Chapter 16 - Review Questions

An investment property has a potential gross income (PGI) of $300,000, a vacancy rate (V&C) of 5% and operating expenses (OE) totaling $140,000. What is the net operating income (NOI)

$300,000 x .05 = $15,000 $300,000 - 15,000 = $285,000 $285,000 - 140,000 = 145,000

A residence has a living area measuring 42 ft by 38 ft and a garage that measures 24 ft by 22 ft. An appraiser feels that today's cost to reproduce the living area would be $63.00 per square foot and to reproduce the garage would be $19.00 per square foot. The home, which is 5 years old, is estimated to have a useful life of 50 years. Based on this information, what is the depreciated cost of the property? Hint: Start by calculating the current reproduction cost of the property. (a) $11,058 (b) $99,522 (c) $110,580 (d) $121,638

(b) $99,522

A warehouse sold for $740,000. If market evidence indicates an annual gross income multiplier (GIM) of 8 is appropriate, how much income should be produced? (a) $1,081.50 (b) $59,200.00 c) $80,937.50 (d) $92,500.00

(d) $92,500.00

. A residence recently sold for $300,000 that was rented for $2,850 per month. What is the monthly gross rent multiplier? (a) 87 (b) 88 (c) 95 (d) 105

(d) 105

The monthly rent of a residence that recently sold for $91,800 is $850. What is the monthly gross rent multiplier? (a) 0.09 (b) 9 (c) 10.8 (d) 108

(d) 108

A comparable property recently sold for $575,000, with a golf course view. The subject property is similar in all other respects, but has no golf course view. In this area a golf course view is estimated to add $15,000 to the value of a property. Which would be the correct adjustment? (a) Increase the adjusted selling price of the subject property to $590,000. (b) Decrease the adjusted selling price of the subject property to $560,000. (c) Increase the adjusted selling price of the comparable to $590,000. (d) Decrease the adjusted selling price of the comparable to $560,000.

(d) Decrease the adjusted selling price of the comparable to $560,000.

A house that is valued at $65,000 Rents for $500 a month. What is the gross rent multiplier?

130

If the value of an investment property is $200,000 and the net operating income is $30,000, what is the capitalization Rate?

15%

How is an appraiser compensated?

A fee based on time and difficulty involved

What is Price?

Amount actually paid in a real estate transaction

Which term, as defined by USPAP, refers to the actual or estimated amount required to create, produced, or obtain a property?

Cost

What are the 4 elements that interact to create or affect the value of Real Estate?

Demand Utility Scarcity Transferability

What type of expenses do not change with occupancy levels?

Fixed Expenses

What entity was created by part II of F.S. 475 to administer the regulation of real estate appraisers involved in federally-related transactions?

Florida Real Estate Appraisal Board (FREAB)

A well-maintained property has decreased value due to an outdated kitchen, outdated bathrooms, and insufficient lighting. What category of depreciation applies to the property?

Functional obsolescence

How is the effective gross income (EGI) determined, assuming there is no other income from miscellaneous sources such as vending machines?

PGI - V&C

Which type of value results from the combining of two or more adjacent parcels of land under on owner?

Plottage Value

A sales comparison approach is most frequently utilized and most applicable to which type of property?

Residential property in an active market

A comparable property recently sold for $429,000. The comparable property is built of superior materials valued at $25K but has less SF than the subject property, valued at $35K. What is the adjusted sales price of the comparable property?

Solution: Adjust the comparable property by subtracting the value of its superior feature (building materials) and increasing the value for its inferior feature (SF). Adjusted sales price = ($249K - $25K) + $35K = $439K

After the 3 valuation approaches have been applied, how are the results reconciled to estimate the final opinion of value?

The results of each approach are weighted to reflect the appraiser's opinion on how well each approach best reflects the value of the subject property.

What legislation did Congress adopt to address the problem of unregulated persons performing incompetent or fraudulent appraisals for federally regulated financial institutions?

Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)

As part of the appraisal process, a highest and best use analysis is performed on the property. What is the purpose of this analysis?

To determine whether the present use if the best use or if an alternative should be considered to maximize the value.

For what reason is a broker price opinion (BPO) most often requested?

To help determine the selling price of a foreclosed property or one that is being considered for a short sale transaction.

A subject property has 4 bedrooms and the comparable property has 3 bedrooms. A bedroom in that neighborhood has an estimated value of $3,500. What adjustment should be made using the cost comparison approach?

add $3,500 to the comparable property sales price.

A RE licensee who is not a registered or certified appraiser may provide all of the following evaluation services, EXCEPT: a. Comparative Market Analysis (CMA) b. Appraisal in a federally-related transaction c. Valuation services in a non-federally related transaction d. Broker Price Opinion (BPO)

b. Appraisal in a federally-related transaction

All of the following statements are correct, EXCEPT a. Appraisers must complete at least 30 hours of approved continuing education courses and renew their license every two years b. Appraisers must hold a valid, active real estate license to perform residential appraisals c. Appraisers are required to register the office location(s) from which they operate d. The minimum educational requirements for a registered trainee appraiser is 100 hours of appraisal qualification board- prescribed education.

b. Appraisers must hold a valid, active real estate license to perform residential appraisals

All of the following are included in operating expenses, EXCEPT a. Maintenance expenses b. property tax c. Utility payments d. Mortgage payments

d. Mortgage payments

What is the estimated value of an apartment building that has a net operating income of $55,000 per year and overall capitalization rate of 11%?

$500,000

Which Valuation service, often prepared by RE licensee, is developed using the same basic steps as an appraiser uses with the sales comparison approach, but with less stringent method?

CMA

The Sales comparison approach is a direct application of which appraisal principle?

Principle of substitution

The subject property is a 20-year old single-family home in an established residential neighborhood. Which property would be the best choice as a comparable property? a. A Similar property in the same neighborhood that sold 3 months ago b. a similar property in the same neighborhood that sold 2 years ago c. a newly constructed home in the same neighborhood that sold 6 months ago d. a similar property that is currently listed for sale in the same neighborhood.

a. A Similar property in the same neighborhood that sold 3 months ago

All of the following are mathematical methods that an appraiser would typically use to estimate the value of a subject property, EXCEPT: a. Cost-depreciation approach b. MLS Averaging Approach c. Income Approach d. Sales comparison Approach

b. MLS Averaging Approach

The cost-depreciation approach is the best approach for valuing all of the following types of properties, EXCEPT: a. Special-purpose property such as school or church b. Residential property in an active market with frequent sales c. Property proposed for renovation d. Property that is infrequently exchanged or sold.

b. Residential property in an active market with frequent sales

A subject property is located in close proximity to a planned airport runway expansion. What category of depreciation would apply to this property if there is a loss in value when the runway it built?

External obsolescence

An Investment property has 5 units which each rent for $1K per month. The vacancy and collection losses are 4%. Property Taxes are $6K, Insurance is $4,500, and variable expenses total $8,000. Additional reserve for replacements is $3,500. Using a capitalization rate of 5%, what is the estimated value of the property?

PGI= 5 units x $1,000 (rent) x 12 (Month) = $60,000 V&G = 4% of PGI, or $60,000 x .04 = $2,400 OE = $6,000 (taxes) + $4,500 (Insurance) + $8,000 VE + $3,500 (Reserves) = $22,000 $60,000 (PGI) - $2,400 (V&C) = $57,600 - $22,000 (OE) = $35,600 (NOI). Value = $35,600 (NOI) ÷ .05 (Cap Rate) = $712,000

The income approach is a direct application of the principle of substitution and which other appraisal value?

Principle of Anticipation

Which appraisal principle recognizes that no one would pay more for a property than the amount necessary to acquire an acceptable alternative property?

Principle of Substitution

Which appraisal principle states that the value of a property today is the sum of its future benefit?

Principle of anticipation

Which appraisal principle states that when a higher-priced property is constructed in an area of lower-priced properties, the higher-priced property will decreased in value toward the level of the less expensive properties in the area?

Principle of regression

If the net operating income is forecast to be $12,000 and the estimated value of the property is $120,000, what is the capitalization rate?

Solution: Since the unknown value is the capitalization rate (R), we cross out "R" and perform the division with the values for "I" and "V" that are remaining. $120,000/$120,000 = .10 or 10% cap rate.

If the net operating income is forecast to be $12,000 and the overall capitalization rate is 10%, what is the estimated value of the property?

Solution: Since we are looking for the estimated value, we use the V = I/R form of the formula. Value (V)= Net operating income (I) ÷ Cap Rate (R) V= $12,000 / .10 = $120,000

What is used to determine the value of a subject property using the cost-depreciation approach?

The depreciated replacement or reproduction cost plus the value of the land.

The subject property has a garage. The comparable property has no garage. If a garage has a value of $14,500, and the comparable property sold for$149,900, What adjustment should be made?

Answer: add a $14,500 adjustment to the comparable property Explanation: An adjustment must be made for the physical difference of the absence of the garage in the comparable property. Adjustments are always made to the comparable property; Never to the subject property. Since the comparable property has no garage, and therefore the inferior in value to the subject property, you increase (add) the $14,500 adjustment to the comparable property's value.

An appraiser is appraising a three-bedroom home that has only one bathroom. The standard for the neighborhood is two bathrooms. From an analysis of the market, the appraiser believes a bathroom contributes $4,000 to the value of a home. If a comparable property having three bedrooms and two baths recently sold for $126,000, and is similar in all other respects to the subject property, what value should be estimated for the subject property?

$122,000

The estimated effective age of a building is 6 years. the building is expected to have a useful life of 30 years. if the reproduction cost is $350K, what total amount should be estimated for the accrued deprecation over the expected life of the building?

$70K

The subject residence has a gross monthly rent of $600. if a comparable residence has a GRM of 120, what is the estimated value of the subject property?

$72,000

A residence sold for $78,000 and rented for $600 per month. The subject residence rents for $650 per month. What is the estimated value of the subject residence by using a GRM?

$78,000 (Comparable sales price) / $600 (Gross Monthly rent) = $130 (GRM (Monthly)) $650 subject residence rent x $130 GRM = $84,500 subject residence Estimated value

A property sold for $78,000 and rented for $7,200 per year ($600 x 12). The subject property rents for $7,800 per year. What is the estimated value of the subject property by using a GIM?

$78,000 / $7,200 = 10.83 (GIM) 7,800 x 10.83 = $84,474 (Subject property estimated value - round to $84,500)

A 4-bedroom, 2-bath subject property has no pool. A comparable property that sold for $100K has 3 bedrooms, 2 baths, and a pool. Estimated values in that neighborhood are $4K for the bedroom and $10 for the pool. What is the adjusted price of the comparable?

$94K

What are the adjusted price of the comparable properties shown below if the estimated value of additional features are: bedroom: $6,500; Bath: $4,000; 2-car garage: $2,000?

(See image for solution)

An investment property has a value of $300,000. If the capitalization rate is 12%, what is the net operating income? (a) $36,000 (b) $250,000 (c) $264,000 (d) $300,000

(a) $36,000

A homeowner visited a resort which contained a beautiful pool with caves and a lazy river. The homeowner then spent $100,000 to create a similar setting in their own yard. When the property was appraised for financing purposes, the appraiser only allocated $10,000 for the pool. What is this an example of? (a) An un-informed appraiser (b) Straight line depreciation (c) Accelerated depreciation (d) An over improvement

(d) An over improvement

Which approach to value is typically used to estimate the value of special purpose properties? (a) Comparable Sales or Sales Comparison approach (b) Income Capitalization approach (c) Gross Income Multiplier Approach (d) Cost Depreciation Approach

(d) Cost Depreciation Approach

When making adjustments based on the following information, what should be done with the $2,000? Comparable sales price... $40,000 Comparable property.........Two-car garage Subject property................No garage Garage value....................$2,000 (a) It should be added to the price of the comparable property. (b) It should be added to the price of the subject property. (c) It should be subtracted from the price of the subject property. (d) It should be subtracted from the price of the comparable property.

(d) It should be subtracted from the price of the comparable property.

In the income approach, a capitalization rate can be derived from which of the following? (a) Tables published nationally by appraisal organizations (b) Rate schedules maintained by lending institutions (c) The interest rate paid on Treasury bills (d) The relationship between sale prices and income of similar properties

(d) The relationship between sale prices and income of similar properties

Which of the following conditions is necessary for the sales price of a property to equal its market value? (a) The parties cannot be dealing with a self-interest. (b) The property would have to be exposed to the market for an unreasonably short time. (c) There can be no existing liens against the title. (d) The transaction must involve a willing and informed buyer and seller.

(d) The transaction must involve a willing and informed buyer and seller.

Complete the statement. Highest and best use of a property is the single use that produces the greatest return on: (a) similar properties. (b) neighboring properties. (c) properties of similar use. (d) the land and any improvements to it.

(d) the land and any improvements to it.

What is the basis for the principle of substitution? (a) An informed buyer will pay no more for a property than the cost of acquiring another equally desirable property with the same or equal utility. (b) Properties will typically hold their value when properties in a neighborhood tend to be similar and conform to common standards. (c) Although a property may have multiple potential uses, one will be the highest and best use. d) Smaller properties in a neighborhood of large properties will tend to increase in value, while larger properties in an area of smaller properties will tend to decrease in value over time.

(a) An informed buyer will pay no more for a property than the cost of acquiring another equally desirable property with the same or equal utility.

Functional obsolescence includes which of the following? (a) An over improvement (b) Broken windows (c) A waste water treatment plant next to the subject property (d) A property located in the glide path to an airport

(a) An over improvement

What estimate is a result of income divided by a capitalization rate? (a) Market value (b) The effective gross income (c) Reproduction cost (d) The amount of accrued depreciation

(a) Market value

How is investment value best defined? (a) The value to an individual (b) The highest price a property would sell for in an open market (c) The value based on the use of the property (d) The minimum value of a business opportunity

(a) The value to an individual

Calculate the reproduction cost of the following property using the Cost/Depreciation Approach to Value: the lot measures 100' x 100', and land in the area sells for $40 per square foot. The structure measures 50' x 90' and construction costs in the area are estimated to be $90 per square foot. The building is 10 years old and has a useful life of 50 years. (a) $900,000 (b) $405,000 (c) $400,000 (d) $180,000

(b) $405,000

How is a gross rent multiplier calculated? (a) Multiply comparable property sales price by comparable property rent. (b) Divide comparable property sales price by comparable property rent. (c) Multiply comparable property sales price by subject property rent. (d) Divide comparable property sales price by subject property rent.

(b) Divide comparable property sales price by comparable property rent.

All of the following methods may be used to estimate replacement/reproduction cost, EXCEPT: (a) Quantity survey (b) Economic age-life (c) Unit-in-place (d) Comparative unit

(b) Economic age-life

A new airport built in proximity to a residential neighborhood may cause properties to lose value due to which of the following? (a) Physical deterioration (b) External obsolescence (c) Functional obsolescence (d) Proximity obsolescence

(b) External obsolescence

If an owner built a 6 bedroom house in an area surrounded by two bedroom houses, this would be considered an overimprovement. For appraisal purposes, what would an over improvement create? (a) Physical deterioration (b) Functional obsolescence (c) External obsolescence (d) Excess depreciation

(b) Functional obsolescence

Which appraisal approach would be given greater weight when appraising an apartment complex? (a) Cost-depreciation (b) Income approach (c) Comparable sales (d) Land residual

(b) Income approach

1. What type of value does an appraiser most commonly estimate? (a) Book (b) Market (c) Insurable (d) Condemnation

(b) Market

Which appraisal approach is most suitable for estimating the value of a single-family property? (a) Cost-depreciation (b) Sales comparison (c) Income approach (d) Land residual

(b) Sales comparison

As used by an appraiser, what does the term "price" refer to? (a) The asking price in the listing contract (b) The amount of money paid by a buyer to a seller in a transaction (c) The market value (d) The total cost of land, labor, and materials

(b) The amount of money paid by a buyer to a seller in a transaction

What will happen to the value of a property if the capitalization rate remains the same, but the net operating income is reduced? (a) The value will increase. (b) The value will decrease. (c) There will be no change in the value. (d) The value cannot be determined without knowing the dollar amount of the operating expenses.

(b) The value will decrease.

If net operating income is $4,000 and the capitalization rate is 16%, what is the value of the investment property? (a) $21,000 (b) $24,360 (c) $25,000 (d) $64,000

(c) $25,000

An investment property has three units which rent for $1,200 per month, per unit. The vacancy and collection losses are 5%. Property taxes are $5,000, insurance is $5,000, and all other expenses are $10,000. Reserve for replacements is $2,000. Using a cap rate of 6%, estimate the value of the property. Round your final answer to the nearest thousand. (a) $41,000 (b) $43,000 (c) $317,000 (d) $397,000

(c) $317,000

An appraiser has selected a comparable sale for inclusion in an appraisal that recently sold for $95,000. The comparable has 3 bedrooms, 2 baths and a pool. The subject has 4 bedrooms, 2 baths and no pool. Analysis by the appraiser indicates a bedroom is worth $10,000 and a pool is worth $7,500. What is the adjusted sales price of the comparable property? (a) $77,500 (b) $92,500 (c) $97,500 (d) $112,500

(c) $97,500

What is the capitalization rate of an investment property that has a value of $450,000 and income of $56,250? (a) 8% (b) 12% (c) 12.50% (d) 87.50%

(c) 12.50%

The various approaches to estimating value are based upon which of the following principles? (a) Alignment (b) Retribution (c) Substitution (d) Capital Investment

(c) Substitution

What is market value? (a) The amount a buyer is willing to pay. (b) Tha amount a seller is willing to accept (c) The amount that should be paid. (d) The amount that was previously paid.

(c) The amount that should be paid.

If income remains constant and the capitalization rate is reduced, what is the effect on value? (a) Insufficient information is provided to determine the effect. (b) The value decreases. (c) The value increases. (d) There is no effect on the value.

(c) The value increases.

For the purposes of calculating net operating income, which of the following would be considered an operating expense? (a) Mortgage payment (b) Mortgage principal payments (c) Water bill (d) Capitalization rate

(c) Water bill

A building has a total economic life of 50 years, and the appraiser estimates its (current) effective age to be 10 years. If the reproduction cost is $100,000, what total amount should be estimated for the accrued depreciation over the expected life of the building?

10 ÷ 50 = 0.20 (or 20%) Total depreciation rate $100,000 x .2 = $20,000 (total accrued depression amount over 50 years) The yearly depreciation rate can also be calculated by dividing the total depreciation rate for the entire time period by the effective age. In this example: .20 ÷ 10 = .02 (2%) Yearly depreciation rate. Depreciated cost: Subtract the accrued depreciation from the reproduction cost of the main improvement to derive its depreciated cost. From Example Above: reproduction cost is $100,000 $20,000 =total accrued depression amount over 50 years $100,000 - 20,000 = $80,000 (Depreciated cost of the main improvement) Step 5: Depreciate Improvements Estimate the cost to construct any site improvements, such as driveways, landscaping, fences, and so on, and subtract any depreciation in these items. Step 6: Add the vacant site value Add the vacant site value, the depreciated cost of the main improvement, and the depreciated site improvements. The total is the value of the subject property estimated by the cost-depreciation approach. Vacant site value (step 1) + Depreciated cost of main improvement (step 4) + Depreciated site improvements (step 5) = Estimated value of the subject property.

How is the net operating income (noi) determined?

EGI- OE