Module 11: Real Estate Appraisal
A new company has just opened in an area. There are not too many properties for sale yet, and no new construction taking place. Many people are moving into the area to take these new jobs. What type of market has been created? A.) Balanced market B.) Buyer's market C.) Seller's market D.) Trader's market
C
A period of time during which a structure may reasonably be expected to perform the function for which it was designed is known as its A.) Chronological age B.) Depreciation C.) Economic life D.) Effective age
C
Appraiser Allison used various cost manuals and regional multipliers, as well as her own experience, to determine that it would cost $72 per square foot to replace the subject property. If the property's square footage is 1,775 what is the estimated cost to rebuild the house? A.) $87,900 B.) $106,450 C.) $127,800 D.) $132,900
C
Based on what you know about CMAs so far, which formal appraisal approach do you think it most resembles? A.) Cost approach B.) Income approach C.) Sales comparison approach D.) It has elements of all three
C
Gladys is a widow who has been working hard to maintain her home as well as she can, but there's only so much she's able to do. It's just too much house for her and she's ready to move to a condo. As she prepares her home to sell, all of these could be considered curable physical federation except the: A.) Carpet is stained and ripped B.) Driveway pavement is cracked C.) Floor joists are sagging D.) Paint on the siding is peeling
C
In an arm's length transaction, the market price should be A.) Less than market value B.) Greater market value C.) Equal to market value D.) It's impossible to tell
C
A building has an effective age of twenty years, an actual age of ten years, and a total expected life of seventy years. What is the remaining economic life of the building? A.) 30 years B.) 40 years C.) 50 years D.) 60 years
C To calculate remaining economic life, subtract the effective age (20 years) from the total expected life (70 years)
After freeway construction, a home experiences noise from traffic. This can be considered A.) Functional obsolescence B.) Poor urban planning C.) Poor smog control D.) External obsolescence
D
Agent Alex is using competitive market analysis to set his seller client Pam's expectations about the sale of her property. His research shows that there are 12 current listings and only three listings have sold in the past 90 days. Based on this, how long should Pam expect that her house might be on the market? A.) 60 days B.) 180 days C.) 6 months D.) 12 months
D
An example of external obsolescence would be A.) Peeling paint on a home's exterior B.) An outdated floor plan C.) A basement that leaks D.) Location in a declining neighborhood
D
Comparable sales should be A.) Competitive listings B.) On the same street C.) Special sale properties D.) Very similar in most respects
D
Considering the highest and best use of land is important A.) Only when the site is vacant B.) Only in the analysis of developed property C.) Only when land is ready for rezoning D.) In every appraisal
D
The age that a building appears to be based on wear and tear from physical, functional, or external obsolescence is the A.) Accrued age B.) Actual age C.) Chronological age D.) Effective age
D
What's the first step in the appraisal process? A.) Collect and analyze relevant data B.) Define the data and sources necessary to do the appraisal C.) Determine the value of the land separate from the structures D.) State the problem
D
Which of these reasons do you think is most likely to cause two investors to perceive different values for the same property? A.) Analysis of historical data for the subject property B.) Analysis of comparable properties C.) The current health of the marketplace D.) The anticipation of future income and expenses
D
Which statement best describes the nature of appraisals? A.) An appraisal can always determine market price B.) An appraisal is completely subjective in defining market value C.) An appraisal is completely objective D.) An appraisal is only an option of value supported by objective data
D
The Park Street Shops sold for $920,000. The four stores generate a total of $8,000 each month in rent; expenses run $2,500 each month. What is the gross monthly rent modifier? A.) 28.75 B.) 41.82 C.) 87.62 D.) 115
D GRM is found by dividing the sale price ($920,000) by the gross monthly rent ($8,000). Ignore the expenses
T or F: A Michigan state licensed real estate appraiser may appraise any residential property regardless of mortgage amount
False Up to 1 $1 million mortgage amount
T or F: When determining the extent of any physical deterioration, the appraiser must also consider the depreciation of the land
False With rare exception, land itself never suffers from physical depreciation
T or F: Fewer adjustments indicate that the comp is similar to the subject property
True
T or F: When adjusting properties, the comps are adjusted up or down depending on the features of the subject property
True
A competitive market analysis puts the most weight on A.) Any observable differences B.) The date of the sale C.) Financing concessions D.) All factors are treated equally
A
A nice, well-kept house located in the heart of an all residential area, surrounded by other well-kept houses of similar style and value is an example of A.) Conformity B.) Contribution C.) Regression D.) Substitution
A
Sue is appraising a 20-year old bank building. Based on her research and analysis on the quality of the construction and the local conditions, she determines that the building should have an economic life of 50 years. She also concludes that the building has not been well maintained and has an effective age of 30. What is its remaining economic life? A.) 20 years B.) 30 years C.) 40 years D.) 50 years
A
Vincent is tasked with deriving the value for a large, custom home that was constructed nine months ago on a secluded 10-acre lot. Which approach could be considered the most reliable for valuation? A.) Cost approach B.) Income approach C.) Sales comparison approach D.) All are equally reliable
A
What would be the best strategy for an agent whose objective is to determine a range of appropriate listing prices for his seller client? A.) Competitive market analysis B.) Cost approach C.) Income approach D.) Sales comparison approach
A
Which method of determining replacement cost is most rooted in market data? A.) Comparative unit method B.) Index method C.) Quantity survey method D.) Unit-in-place method
A
Jack is appraising a relatively new home and determines that the lot value is $14,000 and the home's replacement cost is $194,500. He finds no remarkable physical deterioration, but thinks that the lack of a two-care garage impacts the value. Cost manuals indicate that a two-care garage would cost $30,000 to build. Using the cost approach, what might be Jack's final estimate of value? A.) $178,500 B.) $208,500 C.) $210,500 D.) $224,500
A $14,000 + $194,500 - $30,000 = $178,500
What would happen to the estimate of value if the capitalization rate was higher? A.) It would be less B.) It would be more
A As the rate of return an investor desires goes up, the value of the property goes down
Which would most likely not be considered functional obsolescence? A.) Home with crumbling roof B.) Home with low ceilings C.) Home with steep, narrow stairs D.) Geodesic dome home in neighborhood of ranches
A Functional obsolescence is a problem with the design of the structure itself. A roof can be replaced relatively easily, it's an example of physical deterioration
Depreciation, as you'll recall, is the loss in value of a piece of real estate for any reason. Let's see what you remember. Which of these would be considered functional obsolescence? A.) A bedroom through bedroom floor plan B.) A home fronting on a busy four-lane highway C.) A home with a broken furnace D.) A home with severe structural damage to the foundation
A Functional obsolescence is when a building is less desirable because of something inherent in the design of the structure
Which homes should a real estate licensee consider when performing a CMA. Select all that apply A.) Home currently listed for sale in the market B.) Homes that have sold recently in the market and area where the subject is located C.) Homes where the listing agreements have expired D.) Homes that were taken off the market
A, B, C, and D
Fiona is appraising a home that was built in 1875. Because of its unique architecture, it is on the National Register of Historic Places. Which cost estimate is Fine more likely to need? A.) The replacement cost B.) The reproduction cost
B
Market price is A.) Equal to market value B.) The amount, in dollars, actually paid for the property C.) The amount, in dollars, asked for by the seller D.) The amount, in dollars, that a property should bring on the open market
B
Paul is doing an appraisal for Fannie Mae. What is the minimum number of comps he needs to consider when using the sales comparison approach? A.) 2 B.) 3 C.) 4 D.) 5
B
Which examples of deterioration would most likely be considered curable? A.) Basement with collapsing walls B.) Furnace too small for size of home C.) Peeling paint on home's exterior D.) Railroad tracks across the street E.) Shingles on roof damaged F.) Steep, narrow staircase
B, C, E
According to ANSI guidelines, what element(s) would not be considered part of the gross living area? Select all that apply A.) A bedroom's walk-in closet B.) A finished basement C.) A garage D.) An unheated sun porch
B, C, and D
Tor F: Michigan real estate licensees may perform an appraisal on residential property as long as he or she uses the sales comparison approach
False Real estate licensees may never perform an appraisal, unless they are also licensed appraisers
T or F: When adjusting properties, the subject property is adjusted up or down depending on the features of the comps
False The subject property is your base and each comparable is then compared to the subject. The subject never changes
An "arm's length transaction" means that the transaction occurred A.) Between a buyer and a seller who have a close family relationship B.) Under typical conditions where each of the parties were acting in their own best interests C.) When the buyer purchased the property sight-unseen D.) Only after the seller made concessions for closing costs
B
Comp #2 has a deck; the subject property does not have a deck. Through matched pay analysis, the appraiser has determined that a deck in that neighborhood is worth $3,000. What is the appropriate way to apply this information when performing the sales comparison to valuation? A.) Add $3,000 to Comp #2 value B.) Subtract $3,000 from Comp #2 value C.) Add $3,000 to the subject base D.) Subtract $3,000 from the subject base
B
Comp #3 has five bedrooms; the subject property has four bedrooms. Through matched pair analysis, the appraiser has determined that a bedroom in that neighborhood is worth $7,500. What is the appropriate way to apply this information when performing the sales comparison approach to valuation? A.) Add $75,00 to Comp #3 value B.) Subtract $7,500 from Comp #3 value C.) Add $7,500 to the subject base D.) Subtract %7,500 from the subject base
B
The first step in the appraisal process is to A.) Collect data B.) Define the appraisal C.) Define the data sources D.) Determine highest and best use
B
The principle of a substitution says that an informed buyer would pay ________ for the property than what the buyer would pay to obtain a similar one with the same benefits and utility A.) Less B.) No more C.) More D.) Considerably less
B
The severe structural damage to a home's basement and foundation would cost $80,000 to repair, but would add only $20,000 to the value of the property. This would most likely be considered A.) Curable physical deterioration B.) Incurable physical deterioration C.) Curable functional obsolescence D.) Incurable external obsolescence
B
The value of an improvement is equal to A.) The amount the owner adds to the selling price of the home when the home improvement is made B.) What it actually contributes in value to that piece of real estate C.) Only what the owner spent on the materials necessary to make the improvement D.) What it actually cost to make the improvement in both materials and labor
B
What feature of a comp is considered in a sales comparison appraisal that is not generally considered in a competitive market analysis? A.) Age B.) Financing concessions C.) Lot size D.) Number of rooms
B
What is the minimum number of comps required by most secondary lenders to ensure an accurate estimate of value when performing the sales comparison approach? A.) 2 B.) 3 C.) 4 D.) 5
B
Which principle indicates that a particular item or feature of a property os only worth what it actually adds in value to that piece of real estate? A.) Conformity B.) Contribution C.) Regression D.) Substitution
B
Will and Gwen are getting a divorce and need to sell their house. Ursula is considering purchasing the home. Buyer agent Betty just finished a competitive market analysis on the home. Who is the most likely audience for her value estimation? A.) Gwen's accountant B.) Ursusla C.) Ursula's lender D.) Will's attorney
B
Which would be considered external obsolescence? A.) A home with a one-care garage B.) A home fronting on a busy four-lane highway C.) A home with a broken furnace D.) A home with severe structural damage to the foundation
B External obsolescence is when something outside the control of a property, in this case a highway, makes it less desirable and therefore decreases its value
Robert own a building he leases to a software company, collecting monthly rent of $7,500. His expenses are $45,000 per year, and the building's depreciation is $10,000 per year. Robert wants to sell the building, and Hannah is interested in buying it if she can make a 12% return on her investment. Using the capitalization rate method, estimate the value that Hannah can expect A.) $291,666 B.) $375,000 C.) $540,000 D.) $750,000
B IRV formula Income / Rate = Value
For which property would you expect the cost approach method to be least useful? A.) A new home in a relatively new subdivision B.) An older home in a neighborhood with high turnover C.) A school building D.) A home with many unique features
B The cost approach is best for properties that have little relevant market data. The sales comparison approach would probably be more useful for a home in an older neighborhood with high turnover than the cost approach
Remember that the strip mall has a net operating income of $84,000. The capitalization rate in the area for similar properties is 12%. What is the value of the property? A.) $184,800 B.) $700,000 C.) $940,800 D.) %1,008,00
B The formula used for determining value using these figures is this: Income ($84,000) / Rate (12%) = Value ($700,000
Harvey owns a large home in a nice neighborhood. His house, impeccably maintained, is at the upper limit of its value. After he retired, Harvey spent $28,000 building a new deck and greenhouse on the back of his property. Although he enjoyed the new features, they did not add anything to the value of his home. This is an example of the principle of: A.) Conformity B.) Contribution C.) Regression D.) Substiution
B This principle states that a specific feature added to a home is only worth what it actually contributes in value to a piece of property
Amy is appraising a four-unit apartment building for a potential buyer. She determines that each unit should provide $800 per month in rent. She also determined, based on evaluating similar properties in the area, that the annual GRM for the building should be about 9. What is Amy's estimate of value? A.) $288,000 B.) $345,600 C.) $376,700 D.) $460,800
B Total annual rent ($800 x4 x12 = $38,400) x annual GRM (9) = $376,700
Which of these properties do you think is the best example of a piece of real estate being put to its highest and best use? A.) An abandoned building in the middle of a city lacking parking B.) A farm in the middle of a growing suburb C.) An office building in a corporate park D.) An old house with commercial development on both sides
C
Using Allison's notations, determine the final estimate of value using the cost approach: Replacement cost: $127,800; Deterioration: $19,000; Site Value $25,000 A.) $83,300 B.) $121,800 C.) $133,800 D.) $171,800
C $127,800 - $19,000 + $25,000 = $133,800
Using appraiser Maria's notations, determine the final estimate of value using the cost approach: Replacement cost = $465,000' Deterioration = $32,000; Site value = $85,000) A.) $412,000 B.) $433,000 C.) $518,000 D.) $550,000
C $465,000 - $32,000 + $85,000 = $518,000
The rent for each unit of a ten-unit strip mall is $1,000 per month. The annual vacancy rate averages 5%. The expenses for the property come to $30,000 per year with depreciation of $15,000. What is the net operating income? A.) $49,000 B.) $54,500 C.) $84,000 D.) $96,000
C Annual income (10 units x$1,000) x 12 months = $120,000) Vacancy (5% or $6,000) Expenses ($30,000) = NOI ($84,000
The income capitalization method is seen as more accurate than the GRM because it A.) Uses annual income B.) Uses monthly income C.) Considers expenses D.) Doesn't consider depreciation
C GRM is held to be not as reliable as the capitalization rate method to perform an income approach appraisal for a piece of real estate because the GRM does not take into account expenses and losses
Adding a second bathroom to a five-bedroom house will cost $25,000, which would increase the value by $12,000. This is an example of A.) Incurable external obsolescence B.) Incurable physical deterioration C.) Incurable functional obsolescence D.) Curable functional obsolescence
C It is incurable because the cost of renovation is greater than the value that will be added to the property
Appraiser Marla analyzes several rental properties in her town, determining their respective GRMs using gross annual rent. She determines that the gross rent multiplier for her subject property should be around 9.5. The property currently rents for $1,225 per month. What would be Marla's approximate estimate of value? A.) $116,375 B.) $128,950 C.) $139,650 D.) $154,750
C Multiply the annual rent ($14,700) by the GRM of 9.5 to find an estimate of $139,650
A commercial property has a first year gross operating income of $64,000 and expenses of $12,000. If the capitalization rate for similar properties in the same area is 8%, what is the estimate of value? A.) $416,000 B.) $533,333 C.) $650,000 D.) $768,000
C Net Operating income ($64,000 - $12,000) / Rate (8%) = Value ($650,000) Remember IRV
A run-down house in a good neighborhood A.) Benefits from the principle of regression B.) Is hurt by the principle of regression C.) Benefits from the principle of progression D.) Is hurt by the principle of progression
C When the value of a property is helped up by the other properties in the area, this is known as the principle of progreesion
That figure of $127,800 does not give us the value of the subject property, however, does it? What must also be considered in order to arrive at an opinion of value using the cost approach? Select all that apply A.) Depreciation B.) Inflation C.) Labor costs D.) Site value
A and D
Which is not an accepted appraisal approach? A.) Cost approach B.) Income approach C.) Highest and best use approach D.) Sales comparison approach
C
In Michigan, which licensee may appraise any type of property? A.) Certified general appraiser B.) Certified residential appraiser C.) Limited real estate appraiser D.) State licensed real estate appraiser
A
When looking at highest and best use, what is the primary consideration that the appraiser must take into account? A.) What is the ideal building for the land if it were vacant? B.) What is the most radical zoning change that the owner could try to get for the property? C.) What is the best way to ensure value without tearing down the existing structures if at all possible? D.) What is the best way to move the existing building to a new site?
A
Which Michigan appraiser license requires 3,000 hours of real estate appraisal experience? A.) Certified general appraiser B.) Certified residential appraiser C.) Limited real estate appraiser D.) State license real estate appraiser
A
Which Michigan appraiser license requires the greatest amount of experience? A.) Certified general appraiser B.) Certified residential appraiser C.) Limited real estate appraiser D.) State licensed real estate appraiser
A
A duplex recently sold for $200,000. It brings in monthly rental income of $900 per unit. The expenses for this property run $8,000 per year. What is the GRM using the annual income for this duplex? A.) 9.26 B.) 14.7 C.) 18.52 D.) 111.11
A Sale price ($200,000) / Annual income ($900 x 2 x 12 = $21,600). This gives us a GRM of 9.26 (rounded). Remember when figuring GRM, you do not consider expenses.
Appraiser Julia is estimating the value of a small office building. Which method of income approach would she be most likely to use? A.) Capitalization rate B.) Gross rent multiplier C.) Either would be appropriate D.) Neither would be appropriate
A The capitalization rate is used for commercial property and some residential rental property
Market __________ is what property is expected to sell for; market __________ is what the property actually sold for A.) Cost/price B.) Price/value C.) Value/price D.) Value/cost
C
Market value can best be defined as a property's A.) Appraised value for property tax purposes B.) Listing price C.) Most profitable selling price D.) Most recent selling price
C
Which appraisal approach is least useful for a special purpose property? A.) Cost approach B.) Income approach C.) Sales comparison approach D.) All are equally reliable
C
Which cost approach method requires a thorough itemization of every building component used? A.) Comparative unit method B.) Index method C.) Quantity survey method
C
Which homes should an appraiser consider when finding comps? A.) Homes currently listed for sale in the market B.) Homes where the listing agreements have expired C.) Homes that have sold recently in the subject's area D.) Homes that were taken off the market
C
Tom and Margo find their dream house which includes the stainless steel appliances they wanted, but it's priced high. They decide to buy a house two blocks away with nearly identical features, minus the appliances, for $20,000 less. They figure they can replace the appliances later if they choose and still come out ahead financially. What theory is at work? A.) Conformity B.) Contribution C.) Regression D.) Substiution
D
Appraiser Allen determined that the rental property he's appraising should take in $1,100 each month in rent, and he also determined that the GRM should be about 135. What is Allen's estimate of value? A.) $97,778 B.) $135,000 C.) $147,273 D.) $148,500
D Multiply monthly rent ($1,100 by the GRM (135)
The accepted standards of ethics and appraisal practice are known as A.) AQB B.) CMA C.) URAL D.) USPAP
D The Uniform Standards of Professional Appraisal Practice (USPAP)
Steve and Jana bought an empty lot on a quiet street of small, 40-year-old ranch homes. On the lot, they built a luxurious two-story 3,500 square foot home. A year later when they put their home on the market, its value will likely be held down by the other homes in the neighborhood. This is an example of the principle of A.) Anticipation B.) Balance C.) Progression D.) Regression
D The principle of regressions states that the value of the "best" home in a neighborhood is lower than what it might be in a comparable neighborhood
