Real Estate: Valuation/ Market Analysis

Capitalization

A mathematical process used in estimating the value of income producing property by applying a certain capitalization rate to the net operating income.

An appraiser using the cost method can use the unit cost per square foot or per cubic foot in his/her computations. On a unit cost basis:

A small house would cost more than a large house. The cost of the essential core items such as the kitchen and bathrooms (which are usually the most expensive to produce) would be prorated over a smaller number of square feet so the unit cost would be higher in a small house.

Which of the following comparables would be the most helpful in appraising a home?

A similar home sold by a motivated seller to a motivated buyer. This relates to the "willing seller, willing buyer" concept of value.

Both buildings and neighborhoods alike generally exist in one of four life cycle stages; these are:

Growth, stability, decline, and revitalization. As they are developed, they achieve growth, attain a period of equilibrium (or stability) in which little change is evident, then decline as properties deteriorate. Then, if warranted, they are repaired and undergo a fourth stage, revitalization.

When using the land residual technique, the goal is to establish the value of the:

Land. The land residual technique is a method of estimating the value of land through the capitalization of income used when the value of the land is not known.

When appraising a commercial property, an appraiser would be least interested in:

Original cost. The value of commercial property is more often derived from its income earning potential.

The income approach would NOT be used when appraising:

Residences in a subdivision. When there are no suitable comparables or in this case no income to capitalize, the income approach is not a viable method.

Physical Obsolescence

An appraisal term that describes the ordinary deteriorization of a property due to aging

A homeowner builds a $1,200,000 house among $675,000 to $900,000 homes. A loss in value suffered by the expensive home would be best attributed to:

Economic obsolescence.

A loss in value due to a city sewer system in poor condition would be classified as:

Economic obsolescence. A poor sewer system is an outside influence and is considered economic obsolescence.

Any loss in value due to placing a building in an incompatible neighborhood would be an example of:

Economic obsolescence. The fact that neighboring properties are hurting the value of a building would indicate that it is suffering from economic obsolescence.

A flight pattern to a nearby airport was changed so that planes pass over a single-family residential neighborhood. Any loss in value to these properties would be attributed to:

Economic obsolescence. This outside influence is considered economic obsolescence.

Which would be considered economic obsolescence?

Blighted neighborhood. Economic obsolescence concerns influences outside the property limits and would include a blighted neighborhood.

What has the least to do with market value?

Book value. Book value is the adjusted basis of an asset and usually differs from appraised value or market value.

An appraisal under the cost approach method, places the value of landscaping, fences and walkways:

Usually in the land value. Landscaping, fences, and walkways are considered as improvements or simply as part of the land.

Knowing that the value of a home can be influenced by neighboring property, the value of a home would least likely be influenced by a neighborhood containing:

Vacant Lots

Capitalization Rate

The rate of return a property will produce on the owner's investment.

The primary steps of the cost approach are to

(1) estimate the land value (2) estimate the replacement cost of the building new (3) deduct all accrued depreciation from the replacement cost and (4) add the estimated land value to the depreciated replacement cost.

Recognized methods of appraisal?

1. Comparative Method 2. Allocation Method 3. Extraction Method

What 3 things are important to an appraiser?

1. Location 2. Recent comparable sales 3. Square Footage

Appraisal

A document from a professional that gives an estimate of a property's fair market value based on the sales of comparable homes in the area and the features of a property. An appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property

What is meant by the expression "turnkey project?"

A development where everything is ready for the buyer to move in. A turnkey project is a development term meaning the complete construction package from ground breaking to building completion. All that is left undone is to "turn over the keys" to the buyer.

Economic Obsolescence

A loss in the value of a property due to outside forces over which the owner has no control

Functional Obsolescence.

A loss of value to an improvement to real estate arising from functional problems, often caused by age or poor design.

Interest Rate

A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. Interest rates often change as a result of inflation and Federal Reserve policies.

Adjusted Basis

Adjusted basis. The original cost basis of a property reduced by certain deductions and increased by certain improvement costs.

What is the best way to appraise a land site?

Allocation. The allocation method (also called the abstraction or extraction method) is an appraisal method whereby the appraiser estimates the land value of any improved property by deducting or abstracting the value of any site improvements from the overall sales price of the property.

When analyzing the income produced by a property, an appraiser is concerned with:

Amount of income, prospect of continued income, quality of tenants

Inverse Condemnation

An action for just compensation brought by a person whose property has been effectively taken, substantially interfered with, or taken without just compensation. For example, when a governmental authority announces it will condemn an owner's property and then unduly delays in taking the property, the owner can bring legal action to force a condemnation and payment for the taking.

An appraiser using the cost approach to appraise property would be least concerned about the economy in the area of the subject property when appraising:

An electronic assembly plant. An electronic assembly plant is producing products which will not depend on the local economy. The products will be distributed either nationally or internationally. The value of the other three choices would be directly affected by the local economy.

While the economy is experiencing inflation, interest rates:

And housing prices rise. During inflationary periods, interest rates and housing prices usually rise.

In order to accurately calculate a gross rent multiplier, what data would an appraiser obtain from comparable properties:

Annual rent and the selling price. The gross rent multiplier is arrived at by dividing the monthly or annual gross rent into the selling price of the property.

The increase of value with the passage of time describes:

Appreciation. Appreciation is a temporary or permanent increase in the worth or value of property due to economic causes, the opposite of depreciation.

When using the building residual technique, the unknown value is the value of the:

Building. The building residual technique is used to determine the value of the building only.

How would an appraiser define the boundaries of a residential neighborhood?

By social conformity. A neighborhood is defined as a contiguous area showing common social characteristics.

An appraiser would use which of the following approaches in appraising a shopping center?

Capitalization Approach. The shopping center would regularly produce income and would be valued using the capitalization (income) approach to value.

An appraiser would determine the value of an apartment building by:

Capitalizing anticipated future income. The income capitalization method analyzes a property's anticipated future income.

An appraiser employed to appraise a commercial strip mall valued at $550,000 must hold which of the following appraisal licenses?

Certified general. There are different levels of appraiser licenses issued by the Office of Real Estate Appraisers (OREA). A certified general appraiser's license would be required to appraise a commercial strip mall valued at $550,000.

A property with great amenity value would best be appraised by using the:

Comparison method. The comparison method would be used in this case by adjusting comparables to compensate for the amenities of the subject property.

Real estate undergoes constant change from?

Constant change from physical, economic, social, and political forces.

Capitalization is a process whereby an appraiser:

Converts income into capital value.

The quantity survey method, unit-in-place method, and square foot/cubic foot methods of real estate appraisal most directly relate to the:

Cost Approach. In the cost approach, an appraiser may use all of these methods to determine the cost to build.

Property that is very seldom sold would be appraised by which of the following appraisal techniques?

Cost approach

Which of the following appraisal techniques require a separate estimate for the value of the land?

Cost approach

Reproduction

Cost is the cost of reconstructing a replica of the existing structure using the same design and materials.

What would influence the value of a commercial lot?

Drainage, proximity to transportation, compaction of soil. Fertilization of soil would NOT influence it. The fertility of the soil applies to agricultural land.

Physical Deterioration refers to?

Deferred Maintenance

What is the first step in the appraisal process?

Define the appraisal problem. The first step in the appraisal process is to write a concise statement of the appraisal problem.

The capitalization rate in the income approach provides for "return of" and "return on" the investment. "Return of" refers to:

Depreciation. An investor is allowed a "return on," his/her investment which is the same as interest, and a "return of" which is depreciation,. The "return on" is the investor's profit. The "return of" allows for depreciation of the wasting asset.

A gross rent multiplier is obtained by:

Dividing sales price by gross monthly rent.

The period over which a property may be profitably utilized is called its:

Economic Life. Economic life is the estimated period over which it is anticipated that a property may be profitably utilized.

Which is the least important in appraising property using the cost approach?

Estimated rental income. Income is not considered when using the cost approach method.

Which of the following is the biggest problem in using the cost approach to appraise an older building?

Estimating accrued depreciation. For appraisal purposes, accrued depreciation is the difference between the cost to reproduce the property (as of the appraisal date) and the property's current value as judged by its condition. Accrued depreciation is difficult to estimate on very old properties.

Amenities are:

Features that add to the value or desirability of a property. Amenities are features both tangible and intangible that enhance and add to the value or desirability of real estate. In a condominium for example, common amenities include a swimming pool, clubhouse, and a good view.

To arrive at a capitalization rate in the appraisal of an income producing property, no provisions should be made for:

Federal income taxes.

What is least important to an appraiser?

Financing.

The measurement or the length of road that abuts a thoroughfare is referred to as:

Frontage. Frontage is a term used to describe or identify that part of a parcel of land or an improvement on the land which faces the street

A four-bedroom house with a one-car garage would be an example of:

Functional obsolescence. Functional obsolescence is a loss in the value of a property resulting from a deficiency in the floor plan of a house. A one-car garage would be inadequate for the four bedroom house.

The principle of anticipation applies when using the:

Income approach. The income approach estimates value based on the amount of net income a property is anticipated to produce over its remaining economic life.

If interest rates on loans increase, capitalization rates would tend to:

Increase. The "return on" part of the capitalization rate is the same as interest. If interest rates increase, the capitalization rate increases.

Economic obsolescence would be considered:

Incurable. Whether an item of depreciation is curable or incurable depends soley on the cost to cure. Since economic obsolescence is caused by external forces there is usually nothing that can be done to change it.

Item is NOT deducted from gross income to determine net income for capitalization purposes?

Interest on money invested. Interest payments are not considered an expense when estimating the value of the property.

If the current highest and best use of a property is expected to change, the current use is referred to as the:

Interim use. An interim use is some use the property is put to while waiting for some future action that will make another use the most productive or as we say in the business..."it's highest and best use." Interim use is a form of nonconforming use of property.

obsolescence

Is NOT a depreciation method, it is a loss in value due to a decrease in the usefulness of property caused by decay, changes in technology, people's behavior, patterns and tastes, or environmental changes.

Income Approach

Is based on the theory that the present worth or value of an income property is the present worth of future net income.

Gross rent multiplier

Is used as a substitute for the income approach in the valuation of a single-family home. The figure used as a multiplier of the gross monthly income of a property to produce an estimate of the property's value.

The three phases normally involved in a single-family dwelling?

Land acquisition, development, and construction. These are the 3 stages of building a single-family dwelling.

If a building is in exceptionally good condition, its effective age is:

Less than its actual age.

What part or portion of the narrative report contains the estimate of value?

Letter of Transmittal. The letter of transmittal identifies the property, purpose of the appraisal, methods used, and value estimate.

Should be included when estimating the value of an income property using the capitalization approach?

Management expenses

The objective value of a property is closest to:

Market Value. Objective value is what a reasonable person ends up paying for a property.

Capitalization Rate

Measures the risk involved in an investment. Thus, the higher the risk the higher the CAP rate; the lower the the risk the lower the CAP rate. Leasing a building for a hardware store involves higher risk of vacancy than leasing for a post office and results in a higher CAP rate.

which would most likely be the highest value?

Market value

Appraiser's primary concern in the appraisal of residential property?

Marketability. If a residential property is not marketable, it is worthless.

The best expression of why real estate has value?

Maximum utilization of available resources. Maximum utilization of available resources relates to highest and best use.

Which of the following appraisal reports is the most complete and detailed?

Narrative. A narrative report is a complete document including all pertinent information about the area and the subject property, as well as the reasons and computations for the value consideration.

In the appraisal of residential property, the cost approach is most appropriate in the case of:

New property. Cost estimates per square foot can more easily be ascertained with new property.

An increase in value as a result of taking several small parcels and joining them together to form a larger parcel is called:

Plottage value. Assemblage is the combining of two or more adjoining lots into one large tract. This is usually done to increase the value of the individual lots because a larger building capable of producing a larger net return may be erected on a larger parcel. The resulting added value is called plottage value.

Value is best described as:

Present worth of future benefits.

Demand being equal:

Prices increase as availability decreases. This is an example of supply and demand.

Functional Obsolescence occurs inside?

Property lines

In order for demand to be effective, it must be implemented by:

Purchasing power

What is the most expensive and most difficult type of appraisal?

Quantity survey. The quantity survey method of appraisal is a highly technical process that requires the appraiser to list every item of material and the cost to install it in the building. It is a very detailed and expensive way to appraise a building.

The effectiveness of the market data approach would be limited most by:

Rapidly changing economic conditions. If economic conditions are rapidly changing, it is difficult to make the adjustments to the price of comparable properties.

The immediate surroundings of real estate is important because:

Real estate is immobile. Real estate is immovable by nature and cannot escape its immediate surroundings.

In appraisal, the adjustment process, whereby, comparables are adjusted to the subject property is known as:

Reconciliation. Reconcilation is the process of interpreting the data gathered by bringing the various value estimates into mutual relationship with one another to determine a final estimate of value. With this process, the comparables are always adjusted to the subject property.

Restoring an old home to its original condition without making any changes in the floor plan or style is referred to as:

Rehabilitation. Rehabilitation is the restoration of a property to a satisfactory condition without changing the plan, form, or style of the structure.

When performing an appraisal for insurance purposes, an appraiser would be concerned with:

Replacement cost. Valuation for insurance purposes is concerned with replacement cost.

You are preparing a competitive market analysis on a vacant lot that you hope to list for sale. Which of the following approaches to value will be used in the development of the estimated value?

Sales comparison approach. The sales comparison approach is most applicable to the appraisal of vacant land.

When an appraiser uses the term "adjusted sales prices" when describing comparables, he/she is referring to:

Sales price plus or minus adjustments for specific characteristics.

The most important economic consideration in relationship to land is:

Scarcity. Scarcity is a lack of supply of some type of real property, the supply of which cannot readily be increased. Scarcity results in increased value when demand exceeds supply.

The most difficult step in applying the income approach in the appraisal of income property is:

Selecting a proper capitalization rate.

The economic life of improved property is which of the following in relation to the physical life?

Shorter. Economic life is the estimated period over which an improved property may be profitably utilized so it will yield a return. The physical life is the estimated period during which a physical thing is habitable if normally maintained. Typically, physical life is expected to be longer than economic life.

Which of the following is the best (or most common) appraisal method used to calculate replacement cost?

Square-foot method

Method of Depreciation

Straight line, sum-of-the-years, declining balance.

A cul-de-sac is which of the following?

Street

Which of the following includes site plans, elevations drawings and street locations?

Subdivision Map

The principle of "highest and best use" refers to the use:

That produces the greatest net income attributable to the land. Highest and best use refers to use of land. It is that use of the land that will produce the greatest net income designated and credited to the land.

Effective age

The apparent age of a building based on observed condition rather than chronological age. The effective age of improvements to real property at the time of inspection differs from actual age by such variable factors as depreciation, quality of maintenance, and the like.

The effect of depreciation is:

The basis goes down. Basis, as it relates to income property goes down each year as the owner deducts depreciation. It may also go up with the addition of capital improvements. Basis or book value will never reach zero because the land does not depreciate.

When using the cost approach, the appraiser may estimate the cost of reconstruction based on its "reproduction" cost or its "replacement" cost. "Reproduction" cost is:

The cost to build an exact replica using the actual materials and design of the present building.

When using the market-data approach to appraise a single-family home, recent sales are compared to the subject property as to:

The entire property. When using the Market Data Approach, the entire property is examined for comparison purposes.

Inflationary Period

The gradual reduction of the purchasing power of the dollar, usually related directly to increases in the money supply by the federal government

Income Approach

The income approach is used in the appraisal of an income-producing property.

Market Value

The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale. Such conditions include the assumption that the buyer and seller acted prudently and knowledgeably and that the price is not affected by undue stimulus.

Cost Approach

The process of estimating the value of a property by adding to the estimated land value, the appraiser's estimate of the reproduction or replacement cost of the building, less depreciation - is most applicable to the appraisal of special purpose properties such as a church.

Sales comparison approach

The process of estimating the value of a property by examining and comparing actual sales of comparable properties.

The "Statement of Purpose" section of a narrative appraisal report would contain which of the following?

The type of value being given. The type of value being given is stated in the "Statement of Purpose." Appraisals are used for various reasons (i.e., loans, insurance, taxation, public acquisition).

An appraiser is appraising a property which is next door to an abandoned gas station. The appraiser should recommend a:

Toxic waste study. There is a possibility that the old underground fuel storage tanks used by the gas station were left in the ground and may be leaking. A toxic waste study would require a soil analysis to determine if the tanks have leaked. A soil engineering study is used to test the soil's ability to support a structure

Which appraisal method values electrical work by number of light fixtures per square yard?

Unit-in-place method. The unit-in-place method, is a method for computing replacement cost which uses prices for various building components as installed, based on specific units of use such as square footage or cubic footage. For example, insulation may cost $.07 per square foot, drywall $1.50 per square yard, painting $.08 per square foot, and so on.

In an appraisal, the term "utility value" would most nearly be described as:

Use Value. Utility value is the value in use to an owner-user. A property that has no utility has no value.

The subjective value of a property is the:

Use value to the owner. Since value sometimes depends on the use by a specific owner, it tends to be considered subjective.

In a tight money market, when interest rates are increasing, but rental rates are stable, how do these circumstances influence the market value of real property?

Value decreases. The value of real property decreases during "tight money" conditions.

After capitalizing the net income of a property and then deducting the replacement cost of the improvements, an appraiser has established the:

Value of the land.

Market value is determined by:

Value paid. The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale. It is assumed that the buyer and seller acted prudently and knowledgeably, and that the price is not affected by undue stimulus.

The relationship between a property and a prospective purchaser is known as:

Value. Value can also be described as the relationship between a property and a prospective purchaser. The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale (market value).

Value is best described as:

Worth. Value is generally described as the amount of money deemed to be the equivalent in worth of the subject property.