Appraisal

A buyer purchased a commercial warehouse for $750,000. Fixed expenses are $15,000 Per year and operating expenses are $49,000 per year. Lf the buyer wants a 9 percent return, how much gross rental income does he need each month? (A 9 percent return on a $750,000 investment is $67,500. Add the expenses ($67,500 + $15,000 + $49,000) and then divide by 12 months)

$10,958

Lots are valued at $30,000. Reproduction cost of the dwelling is $1 70,000. Lf properties are now selling for $1 40,000, the accrued depreciation is: ($140,000 — $30,000 = $110,000; $170,000 — $110,000 = $60,000.)

$60,000

What is an "Obsolescence"?

A type of depreciation of property.

In appraising investment property what does the owner deduct to arrive at the net effective income?

All ordinary expenses to the property

An appraisal of real estate does which of the following?

Estimates value

An appraiser's fee is typically based on which of the following?

Time and expense

Market value is most closely related to:

comparable price.

A buyer is looking for an apartment building with a 1 0 percent return. If an available building produces $78,000 in gross income with expenses at BO percent of income, how much should the buyer offer for the building? ($78,000 less $46,000 (60% x $78,000) is $31 200 net income divided by a 1 0 percent return equals $312,000)

$312,000

A commercial warehouse is located on a half-acre of land valued at $20 a square foot The six-year-old building had an economic life of 50 years when it was built and measures 92 feet by 135 feet. Current replacement cost is estimated at $45 per square foot. Using the cost approach, what is the property's value? (43,560 + 2 = 21,780 x $20 = $435,600 (land value). 92 x 35 = 2,420 x $45 $558,900 less depreciation of 6 ÷ 50 (1 2%) or $67,068, equals an improvement value of $491 832, plus the land value of$435,600 equals $927,432)

$927,432

If a building has an estimated remaining economic life of 50 years,the appropriate recapture rate will MOST likely be: (Using straight-line depreciation, a factor of 2 percent per year would result in a return of 100 Percent of the investment over this building's 50-year useful life)

2 percent

What is "Functional obsolescence"?

A loss in value of an improvement due to functional inadequacies, often caused by age or poor design.

Define "Functional / External obsolescence"?

A loss in value resulting from some internal (i.e., functional) factor (e.g., poor design, outdated equipment) as opposed to an external factor (e.g., neighborhood change, highway relocation).

What is "Capitalization"?

A mathematical process for converting net income into an indication of value, commonly used in the income approach to appraisal.

What is "Gross income Multiplier"?

A useful rule of thumb to estimate market value of income-producing residential property. The multiplier is derived by using comparable sales divided by the actual or estimated monthly rentals and then arriving at an acceptable average.

Define "Income Approach"?

An approach to the valuation or appraisal of real property as determined by the amount of net income the property will produce over its remaining economic life.

What is an "Appreciation:"?

An increase in the worth or value of property due to economic or related causes, which may prove to be either temporary or permanent

What type of reduction in value is present when a hydrogen gas storage tank is located next to a property? A. Physical deterioration B. External obsolescence C. Functional obsolescence D. Negligible obsolescence

External obsolescence

Which one of the following BEST describes the concept of highest and best use?

Greatest net return over a given period

Assume there are two similar buildings, one of which is leased as a library and the other for much greater rent as a warehouse. What can be said about the capitalization rate used for the library? (The library would provide a lower return on the investment although it would provide similar recapture rates (return of the investment)

It would be lower than the warehouse.

All of the following are true about the direct sales comparison approach EXCEPT: A. offers to buy are helpful to set the lower limits. B. the type of financing for comparable sales is relevant C. listing prices of comparable homes are relevant. D. net operating income figures are not relevant

Listing prices of comparable homes are relevant.

The capitalization approach to valuation does not consider

Lot size.

Which of the following is the appropriate method of selecting a capitalization rate for an income producing property?

Net income divided by value

In making an informal appraisal for listing purposes, a broker finds comparable residences that recently sold for $92,000, $82,000 and $102,000. The broker should advise the seller that the residence should be listed at which amount?

Price of the most similar property

Which of the following principles of value is involved with the economic principle of change? A. Conformity B. Contribution C. Progression D. Substitution

Progression

Concerning the valuation of residential property, which of the following is true?

Recently sold homes in a neighborhood give a fair indication of the value of similar homes.

Define "Comparables"?

Recently sold properties that are similar to a particular property being evaluated and that are used to indicate a reasonable fair market value for the subject property.

When properties of dissimilar value are placed together, the value of the more expensive Property will be affected adversely. This principle of change is called: A. regression. B. progression. C. substitution. D. decreasing return.

Regression.

Which is the most appropriate appraisal method to use in evaluating a property for fire insurance purposes?

Replacement cost

A new office building constructed in an old neighborhood is for sale. What is the best method of appraisal to use?

Replacement method

A homogeneous community typically has what effect on real estate values?

Stabilizes them

What is "Useful life"?

That period of time over which an asset such as a building is expected to remain economically feasible to the owner.

Define "Highest and best use"?

That use which, at the time of appraising the property, is most likely to produce the greatest net return to the land and/or the building over a given period of time.

Define "Capitalization rate / Recapture rate"?

The capitalization (cap) rate is the rate of return the Investor wants on a property; it consists of the return on the investment plus the recapture (through depreciation) of the investment.

Define "Reproduction / Replacement cost"?

The cost to construct an exact replica (reproduction cost) as opposed to the cost to construct a building with similar material and use (replacement cost).

What is "Fair Market Value"?

The highest monetary price that a property would bring, if offered for sale for a reasonable period of time in a competitive market to a seller, willing but not compelled to sell, from a buyer, willing but not compelled to buy, both parties being fully informed of all the purposes to which the property is best adapted and for which it is capable of being used.

What is "Plottage"?

The increased value and improved usability that results from the merging or consolidating of adjacent lots into one larger lot. Reproduction cost—The cost on the basis of current prices, of reproducing an exact replica of property with the same material as that used in the original.

What is "Cap rate (capitalization rate)"?

The percentage selected for use in the income approach to valuation of improved property. The cap rate is designed to reflect the recapture of the original investment over the economic life of the improvement to give the investor an acceptable rate of return(yield) on the original investment and to provide for the return on borrowed capital.

What is an "Appraisal"?

The process of estimating, fixing or setting the market value of real property. An appraisal may take the form of a lengthy report, a completed form, a simple letter or even an oral report.

Which of the following BEST describes the highest and best use for a particular properly?

The use that produces the greatest net return

The gross income (rent) multiplier is calculated by dividing the sales price by the:

annual gross income.

The sales comparison approach to value is an indication of the:

range of probable value.

In appraising income-producing property, the remaining useful life of a building is considered to be the:

remaining time that the property can be profitably used.

The value of a leased fee property is equal to:

rent plus reversionary right.

The cost of constructing a new building that has utility equivalent to the property under appraisal but is built with modern materials according to current standards, design and layout is an appropriate definition of:

replacement cost

In appraising a single-family home, the appraiser makes adjustments to the sales price of three comparable properties. The estimate of value would most likely be the:

adjusted value of the comparable property that is most similar to the subject property.

The purchase and putting together of several pieces of land is BEST called:

assemblage.

An appraisal is needed to judge all of the following EXCEPT: A. market value B. replacement value. C. loan value. D. book value.

book value.

In making an appraisal, the before-and-after method is used MOST often with:

condemnation.

Capitalization is a process used to:

convert income into value.

All of the following are characteristic of value EXCEPT: A. utility. B. scarcity. C. transferability. D. cost (The elements of value are utility, scarcity, transferability and demand)

cost

Replacement cost is BEST described as the:

cost of building a property of equivalent utility with modern materials.

The period of time through which a property gives benefits to its owner is BEST described as: (Economic life is the period over which a building is profitably utilized)

economic life.

The useful life of a building, or period of time after which the income provided by it is NOT Sufficient to warrant its maintenance, is called:

economic life.

A factor by which the appraiser multiplies the total rental income from a properly as an estimate of its value is the:

gross income multiplier

A broker usually appraises to determine:

market value.

The actual selling price of a piece of real property is BEST described as the:

market value.

Of the three methods of appraising properties, the replacement cost approach is particularly appropriate and would give the MOST accurate value in the appraisal of a(n): A. new home B. multiple dwelling. C. old home. D. medium-age home.

new home

An appraiser who is evaluating an urban commercial warehouse would look for all of the following factors EXCEPT: A. potential income from the properly. B. the replacement cost and accrued depreciation. C. economic life of building. D. original cost of the building. (In addition to income and replacement cost (less accrued depreciation), an appraiser might also look for comparable sales of similar warehouses)

original cost of the building.

All of the following are used to estimate value EXCEPT: A. improvements. B. deterioration. C. owners livelihood. D. economic life.

owners livelihood.

The formula used in direct capitalization of income property valuation is:

value equals income divided by cap rate.

In regard to the capitalization rate: (For example: $5,000 capitalized at 5 percent is $100,000 ($5,000 divided by .05 = $100,000); $5,000 at 6 percent is $83,333; at 4 percent it is $125,000)

value of property decreases as the rate increases.

The economic life of a building has come to an end when the:

value of the land and the building equals the value of the land only.

A residence located in an area where there are factories and plants, and where there is much smoke and dust is suffering from:

external obsolescence.

The period of time necessary to recover an investment in a commercial building is BEST described as: (The recapture rate is based on the theory that the building will be worthless at the end of its economic life, so a factor must be made to recover this "loss" beforehand)

recapture.

In using the direct sales comparison approach to value, the appraiser considers the:

sales price of comparable properties.

In using the gross rent multiplier, Comparable A has a value of$88,000 with monthly net income of $880; Comparable B is $90,000 with $900; Comparable C is $95,000with $950. If you receive $930 a month net income, what is your comparable value? (The ORM is based on a 10-to-1 ratio)

$93,000

Which of the following conditions is an indication of functional obsolescence?

Ceiling lower than customary

When a property has suffered a reduction in value due to dry rot and termite damage, appraisers refer to such reduction as: (Direct effect of the elements (such as wind or snow) could result in physical deterioration)

physical deterioration.

An appraiser preparing a market analysis of a parcel of real property would be MOST sensitive to the recent market tendencies of: (Buyers' desires as to types of construction, location, amenities and so on will have a direct bearing on a property's evaluation)

buyers.

When evaluating an income property, an appraiser must take into consideration all of the following EXCEPT the:

cost of the building next door.

Assume that the trend in architectural design is toward more contemporary-styled homes. Because of this trend, a conservatively designed home will tend to:

decrease in value more rapidly.

The MOST widely used approach in the estimate of value of residential real property is the:

direct sales comparison approach.

When capitalization is sought a person is particularly interested in:

evaluating income.

An appraiser measuring the area of a house would use the:

exterior dimensions.

All of the following statements are true EXCEPT:

external obsolescence is the result of one's personal financial condition.

A house with four bedrooms and one bath is an example of

functional obsolescence.

The capitalization rate for improvements is the:

interest rate plus recapture rate.

Real estate values are MOST affected by:

location.

In estimating the value lost by a structure due to physical deterioration, the appraiser places greatest emphasis on the:

observed condition of the subject building.

When a landlord makes improvements to property, the investment should be recovered over a set period of time. The landlord should use a(n):

recapture rate.

All of the following would be considered functional obsolescence in evaluating a commercial building EXCEPT: A. architectural design. B. volume or capacity in relation to site. C. parking plan. D. supply and demand.

supply and demand.

All of these facts are important for an appraiser of a commercial shopping center to discover EXCEPT: A. the person(s) entitled to possession and ownership. B. the rents and operating expenses. C. all existing encumbrances. D. the current rate for commercial loans.

the current rate for commercial loans.

The sales comparison appraisal approach would be BEST used for

valuing vacant land.

Physical deterioration MOST closely means:

wear and tear

If the replacement cost shows a higher value than the appraised value, which of the following has MOST probably occurred? (If it would cost $1 00,000 to reproduce a five-year-old building valued at $92,000, an Adjustment has been made for $8,000 of depreciation over the five years)

Accrued depreciation

Market value could be determined best by considering which of the following?

Comparison, income, replacement

A post office of unique design and construction is BEST appraised by which of the following approaches?

Cost

The value of the land plus the reproduction costless depreciation is the formula for which appraisal approach?

Cost

Which of the following tends to lower a property's value? A. Neighborhood conformity B. Excessive demand C. Transferability D. Deferred maintenance

Deferred maintenance

An appraiser often makes a distinction between the physical life and the economic life of an improvement. Regarding these two ways to measure "life," which is generally true?

Economic life ceases first

What factors determine the capitalization rate for a building? (Capitalization involves the return on and the return of the investment money)

Interest and recapture of investment

Which of the following facts might be classified as functional obsolescence?

The property has a single-car garage.

What is an "Assessed valuation"?

The value of real property as established by the state government for purposes of computing real property taxes.

A woman inherited a residence from her father. The value at the date of his death five years ago was $117,000. An appraiser hired to recommend a listing price would be primarily concerned with which of the following?

The value of similar residences recently sold in the community

Which of the following is true of real estate appraisers of property secured by federally related loans?

They must hold a state appraisers license or certification.

All of the following are examples of external obsolescence EXCEPT: A. population density. B. direct effect of the elements. C. zoning. D. nearby highway realignment (Population changes, changes in zoning or highway realignment might cause external obsolescence of the property)

direct effect of the elements.

When an appraiser adjusts the estimate of a home's value because of a poor floor plan, the adjustment is made because of: A. physical depreciation. B. functional obsolescence. C. cost-adjustment ratio. D. structural depreciation.

functional obsolescence.

Using the income approach to valuation, all of the following are proper deductions from effective gross income to determine net income EXCEPT: (Concerning income-producing property, neither principal nor interest payments on existing mortgages are deductible as operating expenses, nor is building depreciation)

interest payments on loans.

Highest and best use is concerned with all of the following EXCEPT: A. net yield to owner. B. utility of surrounding area. C. relationship to regional development D. interest rate on investment loans.

interest rate on investment loans.

The capitalization rate of a property is the ratio between the:

net income and the market value.

During a period of declining values and tight money, real estate is considered to be a:

non liquid investment.

All of the following would be considered in the cost approach appraisal method EXCEPT: A. operating expenses. B. depreciation. C. land value. D. replacement cost.

operating expenses.

What is "Building residual technique"?

A method of determining the value of an improvement, normally used in appraising income property.

Define "Depreciation"?

As related to appraisal, loss in value due to any cause; any condition that adversely affects the value of an improvement

Define "Assemblage / Plottage"? (Note: The term "Plottage" and "Asseblage" are related to the combination of parcels of land)

Assemblage is the process of joining several parcels to form a larger parcel; the resulting increase is called plottage.

A broker has just obtained a listing on a residence located adjacent to a new hamburger drive-in restaurant An appraiser of the residence should give which of the following?

Careful concern to external obsolescence.

Of the following, which type of value equals the actual market value? A. Assessed value B. Insurance value C. Book value D. Comparable value

Comparable value

The collection of data and the analysis of different approaches to value is known as: A. depreciation. B. amortization. C. reconciliation. D. accrual. (Reconciliation (also called correlation) is more than just averaging the three approaches to value; it weighs many factors)

reconciliation.

A capitalization rate incorporates:

return on land and building and recapture of building.

A purchaser is considering buying several single-family residential homes and renting them out. If a gross rent multiplier of 10 is used, what effect will a 5 percent increase in insurance and property taxes have on value? (The gross rent multiplier (GRM) does not take into account the effect of differences in the property's expenses. The ORM is a rough rule of thumb used to estimate the value of rental residential property. It is used to estimate value as a multiple of monthly gross rents)

No effect

Define "Value"?

The power of a good or service to command other goods in exchange for the Present worth of future rights to income or amenities; the present worth to typical users and investors of future benefits arising out of ownership of a property.

All of the following statements are true about loss in value due to obsolescence EXCEPT: A. extra-large load-bearing columns in a 30-year-old commercial building represent incurable functional obsolescence. B. an unattractive store front window represents curable functional obsolescence. C. a chemical plant located across the street from a private residence represents external obsolescence. D. a larger property next door sold for 20 percent below the listed price.

a larger property next door sold for 20 percent below the listed price.

Assume that three rental buildings had sales prices and rents as follows: $1 07,250 and $16,500; $105,625 and $16,250; $112,125 and $17,250. What value would most likely be indicated on a similar building if rents were $16,750? (Based on the three properties, the gross rent multiplier is 6.5; in other words, the sales prices were 6.5 times the annual rent)

$108,875

A man recently appraised a three-bedroom ranch home in a poor neighborhood. He found another comparable in a better neighborhood that sold for $80,000. The comparable also had a fireplace, which the subject property did not. He assigned the following adjustments: $2,000 for the fireplace and $5,000 for the neighborhood. The adjusted sales price for this comparable would now be: ($73,000. Adjustments are made to the comparable property, not to the subject property. The subject property lacks the fireplace ($2,000) and the neighborhood ($5,000))

$73,000

The difference between the cost of replacement and current valuation of a single-family residence is equal to:

accrued depreciation.

An official valuation of property for ad valorem tax purposes is BEST described as:

an assessment appraisal.