Ch 3

A property is valued at $300,000 with a 5% capitalization rate (cap rate). If the prospective buyer wants an 8% return on their money, the property's valued would be:

187500 (As explained in Question 1, the value will move in the opposite direction as the capitalization rate (cap rate). $300,000 x .05 = $15,000 (net income) $15,000 ÷ .08 = $187,500)

Randy recently bought a 12-unit apartment building. What is the minimum number of years in which he may depreciate the building for federal income tax purposes?

27.5 (The depreciation minimum is 27.5 years regardless of the number of units or property usage, as long as it is held as rental property for investment purposes.)

in estimating the value of Fran's single family residence (SFR), the appraiser uses the same gross rent multiplier (GRM) that has been computed for comparable properties in the same neighborhood. The comparable properties generate a rental amount of $3,000 per month and were recently sold for an average of $450,000. The owner's property currently generates $3,200 per month in rent. The estimated value of the subject property is:

480000 (To use the gross rent multiplier (GRM) method of the income approach, you need to first determine the value of the multiplier by using the figures for the comparable property. As the rent increases, so will the property's value when the same multiplier is used. In this example, solve by using the comparable rent and sales price: $3000 x GRM = $450,000. Thus, $450,000/$3,000 = 150 (GRM). Then, apply the GRM to the subject property using the subject property rent: $3,200 X 150 (GRM) = $480,000 (value).)

Which of these is most likely to require an appraisal?

A U.S. Department of Veterans Affairs (VA)-guaranteed loan. (Of the choices offered, only a U.S. Department of Veterans Administration (VA) guaranteed loan is required to have an appraisal to justify the agreed-to sales price/loan amount. Consider the alternative answers: if mortgage financing is not needed, an appraisal is likely unwarranted, precluding answer choices A and D from being correct. In the instance of a new subdivision, as is the case with answer selection B, the lender typically commits to funding all completed sales transactions as part of the loan package agreed to when the land was acquired. Provided the buyer's credit is adequate, no further appraisal is required.)

When an appraiser values a property under the cost approach, they add the value of the site to the depreciated cost new of improvements. If the value of a site is $150,000, the cost to build a new house is $300,000, the cost to build a new garage is$75,000, and the value of site improvements such as landscaping and the driveway are $75,000, what is the final value of the property under the cost approach when a 20% physical depreciation factor is applied?

$525,000. (The cost approach requires the appraiser to adjust the house and garage costs, known as the "cost new" of constructed improvements, by a depreciation factor. Thus: $300,000 (house) + $75,000 (garage) = $375,000 x 0.2 (20% depreciation) = $75,000. Then subtract the depreciation amount from the cost new. $375,000 (cost new) - $75,000 (accrued depreciation) = $300,000 (depreciated cost new). Finally, add the various amounts: $150,000 (site) + $300,000 (depreciated construction costs) + $75,000 (site improvements) = $525,000.)

To calculate a capitalization rate (cap rate), the appraiser uses which of the following methods:

. market comparison. . band of investment. summation.

As opposed to condominium ownership, cooperative ownership has the disadvantage that:

. owners could lose their equity if the other cooperative owners fail to make their tax and loan payments. (Cooperative ownership (co-op) is a corporate ownership of the property. Thus, individual owners have a lease on the apartment unit and a share of stock in the corporation that owns the property. If the other shareholders do not meet their mortgage and property tax obligations, the corporation may default on the mortgage and the lender may foreclose, causing all the owners to lose their equity.)

The ultimate test to determine the functional utility of a property is the:

. property's marketability. (Marketability is the ultimate test.)

In which appraisal approach to value would the value for the land be calculated separately?

Cost. (In the cost approach, the cost of constructing the property improvements and the cost of the land are handled separately and then combined to arrive at a final value for the complete property. The other two appraisal approaches are: sales comparison - comparing the subject property to similar properties recently sold - and the income approach - developing a property's value by comparing the income generated by similar properties that have recently sold to the income generated by the subject property.)

When comparing a small house with a large house of similar quality, which of the following it true?

A small house costs more per square foot. (The overall value of the property includes the land it is situated on. Thus, when the house is smaller, the price per square foot will be higher since the cost of the underlying land is divided into fewer square feet.)

An appraiser notices an abandoned auto salvage yard on the adjoining lot of a property they are appraising. The appraiser should recommend which of the following?

A toxic waste study. (The nature of the adjoining auto salvage auto yard will lead the appraiser to recommend a toxic waste study. An auto salvage yard has the potential of emitting hazardous wastes into the neighboring property being appraised, and thus a toxic waste study is advisable.)

Which of the following type of rental income would be the highest?

Scheduled gross income. (Pre-tax gross income will always be greater than post-tax net income - just like with a paycheck. Scheduled gross income is the amount that is charged to the tenants. Gross operating income is a lesser amount as it is the scheduled gross income minus vacant rentals and delinquent payments. Net spendable income is developed by subtracting both the mortgage payment and income taxes from the net operating income.)

Which of the following is least important to an appraiser when appraising a property?

The original cost of the property. (The utility of the land, condition of the improvements, and the bundle of rights all have significance and will likely affect an appraiser's final valuation of a property. The original cost of the property has no effect on the current value of the property.)

When a seller writes a counteroffer, what happens to the original offer?

The original offer is voided. (A counteroffer constitutes an entirely new offer, which rejects and voids the original offer. An offer is either accepted in its entirety or voided by rejection.)

A lot 300 feet deep lost 10 percent of its depth. What is the effect of the loss in depth on the value of the lot?

The price per square foot will increase. (The loss of depth for any reason will most likely increase the price per square foot of the property since, though the value of the lot may decrease, it will not diminish proportionately with the reduction in size. For example, a rectangular residential lot that is 60 feet across the front and 200 feet deep (12,000 square feet total) has a value of $360,000, or $30 per square foot. If the depth loses 50 feet, either through natural causes or eminent domain, the lot would not lose a proportional ¼ of its value. The now smaller lot (9,000 square feet) may still be worth $360,000, with an increase in the price per square foot to $40.)

Which of these most nearly refers to a loss in value due to economic obsolescence:

a zoning change. (When demand for a property type changes, it can cause a diminished value for existing buildings. Answer selection B. a zoning change is the best answer since it suggests a need for an entirely different property use.)

Which of the following real estate types cannot be depreciated?

a. Single family residences (SFRs). b. Land used to raise crops. (This is a NOT question. Land is not depreciable. Any structure is depreciable so long as it is used for business or investment purposes.) c. Commercial buildings. d. Single-use industrial buildings.

Which of the following is not a part of the cost approach appraisal method?

a. Unit-in-place. b. Capitalization. (Capitalization is an income approach method. Unit-in-place is a sub-element of construction. The index method is for historic cost valuations. Quantity survey is the most detailed method used by sub-contractors when making bids on projects.) c. Quantity survey. d. Index method.

The form style of an appraisal report includes all of the following information, except:

a. a site analysis. b. a description of the improvements. c. a market analysis. ANSWER= loan and financing data. (This is an EXCEPT question. Appraisals state factual data about the property and surrounding area, not the financial and loan data.)

Which of the following is not an example of functional obsolescence:

a. a swimming pool in cold climate. b. proximity of obnoxious nuisances. c. an old kitchen. d. a one car garage. (Functional obsolescence applies to aspects within the property. External conditions may represent an economic obsolescence.)

All of these are good reasons for making a separate site valuation:

a. to apply a residual technique. b. to determine building obsolescence. c. for taxation purposes.

Compared to other appraisal factors, appraisers generally find the __________ the most difficult calculation to measure precisely.

accrued depreciation (Accrued depreciation can be a difficult number to calculate since it requires estimating the effective age of the property. The alternative answer choices are all numbers that are readily available in the industry.)

The appraised value of a building is $800,000 but costs $1,200,000 to replace. This difference is an example of:

accrued depreciation. (The difference between cost and value is described as depreciation. Accumulated depreciation over time is called accrued depreciation.)

To calculate replacement cost, compute the cost to replace:

an equally desirable property with the same utility value. (A replacement property is to produce a similar level of utility and be as desirable as the subject property.)

A(n)____________ is an individual's opinion or estimate of a property's value on a specific date.

appraisal (An appraisal is an individual's opinion of a property's value on a specific date, documented in an appraisal report.)

Each unit in a duplex rents for $1,000 per month. With a price of $240,000, the monthly gross multiplier is:

b. 120 (As shown in Question 3, $240,000 (value) / $2,000 (rent) = 120. Note the property is a duplex, requiring the given rent amount to be doubled to solve for the gross multiplier.)

An apartment building produces a monthly rent of $16,000. A similar property with monthly rents of $21,000 recently sold for $2,940,000. Using this as the only data, the appraiser would say that the first apartment building is wort

b. 2240000 (When an appraiser is appraising income-producing property, they use the income approach to determine its value. This is accomplished by dividing the value by the rent, yielding the gross rent multiplier (GRM). Then, using the rent of the subject property, the appraiser can determine the value of the subject property. $2,940,000 ÷ $21,000 = 140 140 x $16,000 = $2,240,000)

When an appraiser relies on the principle of substitution, they assume that one property may be substituted for another in terms of all of the below, except:

b. nostalgic significance. (Substitution applies to income, structural design and use. Nostalgic significance is unique to a property or individual and is not considered in the principle of substitution.)

Based on recent comparable sales, an agent's opinion of a property's fair market value (FMV) is referred to as a(n):

broker price opinion (BPO). (The broker's price opinion (BPO) is based on comparable sales only.)

By dividing the net operating income (NOI) generated by an income-producing property by price paid or offered for a property, a buyer can determine the:

capitalization rate (cap rate). (Dividing the net operating income (NOI) by the sales price yields the capitalization rate (cap rate). The gross rent multiplier (GRM) uses the gross rent in the calculation.)

the simplest method of estimating the replacement cost of an improvement is the:

comparative method. (The replacement cost of a property can most easily be determined under the comparative method, which uses a private costing service that provides generic pricing for property types based on quality and regional differences. Answer selections C. unit-in-place and A. quantity survey are more detailed and precise, while the index method is used for historic appraisals.)

For appraisal purposes, "capitalization" is a process used to:

convert future benefits to present net worth. (Capitalization is the process to convert future income into a present value. To do this, an appropriate capitalization rate (cap rate) needs to be determined. The cap rate is calculated by dividing the net operating income by the price asked or offered for income property.)

When appraising a special purpose property, an appraiser uses the:

cost approach. (A special purpose property will not have sufficient comparable sales to generate a valid analysis nor an income to produce an accurate value. Therefore, the cost approach is the only appropriate approach to determine value.)

the correct sequential steps of the appraisal process are:

define the problem, gather the data, analyze the data, reconcile the results, reach a conclusion.

Which of the following does a property owner not show as an expense?

depreciation

Return of an investor's investment is provided for through:

depreciation. (Depreciation, as an income tax deduction, is the means by which investors have their investment returned.)

Return on investment (ROI) comes in the form of profit, while return of investment comes in the form of:

depreciation. (While the return on investment is profit, the return of investment is the recuperation of the investment through depreciation.)

The gross rent multiplier (GRM) is determined by:

dividing the sales price by the gross scheduled rent

When comparing the economic life and the physical life of an improvement:

economic life is shorter. (A building will become economically undesirable long before it is physically unusable.)

The period for which a property can show a return attributable to the improvements is known as the property's:

economic life. (Economic life is that length of time during which the building remains viable and generates a return on investment.)

The period of time a structure continues to earn sufficient income to continue operations is referred to as the structure's:

economic life. (Economic life refers to the period of time a structure continues to earn income from its operations. The use of "earn sufficient income" in the question should help lead to this conclusion.)

The statement "more buildings are torn down than wear out" is an illustration of:

economic obsolescence. (The fact that buildings are torn down that are not yet physically worn out suggests economic obsolescence. Market expectations will drive many of these decisions.)

John is considering an extensive modernization program for an older apartment building he owns. His decision should give most emphasis to:

effect on the net income. (Net income is the key. Increased rents may generate even higher costs.)

When a residence has a physical age of 20 years, but the appraiser notes the building has the appearance of being only 10 years old, the appraiser is referring to:

effective age. (Effective age refers to the 10 year old condition of the property. Actual age is 20 year

Rental income minus operating expenses, debt service and income tax payments equals:

net spendable income. (After all expenses of an income-producing property, including debt service and income tax payments, have been paid, the resulting income from rental properties is called net spendable income.)

In real property, the major loss of value comes from:

obsolescence. (Obsolescence is the greatest loss in value for real estate as it affects the utility of the structure, and thus its value and marketability. Deterioration and lack of maintenance are less damaging and may be remedied. The age of a property has little to do with its value, provided it is properly maintained.)

ln the cost approach to appraisal, the phrase "reproduction cost" differs from "replacement cost." "Reproduction cost" measures the:

present cost to build an exact replica of the property. (Reproduction cost measures the present cost to build an exact replica of the property. Replacement cost is the present cost to build a structure with similar utility using modern methods and materials.)

When the market turns from a seller's market to a buyer's market, which of the following is true?

prices fall

The basis of the market data approach to appraisal is found in the:

principle of substitution. (The principle of substitution is the basis of all appraisal including the market data approach. The principle of substitution holds that a buyer will pay no more for a property than the cost of a similar property. Similarly, a seller will accept no less than a similar property sold for.)

Obsolescence does not relate to a:

property that needs to be painted. Obsolescence is a loss in value due to reduced desirability and usefulness of a structure because its design and construction become obsolete. Obsolescence is unrelated to the maintenance of a property. Physical wear and tear and the need for paint are not examples of obsolescence.)

Demand has no effect on value unless there is also:

purchasing power which enables the ability to buy the thing in demand. (Demand requires the ability to pay, called purchasing power.)

The cost of a capital improvement and its effect on market value are:

rarely the same. (The cost of an improvement and its effect on value are rarely the same. The contribution of the improvement is usually less than the cost. An appraiser is most often concerned with the added value -contribution - of the improvement.)

Economic rent is rent:

received for similar space in an open market free of duress or otherwise affected by external conditions. (Another name for economic rent is market rent. Given that information, answer choice A seems more obvious. Also, note the length of the answer and the degree of detail used in the answer, which is also an indication that it is likely correct.)

The final step in the appraisal process is to:

reconcile the different approaches and arrive at a conclusion. (Reconciling the appraisal analysis explains how the conclusion of the appraisal report was reached. The reconciliation will weigh the differences between the various appraisal approaches used by the appraiser.)

Loss of value of an expensive home due to the close proximity of lower-priced homes in a neighborhood is known as:

regression. (Regression is the loss of value of nicer homes due to lower-value neighboring properties, progression is the increase in value of lesser homes due to higher-value neighboring properties. Both are elements of the principle of conformity.)

Which of the following approaches to valuation yields the highest estimate of value?

reproduction. (Reproduction is a version of the cost approach. Generally, the cost approach produces the highest estimate of value of all the appraisal methods. The income approach generates the lowest estimate of value.)

The income approach of appraisal is inappropriate when appraising:

residences in an owner-occupied subdivision. (The income approach of appraisal is inappropriate when appraising residences in an owner-occupied subdivision as they do not generate revenue. The income approach is appropriate for an income-generating rental property whose value is based on the income it produces.)

The appraisal method most commonly used to value land or sites is the:

sales comparison approach. (The sales comparison approach is the most commonly used appraisal method to value raw land since it has neither an improvement cost nor an income generated.)

The gross rent multiplier (GRM) is calculated by dividing:

sales price by gross monthly rents.

Marta's city built a new park in her neighborhood. This may result in a(n):

special assessment. (In this question, the park is built within a specific neighborhood. If an assessment is made for the cost to build and/or maintain the park, it would apply to just the owners of property in that neighborhood as a special assessment.)

An analysis of rental income does not determine the income's:

suitability for reinvestment. (As applied to rental income, durability = longevity; quantity = amount of rent; quality = assurance of payment.)

A capitalization rate (cap rate) is least affected by:

taxes. (The capitalization rate (cap rate) is least affected by taxes. The cap rate is the annual rate of return produced by the operations of an income property or sought by an investor, and is therefore an investor demand. Comparisons to current interest rates and requirements for a return on or of the investment are all investor considerations.)

When using the replacement cost method of appraisal, the appraiser calculates all of the following, except:

the capitalization rate (cap rate). (This is an EXCEPT question. The capitalization rate (cap rate) is used in the income approach, not the replacement cost method. The replacement cost method of appraisal is one alternative of developing a value under the cost approach.)

An appraiser describes "replacement cost" as:

the current cost to build a structure of similar utility using modern methods and materials. (Replacement cost is the cost to build a structure of a similar size and utility using modern methods and materials. Reproduction cost is creating something as similar as possible to the original. Both use current costs in the calculation.)

On appraisals of older apartment buildings, a major problem in the cost method is:

the determination of accrued depreciation. (The quantity of accrued depreciation becomes increasingly difficult as buildings get older, and causes the cost approach to lose its validity. Under the cost approach of appraisal, an appraiser arrives at a property's value based on the present cost of constructing the present improvements and acquisition of the land.)

The first thing an appraiser does when appraising vacant land is determine:

the highest and best use of the land. (The first thing an appraiser does when appraising vacant land is determine the highest and best use of the subject property. This determination is needed before the appraiser can determine what properties are comparable.)

When using the replacement cost method of appraisal, the appraiser calculates all of the following, except:

the land value. b. the cost to build the improvements on the property. ANSWER= the capitalization rate (cap rate). (This is an EXCEPT question. The capitalization rate (cap rate) is used in the income approach, not the replacement cost method. The replacement cost method of appraisal is one alternative of developing a value under the cost approach.) d. accrued depreciation.

The calendar date that is of most concern to an appraiser is the date:

the purchase contract was signed. (The date that is most critical to an appraiser is the date the contract was signed since the fair market value (FMV) for a property is established as the purchase price agreed to by the buyer and seller.)

The loan-to-value ratio (LTV) is best described as:

the ratio of the loan to the appraised value of the property. (The loan-to-value ratio (LTV) reflects the mortgage balance as a percentage of the mortgaged property's fair market value (FMV). Lenders will loan against the sales price or the value of the property as determined by an appraisal, whichever is lower.)

The appraisal process which allocates a percentage of a property's total value to the land and a percentage to the improvements is known as:

the ratio of total value to site value & the allocation approach. (The appraisal process that allocates a percentage of a property's total value to land and a percentage to the improvements is known as the allocation method. It is the ratio of total value to the site value.)

The term "highest and best use" can best be defined as:

the use that creates the greatest net return. (Once again, net results are the most relevant. The maximum productivity that generates the greatest net return is the highest and best use.)

The relationship between the thing desired and the potential purchaser could be described as:

value

When a comparable sale used in an appraisal was not an arm's length transaction, this affects the:

value of the subject property. (This is a NOT question. An arm's length transaction represents the fair market value of a property uninfluenced by external forces, such as business or familial relations. When a comparable is not arm's length, its sales price may be higher or lower than market and thus will affect the subject accordingly.)

If an appraiser uses improper valuation methods or is negligent in completing a government loan assignment, they may be guilty of:

violating appraisal ethics and committing a felony

An appraisal is valid for what length of time?

The date stated in the report. (An appraisal report is a snapshot of property and local market conditions. Therefore, an appraisal is only valid on the date stated in the report. As conditions and the market change, an appraisal becomes invalid.)

When changes are made in a residence to correct functional obsolescence, this activity is termed:

modeling (Remodeling is done to a property to correct functional obsolescence which limits the practical use of a property. The functionally obsolete element needs to be updated through remodeling, not simply resolved with repairs or the replacement of an item with the same thing.)

in using the capitalization process, which of the following cannot be deducted to determine the net income?

Debt service.

Which of the following statement regarding capitalization rates is least correct?

Decreasing the risk of loss increases the cap rate. (The capitalization rate (cap rate) is the annual rate of return produced by the operations of an income property. The cap rate is calculated by dividing the net operating income (NOI) by the price asked or offered for income property. Thus, the value moves in the opposite direction of the rate, and a higher risk is rewarded by a higher return.)

The ethics and standards of practice for appraisers are described in:

Uniform Standards of Professional Appraisal Practice (USPAP). (The Uniform Standards of Professional Appraisal Practice is the code of ethics for appraisers.)

Which of the following will have the least degree of influence on real estate in the future?

Weather.

Which of the following will have the least degree of influence on real estate in the future?

Weather. (All of the answer selections will have an impact on the future real estate market, although weather exerts the least amount of direct influence.)

A property's effective gross income is found by deducting which of the following from the scheduled gross income?

Vacancies and credit losses. (To estimate the effective gross income, subtract the vacancies and credit losses from the scheduled gross income. To determine net operating income (NOI), subtract operating expenses from effective gross income.)

When is the usefulness of the appraisal cost approach the least appropriate?

When appraising an old structure with many functional deficiencies. (This is a LEAST question. The cost approach to appraisal is of least utility when appraising an old structure with numerous functional deficiencies. This is a result of the difficulty in accurately applying accrued depreciation for both age and functional issues. This is of little concern when appraising newer properties of any kind or estimating future costs for property development.)

The vacancy rate of an apartment building under normal competitive conditions is primarily the result of

housing supply and demand in the area. (The vacancy level and rental income will fluctuate as supply increases or demand grows or shrinks

To depreciate real estate, it needs to be:

improved

the cost method of appraisal

it is used in computing real estate values of public buildings, it is hard to apply, it is used in new residential homes. of the three appraisal approaches to determine a property's value, the cost approach will generally produce the highest value and the income approach will generally produce the lowest. The reason for this is that while the cost approach shows the actual expense to replace the property, the income approach demonstrates the value based on the income it generates which is always less.

An important economic factor in real estate is:

its beneficial use. (The beneficial use of a property is the best choice as an economic factor. Of the alternative answer choices, B and C are unusual since real estate is considered immobile (versus personal property which is mobile). Answer selection D has merit, yet if the building is empty or of little practical use, the size of the structure itself is not an important economic factor for the property.)

The land residual method of appraisal is used to determine the value of the:

land alone. (The word "residual" refers to that which is left after subtracting other values. In a land residual appraisal, the cost of the building is subtracted from the property value to determine the value of the raw land.)

Which of the following is a cost associated with home ownership:

loss of interest on owner's equity. (The owner's equity invested into a property cannot earn interest as it does when deposited in the bank.)

Two similar locations are leased on a long term basis, one for a government building and the other for a used car lot. Using the capitalization approach to appraise the properties, the government building would demand a__________capitalization rate (cap rate).

lower (A government building would demand a lower capitalization rate (cap rate) than a used car lot. Cap rates move in the same direction as risk and create a change of value opposite to their direction. Thus, a higher risk, such as in the case of a used car lot, will require a greater return on investment (i.e., a higher cap rate) and a lower value.)

The primary concern of an appraiser when analyzing property is:

marketability and acceptability.