Valuation

The Cost Approach

Best used for appraising new or unique properties. Highest estimated value

Amenities

Convenient features that helps to make life pleasant; peace and quiet, good school, close to shopping.

Depreciation can be considered..

Curable or Incurable. If it cost more to fix it than the benefit you get from fixing it, then its incurable.

Four Essential Elements of Value (DUST)

Demand, Utility, Scarcity, Transferability

Accrued depreciation

Depreciation built up over time. Deferred maintenance

Market Data Approach

Finding value by comparing a property to other properties of similar size and condition in the same area. Oldest method of appeasing and is most used.

Gross Rent Multiplier

Finding value of small rent producers.

Economic Obsolescence

Loss in value from forces outside the property lines. Ex: A toxic dump built across the street

Formula for income approach..

Net income divided by capitalization rate = property value. Triangle method

Principle of Substitution

No person is justified in paying more for a property when a similar property can be purchased for less - sets an upper limit on price. Shop snd compare

The principle of change

Nothing remains the same for very long.

The principle of anticipation

Purchase price is affected by the expectation of future appeal and benefits

Formula for cost approach..

Replacement cost - depreciation + land value = property

Income Approach (Capitalization Approach)

Seeks to find the present worth of all future benefits

The first step to any appraisal is to..

State the problem

Assemblage

The combining of two or more adjoining lots into one larger tract to increase their total value.

Reproduction cost

The construction cost at current prices of an exact duplicate of the subject property.

Transferability

The costs involved in moving goods from one place to another

Demand

The desire to own something and the ability to pay for it (effective demand)

Plottage

The increase in value or utility resulting from the consolidation (assemblage) of two or more adjacent lots into one larger lot.

Capitalization Rate (Income Rate)

The investor's rate of return.

Physical deterioration

The loss in value due to wear and tear of the structure.

Highest and best use

The most profitable use of the property; the one that provides the greatest net return over time.

Economic life

The number of years during which an improvement will add value to the land. Note: Land is not depreciated, only the improvements.

Situs

The personal preference for one area over another

Value

The present worth of future benefits arising from the ownership of the property

Market price

The price a property DID sell for

Fair Market Value

The price it SHOULD sell for

The principle of contribution

The value of any component of property is determined by how much value the improvement contributes to the value of the whole property.

Utility

Usefulness

The principle of conformity

Value is created and maintained when a property is similar to its surroundings

The principle of substitution is that: Select one: a. A person will not pay more for a property than the cost of another property of equal utility and desirability. b. Amenities are always balanced in appraising. c. Locations can be freely substituted. d. The period for which a property can show a return attributable to the improvements.

a. A person will not pay more for a property than the cost of another property of equal utility and desirability.

The period for which a property can show a return attributable to the improvements is known as: Select one: a. Economic life b. Chronological life c. Effective age d. Depreciation life

a. Economic life

In using the cost approach, you would NOT need to know: Select one: a. Original cost b. Square footage c. Depreciation d. Land value

a. Original cost

The market data approach is based on the principle of: Select one: a. Substitution b. Change c. Anticipation d. Conformity

a. Substitution

Jim Jackson wanted to have a 14% return on his building which he valued at $140,000. What kind of monthly rent should be charged? Select one: a. $19,600 b. $1,633 c. $1,000 d. $1,233

b. $1,633

The investor's rate of return is the: Select one: a. Debt Service b. Capitalization Rate c. Rent Multiplier d. Net present value

b. Capitalization Rate

A method used by brokers and salespeople to determine the value of a property in order to place it on the market is: Select one: a. Income approach b. Competitive market analysis c. GRM d. Cost approach

b. Competitive market analysis

A separate value for the land must be computed for: Select one: a. Market approach b. Cost approach c. Capitalization approach d. Income approach

b. Cost approach

The best method for appraising new properties or properties that are unique is the: Select one: a. Income approach b. Cost approach c. Market Data approach d. Assemblage approach

b. Cost approach

Which of the following determines the gross rent multiplier: Select one: a. Multiplying the capitalization rate by the net income. b. Dividing the sales price by the gross rents. c. Multiplying the gross rents by the capitalization rate. d. Dividing the net income by the capitalization rate.

b. Dividing the sales price by the gross rents.

A junk yard located across from a subdivision would cause: Select one: a. Functional obsolescence b. Environmental obsolescence c. Physical obsolescence d. Non-conforming obsolescence

b. Environmental obsolescence

Using similar properties selling in the same area for the purpose of appraising, is known as the: Select one: a. Cost approach. b. Market Data approach. c. Highest and Best Use approach. d. Income approach.

b. Market Data approach.

When using the income approach, the appraiser divides the capitalization rate into: Select one: a. Gross income b. Net income c. Effective gross income d. Operating expense

b. Net income

After assembling two parcels of property and selling the new single parcel, you realized a profit of $50,000. This would be known as: Select one: a. Assemblage b. Plottage c. Substitution d. Income

b. Plottage

After assembling two parcels of property and selling the new single parcel, you realized a profit of $50,000. This would be known as: Select one: a. Assemblage b. Plottage c. Substitution d. Income

b. Plottage

The art of analyzing and effectively weighing the findings under the cost, market and income approach is: Select one: a. Plottage b. Reconciliation c. Assemblage d. Emblements

b. Reconciliation

In appraising a house for insurance coverage, you would be most concerned with: Select one: a. Income b. Replacement cost c. Selling price of similar homes. d. Age of the house.

b. Replacement cost

The most difficult depreciation to correct would be: Select one: a. functional b. economic c. physical d. accelerated

b. economic

A property with a market value of $140,000 and the annual net income of $19,600 would have a capitalization rate of: Select one: a. 12% b. 7% c. 14% d. 17%

c. 14%

Of the following, which applies to the Market Data Approach of appraising? Select one: a. Based on how many days the property has been on the market. b. Based on the income the property can produce. c. Based on the principle of substitution. d. Based on the cost to rebuild the building.

c. Based on the principle of substitution.

When an appraiser assigns value to the rights to future income he is most likely using the: Select one: a. Market data approach b. Cost approach c. Capitalization approach d. Future forecast approach

c. Capitalization approach

The formula for the cost approach is replacement cost minus _________ plus land value = property value. Select one: a. Tax value b. Original cost c. Depreciation d. Sales price.

c. Depreciation

One bathroom in a four bedroom home would result in: Select one: a. Economic obsolescence b. Physical obsolescence c. Functional obsolescence d. Transferrable obsolescence.

c. Functional obsolescence

An appraisal of property determines the: Select one: a. Selling price b. Highest and best use. c. Market value d. Economic value

c. Market value

The first step of an appraisal is for the appraiser to realize the: Select one: a. Market Value b. Fair Market Value c. Purpose of the appraisal. d. Cost of materials used to build.

c. Purpose of the appraisal.

Economic obsolescence DOES NOT result from: Select one: a. Adverse zoning changes. b. A large industry in the city closing its doors. c. A waste dump next to a subdivision. d. An outdated kitchen.

d. An outdated kitchen.

The idea that a property's value is safer when surrounded by similar properties is the principle of: Select one: a. Substitution b. Progression c. Regression d. Conformity

d. Conformity

The first step in the appraisal process is: Select one: a. Collection of the data. b. Analysis of the data. c. Inspection of property d. Definition of the problem.

d. Definition of the problem.

A large warehouse office that CANNOT be air-conditioned would best define: Select one: a. Economic obsolescence b. Locational obsolescence c. Physical depreciation d. Functional obsolescence

d. Functional obsolescence

The relationship of the value of property to its monthly rental income determines the: Select one: a. Capitalization rate. b. Recovery rate. c. Recapture rate. d. Monthly gross rental multiplier.

d. Monthly gross rental multiplier.

To determine the annual gross rent multiplier: Select one: a. Monthly rent divided into the sales price. b. Sales price divided by the monthly rent. c. Annual rent divided into the sales price. d. Sales price divided by the annual rent.

d. Sales price divided by the annual rent.

All improved properties go through these stages:

-Growth -Stability (balance) -Decline

Depreciation Equation

100% depreciation divided by economic life = % depreciation per year

Depreciation

A decrease or loss in value

Functional Obsolescence

A loss in value bc the property doesn't functional the way it should. Ex: 4 bedroom house with 1 bath

Principal of regression

A property of higher value situated amongst a group of lower valued property will lose value.

Principal of progression

A property of lower value situated amongst a group of higher valued property will gain value.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants

Appraisal

An estimate of the current value of the property.

Broker's price opinion (BPO)

An estimate of value based on the opinion of a broker or agent

The principle of competition

An increase in competition will result in decreased profits.

Competitive Market Analysis (CMA)

Analysis of market activity among comparable properties; not an appraisal!