your turn to work on this one on your own. After diligent research, you're unable to come up with vacant land sales in the vicinity of an assignment you have in Old Town. You do uncover a sale of a dilapidated storefront with two apartments upstairs. The sale price was $250,000. Your investigation of the building department's records allows you to calculate that the reproduction cost of the improvements would currently be $280,000. After an analysis of the property, you conclude that the total accrued depreciation is 60%. On that basis, what would be your conclusion as to the value of the land? $80,000 $112,000 $138,000 $250,000

$138,000 Extraction Method Example 2 Solution $280,000 x .60 (depreciation) = $168,000 $280,000 - $168,000 = $112,000 (value of improvements) $250,000 (sale price) - $112,000 (value of improvements) = $138,000 (value of land)

A building has a cost new of $400,000. Deferred maintenance items have been identified at a cost of $9,000. Short-lived depreciation has been identified at $15,000; these short-lived items have a total cost of $45,000. The building has an effective age of 20 years and a total economic life of 50 years. What is the amount of depreciation attributable to the long-lived items?

$138,400

A 12 unit apartment building has 6 units rented at $900 per month and 6 units rented at $1,050 per month. What is its gross income?

$140,400 Multipliers. 6 X $900 = $5,400. 6 X $1,050 = $6,300. '$5,400 + $6,300 = $11,700. $11,700 X 12 months = $140,400. Gross Income is always expressed on an annual basis.

A property with an old house sold for $220,000. The current replacement cost of the house was $280,000 and it was 75% depreciated. What is the site value of the property by extraction?

$150,000

Extraction Method an improved property sold for $200,000, which represents the current value of both the land and the improvements. If we know that the land is worth $50,000, then the improvements (in their present depreciated state) must be worth the balance, or

$150,000. It's simple mathematics: $200,000 - $50,000 = $150,000.

The tax rate per thousand in a municipality is $12.80. If the property taxes are $1,984 for a particular property, what is the property's assessed value?

$155,000 Find out why this is the solution

A hot water furnace in a building costs $22,000 to replace. It has an expected life of 30 years, and it is 24 years old. How much shortlived depreciation is attributable to this item?

$17,600

An improved property has a net operating income of $75,000. The appraiser estimates that $61,000 of the income is attributable to the building. The land capitalization rate is 8%. What is the estimated land value?

$175,000

A property sold for $50,000. The reproduction cost of the building was $80,000 and it was 60% depreciated. By extraction, what is the value of the land?

$18,000 Solution 80,000 x .60 = 48,000 80,00 - 48,000 = 32,000 50,000 - 32,000 = $18,000

The adjusted sale prices should form a tighter pattern than the raw, unadjusted sale prices we started with. The adjusted sale prices should form the ultimate range of value for the subject property. For example, if the three adjusted sale prices are $182,000, $180,000 and $185,000, then the indicated value of the subject property should lie somewhere between

$180,000 and $185,000

Here's an example of how paired data analysis works. Example 1, Fireplace adjustment: Sale 1 sells for $185,000 and has a fireplace. Sale 2 was built by the same builder, is right across the street, and is similar in all aspects except that it has no fireplace. It sells for $180,000, why?

$185,000 - $180,000 = $5,000 It appears that the value of that fireplace in this neighborhood is $5,000. Then we take that $5,000 and use it to make an adjustment for fireplaces in the sales grid. If one of our Comparable sales sold for $182,000 and did not have a fireplace, it would be adjusted up by $5,000 for the lack of a fireplace - a +$5,000 adjustment. The adjusted value would then be $187,000.

Ranking of the comparable sales in order of desirability makes a logical and persuasive argument. If you remember, in our last example from several pages ago, the adjusted sales prices of the three comparable sales were: Sale 1: $186,000 Sale 2: $192,000 Sale 3: $195,000 If we feel that the best sale was Sale 1 and the worst was Sale 3, then we want to resolve our final estimate towards the lower end of the value range. We may settle on

$186,000, or $187,000, or $188,000.

A home sells in January for $180,000 and sells again in November for $198,000. When the home resold, it had not been improved at all from the date it was originally purchased. The only change was the time. What is the indicated adjustment for time or change in market conditions?

$198,000 / $180,000 = 1.10 That is an increase of 10.0% over 10 months, or an average of .01 (one percent) per month. Therefore, if a comparable property sold 12 months ago, we could adjust it on the basis of 1.0% per month or a total of 12%. That is the way most residential appraisers make adjustments for changes in market conditions; using straight-line adjustments, on a monthly basis. An alternative method is to use compound interest, instead of straight-line, for the monthly adjustments. Let's look at an example using the Hewlett Packard 12C calculator. The HP 12C employs five financial function keys. They are arrayed across the top of the calculator and include: n = number of periods i = periodic interest rate PV = present value PMT = periodic payment FV = future value To clear all the financial registers, press f CLEAR FIN. You should train yourself to do that whenever you start to solve a new problem. It will clear all the information that is stored in all five financial registers. Information can be added into the five keys in any order. To solve a problem, you need to know any three items. Then you can solve for the fourth item (unknown). In some problems, you need to know four items and then solve for the fifth. The keystrokes would be: f FIN (to clear the financial registers) 180000 PV 198000 CHS FV (one of the numbers has to be a negative number) 10 n i The answer is 0.96. That means the rate of increase was less than 1% per month. On a compounded basis it was .96% per month instead of the 1.0% per month) we derived in the straight-line calculation. So 0.96% X 12 months is a total adjustment of 11.49%. $180,000 X .1149 = $20,682. The result from the straight-line calculation would be $180,000 X .12 = $21,600. The results differ by $21,600 - $20,682 = $918. An adjustment could be made on either basis, but we would hope to find additional market evidence for support. We said earlier that one sale does not make a market, and it is also true that in real life, one pair of sales should not be the sole support for an adjustment. We should check this indicated adjustment against other evidence of trends in the market area. For purposes of this course, however, we will often use a single pair of sales to extract an adjustment. NOTE: If, after you have the 0.96 on the HP12C display, you change the display to show 6 digits - [f] [6] - it will show 0.957658. Remember that the HP12C will show the number of decimals you want on the display but still uses the full decimal number in the subsequent calculation if you do it sequentially without re-entering the number manually. If you manually re-entered the 0.96 into the HP12C and multiplied by 12 months the answer would be 11.52%. Doing the calculation sequentially will produce a more accurate result.

Example: A property sold for $190,000, but we discover that the seller was in a hurry because of a job transfer. Hopefully, we could employ a paired data analysis technique. It's our lucky day and we are able to find another nearly identical property that sold under normal conditions for $200,000. If we decide to use that sale as a comparable sale, it would need to be adjusted upwards by $10,000 for conditions of sale. That would equate it to the other sale that occurred at

$200,000 with a normal time for exposure to the market. Remember that in the most common definition it states that market value: "is the most probable price......... for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale.........."

A house contains 2,312 square feet. It was constructed in 2009 at a cost of $72.32 per SF. The cost index at that time was 201.4 and the cost index today is 265.8. What is the estimated cost to build the building today? (Round the index to 2 decimal places)

$220,709 Solution: This one is a little tricky. First you need to know how much the how cost in 2009. 72.32 x 2,312 = $167,203.84 (don't round the decimals on the price, that's where I messed up originally). Now find the index increase 265.8 / 201.4 = 1.3198 (round up) = 1.32 or 132% 132% - 100% = 32% or .32 $167,203.84 x 32% or .32 = $53,505.2 $167,203.84 + 53,505.2 = $220,709.04 Now round down the last decimal on the final price $220,709

Modified Age-Life Method Example The cost new of the subject property is $235,000, the site value is $70,000 and the effective age is 25. The total economic life is estimated to be 60 years. The subject has deferred maintenance items that total $4,500. After these repairs, the effective age will be reduced to 20 years.

$225,000 (rounded from $224,435) Solution: $235,000 - $4,500 = $230,500 Remaining Improvement Cost 20 (effective age) / 60 (total economic life) = .333 (percent of depreciation) Cost Approach Remaining Improvement Cost $230,500 Minus Depreciation ($230,500 x .33) = 76,065 Depreciated Cost of Improvements $230,500 - 76,065 = $154,435 Plus Site Value ($154,435 + $ 70,000) = $234,435 Value by Cost Approach $224,435 Rounded to $225,000

The cost new of the improvements is $245,200, the site value is $60,000, and the effective age is 17. The total economic life expectancy judged by comparable sales is 55 years. What is the indicated value of the cost approach? You may round the price when finished.

$230,000 (Rounded from $229,433) Solution: 17 / 55 = .309 or 30.9% $245,200 x .309 = $ 75,767 Total cost of the improvements $245,200 Less total depreciation - 75,767 Depreciated cost $169,433 Plus site value + 60,000 Indicated value by the cost approach $229,433

We may have three sales with gross sale prices of $60,000, $95,000, and $140,000. However, after we break them down into units of comparison, we may find that they sold at prices ranging from

$28,000 to $33,000 per acre. That is a lot more workable.

A building was constructed in August 1999 for $2,340,000. The cost index at that time was 192.3. The current cost index is 302.1. What is the indicated cost new of the building today? (Round the index to 2 decimal places)

$3,673,800 Solution: 302.1 /192.3 + 1.57 or 157% 157% - 100% = 57% or .57 Now multiply the 1999 house price by 57% or .57 $2,3400,000 x .57 = $1,33,800 then just add them together $2,340,000 + 1,333,800 = $3,673,800

For example: Comparable 1 sold for $400,000 and is greatly superior to the subject; Comparable 2 sold for $250,000 and is significantly inferior to the subject; Comparable 3 sold for $300,000 and is slightly inferior. Based on a qualitative analysis of these sales, the indicated value for the subject would probably be in the range of

$300,000 to $350,000

Comparable 1 sold for $400,000 and is greatly superior to the subject; Comparable 2 sold for $250,000 and is significantly inferior to the subject; Comparable 3 sold for $300,000 and is slightly inferior to the subject. Based on qualitative analysis, the indicated value for the subject would probably be in the range of

$300,000 to $350,000.

A built-in dishwasher and stove have replacement costs of $350 and $500, respectively. They are both 6 years old and have a remaining life of 9 years. What is the total of short-lived physical depreciation attributable to these appliances?

$340

A property has a cost new of $345,000, site value of $90,000, and accrued depreciation of $75,000. What is its value by the cost approach?

$360,000 Solution: Cost New - Depreciation + Land Value $345,000 - $75,000 + $90,000 = $360,000

Example: What if the income was $48,543 and the appropriate capitalization rate was 12.4%? You would need your calculator to ascertain that the indicated value was

$391,476 ($48,543 /.124).

For example, in a declining market with double-digit percentage declines in value and a necessity to adjust from sales that are two or more years old, the difference between straight-line and compound market conditions adjustments can be very large indeed. Consider the following hypothetical example. A large tract of land sells for $2,000,000 and subsequently resells 18 months later in a declining market for $1,000,000. (Swings of this magnitude are known to many students of the market for residential development land during the period 2006 to 2008.) The indicated straight-line adjustment is -2.78% per month. However, the indicated compound adjustment is

-3.78% per month.

A comparable sale sold for $940,000. It had a verified NOI of $122,500. The capitalization rate (Ro) from the comparable sale is calculated as:

.13

Most appraisers make market conditions adjustments using straight-line adjustments on a monthly basis, i.e., if the adjustment is estimated to be +6% per year (or +0.5% per month), they will multiply the monthly percentage figure by the number of months between the contract date of the comparable sale and the effective date of value for the subject property. The resulting percentage adjustment is applied to the comparable sale to provide a time-adjusted indication of value. For example, a sale that closed 18 months prior to the date of value might be adjusted by

0.5% per month times 18 months, or +9%.

An apartment building had 12 units rented for $1,400 per month and 20 units rented for $1,600 per month. It sold for $3,000,000. What was the GIM?

5.1 $1400 x 12 = $16,800 $1600 x 20 = $32,000 $16,800 + $32,000 = $48,800 $48,800 x 12 (annually) = $585,600 $3,000,000 / $585,600 = 5.12 (round to the first decimal = 5.1

A building has an effective age of 25 and a total economic life of 80 years. What is its remaining economic life?

55 Solution: 80 - 25 = 55 remaining economic life If the total economic life is estimated to be 80 years and the current effective age is estimated to be 25 years, then by simple subtraction the remaining economic life is 55 years. (80 - 25 = 55)

A property sold for $183,950, and the purchaser made no significant improvements. One year later it sold again for $195,000. What is the percentage of increase indicated by this sale?

6%

The range is the difference between the highest and lowest numbers. Imagine we had a chart, the highest GRM was 110.4, and the lowest was 102.0. What would be the range?

8.4 110.4 - 102.0 = 8.4

GRM analysis assumes that there is a direct linear relationship between rental income and value. This has proven to be the case over and over. It may be, for example, that properties of a certain type in a specific neighborhood typically sell for 90 times their monthly rent. If the rent is $1,000 per month, then the property would be worth $90,000 to a typical purchaser. If another property is capable of generating $1,200 a month rent in the same market area, the property's indicated value would be

90 x $1,200 or $108,000.

4 of 4A single-unit property has a monthly unfurnished market rent of $1,050. It sold for $98,000. What is the indicated GRM?

93.3 98,000 / 1050 = 93.3

When developing an appraisal, you calculate the following GRMs from comparable properties: 94.3, 90.1, 95.6, 109.2, 84.5, 100.7, 99.9. What is the median of the GRMs?

95.6 Put in numerical order then find the middle number

A property sells for $95,750. At the time of sale it is rented for $975. What is the GRM?

98.2

Gross living area should NOT include:

A basement family room

Common methods of ventilation include:

Attic fans Kitchen fans Vents - basement and crawl space Attic - ridge vents, perforated soffits Louvers Cupolas Mechanical air exchangers

A bright pink contemporary-style house may be right at home in South Beach in Miami, but jarringly out of place in a neighborhood of traditional colonial homes on a quiet street in New England

Atypical or Unusual

Marshall & Swift categorizes reinforced concrete frame commercial structures as Class

B

Fee simple estate is defined as:

Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.

"The number of years that have elapsed since construction of an improvement was completed; also called historical or chronological age."

Actual age

Social forces might include such things as:

Age of residents Average family size Net population changes (in-migration versus out-migration)

The three main methods of estimating depreciation are:

Age-life method Modified age-life Breakdown method or observed condition

The concept of real estate value being inextricably linked to location comes to us from the economist

Alfred Marshall. In 1890 Marshall published Principles of Economics, in which he described "urban situation value," the main criteria for urban real estate value. His concepts were used as the basis for modern valuation approaches by appraisal organizations when they were formed in the 1930s.

Other income is defined as

All income generated in the operation of the property that is not derived directly from space rental.

Comparative - Unit Method - Market Derivation You find a comparable sale of a new house similar to the one you are appraising. It just sold for $320,000. You estimate the value of the site at $75,000 and the cost of the site improvements at $15,000. $320,000 - $75,000 -$15,000 = $230,000. The house has 2,550 square feet (SF) of gross living area (GLA). What is the unit cost of the structure?

All you have to do is divide $230,000 by 2,550 and the answer is $90.20. That is a market-derived comparative unit cost.

Example 3: The subject has a total value of $300,000 by the sales comparison approach. One neighborhood across town has home sales from $260,000 to $270,000, and recent lot sales average $63,000. Another nearby neighborhood has $340,000 home sales, and recent lot sales of $70,000. A builder in the area says his lots typically run about 25% of total value on new construction. What is the subject land's range of value, based on allocation?

Allocation Method Example Solution In the first neighborhood, let's choose an average of $265,000 for improved property sales. $63,000 divided by $265,000 = .24 or 24% In the second neighborhood let's divide $70,000 by $340,000 = .21 or 21% The indication from the builder is 25%. Let's convert those percentages to dollars. The subject total value is $300,000. $300,000 x .21 = $63,000$300,000 x .24 = $72,000$300,000 x .25 = $75,000 Therefore, the indicated value of the subject lot ranges from $63,000 to $75,000.

was used for a short period of time in the mid-50s, due to a shortage of copper during the Korean War.

Aluminum wiring It proved to be a fire hazard, in many instances, as the aluminum was subject to oxidation where it joined the electric boxes and receptacles.

Rent is defined as

An amount paid for the use of land, improvements or a capital good.

reconcile the value indications

An appraiser uses five comparable sales, and gets a differing indication of value from each one. What step of the sales comparison process involves considering these indications and arriving at an indication of value for the subject?

Tenancy in Severalty. The definition is simply

An estate in property held by one owner."

The cost approach is most applicable when:

A lack of market activity precludes the use of the sales comparison approach The property is not typically income-producing and the income capitalization approach is not pertinent The building improvements are new or relatively new The land value is well supported The improvements represent the highest and best use of the land as though vacant Estimating the use value of special purpose properties Building additions or renovations are being considered The appraisal requires that land and improvements be valued separately, such as for insurance or accounting purposes Land value is a significant portion of the overall value, as with agricultural properties

A mortgage is defined as:

A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions.

for family activities, such as a pool, patio, deck, play areas such as swing sets, horseshoe pits, etc. This is usually in the rear yard and may be fenced in or screened with shrubbery or trees

A private area

Ranking analysis

A qualitative analysis

Relative comparison analysis

A qualitative analysis

Cost Approach Equation

A very simplistic example would be as follows. A house cost $200,000 to build new. It is 10 years old and has sustained a total of 15% depreciation. It sits on a lot worth $40,000. What is its value by the cost approach? Cost New $200,000- Accrued Depreciation ($200,000 x .15) - $30,000 $170,000+ Site Value+ $ 40,000Indicated Value by Cost Approach $210,000

External obsolescence may be estimated by:

Analysis of market data Capitalization of income loss The first method is the most commonly employed in residential appraising.

was introduced around 1850 in America.

Balloon Framing

employs studs that run continuously from the sill to the rafter plate. The second story floor joists are hung and attached to the studs.

Balloon framing

gave good structural rigidity and was well suited for the plaster interior finishes of the day.

Balloon framing

The Fannie Mae Selling Guide goes on to state: "Rooms that are not included in the above-grade room count may add substantially to the value of a property-particularly when the quality of the finish is high.

Below-Grade Areas

The advantages of Low - E glass are:

Better heat insulation Reduced carbon dioxide into the atmosphere Reduced condensation on the interior

is the most detailed and comprehensive way to measure depreciation. It breaks down depreciation into its component parts of physical deterioration, functional obsolescence and external obsolescence and measures each individually.

Breakdown Method

Which of these is NOT a technique used for site valuation?

Breakdown method

Masonry construction is also popular, in many varieties:

Brick Stone Concrete block Poured concrete

Deferred maintenance is measured by the cost to cure. Examples would include:

Broken windows Peeling paint Missing shingles on a roof Inoperable air conditioning system

Direct costs include:

Building permits Materials used to construct buildings Labor used to construct buildings Equipment used in construction Security during construction Contractor's shack and temporary fencing Material storage facilities Installation of power line Contractor's overhead and profit Worker's compensation and liability insurance

A/C systems need to be properly sized for the building according to:

Building volume Window area Insulation R factors Appliance heat output Solar orientation Humidity levels in climate

BEA stands for

Bureau of Economic Analysis

There are five types of functional obsolescence:

Curable caused by a deficiency requiring an addition Curable caused by a deficiency requiring substitution or modernization Curable caused by a superadequacy Incurable caused by a deficiency Incurable caused by a superadequacy

"Items of physical deterioration or functional obsolescence that are economically feasible to cure. Curing an item of depreciation is economically feasible if the cost to cure is equal to or less than the anticipated increase in the value of the property that would result after curing the depreciation."

Curable depreciation

An adjustment for expenditures made immediately after purchase might also be required in situations where the anticipated expenditures were for:

Curing deferred maintenance Demolition and removal of any or all of the improvements Costs for filling and grading of the site Costs for attempting to change the zoning Costs for remediation of actual or perceived environmental contamination Costs for running utilities to a site Costs for gaining access to a site, such as curb cuts

Changes in a real estate market may be:

Cyclical - rising and falling with the fates of the local industries (aerospace, defense, etc.) that go through big hiring phases followed by layoffs One-time only - related to an event, either good or bad, which is unlikely to reoccur Seasonal - in a resort town, all real estate purchases might occur within a narrow three-month window of opportunity Exponential - continuously increasing at a rapid rate, such as what was experienced in the early to mid-2000s in the fast-growing parts of California, Nevada or Florida

Wood foundations are more common in

Canada

the owner may have budgeted for capital improvements such as a new roof, furnaces, or appliances, however these items would be included in expenses under reserves for replacement, and would not be included as separate operating expense items.

Capital improvements

To appraise a non-complex 6-unit property for a federally-related transaction, you need to be a _______________

Certified General Appraiser

Much of what they have is oriented towards tourism and touting their community as a destination. But you will also find a lot of hard facts about population, job opportunities, recreation, school systems, and the like. Chambers of commerce are always desirous of attracting new people and businesses to settle permanently.

Chambers of Commerce

cannot be ignored as prime data sources. Their ostensible purpose is to provide information about a locale. They may be a chamber of commerce for a town, village, county, region, or state.

Chambers of Commerce

Here is a list of some factors that can help you analyze changes in market conditions:

Changes in the area's demographics Changes in typical exposure time on the market Foreclosure rates in the area Increases or decreases in residential rents Instances of seller financing Nearby development New construction available for sale Quantity of offers received by sellers Relationships between asking prices and closing prices Terms of available financing Trends in listing prices Volume of properties available for sale Zoning changes

Which of these is the best example of a special purpose property?

Church

Types of Commercial Construction

Class A - fireproofed steel frame Class B - reinforced concrete frame Class C - masonry or reinforced concrete Class D - wood or steel studs Class S - pre-engineered structural; members

the party or parties (i.e., individual, group, or entity) who engage, by employment or contract, an appraiser by employment or contract in a specific assignment, whether directly or through an agent

Client

______________ is "the process by which a value indication is derived in the sales comparison approach".

Comparative analysis

There are three traditional cost estimating methods. They vary in degree of difficulty and accuracy. They include the following:

Comparative-unit method Unit-in-place method Quantity survey method

(Be familiar with, don't memorize) Effective Age vs. Actual Age For example, an entry could be made such as "A-30, E-20" to indicate that the actual age is 30 years and the effective age is 20 years

Comparing properties with actual ages of 80 years and 140 years could cause a client or intended user to ask why homes of more similar age were not used as comparables. Including estimates of their respective effective ages should narrow the range considerably.

a list of popular roof coverings arranged in order of their costs - from low to high.

Composition roll roofing Composition shingle Built-up rock Metal Wood shakes or shingles Cement fiber shingle Clay tile Slate Copper

are laid one block at a time. This type of wall takes a little more time and skilled labor

Concrete Block Walls

There are some specialized forms of ownership in which you may own something in fee simple along with shared rights of certain common properties. The most common types you may encounter are:

Condominiums Cooperatives PUDs Timeshares

Where does this cost data come from? Cost data may be obtained from:

Construction contracts for similar properties Appraiser's files Local building contractors Professional cost estimators Cost estimating services

_____________ rent is defined as "the actual rental income specified in a lease."

Contract

The addenda (plural of addendum) includes a collection of attachments at the end of an appraisal report where you put all the supporting materials used to arrive at your value conclusion. These might include:

Contracts Covenant documents Homeowner association documents Deeds Surveys Title reports Building sketches and/or floor plans (drawn to scale) Leases Location maps showing the subject and comparables Neighborhood plans Subject photos Comparable photos Plat maps

A set of procedures through which a value indication is derived for the fee simple estate by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive or profit, deducting depreciation from the total cost, and adding the estimated land value. Adjustments may then be made to the indicated value of the fee simple estate in the subject property to reflect the value of the property interest being appraised.

Cost Approach

you can virtually always do ayou can virtually always do a

Cost Approach

Separate site valuations may be required in:

Cost approach Assessments and taxation Condemnation appraisals Certain income capitalization methods Highest and best use analysis

Your research shows the land is worth $65,000 and you project the site improvements will cost $12,000. When completed, it will be brand new with no depreciation.

Cost new - Depreciation + Land Value + Site Improvements = Value by Cost Approach $223,245 - 0 + $65,000 + $12,000 = $300,245, rounded to $300,000.

A site has 4.6 acres. You analyze the market and determine it could have four possible uses that would be legally permissible, physically possible and financially feasible. Which one would be the highest and best use of the site? A. Used as a site for a large single-unit house it would be worth $175,000. B. Used as a site for two duplexes, it would be worth $45,000 per unit. C. Used as a site for a small medical center, it would be worth $40,000 per acre. D. Used as a site for an office complex, it would be worth $25 per SF of rentable space. It could support two buildings that each measure 45' x 85'.

D Problem 1 Solution A. One unit = $175,000 B. 4 units X $45,000 = $180,000 C. 4.6 acres x $40,000 = $184,000 D. 45 x 85 x 2 buildings =7,650 SF x $25 = $191,250 Therefore option D (office complex) is the highest and best use. It produces the highest return to the site.

A property was put on the market on January 10th, and an agreement of sale was signed on February 8th. Due to issues with the home inspection, the sale did not close until July 15th. An appraiser is using this property as a comparable sale on an appraisal with an effective date of October 19th. The appraiser's market conditions adjustment should reflect the change in market conditions between

February 8th and October 19th

"Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat."

Fee Simple Interest

Obviously, staying within the market area is preferable when searching for comparable properties. You might have to make exceptions, however, when:

Few sales have occurred in the neighborhood The subject is in a rural area The subject is unusual (a geodesic dome, or log cabin in a neighborhood of traditional ranches, for example

Which of these is the most recent type of siding?

Fiber cement

You have to handle it differently, because of its composition. You cut it with a carbide tipped saw (with dust catcher) or shears and fasten it with hand or pneumatic driven non-corrosive nails or screws.

Fiber-Cement Siding

mortgage and interest payments are not necessary for the continued operation of the property. Even though the current owner may have a mortgage, another owner may not. Mortgage payments and financing costs are not to be included in operating expenses.

Financing and debt service

horizontal structural members, placed on edge, which carry the house loads to girders and sills.

Floor Joists

They have greater strength and allow long clear spans without girders or posts. The open web design allows easy installation of plumbing and wiring.

Floor Trusses

Before completing the sales comparison approach we need to collect:

General data about trends affecting the neighborhood, city, region and nation Specific data about the subject and its improvements Comparables to be used for valuation

According to the EPA, ___________ systems are the "most energy efficient, environmentally clean, and cost effective space conditioning systems available."

GeoExchange systems

usually employ high density polyethylene pipe

Geothermal Heat Pumps

are the main support beams and are set in pockets that were formed in the top of the end walls of the foundation.

Girders

GPS stands for

Global Positioning System

Sources of General Data

Government Trade associations Utility companies School districts Universities Departments of transportation Planning boards Multiple listing services Chambers of commerce

There is a formula for calculating NOI. We have to follow a standardized procedure and take it one step at a time. Essentially, we have to estimate the amount of income the property could potentially generate, then subtract vacancy and collection loss, then subtract operating expenses, to arrive at an NOI.

Gross Annual Rental (Potential Gross Income, or PGI) + Other Income- Vacancy/Credit Loss (V&C)= Effective Gross Income (EGI)- Operating Expenses (TOE)= Net Operating Income (NOI)

"Total floor area of a building, excluding unenclosed areas, measured from the exterior of the walls of the above grade area. This includes mezzanines and basements if and when typically included in the market area of the type of property involved."

Gross Building Area

"Total area of finished, above-grade residential space; calculated by measuring the outside perimeter of the structure and includes only finished, habitable, above-grade living space. (Finished basements and attic areas are not generally included in total gross living area. Local practices, however, may differ)."

Gross Living Area

"A method of estimating land value; applied by capitalizing ground rent at a market-derived rate. This method is useful when comparable rents, rates, and factors can be developed from an analysis of sales of leased land or other market sources."

Ground Rent Capitalization Method

Market areas typically go through four distinct phases of their life cycle:

Growth - Lots of new construction and development activity, speedy sales, increasing prices, a "seller's market" Stability - Slowing down of new construction, prices remain steady and high, excitement is cooling Decline - Prices start to fall, new construction halts, more existing homes flood the market, creating a "buyer's market" Revitalization - Prices have bottomed, sales stagnate, and hopefully the area receives new interest and renewal

Nonconventional Mortgage (2 examples)

Guaranteed mortgage Insured mortgage

The Manufactured Home Construction and Safety Standards is also known as the

HUD Code

Wood siding, both shingles and clapboard, was the standard in this country from the 1600s through the 1800s. In the last 50 years or so, there have been many innovations in lower maintenance siding materials. Many have the color baked in, and textures are available to resemble wood. As before, a list follows with sidings in approximate order of cost.

Hardboard Wood clapboard Aluminum Vinyl Stucco Wood shingles EIFS Brick Stone

in masonry, the stones or bricks that are laid cross ways on a wall providing support to the horizontal stretcher bricks. The ends of the header bricks are visible in the wall. A beam providing lateral support to wall joists around an opening such as a window or finishing roof rafters.

Header

are built over the openings to spread the load out to the sides and prevent the windows and doors from getting crushed or sticking.

Headers

One of the main categories of operating expenses for any property is the utility expense. Depending on the property, this could include charges for

Heating Cooling Electricity Gas Water heating Water Sewer Trash collection

HVAC

Heating, Ventilation and Air Conditioning

the use(s) of an appraiser's reported appraisal or appraisal review assignment results, as identified by the appraiser based on communication with the client at the time of the assignment"1

INTENDED USE:

the client and any other party as identified, by name or type, as users of the appraisal or appraisal review report by the appraiser, based on communication with the client at the time of the assignment."2

INTENDED USER

Different texts identify various sub-steps in differing ways, but they generally include:

Identification and location of the real estate Identification of the property rights Definition of value Purpose and intended use of the appraisal Effective date of the opinion of value Any special limiting conditions

Questions for School Districts

If they project 7,500 new residents in the next five years and 12% of them will be school age children, they know they will need more space. But it's not that easy. How many of them will be in the elementary schools? How many in junior highs and how many in the high schools? What are trends in birth rates? How many children are expected to start kindergarten over the next five years? These kinds of figures will impact the infrastructure of the schools. Do they need to build a new elementary school, and where should it be? Will they be looking to close down or consolidate certain facilities?

"Expenditures or allowances for items other than labor and materials that are necessary for construction, but are not typically part of the construction contract. Indirect costs may include administrative costs; professional fees; financing costs and the interest paid on construction loans; taxes and the builder's or developer's all-risk insurance during construction; and marketing, sales, and lease-up costs incurred to achieve occupancy or sale. Also called soft costs."

Indirect Costs

InterFlood https://www.alamode.com/appraiser/interflood?purchaseOptions=1

InterFlood https://www.alamode.com/appraiser/interflood?purchaseOptions=1

The foundation system serves three purposes

It distributes the weight of the building over the ground anchors the building to the ground, and protects the wood in the house structure from decay and insect attack

are laid perpendicular to the girders. They may rest on top of, or be at the same height as, the girders

Joists

"A method of estimating land value in which the net operating income attributable to the land is isolated and capitalized to produce an indication of the land's contribution to the total property."

Land Residual Method

Partial Interests - Other Forms of Ownership Besides the forms of individual ownership that we previously mentioned, real property can be owned by various legal entities, including:

Land trusts Partnerships Corporations Syndications

A parcel is valued at $160,000 as a large single-family homesite with no further development costs required. Zoning allows it to be subdivided into four lots, and it is estimated that each lot could sell for $50,000. Site development costs (sewer, grading, road, etc.) would cost $60,000. What is the highest and best use?

Leave it alone! Problem 2 Solution $50,000 x 4 = $200,000$200,000 - $60,000 = $140,000 value of property as subdivided into 4 lots $160,000 = value as single parcel Leave it alone! It is worth more as it stands as a single parcel. Not every property is ripe for development.

A parcel is valued at $450,000 as a single entity. Zoning allows it to be subdivided into 8 lots and it is estimated that each lot could sell for $60,000. Site development costs (sewer, grading, road, etc.) would cost $50,000. What is the highest and best use? Leave it as one parcel Subdivide it There is not enough information Both are highest and best use - both are equally profitable

Leave it as one parcel

there are many provisions that may appear in a lease that would have an impact on the overall value and desirability of one property as compared to another. These particular provisions might include

Length of term Amount of security deposit Apportionment of expenses Penalties for breaking the lease Penalties for late payments Ability to sub-let Options to renew Rental concessions Inclusion of furnishings

Let's assume that a purchaser has agreed to buy a property for $125,000 and will put down $25,000. The current interest rate for mortgages is 10% and most loans are available for a 30-year period. The seller has agreed to provide a 30-year mortgage at only 8% interest. What is the cash equivalent value of the sale due to the favorable financing?

Let's use the HP12c calculator again to calculate the mortgage payments. We enter in the known information and then solve for the payment (PMT). We will use a shortcut (g) to calculate the monthly payments. The g shortcut divides the interest rate you enter by 12 and multiplies the time period by 12. f CLEAR FIN 30 g n 10 g i 100000 CHS PV PMT 877.57 The monthly payment for a $100,000 loan at 10% interest would be $877.57. f CLEAR FIN 30 g n 8 g i 100000 CHS PV PMT 733.76 The monthly payment for a $100,000 loan at 8% interest would be $733.76. The buyer will be saving $143.80 each and every month. Wow - that is a total of $143.81 X 360 months, or $51,772

There are many kinds of partial interests. Some are specific forms of ownership that are created by special situations. These would include:

Life interests Leased fee interests Leasehold interests

Example: Your subject is a three-bedroom, two-bath ranch in good condition. You find a comparable that is the same size, in similar condition, which sold six months ago for $216,000. You know that house values have gone up in the past year, but you're not sure by what percentage. How much should you adjust the sale price to arrive at your opinion of value of the subject?

Like anything else, this can be quantified with a paired data analysis. If you can find two comparables that are identical except that they sold in different time frames, you can reasonably conclude that the difference in sale prices is attributable to the change in market conditions between the two dates. Or you may find a very recent sale and when you research it, you find that it had also previously sold several months ago, and no improvements have been made to the property since it was purchased. In this case, you can compare the recent sale price to the sale price several months ago, and extract an adjustment for market conditions.

a type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the value definition of the term that is identified by the appraiser as applicable in an appraisal. Comment: Appraisers are cautioned to identify the exact definition of market value, and its authority, applicable in each appraisal completed for the purpose of market value."1

MARKET VALUE (Generic View)

This category applies to landlord expenses for upkeep of the property, both interior and exterior, and includes such items as roof repair, parking, sidewalk repair, window repair, electrical or plumbing repair, and maintenance of grounds or a swimming pool. Here also, there should be sufficient funds budgeted for routine upkeep as well as to account for emergency repairs.

Maintenance and Repair

"A factory-built house manufactured under the Federal Manufactured Home Construction and Safety Standards Act of 1976, commonly known as the HUD Code."

Manufactured Home

Which of the following are the two major cost estimating services?

Marshall & Swift and RS Means Company, Inc.

The major cost estimating services are:

Marshall & Swift www.marshallswift.com RS Means Company, Inc. www.rsmeans.com

1. The application of computer technology and statistical techniques to the solution of appraisal problems; used in assessment administration to derive value indications in the cost and sales comparison approaches and to perform other functions, e.g., assessment ratio analysis. 2. A system of appraising property, usually only certain types of real property, that incorporates statistical analyses such as multiple regression analysis and adaptive estimation procedure to assist the appraiser in estimating value."

Mass Appraisals

Support for an allocation ratio may be derived from:

Mass appraisals Observed patterns Consultations with developers on their costs An appraiser's files Published studies

Economic factors comprise a large category that could include:

Median wages Tax rates Unemployment rates Interest rates Construction costs Land values

If an expense does not fit any specific category, it may be listed as miscellaneous. We always need a catch-all category for the oddball things that come up.

Miscellaneous

"A factory-built house built in compliance with a building code other than the HUD Code. This usually means that the home is constructed to the standards of the state or local building code used by the governmental unit where the house is to be located. Note that the California Factory-Built Housing Program uses the term factory-built housing (FBH) in place of the term modular home."

Modular Home

What kinds of situations might cause duress? What might cause a transaction to be something other than arm's-length? Results may vary

Non-Arm's-Length This list is certainly not all inclusive, but some of the causes of duress that could result in a transaction that would not be considered arm's-length include: Job Transfer Death of a spouse or close relative Sale to a relative Sale to a friend or business partner Sale by an unknowledgeable buyer or seller Desire to buy and control an adjoining property Desire to purchase a property for an assemblage Sale prior to impending foreclosure Sale under threat of condemnation Sale prior to proposed zoning change Sale influenced by tax considerations (it may have been part of a tax-free exchange)

Site Preparation - Legal Considerations Legal considerations that need to be accomplished include:

Obtain a building permit Check applicable codes Building codes Fire codes Check environmental regulations Wetlands Protected areas Hazard areas Check flood plain Curb cut permit or driveway permit (if needed)

Rigid plastic pipe includes

PVC and CPVC. PVC is approved only for cold water but CPVC can be used to carry hot or cold water.

Paired data analysis is also known as

Paired Sales Analysis

Moisture in a house is produced by many things:

People breathing - an average person breathing puts 2.8 pounds of moisture in the air each day Plants Showers - ½ pound of moisture in the air from each shower Hot tubs, pools Dishwashers Washers and dryers Cooking - 4.7 pounds of moisture per day in the average home

sources from which you might obtain specific data.

Personal inspection Homeowner Deed Lease(s) Assessment record Tax bill Survey Site plan Title document Homeowners Association declaration and bylaws MLS listing Sales agreement Previous appraisal Home inspection report Blueprints Sales brochure Condominium documents Zoning documents Master plan Building code Environmental assessment Building cost estimate

"The wear and tear that begins when a building is completed and placed into service."

Physical deterioration Physical deterioration is real and tangible

There are three different kinds of depreciation:

Physical deterioration Functional obsolescence External obsolescence

"1. An estimate of how old a building or improvement will be when it is worn out. 2. The total period a building lasts or is expected to last as opposed to its economic life."

Physical life

use suction to lift the water

Piston pumps

they are involved in planning

Planning Agencies

Balloon Framing is rarely used today, it has been replaced by

Platform Framing

pipe is similar but has had poor acceptance with many codes due to earlier fitting problems.

Polybutylene

Traditionally, appraisers have rated location as:

Poor Fair Average Good Very Good Excellent

When appraising land or sites, the most common units of comparison are:

Price per square foot Price per acre Price per front foot Price per lot Price per buildable unit Price per animal unit

"real property value is created and sustained when the characteristics of a property conform to the demands of its market."

Principle of Conformity

In the first two steps of the process, we gather and verify sales data. Then, in the third step, we need to select relevant units of comparison. These will vary according to the type of property that we are appraising.

Property Type Typical Units of Comparison One-Unit Residential Total Property Price Price per SF of GLA 2-4 Unit Residential Price per SF of GBA Price per Unit Price per Room Price per Bedroom Offices Price per SF of GBA Price per SF of Gross Leasable Area Price per SF of Net Leasable Area Vacant Land Price per SF Price per Acre Price per Front Foot Price per Buildable Unit Price per Animal Unit

is part of the necessary research when obtaining specific data about a property

Property zoning (Zoning Maps)

Environmental forces include

Public access Convenience to employment Convenience to shopping Presence of hazards Climate Topography

oday's environmentally-friendly refrigerants are manufactured under the brand names

Puron, Genetron AZ-20, and Suva 410A.

The objective of an assignment—e.g., in an appraisal assignment, to develop an opinion of the defined value of a specified interest in real estate.

Purpose of an Assignment

Quality ratings are assigned to the subject on a scale from

Q1 (best) to Q6 (worst).

(RO = IO /VO)." The subscript (little "o") is used to denote "overall." So, we would read the last equation as Overall Rate = Overall Income/Overall Value. In advanced income courses, more of these subscripts are used to identify other rates such as:

RE Equity Rate Rm Mortgage Capitalization Rate (or Mortgage Constant) RL Land Capitalization Rate RB Building Capitalization Rate RLF Leased Fee Capitalization Rate RLH Leasehold Capitalization Rate (You don't need to memorize these rates for this course; they are covered in more advanced income courses.)

From the 1950s until today, we have seen five basic housing types - based on the number of stories. They are the

Ranch - 1 story Cape Cod - 1-½ story Two-story Split level - multi levels Split entry (sometimes called a split foyer, bi-level, or raised ranch) - one story with finished basement (Note: Marshall & Swift refers to this type as a "two story bi-level")

the most common statistical procedures that we might employ.

Range Mean Median Mode

It is not as precise as quantitative analysis, but can be worthwhile in your analysis

Ranking analysis

may be used in a preliminary estimate of value.

Ranking analysis

s a variant of relative comparison analysis, in which the comparable sales are ranked in ascending or descending order. Then the relative position of the subject is determined within the array

Ranking analysis

MLS systems store and maintain their data primarily for the use of:

Real estate agents and brokers

The "elements of comparison" detailed in the grid are features that support a sales price, and typically explain variances in prices. Although they can be collected in any order, the following 10 basic elements of comparison are the minimum suggested by the Appraisal Institute in their textbook; The Appraisal of Real Estate, 14th Edition, Chicago, IL (2013):

Real property rights being conveyed (e.g., fee simple, easements, partial interests, etc.) Financing terms (e.g., favorable or not) Conditions of sale (i.e., arm's-length or otherwise) Expenditures made immediately after purchase (i.e., things not included in age or condition adjustments that were necessary) Market conditions (i.e., time or date of sale) Location (e.g., neighborhood, waterfront, adjacent to school) Physical characteristics (e.g., quality, condition, size, special features) Economic characteristics (e.g., factors that affect property income) Legal characteristics (e.g., zoning) Non-realty components of value (e.g., personal property or intangible property inclusions)

When collecting data, the appraiser looks for information on:

Recent sales Listings of comparables Contracted or pending sales Offers / refusals / options

is a less precise application of the sales comparison method, but it reflects the imperfect nature of real estate markets. Sometimes, it is all we have to go on.

Relative comparison analysis

"The estimated period over which existing improvements are expected to contribute economically to a property; an estimate of the number of years remaining in the economic life of a structure or structural components as of the effective date of the appraisal; used in the economic age-life method of estimating depreciation."

Remaining economic life That's pretty easy to calculate, once we make other judgments. If a total economic life is estimated to be 60 years and the current effective age is estimated to be 20 years, then by simple subtraction the remaining economic life is 40 years. (60 - 20 = 40)

Which term is defined as: "An amount paid for the use of land, improvements or a capital good"?

Rent

When considering purchase of a single unit investment property, it is important to investigate the market area including such items as:

Rent levels Vacancy rates Do the tenants pay most or all the utilities? Any proposed land use changes? Any proposed zoning changes? Number of other homes purchased for investment Are these rental purchases interim uses? Do they signal a transition of use in the market area? Are the rentals on a month-to-month basis? Are long term leases (more than 1 year) common? Availability of financing Will lenders charge higher interest and provide less desirable terms for investment property purchase?

This expense allows for the replacement of building components that may still have a remaining economic life, but will need replacement prior to the end of the remaining economic life of the building.

Replacement Allowance -

"The estimated cost to construct, at current prices as of a specific date, a substitute for a building or other improvements, using modern materials and current standards, design, and layout."

Replacement Cost

"The estimated cost to construct, at current prices as of the effective appraisal date, a building with utility equivalent to the building being appraised, using modern materials and current standards, design and layout."

Replacement Cost

"The estimated cost to construct, at current prices as of the effective date of the appraisal, an exact duplicate or replica of the building being appraised, using the same materials, construction standards, design, layout, and quality of workmanship and embodying all the deficiencies, superadequacies, and obsolescences of the subject building."

Reproduction Cost

"The estimated cost to construct, at current prices as of the effective date of the appraisal, an exact duplicate or replica of the building being appraised, using the same materials, construction standards, design, layout, and quality of workmanship and embodying all the deficiencies, superadequacies, and obsolescence of the subject building."

Reproduction cost

the basic formula for the cost approach:

Reproduction or Replacement Cost New - Accrued Depreciation + Site Value = Property Value

Gross Living Area (GLA)

Residential space that is finished, livable and above grade. Garages, finished basements and storage areas usually do not count.

The final reconciliation process consists of various items:

Review Appropriateness Consistency Accuracy Relevance Quality of data Quantity of data

Example: A subject property has a net operating income (NOI) of $80,000. A comparable sale sold for $525,000, and it had a verified NOI of $65,000. The capitalization rate (Ro) is extracted from the comparable sale as follows:

Ro = I / V Ro = $65,000 / $525,000 Ro = .1238 (or 12.38%) Once we have the capitalization rate (Ro), we can then apply it to the subject to indicate a value. The indicated value of the subject property based on a Ro of 12.38% is calculated as follows: V = I / R V = $80,000 / 0.1238 (or 12.38%) V = $646,203 (or $646,000 rounded)

Site is land that is ready to be developed. To bring it to that state may require adding items such as:

Roads Curbs and gutters Water Sewage disposal Grading Fill Drainage Site plans Site approval Zoning changes Permits

Since the 1960s, the most popular wires have been plastic-coated non-metallic wire (known as

Romex, which is actually a brand name). These are copper wires encased in plastic sheathing, which is flexible and gives the wires adequate protection from contact with conductors or other wires. other wires.

Replacement Allowance - Items that should be considered include the following:

Roof Exterior paved areas (sidewalks, driveways, parking) Exterior painting/siding Carpeting Mechanicals (heating and cooling systems, hot water tanks) Kitchen equipment (stoves, refrigerators)

has the basic function of keeping out the rain and snow. It can also serve aesthetic purposes and adds texture and color to a house design.

Roof Covering

Short-lived items may still have some life at the time of the appraisal and would not need to be replaced immediately. Examples would include:

Roof covering Water heaters Carpeting Furnaces

resist the spreading stresses and transfer all the weight to the outside walls.

Roof truss systems

There are six ways to develop an opinion of site or land value.

SALES COMPARISON - Comparison with recent sales EXTRACTION - Subtracts estimated improvement value to arrive at land value ALLOCATION - Uses land-to-value ratios based on improved sale comparables SUBDIVISION DEVELOPMENT - Subtracts estimated development costs from discounted sale proceeds LAND RESIDUAL - Divides up and capitalizes the income between land and improvements GROUND RENT CAPITALIZATION - Capitalizes income from leased land

Adjustments The type of adjustment also matters. Take a close look at what you did in the sales grid. When analyzing comparable sales, pay more attention to adjustments made in the upper part of the grid, i.e., the adjustments that are above the room count line. The items in the grid below the room count line are pretty straightforward and relatively easy to adjust for differences. One sale has a garage and the subject doesn't, or the subject has a deck and the comparable has a screened porch. The items in the upper part of the grid are more subjective, intangible and harder to quantify. For example:

Sale or financing concessions Date of sale/time Location View Design/style Quality Condition If you had to make large and/or numerous adjustments in those areas, your value conclusion may be suspect. It also means that you owe it to the client to make a detailed explanation of those adjustments.

Consider local preferences when making adjustments here; maybe all homes in your area have screened-in porches or decks. Features to include are:

Deck Gazebo Indoor or outdoor fireplace Patio Porch Screened-in patio Enclosed porch Shed or other outbuildings Pool Tennis court Barn Boathouse Dock Extraordinary landscaping Fence Greenhouse Spa/hot tub

Physical Deterioration It can be divided into three categories:

Deferred maintenance Short-lived items Long-lived items

The steps in the valuation process (sometimes also called the appraisal process) are:

Define the problem Determine scope of work Gather, record, and verify the data Determine the highest and best use Estimate the land value Estimate value by each of the three approaches (if applicable) Reconcile the estimated values into the final opinion of value Report the final opinion of value

Which of these is the best source for traffic count information?

Department of Transportation

You have several recent good comparable sales of improved sales and need to determine the land value of your subject so you apply that established 30% ratio of land value to the comparable sales then reconcile those land values to determine the land value of the subject of your appraisal. Below are the improved sales. Sale 1 - Site size: 12,000 sf. $230,000 X 30% = $69,000 = $5.75 sf Sale 2 - Site size: 11,500 sf. $218,000 X 30% = $65,400 = $5.69 sf Sale 3 - Site size: 12,500 sf. $242,000 X 30% = $72,600 = $5.81 sf Sale 4 - Site size: 9,000 sf. $187,000 X 30% = $56,100 = $6.23 sf Your subject property site size is 12,000 sf. By the allocation method, what is your opinion of the value of the subject site?

Depending of the variables you consider in your reconciliation process, the site value would be somewhere around $5.80 to $5.90 per square foot, or $69,600 to $70,800. In the real world, the hard part is obtaining that 30% ratio.

In appraising, a loss in property value from any cause; the difference between the cost of an improvement on the effective date of the appraisal and the market value of the improvement on the same date. In accounting, an allocation of the original cost of an asset, amortizing the cost of the asset's life; calculated using a variety of standard techniques."

Depreciation

accountants use depreciation differently than appraisers do. As we covered in a previous chapter, appraisers use depreciation in the cost approach. Accountants use depreciation to recover the cost of the building improvements over time. This is a "paper" expense, and is not necessary for the continued operation of the property. As such, it must not be included as an operating expense.

Depreciation

In the Fannie Mae Selling Guide Section B4-1.1-01, General Information on Appraisal Requirements, it lists the following as unacceptable appraisal practices:

Development of and/or reporting an opinion of market value that is not supportable by market data or is misleading Selection and use of inappropriate comparable sales Failure to use comparable sales that are the most locationally and physically similar to the subject property Use of adjustments to comparable sales that do not reflect market reaction to the differences between the subject property and the comparable sales Not supporting adjustments in the sales comparison approach Failure to make adjustments when they are clearly indicated

Appropriateness The final weighting in our value judgments will hinge somewhat on the appropriateness of our methodology. We need to ask ourselves:

Did we use the right techniques for that type of property? Did we use techniques that mimic the perceptions of the marketplace? Did we use techniques that our peers would use? Did we employ those techniques properly? Did we employ the proper methods of analyzing the data collected? If there is an active market, did we employ a sales comparison approach? If the property is fairly new and of standard construction, did we employ a cost approach? If there is an active rental market, did we utilize an income capitalization approach?

"Expenditures for the labor and materials used in the construction of improvements; also called hard costs."

Direct Costs

Whatever the source of the cost data, all cost estimates to be used in the cost approach need to include three basic ingredients:

Direct costs Indirect costs Entrepreneurial incentive

Entrepreneurial incentive/profit is conceptually sound, but in reality may be received only when the property is ultimately sold, or never. However, it needs to be included along with the direct and indirect costs. Depending on local custom, it may be estimated as a percentage of:

Direct costs only Direct and indirect costs Direct and indirect costs plus site value The value of the completed project

Red Flags These suspicious types of sales might include:

Distressed sales (e.g., "short sales") Foreclosure sales Auctions FHA sales VA sale This does not mean that these types of sales should not be used, particularly FHA and VA sales. In some markets, FHA and VA sales make up the vast majority of sales, and it would be difficult - if not impossible - to omit them from consideration. What we are saying is that these sales often involve sale concessions made by the seller, and they warrant further research and verification when considering them for use as comparable sales.

A partial interest is defined as:

Divided or undivided rights in real estate that represent less than the whole, i.e., a fractional interest such as a tenancy in common, easement, or life interest.

There are several additional concerns that come into play when evaluating income property comparables. They should be comparable in terms of

Division of utility expenses between the landlord and tenant Ratio of expenses to income Lease terms

Reconciliation and Summary of Sales Comparison Approach As you consider the data you have used in the sales comparison grid, ask yourself three questions:

Do I have a sufficient quantity of comparables to justify a value conclusion? (With unusual properties, it's not uncommon to need six or more!) Is my data of reliable quality? (Does it reflect standardization of measurements and reputable sources of data?) Is each comparable appropriate? (Does each reflect an arm's-length sale that occurred on the open market?)

Consistency Please check your report for consistency. To be effective, an appraisal must hang together. It must exhibit internal consistency.

Do the trends in supply/demand, values and marketing times correspond with the economic conditions that are described in the neighborhood section? Do all the data and conclusions used throughout the report reflect the same highest and best use? Does the same GLA appear in all sections of the report? Do the dimensions in the sketch enable one to come to the same conclusion about the GLA? If there is finished or partly finished below grade space, is it treated logically and consistently throughout the report and when comparing the comparable properties? Does the description of the interior and exterior condition correlate with the condition as described in the sales grid and with the estimate of depreciation in the cost approach (if developed)? Are actual and/or effective ages applied consistently? Do the improvements described and valued in the sales grid and cost approach coincide with the improvements as shown in the sketch and in the photographs? Does the amount of depreciation in the cost approach coincide with estimates of effective age and remaining economic life reported?

Explain in the report that you couldn't find sales of properties that were very similar to the subject in all aspects, because of its unusual style, size, age, lot size, or whatever. However, you were able to find one sale that was very similar in style, another that was the same size and another that was about the same age, etc., and you are confident that you have utilized the most similar sales that were available.

Do you have enough land sales to accurately estimate the site value? Do you have enough rental comparables to be able to accurately estimate the market rent of the subject? Do you have enough sales to formulate a GRM? Have there been enough recent sales to come to a conclusion of the local market trends? Have there been enough recent sales to enable you to determine if there is a need to make an adjustment for market conditions?

Radiant heat advantages are:

Doesn't dry out the air No air or dust blown around No convectors or registers to complicate furniture arrangement Less heat loss to outside air infiltration Can reduce the heat load in a well insulated house by 25% to 35% over conventional convective systems

Two dates are essential to an appraisal report. Standards Rules 2-2(a)(vi) and 2-2(b)(vi) and 8-2(a)(vi) and 8-2(b)(vi) require that each appraisal report specify the effective date of the appraisal and the date of the report. The date of the report indicates the perspective from which the appraiser is examining the market. The effective date of the appraisal establishes the context for the value opinion. Three categories of effective dates - retrospective, current, or prospective - may be used, according to the intended use of the appraisal assignment."

Effective Date of the Value Opinion

"The age of property that is based on the amount of observed deterioration and obsolescence it has sustained, which may be different from its chronological age."

Effective age

When calculating operating expenses, the management fee is usually based on a percentage of:

Effective gross income

are simply reversible air conditioners. They can heat in the winter and cool in the summer. They use a refrigerant to pick up and discharge heat.

Electric Heat Pumps

"The amount an entrepreneur expects to receive for his or her contribution to a project. Entrepreneurial incentive may be distinguished from entrepreneurial profit (often called developer's profit) in that it is the expectation of future profit as opposed to the profit actually earned on a development or improvement. The amount of entrepreneurial incentive required for a project represents the economic reward sufficient to motivate an entrepreneur to accept the risk of the project and to invest the time and money necessary in seeing the project through to completion."

Entrepreneurial Incentive

"A market-derived figure that represents the amount an entrepreneur receives for his or her contribution to a project and risk; the difference between the total cost of a property (cost of development) and its market value (property value after completion), which represents the entrepreneur's compensation for the risk and expertise associated with development. An entrepreneur is motivated by the prospect of future value enhancement (i.e., the entrepreneurial incentive). An entrepreneur who successfully creates value through new development, expansion, renovation, or an innovative change of use is rewarded by entrepreneurial profit. Entrepreneurs may also fail and suffer losses."

Entrepreneurial profit

"The amount an entrepreneur expects to receive." It is the motive for taking on a project. There will be some investment involved and a certain risk. This incentive is what makes it all worthwhile.

Entrepreneurial profit

Cost index trending is Estimating current cost based on the original cost extended to the effective date Estimating the reproduction cost of an improvement based on an extraction from a new property sale Estimating the cost of an improvement based on rent Estimating the reproduction cost of an improvement based on statistical inference from grouped data of sales of existing properties

Example: The contract cost for constructing a house in January 1996 was $324,500. The index for January 1996 was 212.6 and the current index is 306.4. 306.4 / 212.6 = 1.441. This converts to a percentage as 144.1%. Subtracting the 100% from the 144.1%, leaves 44.1% increase. This means the costs have increased 44.1%. $324,500 X 1.441 = $467,605 End of Page

It is possible to derive unit costs from the market. We can just follow these steps:

Select sales of recently constructed buildings that are similar to the subject property and represent the highest and best use of the site Subtract the value of the site and site improvements from the sales price to arrive at the cost new of the improvements (including entrepreneurial incentive) Make adjustments for physical differences between the subject and the sale properties Divide the adjusted cost new by the desired unit of area or volume to arrive at the cost per unit Adjust the unit cost for market conditions, if necessary Apply the unit costs to the subject property

Many residential appraisals involve fee simple ownership, meaning that the current property owner holds all rights of ownership or the "full bundle" of rights. These include the rights to:

Sell an interest Lease an interest Exclusively occupy the property Mortgage an interest Give an interest away (through a will or trust) The right to do any or none of the above

Example: Here's how you might adjust in the case of a home that cost $200,000. The first mortgage was $150,000, and the seller paid 1.5 points:

Selling price of home $200,000 Less value of points (0.015 x $150,000) - 2,250 Adjusted selling price $197,750 Caution: Be very careful when making cash equivalency determinations. There is a lot of discussion in the real estate industry (especially between secondary market participants and appraisers) about how cash equivalency adjustments should be made. Basically, the primary requirement is that the adjustment for favorable financing should be based on comparison to sales unaffected by favorable financing or other seller-paid concessions.

The covering over the outside studs (or rafters) of a roof. May be wallboard, plywood,

Sheathing

is applied to: Strengthen the structure Provide a nailing surface for siding Combat air infiltration Form a moisture barrier Provide some insulation

Sheathing

"1. A building component with an expected remaining economic life that is shorter than the remaining economic life of the entire structure. 2. An item that will probably be replaced one or more times during the life of the improvements, such as painting or flooring."

Short-Lived Items

Quality of Data You need to really feel comfortable with the data you gathered. It needs to be confirmed or verified. Again, ask yourself some questions, and give honest answers.

Should I really go back and check some other data sources? Should I try to verify some of the information with a second or third source? Should I try again to talk with a party to the transaction, who was unavailable earlier? How much of the data was gathered from first-hand or primary sources? Do a gut check - does it all feel right? Would I be comfortable if I had to defend my appraisal in court with the information I have now? Do I have more confidence with the data in one approach than the other(s)? Did I have to make unusually large adjustments? Were there unusual characteristics of the subject property, and if so, did I explain them clearly?

Bottom piece of a frame horizontally anchored to the foundation providing a nailing surface for the floor or wall system

Sill Plates

USPAP Obligations What approach or approaches to value are required by USPAP?

Simply put, appraisers are required to develop whatever approaches are necessary to produce credible assignment results.

Local and regional multiple listing services typically concentrate on ____________ properties.

Single unit residential

"Improved land or a lot in a finished state so that it is ready to be used for a specific purpose."

Site

In developing the Cost Approach we start with the

Site Value

In actuality, the process of reconciliation occurs at various points throughout the appraisal process. We make many choices along the way. We may reconcile one indication of value from various possible choices in arriving at estimates of:

Site value Replacement costs Depreciation Vacancy rates Market rents GRM Operating expenses Taxes Insurance

General data can include many different items of information, depending upon the area in which the subject property is located. The definition cites four different forces that affect property values. (You may remember these from the Basic Appraisal Principles course.)

Social Economic Governmental Environmental

Details about the property being appraised, comparable sale and rental properties, and relevant local market characteristics."

Specific Data

these are things that are more than adequate for their intended purpose. Someone paid more for something than was necessary. They will not be able to recoup the additional expense in the marketplace.

Superadequacies

Typically these are miscellaneous materials not covered by other categories. For example, in a motel operation, this becomes a substantial outlay - for cleaning supplies, toilet paper, paper towels and rags, and all those little bars of soap and bottles of shampoo (plus the mint on your pillow).

Supplies

These are prepared and maintained by the assessor's office.

Tax Maps

the type and extent of research and analyses in an appraisal or appraisal review assignment

Scope of work

Style can be influenced by:

Type and texture of exterior finish Colors Roof style Roofing materials Window types Building shape Ornamental details Shutters Dormers Cupolas Corner boards

The largest source for demographic information is

U.S. Bureau of the Census

Which of the following would NOT be considered a source of specific data?

U.S. Census Bureau

Which would NOT be considered a source for specific data?

U.S. Census Bureau

Which of the following sources of data would not be considered "specific" data?

US Census data for the MSA

The acronym UAD stands for

Uniform Appraisal Dataset

In 2011, Fannie Mae and Freddie Mac created the

Uniform Appraisal Dataset (UAD) which is a set of standardized reporting requirements used in residential mortgage lending appraisal reports.

"The period of time over which a structure or a component of a property may reasonably be expected to perform the function for which it was designed."

Useful life

You are appraising a single-unit detached dwelling. How would you measure the gross living area?

Using exterior measurements

"A systematic set of procedures an appraiser follows to provide answers to a client's questions about real property value."

Valuation process

the income can be divided by a rate; or the income can be multiplied by a multiplier. Please look at the formulas below:

Value = Income / Rate Value = Income X Multiplier

Remember the basic income capitalization formula that Value = Income/Rate.

Value = Market value Income = Net operating income Rate = Capitalization rate

data, information, and documentation necessary to support the appraiser's opinions and conclusions and to show compliance with USPAP

WORKFILE

We need to review the entire process including our scope of work.

Was the scope of work adequate, given the intended use and intended users? Did we correctly employ the scope of work that we said we would perform? Were any changes in the scope of work necessary along the way? Were the steps logical? Were our data sources and methods of collection and verification adequate? Did we review the math and double check the calculations? Did we explain formulas and calculations in an appropriate manner?

We also said that the cost per lineal foot was $106.28 in this structure. 172 x $106.28 = $18,280. That would be the cost for the exterior wall.

We also said that the cost per lineal foot was $106.28 in this structure. 172 x $106.28 = $18,280. That would be the cost for the exterior wall.

Sales or financing concessions Market conditions when sale occurred Location Property rights appraised Site characteristics Physical characteristics of structures Quality Functional attributes Amenities Motivations of sellers and buyers

When choosing comparables, the appraiser looks for properties that are as similar as possible to the subject in all aspects. This research process will likely involve analyzing many different factors, such as:

When determining how much to adjust for a two-car garage in the sales comparison approach, which valuation principle is of primary importance?

When determining how much to adjust for a two-car garage in the sales comparison approach, which valuation principle is of primary importance?

There is no magic formula. We need to apply logic, reasoning, and a good deal of common sense. We might employ some limited statistical analysis, depending on the quantity of the data. We embark on a process similar to the one we used when reconciling at the end of the sales comparison approach. Only here, we are analyzing the strengths and weaknesses of each approach instead of each comparable sale.

Which approach is strongest for that type of property? Which approach is weakest? If more than one approach is used, do they support each other? If they differ, why do they differ? Do the approaches used make sense in light of theScope of work?Intended use?Intended user?Definition of market value?

We embark on a process similar to the one we used when reconciling at the end of the sales comparison approach. Only here, we are analyzing the strengths and weaknesses of each approach instead of each comparable sale.

Which approach is strongest for that type of property? Which approach is weakest? If more than one approach is used, do they support each other? If they differ, why do they differ? Do the approaches used make sense in light of theScope of work?Intended use?Intended user?Definition of market value?

Which type of expenses do not vary with the occupancy of the property?

Which type of expenses do not vary with the occupancy of the property?

sales comparison

You are conversing with an appraiser who has been in the profession for 40 years, and he mentions the term "market approach". What approach to value is he probably referring to?

If you log on to https://www.ffiec.gov/Geocode/default.aspx you can access the census tract info for your local area. Go to that site and input your local ZIP Code or address. Then click at the bottom of the next page where it says "Get Census Demographic."

You can get more information by then clicking at the link on the bottom of that page which says "More on Housing Data."

Governmental forces might include such items as:

Zoning Public utilities Public transportation Schools Building codes Police and fire protection

is the document that details the permitted uses in each zone.

Zoning Ordinances

A property sold for $129,000. It was not improved or added onto, and it re-sold 12 months later for $141,900. What is the annual change in market conditions indicated by this sale?

a 10% increase

An appraiser uses a comparable sale that sold as a result of the owner's bankruptcy, and the appraiser adjusts the sale because it is not an arms-length transaction. This is an example of ___________ adjustment.

a conditions of sale

Which of these items is NOT required by Fannie Mae to be included as an exhibit in an appraisal report?

a copy of the deed or legal description

A typical purchaser might say (or think), "It's a nice house. I like it. But if I were going to buy it, the first thing I would do would be to rip out that entire kitchen and put in a new one. Therefore, I'm going to offer $20,000 less." That would demonstrate functional obsolescence and should dictate

a deduction from cost new in the cost approach, and a corresponding adjustment for functional obsolescence in the sales comparison approach.

GRM assumes there is __________ relationship between rental income and value.

a direct linear

A VA mortgage is an example of

a guaranteed mortgage

The Fannie Mae URAR form is designed to report an appraisal of

a one-unit property with accessory unit

USPAP does not require a sales history of the comparable sales, but when completing the URAR for lending purposes, the form requires a

a one-year sales history of each comparable sale. Please note that it is for one year prior to the date of sale of the comparable - not one year prior to the effective date of the appraisal.

Management Fee - This expense varies, depending on your market. A management fee usually is based on

a percentage of the gross income. The fee could include many features such as collecting rents, accounting, phone services, maintenance and repairs, advertising, legal, etc. You should survey management companies in the area to estimate a typical management fee for the subject property type.

The effective date of value can be

a present, past, or future date

Under USPAP, an appraisal may be expressed numerically as

a range of numbers a specific amount a relationship to a benchmark any of these (Correct Answer)

For appraisals prepared using the UAD, quality of construction for the subject and comparables is rated using

a scale from Q1 through Q6

A parcel of raw land has been improved so that it is ready to be used for a specific purpose. The land has now become

a site

Balloon framing

a style of wood-house building that uses long, vertical 2" x 4"s for the exterior walls

According to Standards Rule 1-2, of the 2020-2021 USPAP: "In developing a real property appraisal, an appraiser must:

a) identify the client and other intended users; (b) identify the intended use of the appraiser's opinions and conclusions... (c) identify the type and definition of value.. . (d) identify the effective date of the appraiser's opinions and conclusions ... (e) identify, from sources the appraiser reasonably believes to be reliable, the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal:... (f) identify any extraordinary assumptions necessary in the assignment... (g) identify any hypothetical conditions necessary in the assignment... (h) determine the scope of work necessary to produce credible assignment results in accordance with the SCOPE OF WORK RULE....1

a list of things that are "in" and trendy in construction now. Depending on where you live, it could include such things as:

Ten-foot ceilings Media rooms Granite or quartz countertops Bamboo flooring Composite decking Fiber-cement siding Three-car garages Gas fireplaces

Partial Interests - Concurrent Ownership Property may also be concurrently owned by more than one individual. Concurrent ownership includes forms of ownership such as:

Tenancy in common Joint tenancy Tenancy by the entirety

Which of these ownership types is NOT a form of concurrent ownership?

Tenancy in severalty

www.bea.gov

The Bureau of Economic Analysis provides information used to analyze the economy. They do provide statistics and analysis on an international, national and regional basis. Note the link on the right for a quick overview of the U.S. economy. You should check out their publications through the link on the left. Hold down the Ctrl key while you click on the link at the top of any of these pages to go to the sites and check them out

"real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium."

The Principle of Balance

"An appraiser must prepare a workfile for each appraisal or appraisal review assignment. A workfile must be in existence prior to the issuance of any report or other communication of assignment results. A written summary of an oral report must be added to the workfile within a reasonable time after the issuance of the oral report

The RECORD KEEPING RULE in the 2020-2021 USPAP

Effective Age vs. Actual Age

The URAR form specifically asks for the actual age to be entered into the sales grid. In some cases that is adequate, and we can make an adjustment based on differences in actual age, particularly with relatively young properties and ones that are similar in age. The Uniform Appraisal Dataset (UAD) requires that only the chronological age of the subject and comparables be entered into the "Age" field on the sales comparison grid. For non-UAD appraisals, effective age may be entered as well. We certainly should know the effective age of the subject property after making our appraisal inspection, but we may or may not have a clear idea as to the effective age of the comparable sales. That will have to be based upon the best information that we can obtain.

Functional utility is defined as

The ability of a property or building to be useful and to perform the function for which it is intended according to current market tastes and standards; the efficiency of a building's use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms.

Excess rent is defined as

The amount by which contract rent exceeds market rent at the time of the appraisal; created by a lease favorable to the landlord (lessor) and may reflect unusual management, unknowledgeable or unusually motivated parties, a lease execution in an earlier, stronger rental market, or an agreement of the parties.

Effective gross income (EGI) is defined as:

The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses and an addition is made for any other income The gross income multipliers may be employed with either potential or effective gross income streams. The effective gross income multiplier (EGIM) would be preferable because of the increased accuracy, but the data is harder to verify. In the absence of better data, the potential gross income multiplier (PGIM) may be employed.

It is the oldest of the three traditional approaches that appraisers use.

The cost approach

leaves the tank as new wastes enter, through a 4-inch solid line that goes to a junction box

The liquid wastes, or effluent

Sequence of adjustments is defined as

The order in which quantitative adjustments are applied to the sale prices of comparable properties. The definition says the sequence of the adjustments is determined by the market and through data analysis. However, there are generally accepted sequences that are utilized by most appraisers. These will work for you most of the time. If there are particular factors in a local market that call for emphasis of particular factors that are more important in extenuating circumstances, then you may modify the normal procedure, with detailed explanation. Here's an example of an acceptable sequence that is illustrated in The Appraisal of Real Estate, 14th Edition: Property rights conveyed Financing terms/cash equivalency Conditions of sale Expenditures made immediately after purchase Market conditions Location Physical characteristics Economic characteristics Legal characteristics Non-realty components of value

Why should I pay more than $200,000 for your property, when I can build another one just as good for $200,000?

The principle of substitution (Cost Approach)

When reconciling to a value conclusion, USPAP requires an appraiser to consider:

The quality of the data available The applicability and relevance of the approaches used The quantity of the data available All of these (Correct Answer)

Just a reference, no need to memorize When appraising vacant land, for example, it may seem difficult to compare a land sale of $90,000 to another one that sold for $210,000. On the face, they may not appear comparable or competitive in the marketplace. However, after breaking the two sales down as to what they sold for per acre, they may be very similar in price. One may have sold for $35,000 per acre and the other one at $40,000 per acre.

The same thought process applies when appraising multi-unit properties. A three-unit property may sell for $120,000 and a four-unit property may sell $160,000. The point is, they both sold for $40,000 per unit.

The foundation system is made up of three components

The soil bed Footings Foundation wall or piers

Our sources for rental information may come from

The subject property Comparable sales used in the sales comparison approach Other comparable sales Interviews with investors Interviews with landlords Interviews with tenants Interviews with neighbors Interviews with leasing agents Interviews with other appraisers Your own files

Total operating expenses

The sum of all fixed and variable operating expenses and the replacement allowance cited in the appraiser's operating expense estimate.

Net adjustment is defined as:

The sum of the positive and negative adjustments made to a comparable sale price.

A gross adjustment is defined as

The total adjustment to each comparable sale price calculated by adding the absolute values of all positive and negative adjustments.

Sources of General Data

There are innumerable sources of general data. Some of these provide information of a national character, state, regional or local nature. You will not have to tap these sources for every appraisal, but it is important to keep abreast of general trends. Make sure you update your information periodically. Is the national economy in a boom cycle or a depression? What is the state doing to increase employment? How do the state taxes compare to other states? What are trends in local property taxes? Is the county, city or town giving incentives to attract new businesses? What is the local unemployment rate? How does that compare to neighboring communities? Are local companies expanding or laying workers off? What are the median earnings for families in the area? What are current interest rates for various m

If your net adjustments exceed _______% when using a URAR form, Fannie Mae requires an explanation.

There is no longer a threshold amount for net adjustments

True or False: A building may be obsolete and valueless even though it is still standing and is physically sound.

True

True or False: A market area could encompass an entire state, or several states.

True

True or False: A workfile must be in existence prior to the issuance of a written or oral report.

True

True or False: An appraiser would typically not value a 50-unit apartment complex with a gross rent multiplier (GRM).

True

True or False: Condemnation appraisals often require an appraiser to develop a separate opinion of site value.

True

True or False: External obsolescence can be shared between building and land.

True

True or False: General data includes items of information on value influences that originate outside the property being appraised.

True

True or False: HUD/FHA requires an appraiser to verify all comparable sales data used in an appraisal.

True

True or False: Modular homes have no permanently attached tags or labels that identify them as modular homes.

True

True or False: Real property appraisal reports may be written or oral.

True

True or False: The extraction method of site valuation typically has good applicability in older urban areas.

True

True or False: The usefulness of MLS information can be dramatically increased through verification with a selling or listing agent.

True

True or false: Heat pumps are essentially reversible air conditione

True

GLA includes ___________ but not____________.

above grade heated area, garages

Another name for the extraction method of site valuation is

abstraction

The URAR requires you to enter in the ________ age of the subject property in the sales comparison grid.

actual

The number of years that have elapsed since a building was constructed is its

actual age

The fifth element in the sequence of possible adjustments is an

adjustment for change in market conditions.

In residential mortgage lending appraisals, it is more common for lenders and AMCs to ask for _________ maps to be included in appraisal reports.

aerial

Who is the primary intended user for MLS information?

agents and brokers

In most situations, which of these would be considered an example of a superadequacy?

all of these foundation walls that are 4 feet thick R-90 insulation in walls and ceilings gold-plated faucets

"A method of estimating land value in which sales of improved properties are analyzed to establish a typical ratio of land value to total property value..." is the definition of the __________ method.

allocation

Which method of site valuation is based on a typical ratio of land value to total property value?

allocation

"A method of estimating land value in which sales of improved properties are analyzed to establish a typical ratio of land value to total property value and this ratio is applied to the property being appraised or the comparable sale being analyzed."

allocation method

Quantitative

analysis is based on numbers, and results in either dollar or percentage amounts.

Qualitative

analysis is used for elements that cannot be given a numerical value

Depreciation is defined as a loss in property value from

any cause

2 of 10Which would be an example of a sales or financing concession - when the seller

any of the above (Correct Answer) pays an interest rate buydown holds a mortgage at a below market rate pays loan origination fees

Which would be an example of a sales or financing concession - when the seller

any of the above (Correct Answer) pays an interest rate buydown holds a mortgage at a below market rate pays loan origination fees

Improvements that could be made to raw land in order to make a site would include

any of these

Appraisal regulatory agencies state that one of the problems with the allocation method is

appraisers often have no workfile support for the ratio they use

Fannie Mae says that positive adjustments for sales or financing concessions

are not acceptable

Standards Rule 1-1 (a) says an appraiser must

be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal." 1 Standards Rule 1-4 (b) says "when a cost approach is necessary for credible results, an appraiser must:(i) develop an opinion of site value by an appropriate appraisal method or technique;(ii) analyze such comparable cost data as are available to estimate the cost new of the improvements (if any); and(iii) analyze such comparable data as are available to estimate the difference between the cost new and the present worth of the improvements (accrued depreciation)." 2 Standards Rule 1-2 (h) says you must "determine the scope of work necessary to produce credible assignment results in accordance with the SCOPE OF WORK RULE." 3

Drilled wells need to use casing until the drilling enters what?

bedrock

Drilled wells need to use steel casing until the drilling enters

bedrock. Therefore, rock near the surface will save on drilling costs. A negative factor might be the presence of radon, which occurs from the decay of uranium rocks.

A level is considered below-grade if any portion of it is

below-grade - regardless of the quality of its finish or the window area of any room. A walk-out basement with finished rooms would not be included in the above-grade room count.

Which would NOT be a typical adjustment when preparing a sales comparison approach for a vacant land parcel?

below-grade living area

A set of numbers that has two modes is referred to as a:

bi-modal distribution

a layer of brick over a frame wall

brick veneer

"Real property for which the expansion, redevelopment, or reuse of the real estate may be complicated by the presence of environmental contamination that needs to be remediated to appropriate regulatory standards."

brownfield

Adjustments for physical characteristics could include all of the following items EXCEPT

busy street

A ___________ is a lump-sum payment to the lender that reduces the interest rate of the borrower's mortgage.

buydown

In the age-life method, total depreciation is estimated by

calculating the ratio of the effective age of a property to its economic life.

A ratio of one year's net operating income provided by an asset to the value of the asset" is the definition of

capitalization rate

If you log on to https://www.ffiec.gov/Geocode/default.aspx you can access the

census tract info for your local area. Go to that site and input your local ZIP Code or address.

In order for an appraiser to appraise a 5-unit property for a federally related transaction, he/she must be a

certified general appraiser only

"An element of comparison in the sales comparison approach; comparable properties can be adjusted for differences in the motivations of either the buyer or a seller in a transaction" is the definition of

conditions of sale

Materials that transfer heat and energy more quickly are called

conductors

Some materials transfer energy more quickly and are called

conductors

The Fannie Mae Selling Guide states that it is important to be

consistent, and compare above-grade area to above-grade area, and below-grade area to below-grade area.

Market condition adjustments to comparable sales should always be calculated from the time of the _________ to the

contract, effective date of the appraisal

The principle of _________________ is used when determining how much to adjust for differences between various components of a property.

contribution

A home suffers functional obsolescence of $10,000 because it lacks a second bathroom, which could be installed at a cost of $9,500. This type of obsolescence is considered

curable

Deferred maintenance is considered to be

curable.

In the URAR, concerning verification, you are asked to provide the ____________ and the __________.

data source, verification source

The third step in the life cycle of a market area is

decline

Which would NOT be a possible source of general data?

deed

"Items of wear and tear on a property that should be fixed now to protect the value or income- producing ability of the property, such as a broken window, a dead tree, a leak in the roof, or a faulty roof that must be completely replaced. These items are almost always curable."

deferred maintenance

Which type of physical deterioration is considered to be curable?

deferred maintenance only

Chapter 6 "1. In appraisal, a loss in property value from any cause; the difference between the cost of an improvement on the effective date of the appraisal and the market value of the improvement on the same date. See also external obsolescence; functional obsolescence; physical deterioration. 2. In accounting, an allocation of the original cost of an asset, amortizing the cost over the asset's life; calculated using a variety of standard techniques."

depreciation

The difference between the cost of an improvement and its market value on the effective date of the appraisal is

depreciation

To ascertain the depreciated value of the building improvements, we start with the cost to build them new and subtract

depreciation

After an appraiser estimates cost new, he/she subtracts ____________ then adds _______________ to arrive at an indicated value by cost approach.

depreciation, site value

When we estimate land value, as part of the cost approach, we should make adjustments in our comparable land sales to reflect the

diminished value of the land parcel. In other words, suppose the land would be worth $50,000 under normal circumstances. Because of the nearby pollution, the land value would now be reduced to $47,500. Then, we would only take a reduction of $7,500 against the cost new of the building improvements. If we were not careful, we could mistakenly charge off the entire $10,000 to the building improvements. Then we would be double-counting the $2,500 we should have already taken against the land value.

We may have two comparables that adjust to virtually the same price. However, you might have a feeling about one of them that something funny happened in that transaction, but you just can't pin it down. You may have done extra research and verification of the details, but it just doesn't feel right. You lack confidence in the result. You may want to

discard such a sale if you have the luxury of an adequate quantity of other reliable sales.

The subdivision development method of land valuation is a variation of

discounted cash flow analysis

CHAPTER 8 Types of Adjustments In the last chapter we described the derivation of adjustments that may be made to comparable sales in the sales comparison approach. Adjustments that are derived with quantitative approaches can be applied to a comparable property in one of two ways:

dollar amounts; or percentage amounts.

Here the water is diverted into several directions and the water flows out into the

drainage field or leach field through perforated tiles that allow the water to seep slowly out.

If we subtract vacancy and collection loss from potential gross income, we get

effective gross income

There are two types of radiant heating systems in common use -

electric and hot water

"The amount an entrepreneur expects to receive for his or her contribution to a project or risk..." is the definition of

entrepreneurial incentive

The amount an entrepreneur expects to receive for his/her contribution to a project is

entrepreneurial incentive

someone has to collect the rents, contract for repairs, and do all the things necessary to keep the income flowing, and this needs to be accounted for when

estimating the operating expenses for a property.

Geographic Characteristics of the Land/Site The first step is to

examine the legal description

A short-lived item is a building component with an ______________ life that is shorter than the _______________ life of the entire structure.

expected remaining economic, remaining economic

An expense ratio is the ratio of

expenses to income

Fannie Mae will accept the use of other comparisons for two- to four-unit properties (such as the total above-grade and below-grade areas) provided the appraiser:

explains the reasons he or she did not use a gross building area comparison, and clearly describes the comparisons that were made.

Which type of depreciation is generally considered to be incurable?

external obsolescence

End Ch. 3 - Land/Site Valuation The ___________method has good application in valuing land in rural areas and in older, urban areas.

extraction

"A method of estimating land value in which the depreciated cost of the improvements on an improved property is calculated and deducted from the total sale price to arrive at an estimated sale price for the land."

extraction method, which is sometimes also called the abstraction method

There is, however, an alternative method - the use of compound monthly market conditions adjustments. Consider the following example: a property sells first for $500,000 and then resells, without major changes, 18 months later for $590,000. On a straight-line basis the percent change is 18% over 18 months, or 1.0% per month, or 12% per year. However, it is also possible to extract the time adjustment on a compound monthly basis, most easily using a financial calculator. For the HP12c, the keystrokes are as follows:

f CLEAR FIN 18 n 500000 CHS PV 590000 FV i (we are solving for i) 0.92 The solution produced by the calculator is 0.92%, or slightly less than 1%. This may not seem like a significant difference from 1.0% straight-line, but over longer periods and with larger rates of change, the difference between straight-line and compound time adjustments can be significant.

Most residential new construction today employs _____________ shingles.

fiberglass

The most common roofing material currently used in new construction in the U.S. is

fiberglass composition shingles

Rooms that are below grade are noted separately on the URAR form, and must be

finished (having ceiling, walls and floor).

Expenses are divided into two categories:

fixed expenses and variable expenses.

the most common type of heat system in new construction today is

forced warm air

"The ability of a property or building to be useful and to perform the function for which it is intended according to current market tastes and standards" is the definition of

functional utility

"The ability of a property or building to be useful and to perform the function for which it is intended according to current market tastes and standards; the efficiency of a building's use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms."

functional utility

"Data that relates to the four forces that affect real property values—social, economic, governmental, and environmental forces. This type of data is usually not specific to any particular property but is applicable in many assignments of similar types of properties. Also known as macro-level data" is the definition of

general data

The main support beams for a home are called

girders

When estimating depreciation, which of these items is likely to be considered a long-lived item?

girders

For many years, the warm air furnaces were "ductless". They were known as

gravity furnaces

"The total adjustment to each comparable sale price calculated by adding the absolute values of all positive and negative adjustments" is the definition of __________ adjustment.

gross

When arriving at a value indication utilizing a GRM, one component is the _______________ rent of the subject property.

gross monthly unfurnished market

The first step in the life cycle of a market area is

growth

What type of mortgage includes a party other than the borrower who assures payment in the event of default?

guaranteed

Direct costs are also called

hard costs

In framing, __________ are constructed above window and door openings.

headers

A reversible air conditioner is called a(n) _______________.

heat pump

Which would NOT be a sub-step in defining the problem?

highest and best use

Utilities - The best source for utility expenses is

historical data on the subject property, with consideration to any foreseen increasing cost. If historical data is not known, then projections must be estimated based on data from similar, competing properties.

You can click on this link to download a booklet from The Appraisal Foundation's website describing the Appraiser Qualifications Board's Real Property Appraiser Qualification Criteria in its entirety.

https://www.appraisalfoundation.org/imis/TAF/Standards/Qualification_Criteria/Qualification_Criteria__RP_/TAF/AQB_RPAQC.aspx

Universities websites

https://www.terry.uga.edu/real-estate (University of Georgia), or https://business.wisc.edu/faculty-research/real-estate/ (University of Wisconsin).

An appraiser is valuing a property under a condition that is known by the appraiser to be false. The appraiser is employing a(n) ____________ in this appraisal.

hypothetical condition

An appraiser observes that an underground tank is leaking. An appraisal could be done of the property in its "as is" contaminated condition or could be appraised under the _______________ that the property is free of contamination.

hypothetical condition

a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis.

hypothetical condition

You have a property that is functioning well and in harmony with its parts and its surroundings. If that is hampered, it results

in functional obsolescence. That is defined as: "The impairment of functional capacity of improvements according to market tastes and standards."

property taxes are an operating expense;

income taxes are not. Income taxes are a personal expense to the owner of the property, and are not operating expenses for the purpose of valuation.

The basic formula for income capitalization states that value equals _______________ divided by a __________.

income, rate

You can't do an income capitalization approach unless the property is

income-producing or has the potential to produce income

An outdated kitchen can be remodeled at a cost of $15,500. After remodeling, the value of the home will increase by $14,000. This item of depreciation is considered

incurable

Conversely, depreciation charged to the short-lived and long-lived items is

incurable.

It is only available in limited situations.

index method

Financing costs and marketing costs necessary to achieve occupancy are examples of ____________ costs.

indirect

The most common sheathing is

insulating foam sheathing

The most common sheathing is

insulating foam sheathing, which can provide up to R-8 insulation. plywood or OSB board is sometimes still used, particularly when strength and rigidity are required. Then sheathing paper, such as asphalt building paper, or vapor and wind barriers such as "Tyvek", are applied.

For units in condo or co-op projects, the appraiser must use

interior perimeter unit dimensions to calculate the gross living area. In all other instances, the appraiser must use the exterior building dimensions per floor to calculate the above-grade gross living area of a property.

The most commonly-used land appraisal report form

is a generic form

The HUD label on a manufactured home

is a metal tag on the outside of the home

A monolithic slab on grade foundation

is essentially one giant footing

In their Selling Guide, Section B4-1.4-14, Appraisal Report Review: Layout, Floor Plans, and Gross Building and Living Areas, Fannie Mae addresses GBA, stating: "Gross building area:

is the total finished area including any interior common areas, such as stairways and hallways of the improvements based on exterior measurements. is the most common comparison for two- to four-unit properties. must be consistently developed for the subject property and all comparables used in the appraisal. must include all finished above-grade and below-grade living areas, counting all interior common areas such as stairways, hallways, storage rooms, etc. cannot count exterior common areas such as open stairways."

Freon R-22 was banned from use in HVAC systems in new construction because

it damages the ozone layer

Which of these is NOT a disadvantage of hot water heat?

it is inefficient and creates drafts and dust

One of the weaknesses of spellcheck is

it will not catch misused words

The sales grid from the Uniform Residential Appraisal Report (URAR) illustrates

itypical elements used in the sales comparison approach. We will discuss how to fill in the grid in detail later in this course

The earliest type of wiring in a house was called

knob and tube. It consisted of bare copper wires strung between porcelain insulators or standoffs. You may still encounter some of these, but they are outdated and banned by many codes.

Ch. 3 - Land/Site Valuation "1. In law, the solid surface on the earth, as distinguished from water. 2. One of the four agents of production in economic theory"

land

In the land residual method, judgments have to be made and market evidence studied to identify and separate a

land cap rate and a building cap rate

Ground Rent Capitalization Method This technique sounds complicated as well, but it's much more straightforward than the land residual method. First, remember that it is a specialized technique that should only be applied in the case where a subject site is rented under a

land lease

The ground rent capitalization method is most applicable when appraising which of the following __________.

land under a McDonalds restaurant where McDonalds owns the building

if I know what the whole property is worth and I can figure out what the building is worth, then what is left over must be the

land value

Which would NOT cause external obsolescence?

leaking septic in the back yard

Which of these would be considered an indirect cost when constructing an office building?

lease-up costs to achieve occupancy

The ground rent capitalization method is most applicable when appraising a _______ interest.

leased fee

If you are appraising a multi-unit property, where at least one unit is rented, the property rights appraised consist of a _______________.

leased fee estate

The highest and best use of a property must be:

legally permissible, physically possible, financially feasible, maximally productive

Another practical reason why we draw the line at four units for residential appraisers is because of

limitations imposed by the federal financial institution regulatory agencies and incorporated into state licensing statutes. These limitations stipulate that licensed residential appraisers are qualified to appraise non-complex 1-4 residential units with a transaction value of less than $1 million, and complex 1-4 unit residential units with a transaction value less than $250,000.

Which influences typically exert the greatest pressure on property values?

local influences

When using Marshall & Swift, adjustments need to be made for construction costs in various locations of the country. This is accomplished through use of

local multipliers

land will not

lose value simply because it is older, whereas buildings will lose value as they age.

Specific data would include:

lot size

Example: Comparable 1 is located on an arterial highway, while the subject is not. The market recognizes a difference in desirability because of the increased traffic and noise along the arterial highway. Therefore, we must

make an adjustment to equalize the properties for location.

In many cases you will not have a conversation with your client. He or she will only read your report. This is your only chance to

make yourself heard. In the reconciliation you need to reinforce your scope of work. You need to convince the reader that you did everything that was necessary to solve the problem. You need to take your reader by the hand and walk him/her down the same path you traveled on the way to your conclusion.

Which type of home is built to meet the HUD Code?

manufactured home

One way to rank the sales is to look at the number of adjustments that were necessary. A perfect comparable would require no adjustments. A weak comparable would require

many significant adjustments.

External obsolescence can be

marketwide

With real property, the value of the whole __________ the sum of the separate estates or parts.

may be equal to, more than, or less than

"A measure of central tendency identified as the middle value in an ordered array of numerical values ..." is the definition of

median

An appraiser has analyzed a set of 12 GRMs extracted from the market. In this set, the number 98 appears three times, and no other number appears more than once. The number 98 is therefore the _______ of this data set.

mode

A gross income multiplier is most likely to be used for _______ property units.

more than four

Effective ages can be

more than, less than, or the same as actual ages. It is a quick measure of the overall condition, utility, and desirability of a structure.

It is important that you know when to apply the cost approach and when

not to

The next generation of heating systems had ducts and multiple registers in the floor, but there were no fans. The air simply rose when warmed. Because of its configuration, it was known as an

octopus system

Besides properties that have recently sold, other value indications might include all of the following EXCEPT

offers to lease

Footings should be at least _____________ average frost penetration levels.

one foot below

Tenancy in severalty means the property is owned by

one person

With platform framing, the studs run

one story high

_______________ appraisers can appraise a 15 unit residential property without regard to value or complexity.

only Certified General

Variable expenses are defined as:

operating expenses that generally vary with the level of occupancy or the extent of services provided

When describing rates, what does the little "o" indicate in Ro?

overall

"The relationship between a single year's net operating income expectancy and the total property price or value" is the definition of a(an) ______________ rate.

overall capitalization

Example: A property owner of a 12-unit building does not spend any money on painting and decorating over a three-year period, and therefore includes no expenses for painting and decorating on his operating expense sheet that he provides to the appraiser. Prudent management would dictate that the building owner should have a painting and decorating schedule that would require periodic outlays. Therefore, the appraiser should include expenses for

painting and decorating in their appraisal, even though the property owner has not recently incurred any such expenses.

Coating cement on a masonry wall, usually for water proofing

parging

One or two coats of ____________, consisting of troweled-on Portland cement, are applied to the exterior of the wall for moisture control

parging

A lot and block legal description will refer to a

particular map number

Making adjustments in dollars is usually preferable, especially in residential appraisals. In non-residential appraisals,

percentage adjustments are often used.

Ch. 4 - Building Styles and Construction The results of a __________ test will determine if there is suitable drainage and the size of the drain field that will be required for a septic system.

percolation

The most common source of brownfield contamination is

petroleum

Which of these elements in the adjustment process does NOT apply primarily to commercial or income producing properties?

physical characteristics

A 10-year-old house will always have

physical deterioration

Long walls may need additional support from

pilasters.

a rectangular protrusion from a wall. They look like a rectangular column that has been set into the wall

pilasters.

Poor conductors, or insulators, include

plastic and air.

What type of wiring is most commonly found in new residential construction?

plastic coated or Romex

What is the most common type of framing today?

platform frame

For over a thousand years, the framing system utilized was the

post and beam system. This consists of large vertical posts that support horizontal beams. The posts and beams were joined together by various interlocking joints, such as mortise and tenon, and then secured by wooden pegs.

"The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted" is the definition of

potential gross income

In electricity, voltage measures __________ , while amperage measures __________ .

pressure, volume

The _______ area of the site is used for family activities and is often found in the _______ yard.

private, rear

Which of these would be a fixed expense?

property taxes

n January 2002, President George W. Bush signed H.R. 2869, which

provides liability insurance for those who buy brownfield sites Note: States will handle most lower-level cleanups, but the Environmental Protection Agency (EPA) will control sites that cross state lines or that pose an imminent threat to public health or the environment.

usually in the front yard, which contains the guest entrance and driveway.

public area

Platform Framing If the studs are 2 x 4 boards, they are installed 16 inches on center; if 2 x 6 boards are used, then they are typically

put 24 inches on center. With 2 x 6s there is a bigger wall cavity, so more insulation can be inserted.

Ranking analysis is a ___________ method for estimating site value.

qualitative

What type of analysis is used for elements that cannot be given a numerical value?

qualitative

"A numerical (dollar or percentage) adjustment to the indicated value of a comparable property to account for the effect of a difference between two properties on value" is the definition of _______________ adjustment.

quantitative

Paired data analysis is an example of _______________ analysis.

quantitative

The biggest difference between real estate and other major investments is

real estate is fixed in location

The last step in the sales comparison approach is

reconcile the value indicators

Step 7 of the valuation process involves

reconciliation hat is reconciliation, you ask? If we utilize more than one appraisal approach, it is likely that the approaches will produce differing indications of the value of the property. For example, the cost approach might indicate a value of $200,000, the sales comparison approach might indicate a value of $210,000, and the income capitalization approach might indicate value of $195,000.

Beyond the written terms, we need to try to investigate the motivations behind the consummation of the written lease. This process is somewhat similar to what we do in the sales comparison approach - we want to know if it was an arm's-length transaction. Were the parties

related? Were they typically well-informed? Was there undue duress on either party?

In order for a comparable to be useful in extracting a GRM, it must have been __________ at the time it __________.

rented, sold

If a cost manual is used the result is _____________ cost.

replacement

The estimated cost to construct, at current prices as of a specific date, a substitute for a building or other improvements, using modern materials and current standards, design, and layout, is _______________ cost.

replacement

When ____________ cost is used, it eliminates any functional obsolescence that may be present in the structure.

replacement

"The estimated cost to construct, at current prices as of a specific date, a substitute for a building or other improvements, using modern materials and current standards, design, and layout" is the definition of

replacement cost

The final step (Step 8) in the valuation process.

report

What is the final step in the valuation process?

report the final opinion of value

"The estimated cost to construct, at current prices as of a specific date, a substitute for a building or other improvements, using modern materials and current standards, design, and layout" is the definition of

reproduction

If a property is older or exhibits unusual construction, then perhaps the more accurate method would be to use _______________ cost.

reproduction

Which type of cost new would replicate a slate roof and a steam heating system in a 100-year-old home?

reproduction cost

The first step in the sales comparison approach is

research the market

Electricity is sent through a

resistor, which causes it to heat up. Air passes over the heated surface and warms the room by convection. In some cases fans are also employed to move the air around.

Decorating - The cost of updating interior decor and finishes should be considered. You need to

review leases to determine if this is the responsibility of the landlord or tenant. Examples of updating interior decor are interior painting, wallpapering or cleaning. Obviously, this varies considerably depending on the property size and type. For example, 100 apartment units would require substantial upkeep. You need to consider expenses for a regular schedule of decorating; perhaps all the units are painted every five years.

How might an appraiser obtain expense ratio information for income properties?

reviewing the appraiser's files reading published studies interviewing market participants all of these (Correct Answer)

The slope of the roof is described as a precise relationship of the

rise over run

Roof slope is expressed as ____________ over ___________.

rise, run

Lineal foot means

running along the ground.

Payroll - Consideration should be given to

salaries paid to employees involved in the operation of the property. A specific instance, of which you must be aware, occurs in apartments. A landlord may give a rental break or an apartment unit in return for services, to a live-in superintendent, or "Super."

What type of comparison provides the BEST evidence for a market conditions adjustment?

sale and re-sale

The most commonly-used method for valuing sites is the _____________ method.

sales comparison

An example of a special purpose property is a ____________.

school building

"The type and extent of research and analyses in an appraisal or appraisal review assignment" is the definition of

scope of work

The unit-in-place method is sometimes called the ____________ method.

segregated cost

The appraiser must report the basement or other partially below-grade areas

separately and make appropriate adjustments for them on the 'basement and finished areas below-grade' line in the 'sales comparison analysis' grid."

that allows for semi-public area for deliveries, trash removal, meter readers, fuel trucks, mail delivery, etc

service area

Adjustments only need to be made when there is a

significant, measurable difference between the subject property and a comparable sale. By measurable, we mean measurable in the marketplace, such that a typical purchaser would recognize this difference and take it into consideration in the buying decision.

In a home's plumbing system, grey water comes from

sinks and laundry

Sidewalks, curbs, and landscaping are examples of

site improvements

The definition of general data refers to the four main categories of external market forces. They are

social, economic, governmental, and environmental

Comparable sale and rental properties would be considered ________ data.

specific

The zoning of a property is _____________ data.

specific

When completing an appraisal assignment, comparable sales information that the appraiser gathers would be considered _________ data.

specific

During her research, an appraiser discovers that the annual taxes for the subject property are $5,500. What type of data is this?

specific data

1 of 4A bilevel home is also often referred to as a __________ home.

split entry

The most common unit of construction cost in residential properties is cost per

square foot

Sometimes inadequacies occur when

standards change

The earliest foundations were made of

stone (loose or mortared) and brick. Today most foundations are constructed of poured concrete or concrete block.

vertical framing members that help create wall structures

studs

Which would NOT be considered to be a site improvement?

sub-soil composition

We never adjust the _______________.

subject property

It is common in appraisal reports to include a map that shows the location of the ____________.

subject property and comparable sales

Which of the following would NOT be considered general data?

subject property tax assessment

Ch. 5 - Cost Approach - Cost Estimating "The appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the cost and sales comparison approaches are based."

substitution

The basic principle underlying the cost approach is the principle of ___________.

substitution

The primary principle upon which the cost and sales comparison approaches are based is the principle of ________________.

substitution

Two virtually identical houses are offered for sale in a subdivision. House A is listed for $129,900 and House B is listed for $169,000. House A has been shown 12 times and there are 4 offers pending, while House B has been shown twice and there have been no offers. Which appraisal principle is being demonstrated here?

substitution

The Cost Approach is sometimes referred to as the

summation approach

A well-written reconciliation statement in an appraisal report is like an attorney's

summation to the jury

the "ranch" style home was introduced in

the 1940s and 1950s.

No manufactured home may leave the factory unless it complies with

the HUD Code and is released for shipment by an independent third party inspector, certified by HUD

Contract rent is defined as

the actual rental income specified in a lease This rent may or may not be the same as market rent. In developing a potential income to estimate market value, the contract rent would be used only if it is supported by the comparable market rents.

he total amount, or lineal feet, of drain tile needed is determined by

the character of the soil, as revealed through percolation ("perc") tests. The perforated drainage tile is laid in trenches filled with gravel, to promote drainage.t

All of the following are situations where the cost approach has good applicability, EXCEPT for

the improvements do not represent the highest and best use of the land as if vacant

"Why should I pay more than $200,000 for your property, when I can buy another one for $200,000 that has an economic return just as good?

the income approach

"Why should I pay more than $200,000 for your property, when I can buy another one just as good for $200,000?"

the sales comparison approach

A lack of market activity precludes the use of

the sales comparison approach

The cost approach would likely be MOST applicable in a situation where

the subject is a special purpose property

Geographic Characteristics of the Land/Site One of the first things we need to do is make an unequivocal determination of the exact location of

the subject property.

What is another name for the cost approach?

the summation approach

One of the disadvantages of Balloon Framing

the two-story cavities between studs were dangerous in the event of a fire. This could be ameliorated by installing horizontal "fire stops" made of 2 x 4's but by the 1930s and 1940s, balloon framing was outlawed in many municipalities.

The subject property is a house adjoining a busy interstate highway. A vacant lot next door recently sold for $60,000 and a similar lot with the same zoning, in a quiet location, recently sold for $65,000. These two sales indicate there is a premium of $5,000 for less traffic noise. A house along the interstate in the next block recently sold for $340,000, and a similar house away from the interstate sold for $360,000. Thus, the property located along the interstate suffered a $20,000 loss for the location. The external obsolescence attributable to

the whole property is $20,000 ($360,000 - $340,000). Pairing the two land sales indicates a loss of $5,000 for the land portion. Therefore, the external obsolescence attributable to the building is $15,000 ($20,000 - $5,000).

t consists of brick material that is only about an inch thick and is applied over a frame wall.

thin bricks

Each HUD code manufactured home has a label on the exterior of each section containing a

three-letter designation plus a six- or seven-digit number. This is a red, metal 2" x 3" tag that is pop-riveted to the exterior siding.

For residences, the entry in this box may be "Fee Simple". But if it is not, note the variance and assign an appropriate value to it, based on data obtained from the market. For example, if Comparable 1 sold for $220,000 but did not include timber rights, you would search for other comparables with

timber rights and compare prices. Comparable 2 was nearly identical to 1, and included timber rights. It sold for $250,000. It would be reasonable to conclude that timber rights were worth $30,000.

Never assume that a difference in sales price is due solely to

time elapsed. When you are comparing dates of sale, check all of the other factors that contribute to sales price before arriving at a dollar-amount adjustment

Footings should be __________ as wide as the _______________.

twice, foundation wall

In the quantity survey method, the quantity and quality of all materials used and all categories of labor required are estimated, and

unit cost figures are applied.

Segregated cost method is another name for the _______________ method.

unit-in-place

If your comparable sales are not sufficiently similar so as to allow for direct comparison, then we can resort to breaking the available sales into common

units of comparison

sing price per square foot as a unit of comparison has primary applicability in

urban areas, where there are small lots.

According to Fannie Mae, all of the following are unacceptable appraisal practices EXCEPT

use of comparables that are over six months old

According to Fannie Mae, all of these are unacceptable appraisal practices EXCEPT

use of comparables that are over six months old

"The period of time over which a structure or a component of a property may reasonably be expected to perform the function for which it was designed" is the definition of __________ life.

useful

Specific data is

usually gathered from an online source, such as the U.S. Census Burea

The formula for applying the income capitalization approach is

value = income / rate

If an apartment building is operating at only 50% occupancy, this should mean that __________ expenses would be lower.

variable

With platform framing, the studs are mounted

vertically and have a sole plate nailed across the bottom

www.epa.gov/brownfields.

www.epa.gov/brownfields.

The National Association of Homebuilders is a great resource for information concerning construction trends. They keep track of building starts in all areas.

www.nahb.org

www.ordinance.com (zoning ordinances)

www.ordinance.com (zoning ordinances)

This site is the portal to more than 200 federal agencies

www.usa.gov

The only limitation of the sales comparison approach is that

you need a sufficient number of reliable sales

Which zones are identified by FEMA as Special Flood Hazard Areas?

zones A and V

Which of these items would NOT be typically found in the deed for the subject property?

zoning classification

Which appraisal term is defined as: "Details about the property being appraised, comparable sale and rental properties, and relevant local market characteristics"?

Specific data

The valuation process is a systematic procedure employed to provide the answer to a(n) ________ question about the value of __________.

client's, real property

The SCOPE OF WORK RULE was added to the 2006 edition of USPAP, and it continues in USPAP to this day. In the 2020-2021 USPAP, the SCOPE OF WORK RULE states: (Don't memorize, just be familiar with the back of the card)

"For each appraisal or appraisal review assignment, an appraiser must: 1. identify the problem to be solved; 2. determine and perform the scope of work necessary to develop credible assignment results; and 3. disclose the scope of work in the report."1

Standards Rule 1-2(e) of the 2020-2021 USPAP says an appraiser must:

"identify, from sources the appraiser reasonably believes to be reliable, the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal, ... including: (i) its location and physical, legal, and economic characteristics;"1

There are three commonly recognized approaches to value.

Cost Approach Sales Comparison Approach Income Capitalization Approach

What is the first step in the valuation process?

define the problem

Local utility companies can also be fruitful information sources. They are constantly studying trends in local market areas. They are vitally interested in future growth trends. Their livelihood and profitability depend on it. They want to know:

Are populations growing or shrinking? At what rates? What will the population be in two years? Five years? Ten years? What is the direction of growth? Which are the fastest growing areas? What are trends in family size? How many people will be served in the future? What are the trends with local businesses and industries? What demands will they have in the future? What new water, sewer, gas, and electric lines will have to be run?

Scope of work applies to

Both appraisals and appraisal review assignments

Sources of Specific Data

Deeds Location maps Tax maps Flood maps Assessor's records Title companies Zoning ordinances Multiple listing services

What is the first step in the valuation process?

Define the problem

True or False: An appraiser's client must always directly engage the appraiser.

False

Professional or trade associations offering general data include all of the following EXCEPT

Federal National Mortgage Association

This is also a portal that can take you to information provided by over 100 federal agencies. The link above takes you to the home page of that website. The tabs along the menu bar at the top take you to other agencies, committees, data sources, etc., where you can find more sources for information.

Fedstats https://nces.ed.gov/FCSM/index.asp

are prepared by the Federal Emergency Management Agency (FEMA). They detail areas that are prone to periodic flooding.

Flood Maps

Ch. 2 - Data Collection Data that relates to the four forces that affect real property values—social, economic, governmental, and environmental forces. This type of data is usually not specific to any particular property but is applicable in many assignments of similar types of properties. Also known as macro-level data.

General data

Who is responsible for identifying the intended use of an appraisal?

The appraiser

One of the prime sources of specific data about a property is the deed. The deed will provide you with:

The legal description of the property The owners of record Easements of record Deed restrictions Chain of title (when the property was purchased and from whom)

Each appraisal report must contain two dates, the ____________ and the ______________.

effective date of the appraisal, date of the report

In Step 5 of the valuation process, we

estimate the land value

An appraiser encounters an underground storage tank. If there is no evidence of any observable leaks, the appraiser could indicate a value opinion based on the ______________ that the tank is indeed not leaking.

extraordinary assumption

Information on tax rates in an area would be considered

general data

Which is NOT an appropriate source for a legal description?

postal address

An appraiser having custody of a workfile must allow other appraisers with workfile obligations related to an assignment appropriate access and retrieval for the purpose of: submission

submission to state appraiser regulatory agencies; compliance with due process of law; submission to a duly authorized professional peer review committee; or compliance with retrieval arrangements.

"In valuation practice, the process of validating or establishing the truth about information from another source, which is critical to credible assignment results. A valuer or reviewer may confirm information directly with a party knowledgeable about the property or the transaction involving the property or with another credible source to determine the reliability of that information for use in the assignment."

verification

"1. To prove the truth of by the presentation of evidence or testimony; substantiate. 2. To determine or test the truth or accuracy of, as by comparison, investigation or reference."1

verify

www.appraisalinstitute.org

www.appraisalinstitute.org

This is also an enormous site. You should go exploring! Notice the link on the left that says "I want to" and then underneath it is a list of resources such as "buy a home" and "avoid foreclosure".

www.hud.gov

www.realtor.org

www.realtor.org

Which of these organizations is responsible for preparing flood maps for U.S. communities?

FEMA

Fannie Mae and Freddie Mac no longer require the appraiser to estimate remaining economic life, but

FHA and VA still do

In the sales comparison method, quantitative adjustments are based on dollars, while qualitative adjustments are based on percentages.

False

True or False: A postal mailing address is equivalent to a legal description.

False

True or False: Adjustments for market conditions are always negative.

False

True or False: Effective age is the same as chronological age.

False

True or False: Fee simple ownership is not subject to the governmental powers of police power and escheat.

False

True or False: If a property is rented, its market rent is always the same as its contract rent.

False

True or False: If the sales comparison approach cannot be developed because of a lack of sales data, the cost approach cannot be developed either.

False

True or False: In a residential appraisal, the comparable sales must always be located in the same market area as the subject.

False

True or False: Qualitative analysis uses percentages adjustments, while quantitative analysis uses specific dollar adjustments.

False

True or False: Reconciliation involves taking the indicated values of the comparable sales and averaging them.

False

True or False: The reconciliation process means simply proofreading the report for typos and math errors.

False

Check the Seasonal Energy Efficiency Rating (SEER) label for the air conditioner. Acceptable Minimum is

10 - maximum is 18.

Sometimes market conditions adjustments are relatively straightforward. Example: A house sold 14 months ago in an arm's-length transaction for $160,000. The same house sold again two months ago for $176,000. Your research shows that no major improvements were made to account for the increase in value and that this was also an arm's-length sale. Because both sales were for the same piece of property, and the sales occurred at the same time of the year, you could logically conclude that values have gone up by

10 percent ($176,000 - $160,000 = $16,000 / $160,000 = 0.10). This is called a sale and re-sale comparison. It provides the best data for a market conditions adjustment. It represents the perfect paired data analysis - two sales with only one significant difference (in this case, time).

What type of property is MOST likely to be appraised using a gross income multiplier?

10-unit

5 of 5In a UAD-compliant appraisal report, how would the date October 30, 2018 be formatted?

10/30/2018

A property sold for $74,000 and it was rented for $675 at the time of sale. What is the indicated GRM?

109.6

6 of 10Condos in your city sold for a median price of $195,320 twelve months ago and the median price of condos for the current month is $219,540. What is the percentage of change in market conditions?

12.4%

Condos in your city sold for a median price of $195,320 twelve months ago and the median price of condos for the current month is $219,540. What is the percentage of change in market conditions?

12.4%

If a Sale Price is $98,500, The monthly rent is $750, what is the GRM? Round to the nearest decimal.

131.3 $98,500 / $750 = 131.3

Effective age may differ significantly from actual age. For example, I may know that a house is actually 60 years old, but it has been well maintained. The kitchen is only 10 years old, the roof is only 8 years old, and the mechanical systems have been well maintained and were all replaced in the last 12 years. I might conclude that it is effectively as good as, and has the utility of, a house that is

15 or 20 years old.

The modern "central" heating system with one central furnace didn't appear until around ________.

1880

The modern "central" heating system with one central furnace didn't appear until around

1880. At first, they too burned wood, but evolved through coal, oil, gas, electricity, etc.

The sill plates are usually

2 x 6 or 2 x 8 wooden boards, depending on the size of the foundation wall Before they go down on top the foundation wall, there should be an insulation strip or sill sealer installed.

Considering your property is $90.20 per sq feet, If your subject property has 2,475 SF, what should it cost to build?

2,475 x $90.20 = $223,245. That works well when the houses are about the same size. We will see later that the costs vary according to the size of the structure.

A house contains 2,826 square feet. It was constructed in 1995 at a cost of $54.18 per SF. The cost index at that time was 193.4. The cost index today is 286.3. What is the estimated cost to build the building today?

2,826 SF X $54.18 = $153,113 286.3 / 193.4 = 1.480 $153,113 x 1.480 = $226,607 Therefore, costs have gone up 48% since 1995, and it would cost $226,607 to build the same house today. Don't forget to round up or down the last number if necessary

GBA is used in measuring

2- to 4-unit residential properties. It is also sometimes used in measuring commercial buildings, such as office buildings. Depending on the situation, it may include some unfinished areas or common areas such as hallways.

Example: The subject property is a four-unit building, consisting of two 2-bedroom units and two 1-bedroom units. Through research and analysis, you estimate the market rents for the 2-bedroom units at $1,500 per month, and the 1-bedroom units at $1,100 per month. The market-extracted GRM is 95. What is the indicated value for the subject property?

2-bedroom units = $1,500 x 2 = $3,000 1-bedroom units = $1,100 x 2 = $2,200 Total gross monthly rent = $5,200 Multiplying the monthly rent of $5,200 x 95 GRM = $494,000 indicated value by the GRM income approach.

Most new construction today employs fiberglass composition shingles. The average life ranges from

20 to 35 years, depending on the thickness and weight of the shingles

In the appraisal world we draw the line between a residential property and a non-residential property at how many units?

4

A 2.3 acre parcel that can be developed into four smaller lots or two larger lots. Legal considerations: Zoning will allow two lots per gross acre. The subject parcel is 2.3 acres. Physical considerations: The town allows septic systems if at least one acre - smaller lots require sewer. The sewer line is 800 feet away. You could develop four smaller lots on sewer or two larger lots on septic systems. Financial feasibility: Comparable one-half acre lots with sewer sell for $65,000. Comparable one-acre lots without sewer sell for $90,000. The sewer extension will cost $75,000 and a typical septic system costs $7,500.1 Which yields the maximum profitability?

4 smaller lots Problem 3 Solution Small lots: 4 x $65,000 = $260,000Development costs - 75,000 Value $185,000 Larger lots: 2 x $90,000 = $180,000Development costs - 15,000Value $165,000 Given the current value of the lots, it makes sense to go with the first alternative and develop the property into four smaller lots. That is the highest and best use. NOTE: The $75,000 is the cost to extend the sewer the 800 feet to the site. Connections within each lot would be considered in the construction cost of each home.

Regarding net and gross adjustments, the Fannie Mae Selling Guide B4-1.3-09, Adjustments to Comparable Sales states:

"Fannie Mae does not have specific limitations or guidelines associated with net or gross adjustments. The number and/or amount of the dollar adjustments must not be the sole determinant in the acceptability of a comparable. Ideally, the best and most appropriate comparable would require no adjustment; however this is rarely the case as typically no two properties or transaction details are identical. The appraiser's adjustments must reflect the market's reaction (that is, market based adjustments) to the difference in the properties. For example, it would be inappropriate for an appraiser to provide a $20 per square foot adjustment for the difference in the gross living area based on a rule-of-thumb when market analysis indicates the adjustment should be $100 per square foot. The expectation is for the appraiser to analyze the market for competitive properties and provide appropriate market based adjustments without regard to arbitrary limits on the size of the adjustment.

In their Selling Guide, Section B4-1.4-18, Appraisal Report Review: Lender Review of the Adjustment Grid, Fannie Mae says:

"For each comparable sale, the appraiser should provide the date of the sales contract and the settlement or closing date. Only the month and year of the sale need to be reported unless the exact date is necessary to understand the adjustments.

When appraising 2-4 family residential properties, Fannie Mae, Freddie Mac, HUD/FHA and VA require an appraiser to use gross building area. Fannie Mae says in its Selling Guide, Section B-4-1.4-14,

"Gross building area: is the total finished area including any interior common areas, such as stairways and hallways of the improvements based on exterior measurements. is the most common comparison for two- to four-unit properties. must be consistently developed for the subject property and all comparables used in the appraisal. must include all finished above-grade and below-grade living areas, counting all interior common areas such as stairways, hallways, storage rooms, etc. cannot count exterior common areas such as open stairways.

USPAP - Standards Rule 1-2(c) In Standards Rule 1-2(c), USPAP makes a clear statement as to the appraiser's responsibilities. It states that an appraiser must:

"In developing a real property appraisal an appraiser must: identify the type and definition of value and ascertain whether the value is to be the most probable price: (i) in terms of cash; or (ii) in terms of financial arrangements equivalent to cash; or (iii) in other precisely defined terms; and (iv) if the opinion of value is to be based on non-market financing or financing with unusual conditions or incentives, identify the terms of such financing and any other influences on value; Comment: When reasonable exposure time is a component of the definition for the value opinion being developed, the appraiser must also develop an opinion of reasonable exposure time linked to the value opinion. "1

If you are appraising in a project of condominiums in a resort area where the majority of properties are rented, then you would be remiss in not utilizing the GRM approach. Standards Rule 1-4 says:

"In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results."1

It can't be just "off top of your head". Standards Rule 1-6 of USPAP states the whole process clearly. SR 1-6 states:

"In developing a real property appraisal, an appraiser must: (a) reconcile the quality and quantity of data available and analyzed within the approaches used; and (b) reconcile the applicability and relevance of the approaches, methods and techniques used to arrive at the value conclusion(s)."1

STANDARD 2 says:

"In reporting the results of a real property appraisal, an appraiser must communicate each analysis, opinion, and conclusion in a manner that is not misleading."2

Scheduled rent is defined as

"Income due under existing leases." This is very similar to contract rent except that it refers to the rent due for the entire property not just in one lease. Contract rent refers to the rent in a specific individual lease contract. Scheduled rent can also include the market rents for vacant units when preparing an income/expense projection for a property.

what USPAP says about the concept of market value:

"MARKET VALUE: a type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the value definition of the term that is identified by the appraiser as applicable in an appraisal." Comment: Appraisers are cautioned to identify the exact definition of market value, and its authority, applicable in each appraisal completed for the purpose of market value. Note that this is not a specific definition of value that would be used in an appraisal assignment, nor is it intended to be. SPAP cautions appraisers to use the specific definition of market value that would be applicable in an assignment. For example, for a mortgage appraisal that is to be purchased by Fannie Mae on the secondary market, the appraiser should use Fannie Mae's definition of market value. In another assignment for an ad valorem assessment appeal, the appraiser should use the definition of market value that is used by the local municipality or taxing authority.

In the Selling Guide, Section B4-1.4-18, Appraisal Report Review: Lender Review of the Adjustment Grid, Fannie Mae says:

"Only finished above-grade areas can be included in the calculation of the gross living area for a one-unit property or a unit in a condo or PUD project. Basements and other partially below-grade areas must be considered separately and the appraisal adjusted accordingly.

Fixed expenses are defined as:

"Operating expenses that generally do not vary with occupancy and which prudent management will pay whether the property is occupied or vacant."

Heat energy will flow from warm areas to cold areas. We can retard the flow, but can't stop it. The measure of resistance to heat transfer is called an

"R" factor. To give some perspective - an inch of wood has an R factor of about 1.

Percentage rent is defined as

"Rental income received in accordance with the terms of a percentage lease; typically derived from retail store and restaurant tenants and based on a certain percentage of their gross sales." This is typically a fluctuating rental amount. There may really be no base contract rent amount; the rent could be entirely based on a percentage of sales. Let's pa

A "point" is equal to _____% of a _______________.

1, mortgage loan amount

A 6 year old water heater with an expected life of 15 years will have experienced depreciation of ____%.

40

I might look at another 60-year-old house that has not been kept up and is in a deteriorating neighborhood, and conclude its effective age is

40 or 50 years old.

A 10-year-old furnace with an expected life of 25 years will have experienced depreciation of:

40%

Let's look at another example of short-lived depreciation, and we will work with some numbers. A roof on a house has an expected life of 20 years. If the economic life of the house is 60 years, the roof might have to be replaced three or more times during the life span of the houses. So the roof covering would be a short-lived item. Now suppose we were appraising that house when it was 15 years old. We might estimate the cost to replace the roof at $4,000. That roof has lost a lot of its life, but there might be 5 years left in it. There is no need to replace it now, because we would just be throwing away money. However, in the cost approach, we will have to measure its loss of utility and subtract that amount. Fifteen out of 20 years means it has lost .75 or 75% of its value. However, it still retains what percentage of value?

25% of its original value. $4,000 x .75 = $3,000 depreciation. The roof still has a remaining value of $1,000, but the short-lived depreciation charged to the roof is $3,000.

A rectangular-shaped two-story home measures 28 feet by 40 feet. How many lineal feet are there in the foundation?

28 + 40 + 28 + 40 = 136 lineal feet

Depreciation is a loss in value from

Any cause

Indirect costs include:

Architectural and engineering fees Appraisal, accounting and legal fees Cost of carrying the investment (e.g., construction loans) Property insurance and taxes during construction Marketing, sales and lease-up costs and commissions Administrative expenses of the developer Costs of title changes Cost of carrying the investment after construction until stabilized occupancy is achieved

Gross is what you start with -

Net is what is left over!

"Brownfield - real property, the expansion, redevelopment or reuse of which may be complicated by the presence or potential presence, of a hazardous substance, pollutant or contaminant."

EPA brownfield definition

Other times, partial interests are created when some part of the fee simple estate is taken away by:

Easements Encroachments Transfer of subsurface rights Transfer of air rights Exercise of transferable development rights (TDRs) Private restrictionsDeed restrictionsConditions, Covenants, and Restrictions (CC&Rs)

"The period over which improvements to real estate contribute to property value."

Economic life

(Study Material Don't Memorize) Cash Equivalency When we use the sales comparison approach to develop an indication of market value, we are assuming that the comparable sales were: Purchased by a "typically motivated" buyer; and Paid for in cash or its equivalent, such as financed with a conventional mortgage that was obtained on the open market If the comparable sale was not cash or its equivalent, the appraiser may need to make adjustments, or, in some situations, disregard the sale as not being indicative of typical financing terms. You can usually assume that a house would have sold for less money if special financing had not been involved. This means that you must subtract the value of the financing from the price paid. With very rare exception, adjustments for financing terms are always negative adjustments.

Example: A seller determines that his/her house is worth $150,000. Market financing is running 6.5%. The buyer convinces the seller to offer private financing at 5%. In return, the buyer agrees to a sales price of $155,000. It looks like this property sold $5,000 above market on the face of it. This should be confirmed by comparison to other sales to see if this is true.

In the unit-in-place method, typical components would include:

Excavation Foundation Floor construction Framing Interior walls Ceilings Exterior walls Roof framing Roof covering Plumbing Heating system Plumbing system Electrical system Special items

is sometimes known as Synthetic Stucco. This is a combination of insulation and exterior finish in one process.

Exterior Insulation and Finish Systems (EIFS)

can be measured by market data analysis. This involves analysis of comparable sales.

External obsolescence

"A type of depreciation; a diminution in value caused by negative external influences and generally incurable on the part of the owner, landlord, or tenant. The external influence may be either temporary or permanent."

External obsolescence The IVS Glossary defines external obsolescence as: "A loss in value due to factors outside the subject asset. External obsolescence is also called economic, environmental, or locational obsolescence. Examples of external obsolescence are changes in competition or in surrounding land uses like an industrial plant near a residential area. It is deemed incurable as the expense to cure the problem is impractical."

End of Chapter 1 Valuation Process An appraiser encounters a small crack in a foundation slab on a house he is appraising. He discloses the crack in the appraisal report and states that he is not a structural engineer and assumes the crack is not structural in nature and does not require a repair. This is an example of the use of a(n) ______________.

Extraordinary assumption

an assignment-specific assumption, as of the effective date, which, if found to be false, could alter the appraiser's opinions or conclusions. Comment: Uncertain information might include physical, legal, or economic characteristics of the subject property; or conditions external to the property, such as market conditions or trends; or the integrity of data used in an analysis

Extraordinary assumption

These items are only replaced under extraordinary circumstances. Examples would include:

Framing Foundation Insulation Underground pipes

undergo tremendous stresses and must be engineered to handle them. The entire weight of the roof presses down on the walls and tries to spread the walls outward. The walls carry the weight of the entire structure down to the foundation and ultimately the footings.

Framing Systems

Which architect is known for one-story "prairie style" homes?

Frank Lloyd Wright

is hard to get a handle on is that it may occur in various forms.

Functional Obsolescence

"The impairment of functional capacity of improvements according to market tastes and standards."

Functional obsolescence

In a high-quality residential property, an unattractive kitchen that does not have enough cabinet space to meet market tastes and demands will likely result in:

Functional obsolescence

means that the building improvements do not "function" as well as they should.

Functional obsolescence

Which of these is a conclusion in an appraisal report that may require an appraiser to employ a reconciliation process?

GRM site value market rent any of the above (Correct Answer)

Sale Price of Comparable + Adjustments to Price = Indicated Value of Subject Notice that the process starts with the comparable, not the subject! We never adjust the subject property. We make adjustments to a comparable sale to show what the comparable would have sold for if it were just like the subject. You start with the sale price of the comparable. Then you add or subtract for differences between the comparable and the subject (like an extra bathroom, nice deck, new roof, swimming pool, etc.). The resulting figure will give you the indicated value of your subject. When determining whether to make a positive or negative adjustment, it is helpful to think of the subject property as a base, which doesn't move. Then think of the comparable property as either above the subject (superior) or below the subject (inferior). You want to adjust the comparable to meet the base, so make a positive (upward) or negative (downward) adjustment as necessary. For example, let's say the subject has a one-car garage (base) and the comparable has a two-car garage (superior). Since the comparable is superior (i.e., "above") the subject, we would need to remove the value of one of the garage bays by making a negative (downward) adjustment to the comparable. So if the comparable sold for $85,000 and we have determined that an extra garage bay is worth $3,000, we would adjust the $85,000 sale price downward by $3,000. The adjusted sale price of the comparable would be $82,000. By making this adjustment in this example, we are answering this question: what would the comparable property have sold for if it had only a one-car garage like the subject?

Here is the basic formula for the sales comparison approach:

$200,000 + $12,000 = $212,000. We then compare that adjusted price of the comparable to the subject and use the adjusted price of the comparable as a "value indicator" for the subject property. Remember, we never adjust the subject. We always adjust the comparable to make it "similar to" the subject.

Here's an example of how the adjustment process is employed. The subject is a three-bedroom home that is 15 years old. It has a brand new kitchen. The comparable is a similar house in the same neighborhood, also 15 years old, but with its original kitchen. Through market research and analysis, we determined that new kitchens in this market area have a contributory value of $12,000. The comparable sold for $200,000. The comparable sale price would be increased (adjusted upward) by the $12,000, adding the value of a remodeled kitchen to the comparable and making it "similar to" the subject. Therefore the comparable adjusted sale price would be:

External obsolescence can be caused by a number of factors, including:

High unemployment Building moratoriums Recessions Traffic noise Road Rail line or airport Location near hazardous influencesAir or water pollution, smog or odorToxic wastesAbandoned landfillsHigh tension power linesAbove or below ground high pressure gas lines Unsightly views Abandoned or boarded up buildings nearby High crime rate or unsafe living conditions Poor access

Several resources I would recommend if you want to learn more about architectural styles are:

Houses, Third Edition, Henry Harrison, Real Estate Education Company, Dearborn Publishing Company American Shelter, Lester Walker, The Overlook Press A Field Guide to American Houses, Virginia and Lee McAlester, Alfred A. Knopf, Inc. The American House, Mary Mix Foley, Harper and Row A Field Guide to American Architecture, Carole Rifkind, New American Library

Sales Comparison Approach Reconciliation Once we make the adjustments in the sales comparison approach, and are trying to reconcile to an indicated value, we need to seriously analyze the sales data. We need to address the quantity and the quality of the data. We should ask ourselves questions such as:

How many comparable sales are there? How many adjustments are made to each? What are the gross and net percentages for each comparable? What is the absolute value of adjustments for each comparable? Which is the best comparable? Why? Which is the worst comparable? Why? How reliable were the sources that supplied the data? Which sales sold most recently? Do the sales bracket the subject value?

(Don't memorize, just understand) For example, in a slow market or with a seller who is anxious to make a deal, various sale concessions may be employed. Perhaps the only way a buyer could afford the property would be to take an FHA loan which requires three points in addition to the down payment. The seller could agree to pay these three points for the buyer. The parties may or may not then increase the contract price accordingly. Let's assume that the negotiated price was $100,000, and the buyer and seller are both content with that price. To make the deal work, the contract could be amended to read $103,000, and the seller would agree to rebate the three points to the buyer at the closing as a sale concession.

If you investigated this transaction and intended to use it as a comparable sale, you could make a $3,000 adjustment in the sales comparison grid for cash equivalency. This means that it really was a $100,000 sale plus a $3,000 sale concession. In other words, if there had been no sales concessions, theoretically this property would have sold for $100,000.

Research the market Verify the information Select relevant units of comparison Identify differences and make adjustments Reconcile the value indications

In applying the sales comparison approach, the appraiser should employ a systematic approach:

Hopefully, we will have adequate data so as to be able to derive adjustment values from a paired data analysis. For example, two similar sites sell within a few months along the same road. One site has many trees, whereas the other has been stripped of trees. The treed site (Sale #1) sells for $55,000, and the bare site (Sale #2) sells for $50,000

In this simplistic example, it would be easy to derive a difference of $5,000 or 10% attributable to the difference in trees. In other words, a property with trees is worth 10% more than a property without trees. Once we have derived this factor, we can use it to adjust for a similar difference in trees between two other sites.

is becoming more common. This flexible plumbing product allows for long plumbing runs with fewer (or no) joints or fittings, which means less chance of leaking.

In today's new construction, cross-linked polyethylene (known as PEX) plumbing

Some property characteristics that might require an adjustment when estimating market rents would include, but not be limited to

LocationAccessTransportationSchoolsShoppingViews Size of unit Condition Quality Amenities Functional utilityMechanical systemsAppliancesIndividual thermostatsCloset spaceCar storageLayoutWindowsSoundproofing Furnishings Operating expenses Lease provisions

"A building component or site improvement expected to have the same useful life as the entire structure."

Long-Lived Items

Marshall & Swift recognizes the following categories of quality in construction:

Low Fair Average Good Very good Excellent

Fiber-cement siding is gaining rapid acceptance for both residential and non-residential new construction. Its features include:

Low maintenance Moisture resistant Won't crack, rot, buckle or de-laminate Termite proof Non-combustible 50-year transferable warranty

What about comparable sale information? Where can we obtain information on property sales?

Multiple Listing Services Data Subscription services Real Estate agents Other appraisers Appraisal organizations Your own files Courthouse records Assessor records Newspaper articles Newspaper advertisements Trade journals The internet Title reports or title companies Mortgage recordings County planning officials Lending institutions Attorneys Accountants Chamber of Commerce Contractors Insurance agents Utility companies

provide the best source of information on residential real estate sales. Virtually all of these MLS systems are internet-based. In many cases their data is updated in real time. As such, it is possible to perform very fast computerized searches according to specified parameters.

Multiple Listing Services (MLS)

End of Ch. 2 - Data Collection Which of these organizations conducts extensive research on current construction trends?

NAHB

Which of these organizations conducts extensive research on current construction trends?

NAHB

The following must be observed when calculating and reporting above-grade room count and square footage for the gross living area:

Only finished above-grade areas can be used in calculating and reporting of above-grade room count and square footage for the gross living area. Garages and basements, including those that are partially above-grade, must not be included in the above-grade room count."

Economic characteristics include all the attributes that influence income. This would include such items as:

Operating expenses Tenant mix Lease terms

Sheathing is applied to:

Strengthen the structure Provide a nailing surface for siding Combat air infiltration Form a moisture barrier Provide some insulation

a lime-based mortar finish applied to a wall. It can be easily applied over concrete blocks. Two or three coats are sprayed or troweled on.

Stucco

usually consisted of 1" x 6" tongue and groove boards laid diagonally for more strength. Today it is almost always 4' x 8' sheets of plywood or oriented strand board (OSB). One-half inch may be an acceptable minimum, but 5/8 inch or 3/4 inch is much more desirable.

Subflooring

are preferable. They go in the bottom of the well and push the water up. However, it is harder to maintain or repair them, as they have to be pulled up to the surface for servicing.

Submersible

What is another name for the cost approach?

Summation approach

Here's a fifth example of paired data analysis. Example 5, Adjustments: Comparable 123 Sales price $120,000 $118,000 $112,000 Garage Two car One car One car Location Quiet street Quiet street Busy street Let's analyze these sales for the purpose of extracting adjustments. The only significant difference between Sales 1 and 2 is the garage size. The difference in sale price can be attributed to the size of the garage. Therefore, indicated adjustment for the garage size is $2,000. Sale 3 is a similar house with a one-car attached garage, but located adjacent to a busy street. It recently sold for $112,000. Sale 3 can be directly paired with Sale 2. The difference in sale price between 2 and 3 ($6,000) can be attributed to the busy street. Comparable 3 can also be paired with 1. There is an $8,000 difference between the sale prices of Comparables 1 and 3, of which $2,000 is caused by the difference in value between a one-car and a two-car garage and $6,000 for the location. Therefore, once we get to the sales grid, we can make adjustments between the subject property and the comparable sales using: $2,000 for differences in garage size $6,000 for a busy street versus a quiet street

Therefore, once we get to the sales grid, we can make adjustments between the subject property and the comparable sales using: $2,000 for differences in garage size $6,000 for a busy street versus a quiet street

Departments of Transportation (info)

They study traffic patterns and are again involved with trying to predict patterns for the future. Where will the growth be for residences, commercial, and industrial properties? They need to think ahead for the purpose of constructing new roads, as well as widening or improving existing ones. Decisions they make can also impact real estate values. A new highway or a new interchange can increase property values in that vicinity. Or, if it brings increased traffic to a residential area, it could reduce values. New commuter roads may make properties on the periphery more valuable by lowering commuting times. Improved access may make commercial or industrial properties more likely or more valuable. If you are appraising a vacant lot in a commercial area and want to know how many vehicles a day pass that point - simply contact the transportation department. They conduct traffic counts on a regular basis.

The trap that many appraisers fall into is that

They use math to calculate a precise number and then utilize that number. We have to walk a fine line between being accurate and too precise.

Sale A, which is a 1,600 square-foot home with a double garage, sold for $190,000 in February. Sale B, which is very similar except it had 1,700 square feet of living area and only a single garage, sold for $204,900 in October. It has been determined that the indicated adjustment for square feet of living area is $38.00 per square foot and the adjustment for the difference in garages is $4,000.00. What is the market conditions (time) adjustment?

This is more complex, but just work your way through the problem, one step at a time. 1,700 SF - 1,600 SF = 100 SF100 SF x $38 = $3,800 size adjustment Sale B price: $204,900Adjustment for size - 3,800Adjustment for garage + 4,000 Sale B adjusted price $205,100Earlier sale (Sale A) $190,000Difference (time of sale) $ 15,100 $15,100 / $190,000 = .0795 or 7.95% increase over 8 months. 7.9 / 8 = 0.993% per month. So, assume the comparable sale we are adjusting sold 5 months ago for $200,000. 5 months X 0.993% per month = 4.965%. 200,000 X 4.965% = $9,930. You could make a positive adjustment for market conditions of $9,900 (rounded). Applying that adjustment to the comparable sale would then make it similar to the subject in respect to date of sale. Remember, when doing paired sales analysis, we are not comparing "comparables" because we are not yet "comparing" the sales to a subject property. We are simply comparing two sales to each other. After we have determined the appropriate adjustment, we then apply that adjustment to the "comparable" sale to make it similar to the subject in our appraisal. The two sales used in the paired sales analysis may not be any of the "comparables" you have selected for the comp grid. They could be other sales in the market that permitted the comparison for deriving the adjustment value of the element of comparison. You would then apply that adjustment value derived to the comparables you actually use in your appraisal.

The lowest horizontal member of a wall which rests on the rough floor, to which the studding is nailed

Top Plate

You can obtain topographic maps from

Topozone

Here is where we can get topographic maps of any location in all 50 states. Click on "Topo Maps". You may need to subscribe to their site, or take advantage of a free trial.

Topozone www.trails.com

The house you are appraising has a total cost of $182,844. It is 22 years old and has an estimated remaining economic life of 28 years. The cost to cure deferred maintenance items is $1,290. Short lived items of depreciation have been identified; the depreciation attributable to these items is $3,530 and their cost is $12,300. What is the amount of long-lived depreciation attributable to the building?

Total Cost $182,844 Minus Deferred maintenance cost - 1,290Minus Short-lived items cost - 12,300 Cost of Long-lived items $169,254 Total life = 22 + 28 = 50 years Depreciation = 22 / 50 = .44 or 44% Long-lived depreciation = $169,254 x .44 = $74,472 Long-lived Depreciation $74,472Deferred maintenance cost to cure + 1,290Short-lived Depreciation + 3,530Total Depreciation $79,292

Possible Adjustments Some examples of the more common adjustments we might encounter would be:

Traffic, cul-de-sac, etc. Size Shape Topography Exposure Usable area Corner location Floodplain Utilities Soil conditions Zoning Restrictions

may often be the expense of the tenant, and leases should be reviewed to see to whom this expense applies. It may be a municipal service or a private service. In some commercial and industrial operations, this may be a significant expense - to get rid of cardboard and packing materials, excess raw materials used in production, or perhaps the need to dispose of hazardous waste materials.

Trash Removal

Comparable 1 sells for $208,000 and contains 2,100 SF. Comparable 2 is similar in all aspects, except it contains 1,950 SF, and it sells for $203,500. How did we get this number?

We can subtract the square footages of the two homes (2,100 -1,950 = 150 SF) to obtain the difference in size between the two homes. Then we can subtract the sale prices of the two homes ($208,000 - $203,500 = $4,500) to obtain the difference in sale price between the two homes. Because the two homes are otherwise the same, we can conclude that the $4,500 difference in the sale price between the two homes is based on the 150 square foot difference in size. We can even take these two numbers and divide them, to get an indication of how much each additional square foot adds to the value of the home. $4,500 / 150 = $30 per SF From this example, we can extract the information that, in this instance, the market derived rate was $30 per square foot for an extra 150 square feet. Then we can take that data and apply it when we make adjustments for differences in size between the subject and the comparable sales. For example, if our subject property contains 2,200 square feet and Comparable 1 has 2,100 square feet, it would warrant a positive adjustment of $30 x 100, or $3,000.

Calculating mortgage payment Example: A two-unit property can be purchased for $400,000. Typical financing terms would require a 20% down payment, with a fully-amortized mortgage at 5.5% for a term of 30 years, with monthly payments. What is the amount of the monthly payment?

We will work through this one together. Here are the keystrokes on the HP12c. f CLEAR FIN 30 g n 5.5 g i 320000 CHS PV PMT 1816.92 The monthly payment for a $320,000 loan at 5.5% interest would be $1,816.92.

In the last step, we go to the market and extract an appropriate cap rate for the land. Let's make another assumption; that our research isolated a land cap rate of 6%. That means someone investing in land would expect a 6% return on their investment.

Well that was easy! Now all we have to do is divide the income stream attributable to the land ($12,000) by the land cap rate (.06) and the land value is indicated to be $200,000.

Chapter 1 Valuation Process Extraction Method Example A run-down neighborhood grocery store on a good corner location in a desirable older neighborhood recently sold for $400,000. The reproduction cost of the improvements today would be $250,000 and the total depreciation is estimated to be 80%. By extraction, what is the land value?

Well, let's run the math. Remember: the total value of both components, the land and the building improvements, is supposed to represent the total value of the entire property. If the improvements would cost $250,000 to reproduce today and they are 80% wasted, what is the present, depreciated value of the improvements? $250,000 x .80 = $200,000. That amount is lost and gone forever. $250,000 - $200,000 = $50,000. Therefore, the present value of the improvements is only $50,000.

Example 1: A run-down neighborhood grocery store on a good corner location in a desirable older neighborhood recently sold for $400,000. The reproduction cost of the improvements today would be $250,000 and the total depreciation is estimated to be 80%. By extraction, what is the land value?

Well, let's run the math. Remember: the total value of both components, the land and the building improvements, is supposed to represent the total value of the entire property. If the improvements would cost $250,000 to reproduce today and they are 80% wasted, what is the present, depreciated value of the improvements? $250,000 x .80 = $200,000. That amount is lost and gone forever. $250,000 - $200,000 = $50,000. Therefore, the present value of the improvements is only $50,000. Some of you were more astute and were able to save a step in the math calculation. You may have realized that if the old clunker of a building lost 80% of its value that there is 20% left. Therefore, you could just multiply $250,000 (cost new) x .20 and arrive directly at the figure of $50,000. At any rate, that is how the theory works. If the total value of the property, as represented by the recent sales price, is $400,000 and $50,000 of that is represented by the value of the building improvements, then undeniably the remaining portion of the value ($350,000) must reside in the land.

Next we would multiply the $800,000 building value x .11 and see that $88,000 of the total income stream must be utilized to produce the appropriate return to the building.

Well, what's left? $100,000 NOI - $88,000 = $12,000. That must be the portion of the income that is attributable to the land. It can't come from anything else; the presumption is that all there is that could produce income is the land and the improvements.

You will need to be very specific when you analyze market conditions for your subject and comparables used in the sales comparison approach. Answer the following questions:

What and where When: Supply/Demand: What and where: Specify the geographic area and type of property you are describing. Market conditions for a retirement community may be very different from conditions for condos or single-family homes. Conditions on one side of town may be different from those on the other. The market for one-bedroom homes will probably differ from the market for three- or four-bedroom homes. Old houses may be selling more quickly than new ones; or vice versa. When: In what stage of the life cycle does your subject market area fall? Short-term is typically more important than long-term in this regard, unless your market has moved from one long-term cycle to another during the study period. Also, estimate how long the current cycle is expected to last. Supply/Demand: Determine whether there is excess supply, excess demand or a relative condition of equilibrium for your type of property in the market area. At the same time, describe how great the excess (or lack) is. A 10% excess will have a very different effect than a 50% excess. NOTE: A quick way to check is to examine the number of current listings in a market area and then how many have sold in a recent time frame. If there are 20 houses on the market now and five sold in the last year, you are looking at a four-year supply of standing inventory! But if 40 houses sold in the last year, then the current 20 listings represent only a six-month supply.

When is an appraiser required by USPAP to develop the cost approach?

whenever it is necessary to produce credible assignment results

If deferred maintenance items are identified,

we subtract the cost to cure these items. They need to be addressed. If there is some trim painting that needs to be done that will cost $250, then that is the cost to cure, and that is the amount of depreciation charged. Next, we identify any depreciation attributable to short-lived items. Unless the building is new or just completely renovated, there will be some short-lived depreciation. Then we subtract the amount of deferred maintenance and the cost (not the depreciation) allocated to the short-lived items from the reproduction or replacement cost new. That's the way we identify the portion of the cost that is allocated to the long-lived items. The short-lived depreciation is then calculated based on the cost allocated to the short-lived items and the long-lived depreciation is calculated based on the cost allocated to the long-lived items. For example, let's assume a total replacement cost of $200,000. A portion of that is accounted for by the cost of the short-lived items (the roof, furnace, water heater, etc.) and any deferred maintenance. The rest, by default, must be the cost of the long-lived items. It's process of elimination, like the old saying goes, "If it isn't one thing‚ it's got to be the other!" If we identify the total cost new of the short-lived items to be $50,000 (assume no deferred maintenance), then the cost of the long-lived items has to be $150,000 ($200,000 - $50,000). Then, remember that the cost of the long-lived items will be depreciated over the remaining economic life of the whole structure. If we estimate the remaining economic life to be 45 years out of a total of 60 years, then the long-lived items have incurred a total depreciation, at this point in their lives, of 15/60 or 25%. In this example, long-lived depreciation is therefore equal to 0.25 X $150,000, or $37,500.

Physical deterioration is best described as

wear and tear

The ratio of expenses to rent is a crucial factor

when comparing properties