Chapter 16: Appraising and Estimating Market Value

If net income on a property is $20,000 and the cap rate is 5%, the value of the property using the income capitalization method is

$400,000.00

The roof of a property cost $10,000. The economic life of the roof is 20 years. Assuming the straight-line method of depreciation, what is the depreciated value of the roof after 3 years?

$8,500

If the monthly rent of a property is $3,000, and the gross rent multiplier (GRM) is 80, what is the value of the property?

3,000 x 80 = $240,000

Which of the following is most accurate regarding appraisers and brokers?

A broker is not necessarily a disinterested third party when searching for an opinion of value; Generally, a broker trying to determine the estimated value of a property is considered an interested party since he or she is involved in the transaction where the property is sold or purchased.

What does a broker or salesperson who is attempting to establish a listing price or range of prices for a property use in order to do so?

A comparative market analysis.

Between an appraisal and a broker's opinion of value, which is most reliable?

An appraisal report is most reliable; it relies on data and the estimated value is achieved by using multiple calculating approaches.

When making a decision as big as committing to purchase a property, what should you rely on when determining how much to spend on the property?

An appraisal report; An appraisal report is much more reliable than a broker's opinion of value; therefore it should be used in your decision making.

If your client requires financing to purchase a property, what will be used to determine the value of the property when attempting to obtain financing?

An appraisal report; When attempting to obtain financing, among other things, the mortgage company will need an appraisal report to determine whether they will finance the amount

The income capitalization approach to appraising value is most applicable for which of the following property types?

Apartment buildings

What Act denotes that all appraisals be conducted by competent individuals whose professional conduct is properly supervised?

FIRREA; requires that competent individuals whose professional conduct is properly supervised perform all appraisals used in federally-related transactions.

What is true regarding real estate value?

Income when there are leases on the land are part of the real estate value; an investor will pay money to buy the income stream generated by ownership of the property.

In a CMA, the broker tends to be biased because there is motivation coming from the desire to option a listing. Additionally, a broker is less likely than an appraiser to consider the full range of data about market conditions and comparable sales. (T/F)

TRUE

Income, appreciation, use, and tax benefits are the primary benefits that contribute to real estate value. (T/F)

TRUE

Which of the following is most accurate regarding a CMA?

The broker is biased as he or she is motivated by the desire to obtain a listing; a broker is less likely than an appraiser to consider the full range of data about market conditions and comparable sales.

What type of guidelines drives the appraisal industry?

Uniform Standards and Professional Appraisal Practice (USPAP) is a set of standards, guidelines and provisions for the appraisal industry.

In which of the following circumstances would a broker's opinion of value not be useful?

When determining investor financing.

What do you call an increase in the market value of a parcel of land over time?

appreciation; usually resulting from a general rise in the sale prices of real estate throughout the market area.

_________is the value of a property as estimated by a taxing authority as the bases for ad valorem taxation.

assessed value

What do you call the value of the property as carried on the accounts of the owner?

book value; The value is generally equal to the acquisition price plus capital improvements minus accumulated depreciation.

What is the first step in the process of an appraisal?

define the purpose of the appraisal

In appraisal, loss of value in a property from any cause is referred to as

depreciation.

The first two steps in the cost approach are to estimate the value of the land and the cost of the improvements. The remaining steps are

estimate depreciation, subtract depreciation from cost, and add back the land value.

An office building lacks sufficient cooling capability to accommodate modern computer equipment. This is an example of

functional obsolescence; occurs when a property has outmoded physical or design features which are no longer desirable to current users.

What kind of income based approach is used in a circumstance where there are properties that produce or might produce income but are not primarily income properties?

gross rent multiplier or gross income multiplier approach

As a component of real estate value, the principle of substitution suggests that

if two similar properties are for sale, a buyer will purchase the cheaper of the two

A home is located in a neighborhood where homeowners on the block have failed to maintain their properties. This is an example of

incurable economic obsolescence; the loss of value due to adverse changes in the surroundings of the subject property that make the subject less desirable.

Highest and best use of a property is that use which

is physically and financially feasible, legal, and the most productive.

Appraisers formulating their appraisals are most commonly in search of estimating what kind of value?

market value

One weakness of the cost approach for appraising market value is that

market value is not always the same as what the property cost.

What type of value is generally sought in appraisals?

market value; an estimate of the price at which a property will sell at a particular time This type of value is the one generally sought in appraisals and used in broker's estimates of value.

In formulating the value of a property you are trying to help sell, what type of value might you use?

market value; the type of value that one can use to determine what the purchase price of a property should be as it relates to its worth at a particular point in time.

The principal shortcoming of the gross rent multiplier approach to estimating value is that

numerous expenses are not taken into account.

There are two main distinctions between a CMA and an Appraisal. These are:

objectivity and comprehensiveness

Net operating income is equal to

potential gross income minus vacancy and credit loss minus expenses.

What is the calculation for gross income multiplier approach?

price divided by gross annual income

What is the calculation for the gross rent multiplier approach?

price divided by monthly rent

What type of value can be used to determine how much a new owner can charge for rent in his or her new investment property?

rental value; an estimate of the rental rate a property can command for a specific period of time.

The cost of constructing a functional equivalent of a subject property is known as

replacement cost.

Most insurance companies use the following knowledge of value to determine the insured value of a property:

replacement value; can be useful in considering what type of coverage a property should have. Replacement value is the value based on the cost of constructing a functional equivalent of the subject property's improvements, assuming current construction costs.

_________ is the value based on the cost of constructing a precise duplicate of the subject property's improvements, assuming current construction costs.

reproduction value

What do you call the estimated selling price of a property at some time in the future?

reversionary value; This value is used most commonly in a performa investment analysis.

When determining whether to purchase a decrepit property on a decently sized plot of land, ________ value was helpful in figuring out whether the value would be worth it if the building were dismantled.

salvage

What does the potential gross income in the income approach include?

scheduled rent and other income

The steps in the market data approach are

select comparable properties, adjust the comparable, estimate the value

A significant difference between an appraisal and a broker's opinion of value is

the broker may not be a disinterested party.

What kind of appraisal approach is most commonly used for newly built properties where actual costs of development and construction are known?

the cost approach

The income approach is based off of the principal of anticipation. What does this mean?

the expected future income stream for property will determine what an investor will pay for the property

How would you best describe real estate value?

the present monetary worth of benefits arising from the ownership of real estate

The concept of market value is best described as

the price that a willing, informed, and unpressured seller and buyer agree upon for a property assuming a cash price and the property's reasonable exposure to the market.

The steps in the income capitalization approach are:

the sales comparison approach

When determining investor financing.

the sales comparison approach

Which appraisal approach serves as the basis for a broker's opinion?

the sales comparison approach

In the sales comparison approach, an adjustment is warranted if

the seller offers below-market seller financing

What is a leasehold value?

the value of the lessee's interest in a property.

What in large part determines a property's value?

the way the property is being used

A notable weakness of the sales comparison approach to value is that

there may be no recent sale price data in the market

What is the final step in the appraisal process?

to present the estimate of value in the format requested by the client

While appraisers use different types of appraisal approaches, real estate agents:

use a limited form of one of the three appraisal approaches

To complete the sales comparison approach, the appraiser

weights the comparable.