CHAPTER 13 QUIZ QUESTIONS

What is an appraisal?

- An opinion by a professional about the value of a property.

What value is used for establishing taxes?

- Assessed value

Which of the following expenses generally increases the value of a property?

- Capital expenditures are used for major repairs to a property. - They also tend to add value to the property.

Net operating income divided by the purchase price equals the...?

- Capitalization rate - NOI / Purchase Price= Cap Rate ;Please remember this formula.

What defines how much risk a property presents?

- Capitalization rates are an indication of risk. This higher the cap rate, the higher the risk. A high cap rate building may not have stable cash flow.

What goes into a land valuation?

- Shape, location, size of lot and frontage are considered

If a property has an effective gross income of $1,250,000 and expenses totaling $680,000, what is the net operating income?

- $570,000 (Dollars)

If a unit is not being rented, it should be classified as a/an...?

- A Vacancy

Why do investors specifically like to buy real estate?

- Hedge against inflation.

What is the principle of anticipation?

- The benefits the property may offer buyer.

A new employer opens up in the area and wants to hire 500 people. What happens to property values?

- Values will likely increase because of the new demand for homes.

Two shopping centers are up for sale. One has a one-year lease with Walmart, and one has a five-year lease with Tom & Bob's BBQ. Which property is worth more?

- Walmart because the company is considered an anchor.

What is an arm's length sale?

- When the buyer and seller are unrelated.

A large apartment complex collects parking fees, pet fees, and laundry fees. Are these included in gross operating income?

- Yes, all fees along with rental income is taken into consideration.

Does a brand new roof make a property more valuable?

- Yes, the new roof should increase the value.

Do higher property taxes impact home values?

- Yes, the properties will be less valuable.

What is the capitalization rate of a property that was purchased for $9,375,000 and has an NOI of $750,000?

- NOI / Purchase Price= Cap Rate - In this example, the NOI will equal $750,000 / $9,375,000 = 0.08 or 8%.

A property's anticipated income and expenses can be found in which of the following documents?

- Pro-forma - A property's pro forma in real estate is essentially its cash flow projections over the next several years.

What is the Sales Comparison Approach?

- Sales comparison approach means comparing one property against recent sales of properties in a neighborhood

The cost approach is primarily used to value which of the following properties?

- Schools are considered a special purchase building, which is valued using the cost approach.

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 is the principle of progression?

- The principle of progression affirms the worth of a lesser valued residence tends to be enhanced by association with higher valued residences in the same area.

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 does clean, clear title mean?

- The title can be easily transfered

What value is most commonly used for commercial property?

- Value in use

There are 100 three-bedroom homes available, and there are 200 buyers, what happens to the property value?

- Since demand outpaces supply, values will increase.

What does depreciation mean?

- Depreciation is the loss in value over time.

What is the effective gross income of a property that has an NOI of $400,000 and expenses totaling $520,000?

- Effective gross income equals NOI plus expenses. - In this example, the effective gross income will equal $400,000 + $520,000 = $920,000.

With each mortgage payment, the owner pays down the principal balance of the loan, thus creating...?

- Equity in the property

In what cases is the cost approach to appraisal used?

- FNMA Manufactured Housing loans, special use buildings, property in the process of being built, or property to be rebuilt

Fannie Mae loans for manufactured housing should not be done using the cost approach?

- False: Fannie Mae requires the cost approach

If Home Buyer is the cousin of Home Seller, what usually happens with the sale price?

- Home Buyer usually pays less for the property.

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. - The principle of anticipation applies, leading to increased home values.

What does time-value of money mean?

- Money in hand is better than money earned in the future.

What is the purchase price of a property with an NOI of $460,000 and a capitalization rate of 6%?

- NOI / Cap Rate= Purchase Price -In this example, the purchase price will equal $460,000 / 0.06 = $7,666,667.

What is the formula used when using the income capitalization approach?

- Net Operating Income/Capitalization Rate = Market Value

Which of the following numbers is used to calculate the value of a property using the income capitalization approach?

- Net operating income - The NOI divided by the cap rate equals the property's value

If the capitalization rate on a property is greater than the interest rate on the mortgage, the investor will experience...?

- Positive leverage - Positive leverage is when a business or individual borrows funds and then invests the funds at an interest rate higher than the rate at which they were borrowed.

The top line in the income section of a pro-forma lists which of the following?

- Potential gross income

Which of the following documents is used to project the future performance of a property?

- Pro-forma

What types of properties are appraised using the income capitalization approach?

- Property that is expected to generate income for the owner. - Income producing properties are valued using the income approach. - These include office buildings and multi-family buildings.

What happens to property values if lenders freeze lending?

- Property values drop because of a lack of capital.

What is the NOI of a property that was purchased for $2,400,000 at a capitalization rate of 10%?

- Purchase Price x Cap Rate= NOI - In this example, the NOI will equal $2,400,000 x 0.10 = $240,000.

What are the three methods for determining the cost of development?

- Quantity survey method, - unit-in-place method and - square foot method - The quantity survey method is the most accurate method, but the most time-consuming. The unit-in-place method or the square foot method (also known as the comparative unit method) may also be used.

If an investor purchased a property for $2,000,000 using all cash, what would be their return on investment in year one if the property yielded $260,000 in cash flow?

- ROI is equal to cash flow divided by the initial cash investment. - In this example, the ROI will equal $260,000 / $2,000,000 = .13 or 13%.

What is the last stage in the appraisal process?

- Reconciliation

What is reconciliation?

- Reconciliation is defined as the final stage in the appraisal process where the appraiser reviews the data and estimates the subject property's value.

If three properties in a neighborhood were sold to the original owner's cousins and siblings, can they be used for a sales comparison?

- Since they will not be considered an arm's length transaction, their sales prices will not reflect the true market value.

What is net operating income?

- The NOI is the cash flow from a property.

If all the homes sold recently have finished basements and the appraised property has an unfinished basement, what happens?

- The appraiser takes the cost of finishing and deducts from the value.

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. - Insured value is defined as the maximum amount an insurance company will pay if an insured asset is deemed a total loss. - The asset's insured value can either be its replacement cost or its market value, depending on the insurance policy.

The NOI plus the total expenses of a property equals which of the following?

- The effective gross income equals the NOI plus expenses. - The effective gross income is the total income collected from the property.

A builder buys all the lots of a street abutting a neighborhood and builds luxury homes. Property values in the neighborhood increase; what principle applies?

- The principle of progression applies.

What is the principle of regression?

- The principle of regression affirms the worth of a higher valued residence tends to be diminished by association with lesser valued residences in the same area.

Can all property be valued using the sales comparison approach?

- The sales comparison approach is closely associated with residential properties. - Commercial properties are valued using the income approach. - Special purpose buildings are valued using the cost approach.

What value is used during the reconciliation process?

- The value derived from the sales comparison approach. - The value derived from the cost approach. - The value derived from the income capitalization approach.

There are 12 buyers looking for homes in the same neighborhood. There are only 8 homes in the neighborhood. What happens to the property value?

- The value of the properties are higher because of demand.

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.

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 happens when a person adds on two bedrooms to an existing two bedroom home, when all the homes in the neighborhood have three bedrooms?

- This goes against the principle of conformity, leading to diminished returns.

This principle affirms the value is created by anticipated benefits to be derived in the future...?

- This question refers to the definition of the principle of anticipation.

According to this principle, it is the future, not the past, which is of prime importance in estimating value...?

- This question refers to the definition of the principle of change.

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. - If employment decreases, so will demand for housing. As demand decreases, so do home values.