Chapter 13 - Quiz - Part 1
Which of the following is an example of economic obsolescence?
A college shutters its doors.
Who regulates appraisers in the State of North Carolina?
A combination of federal and state agencies. State agencies are granted the power to monitor appraisers and set basic criteria for licensing. However, all state agencies are also overseen by the Appraisal Subcommittee. This federal body was established to ensure the states were creating and enforcing policies that would encourage trust for all residents of the state.
Which of the following is an example of an incurable repair?
A crumbling foundation that is expected to last 20 more years. Incurable repairs are those that are considered impractical to be fixed. While someone could fix an otherwise functional foundation, it would not be considered a sound investment by the appraiser.
Which of the following is an example of curable functional obsolescence?
A home with poor insulation. A curable version of functional obsolescence is a solution that's worth the price of the investment. Replacing the insulation would be a simple fix, especially considering the high ROI. However, adding an extra bathroom or redesigning a custom kitchen would require far more effort and would not be considered worth the investment.
Which of the following properties would likely be appraised using the cost approach?
A library.
What is an appraisal?
An opinion by a professional about the value of a property.
How do appraisers typically offer their services?
Appraisers have the option of either freelancing or working for a firm/financing institution. Appraisers may choose to market themselves and set their own hours if they wish. They also have the option of collecting a more reliable paycheck by working through an established institution.
How is the GRM primarily used with the income approach?
As a screening tool. The GRM does not calculate operating expenses, meaning it's not a comprehensive way to determine the overall income that the owner will receive from the building. However, it can be a fast and easy way to estimate the value of one building over another.
How is the cap rate defined?
As the rate of annual return on a property. Cap rate is a ratio of property value to income value. The more rental income an owner can charge in proportion to the estimated value of the property, the higher the cap rate will be.
What value is used for establishing taxes?
Assessed value. Assessed value is defined as a valuation placed upon a piece of property by a public authority as a basis for levying taxes on the property.
What is the point of a cost appraisal?
Buyers should not have to pay more for a property than the cost to replace the property on the same patch of land. A cost appraisal does not take into account the income of the building because it's generally reserved for special-use properties and new construction homes. A seller is not required to make the repairs for a property, only to accept the value based on everything from its depreciation to its location.
What is the principle of change?
Changing market conditions such as supply and demand, interest rates, and property conditions.
Which of the following statements is true regarding cost approaches?
Cost appraisals are generally not as reliable as sales comparison or income appraisals. Cost appraisals are difficult to get right, even for experienced appraisers. Determining the availability and cost of quality labor can be nearly impossible, especially when factoring in substitution costs and unpredictable economic shifts.
What is the basic equation for the cost approach method?
Cost of construction plus the cost of the land, minus the depreciation.
What should estimators consider when calculating the monthly or yearly income revenue of a property?
Estimators must factor in the likelihood of the tenants' ability to pay the monthly required rent.
If Home Buyer is the cousin of Home Seller, what usually happens with the sale price?
Home Seller usually pays less for the property. The buyer may pay less for the property. This is not an example of an arm's length transaction.
Which of the following is a reason why the GRM of a comparable property would be heavily compromised?
If the seller sold it to a family member for half the price it was worth.
A town has decided to build a school and a playground in a neighborhood. Property values are increasing. Why does this occur?
In anticipation of the school and playground, more families are interested in homes.
What is depreciation and when does it begin?
Loss in value for any reason. Depreciation can start at any time. Depreciation is a complicated topic that is far from clear-cut. It can begin for any reason and may begin immediately, for example, if the object or structure in question was made with shoddy materials or was completed as a rush job.
Is data from recent sales enough to establish value?
No, combining recent sales only gives you an estimate. State agencies are granted the power to monitor appraisers and set basic criteria for licensing. However, all state agencies are also overseen by the Appraisal Subcommittee. This federal body was established to ensure the states were creating and enforcing policies that would encourage trust for all residents of the state.
A Victorian home is built in a neighborhood that is almost all split level ranches. Is the Victorian more valuable?
No, the property does not conform and therefore will be worth less than it might otherwise be.
Are property improvements always a good idea?
No, there is the possibility of diminishing returns.
According to this principle, it is the future, not the past, which is of prime importance in estimating value...?
Principle of change
Which of the following principles states that the worth of a lesser valued residence tends to be enhanced by association with higher valued residences in the same area...
Principle of progression
Which of the following principles states that the worth of a lesser valued residence tends to be enhanced by association with higher valued residences in the same area...?
Principle of progression
What happens to property values if lenders freeze lending?
Property values drop because of a lack of capital.
How does an appraiser identify properties when using the Sales Comparison Approach?
Public records such as the clerk in the county and MLS services. The MLS is the best resource for identifying comparable properties.
Which valuation method is commonly used to value residential properties?
Sales comparison approach
What are the four factors that influence value?
Social, economic, construction costs, governmental.
What is the effective age of a building?
The age of the building based on the upkeep and maintenance it has received.
If three homes used for comparison all have different square footage, what does the appraiser do?
The appraiser will get the average square feet and cost per square foot for the new property.
What is the insured value?
The assessment done by an insurance company.
What is the principle of anticipation?
The benefits the property may offer buyer.
Who uses the information contained in an appraisal?
The buyer, seller, lender and insurance company.
Which of the following is an example of a long-lived item?
The crown molding. Short-lived items are those that will not last as long as the building. Even a roof that's expected to last for 75 years is considered short-term if the building is expected to last 200 years.
What is the main difference between the market extraction and sales comparison method?
The market extraction method measures the market's reflection of aging properties relative to the subject property, while the sales comparison method contrasts the prices between comparable properties. The market extraction method is looking at the sales of past properties, but the overall methodology is different from that of a sales comparison method. Market extraction is there to show how buyers react to aging structures as opposed to a more straight-line comparison between the values of the subject and comparable properties.
What is the principle of conformity?
The more unique new homes are, the lower the value. The principle of conformity holds that the maximum of value is realized when a reasonable degree of homogeneity of improvements is present.
What occurs when a subdivision built 10 years ago suddenly has a brand new home added?
The newer home will have a lower value because the other homes are not as new or modern. The principle of regression applies, leading to a decrease in value of the newer home.
A builder buys all the lots of a street abutting a neighborhood and builds mobile homes. Property values in the neighborhood drop; what principle applies?
The principle of regression applies.
An appraisal comes in at $300,000, and the seller has the property listed for $350,000. What should he do?
The sales price should be reduced to be in line with the value.
What happens if a seller is going through a divorce and is forced to sell a home?
The theory of equal motivation would apply; the seller will accept less.
What does clean, clear title mean?
The title can be easily transferred.
If the home for sale has more bathrooms or additional bedrooms than the homes sold, what does the appraiser do?
The value of the subject property will have to be adjusted upwards.
How does the lack of internet access in remote areas impact property values?
The values are likely to be lower due to the lack of service.
What does the acronym DUST stand for?
The values are likely to be lower due to the lack of service.
If three properties in a neighborhood were sold to the original owner's cousins and siblings, can they be used for a sales comparison?
These are not arms length transactions and the values may not be accurate.
What are the qualifications of a Registered Trainee Appraiser?
They must be at least 18 years old and have a social security number. It doesn't take much to get in on the training level of an appraisal program because the trainees will be supervised at every step of the way. Trainees only need to be at least 18 years old and have a social security number. Only once a trainee decides to move on, they'll need to get additional education and experience.
How should an appraiser handle the estimated value of properties that have not yet been sold?
They should factor it in, but it should not be considered a major consideration.
How should an estimator treat a capital expenditure according to the income approach?
They should not factor in capital expenditures because they are not considered necessary to the building. A capital expenditure is any major expense for the building that is not strictly necessary. While the investments may be used to boost rental revenue, the costs are ultimately not part of the income approach.
How should a real estate agent use estimates when listing a property?
They should take the estimate into account while still factoring in other variables that could influence the perception of the property. There's a lot of psychology that goes into setting the price of the home and it's not as simple as just copying the numbers. Appraisers have to take into account how the average buyer is likely to react before deciding the best possible course forward.
What is an appraisal?
This is an official opinion of the worth of a property. It can only be completed by a licensed appraiser. Appraisers are meant to state the value of a property as opposed to the sales price of the property. While they can often be similar numbers, the criteria for an appraiser, as well as the education and experience they are required to have, is very different from that of a broker.
Half of the residents are employed by a large employer in a nearby city, and the employer shutters their doors. What happens to the property in the area?
Typically lower prices because people are moving out.
Can all property be valued using the sales comparison approach?
Typically, this approach is used for residential property.
What is the market extraction method?
Using the sales figures of benchmark properties after calculating the NOI of a building. The market extraction method is extremely helpful for coming up with the proper cap rate. It averages the cap rates of similar buildings that were recently sold to arrive at the probable cap rate for the property in question.
What value is most commonly used for commercial property?
Value in use. Value-in-use is derived from a property's cash flow. Commercial properties are valued based on their cash flow.
What is the principle of regression?
When higher valued properties lose value because of their association to lesser valued properties.
What is the principle of contribution?
When the amenities work for the target home buyer. The principle of contribution holds that maximum values are achieved when the improvements on a site produce the highest (net) return, commensurate with the investment.
What is an arm's length sale?
When the buyer and seller are unrelated.
When should an estimator rely on market data from properties that are still in use?
When there are no comparable sales data available. Sales comparison data is not an exact science, and the estimator must make some difficult decisions when using the income approach method. However, it's generally better to use the data from sold properties to get a better sense of the primary property's resale value (in addition to rental income).
Can a residential appraiser ever evaluate a property with five units or more?
Yes, as long as the transaction value is less than $250,000.
Does it matter if lenders are not offering loans when using the sales comparison approach?
Yes, it does matter; properties may be valued lower.
Does a brand new roof make a property more valuable?
Yes, the new roof should increase the value.
Does it matter if a sale was forced because of foreclosure or divorce?
Yes, this is considered a "fire sale" and may not be a true reflection of value.
Which of the following parties is likely to order a competitive market analysis (CMA)?
a real estate agent. Brokers who complete CMAs will typically work with home sellers/buyers and their respective agents. Many of the criteria are similar to an appraisal, though brokers may have a very different process than a licensed appraiser. Brokers are rarely asked to provide an estimate for the purposes of a home loan or property taxes.