Chapter 3-Property Valuation and Financial Analysis

The period for which a property can show a return attributable to the improvements is known as the property's: economic life. chronological life. effective age. depreciation life.

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

An appraiser defines depreciation as: economic obsolescence loss in value from any cause wear and tear of the improvements recapture that has been realized

loss in value from any cause. A loss in value is the best answer. Economic obsolescence happens off the property. Wear and tear is dealt with through proper maintenance.

Which of the following is a cost associated with home ownership: amenity value loss in value as a result of adverse zoning loss of interest on owner's equity improvement appreciation

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.

Each unit in a duplex rents for $1,000 per month. With a price of $240,000, the monthly gross multiplier is: 10 120 240 20

120. As shown in Question 3, $240,000 (value) / $2,000 (rent) = 120.

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: $187,500. $270,000. $480,000. $420,000.

$187,500. 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

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 worth: $2,940,000. $2,240,000. $2,936,000. $2,475,000.

$2,240,000. 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 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? $510,000 $480,000 $525,000 None of the above

$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

An analysis of rental income determines the income's: durability quantity quality All of the above

All of the above. Each of these is a factor. As applied to rental income, durability = longevity; quantity = amount of rent; quality = assurance of payment.

Which of the following is true regarding capitalization rates (cap rates)? Lowering the cap rate increases the value of the property. Increasing the cap rate lowers the value of the property. Increasing the risk of loss increases the cap rate. All of these are true.

All of these are true. 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 vnet 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.

Value is best described as: a relationship between demand for something and the supply of that same product. the ability of one commodity to command other commodities in exchange. the present worth of future benefits. Any of the above.

Any of the above. All answer selections are true.

To calculate a capitalization rate (cap rate), the appraiser uses which of the following methods: market comparison band of investment summation Any of the above

Any of the above. Any of these can be applied.

When an appraiser relies on the principle of substitution, they assume that one property may be substituted for another in terms of: income use structural design Any of the above

Any of the above. Substitution applies to all three approaches. Each of these comparisons is valid.

Which of the following is ethical for an appraiser to do? Establish a minimum value prior to accepting the assignment. Use other than accepted methodology in an appraisal assignment. Base the appraisal fee as a percentage of property value. Appraise a property in which the appraiser has an interest, provided they first disclose their interest in the property.

Appraise a property in which the appraiser has an interest, provided they first disclose their interest in the property. Disclosure is what makes this answer ethical. Note that none of the other choices are acceptable.

Which of the following is not a part of the cost approach appraisal method? Unit-in-place Capitalization Quantity survey Index method

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.

In using the capitalization process, which of the following cannot be deducted to determine the net income? Electricity Maintenance expense Management Debt service

Debt service. Just as finance is not a consideration in appraisal (see Question 15), the debt service would also not apply.

Which of the following is not a force that influences value? Economic Social Demand Physical

Demand. The forces are: Physical, Economic, Government, and Social (PEGS). Demand is one of the elements of value, not an influence on value.

Which of the following appraisal reports is the most detailed? Summary report Restricted use report Narrative report Oral report

Narrative report. Among the written reports, a narrative report is the most detailed and the restricted use is the least.

Which of these factors does not contribute to obsolescence? Misplaced improvements Out-of-date equipment Changes in traffic patterns Worn out carpeting

Worn out carpeting. Worn out carpeting is an example of physical deterioration, not an obsolescence.

Which of these most nearly refers to a loss in value due to economic obsolescence: an architectural design which is out of style a zoning change improper maintenance of the property an increased demand for more luxurious units

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.

All of the following are essential elements of value, except: anticipation demand scarcity utility

a. anticipation. Anticipation is a principle. The elements of value are listed in Question 8. Notice it is not unusual to recognize answers for questions embedded in other questions and answer selections.

When comparing the economic life and the physical life of an improvement: economic life is shorter economic life is the same as the physical life economic life is longer physical life is shorter

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

To calculate replacement cost, compute the cost to replace: an equally desirable property with the same utility value the identical structure using the original materials the identical structure using modern materials the most economical structure having the same utility value

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.

Appraisers attempt to estimate the value of real estate. The value is: derived from an income analysis based solely on the reproduction cost projected from the original cost based on an analysis of facts as of a specified date

based on an analysis of facts as of a specified date. This is the best answer. Income analysis and reproduction costs may play a part in the decision but are not exclusively correct. Thus, answer selection D best states how an appraiser estimates value.

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) comp appraisal None of the above

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

The elements of value do not include: cost and age. utility and demand. scarcity and transferability. All of the above.

cost and age. The elements of value are Demand, Utility, Scarcity and Transferability (DUST). Therefore, the correct answer, that which is not included as an element of value, is A.

When appraising a special purpose property, an appraiser uses the: cost approach capitalization method market data approach land residual approach

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.

When comparable sales are unavailable or inadequate and a property generates no income, an appraiser would likely use the: capitalization approach gross multiplier approach cost approach sales comparison approach

cost approach. The cost approach is the best answer selection. As the property does not generate income, neither answer selection A or B are applicable as they are both based on the income approach. Further, answer selection D may be eliminated as there is insufficient sales data of comparable properties available to make a comparison.

The first step in the appraisal process is to: set the appraisal fee gather data define the problem analyze data

define the problem. Like in any similar effort, you must first define what the problem is.

Which of the following does a property owner not show as an expense? management fees depreciation utilities property taxes

depreciation. Only depreciation> is a non-cash factor.

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

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

The statement "more buildings are torn down than wear out" is an illustration of: physical deterioration functional obsolescence economic obsolescence accelerated depreciation

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: actual cost history of vacancy potential increase in rents effect on the net income

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 economic life actual age progressive age

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

To arrive at an estimate of value secured under each of the three appraisal approaches, an appraiser: averages the estimates. uses the lowest value. uses the highest value. explains why or why not the other approaches were not used, then chooses the approach the appraiser believes to be the most appropriate.

explains why or why not the other approaches were not used, then chooses the approach the appraiser believes to be the most appropriate. Note how long this answer selection is. Such an extreme length disproportionate to the other answer selections indicates this is likely the correct answer. Appraisers never average numbers between appraisal methods to arrive at a conclusion.

An appraiser uses a site analysis to determine the: highest and best use of a property appropriate zoning designation for a property type of soil under an improved property comparable values of similar properties

highest and best use of a property. The purpose of a site analysis is to determine the highest and best use of a property.

The vacancy rate of an apartment building under normal competitive conditions is primarily the result of: employment fluctuations. housing supply and demand in the area. the cost of construction and the cost of money. taxes and insurance.

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: free of debt encumbered improved 1,000 square feet or larger

improved. There must be an improvement to calculate depreciation. Raw land cannot depreciate in value.

The most common method used by an appraiser in the appraisal of a single family residence (SFR) is: replacement cost reproduction cost market comparison capitalization

market comparison. Whenever possible, an appraiser prefers to compare properties.

The ultimate test to determine the functional utility of a property is the: property's maintenance costs property's marketability building codes controlling the property's use zoning laws where the property is located

property's marketability. Marketability is the ultimate test.

Which of the following is not an example of functional obsolescence: a swimming pool in cold climate proximity of obnoxious nuisances an old kitchen a one car garage

proximity of obnoxious nuisances. Functional obsolescence applies to aspects within the property. External conditions may represent an economic obsolescence.

Demand has no effect on value unless there is also: a need for the thing in demand. an adequate supply of the thing in demand. a scarcity of the thing in demand. purchasing power which enables the ability to buy the thing in demand.

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

Loss of value of an expensive home due to the close proximity of lower-priced homes in a neighborhood is known as: regression. progression. functional obsolescence. physical depreciation.

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.

Restoring a property to a satisfactory condition without changing the floor plan, form, or style of the building is known as: reproduction replacement remodeling rehabilitation

rehabilitation. Rehabilitation suggests making necessary repairs without changing any other elements of the property. Remodeling would change things to current style and preference.

Which of the following approaches to valuation yields the highest estimate of value? market comparison reproduction substitution comparable sales

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 gross rent multiplier (GRM) is calculated by dividing: gross monthly rents by market value gross monthly rents by selling price net monthly rents by market value sales price by gross monthly rents

sales price by gross monthly rents. Review Questions 3 and 9 for example calculations for determining the gross rent multiplier (GRM).

Compared to a property's physical life, economic life is generally: shorter longer about the same varies with property type

shorter. This is similar to Question 37. Note that economic life represents the length of time a building produces a reasonable return. Alternatively, physical life is based on how long the building would remain physically standing. Thus, a property's economic life is the shorter of the two.

The premise that no prudent person would pay more for a parcel of real property than the price of a reasonably close alternative which is available without undue delay refers to the principle of: balance contribution substitution anticipation

substitution. Substitution applies.

When conducting an appraisal, an appraiser considers all the following except: the definition of value the highest and best use of a property the assessed value of a property the legal description of a property

the assessed value of a property. The assessed value is the county tax assessor's determination of value for the purposes of calculating property taxes.

An appraiser describes "replacement cost" as: the original cost to build the structure. the current cost to build a replica of the original structure. the current cost to build a structure of similar utility using modern methods and materials. the current cost to build a structure representing the highest and best use of the site.

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.

In using the market data approach in appraising a single family residence (SFR), comparisons should be made based on: gross multipliers. the total cubic footage of the property. the location of the property. the entire property.

the entire property. Comparisons need to consider all elements of a property and its neighborhood. Therefore, answer selection C is not the best answer, and answer select B is not a measurement that is considered in residential real estate.

All of the following are included in the laws governing the government power of eminent domain, except: the right of the government to take property from the owner for a legitimate public use. a condemnation action in court compensation at fair market value (FMV) the exercise of zoning authority

the exercise of zoning authority. Eminent domain has no specific relevance to zoning. The consideration that must be paid to the owner is the fair market value (FMV) of the property which is determined as the price a willing buyer would pay to a willing seller when the property has had adequate exposure on the market and neither party is under any duress.

The narrative form of an appraiser's report includes all the following except: a description of the property the neighborhood amenities the appraiser's qualifications the financial terms of the sale

the financial terms of the sale. Financing is not part of the appraisal process. All the other answer selections are part of the narrative report.

An appraisal is made as of a given date to indicate: when the appraiser inspected the property. the loan balance at the time of the appraisal. the market condition at the time the appraisal was completed. the true age of the property

the market condition at the time the appraisal was completed. The best answer selection here is C. An appraisal is an objective opinion of value based on the market conditions at a specific time.

The loan-to-value ratio (LTV) is best described as: the ratio of the loan to the sales price the ratio of the loan to the appraised value of the property the loan as a percent of assessed value the loan as a percent of interest

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 term "highest and best use" can best be defined as: the use that produces the biggest building the use that produces the highest building the use that produces the greatest gross income the use that creates the greatest net return

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 capitalization method of the income approach determines: the value of a property based on its net operating income (NOI). the effective interest rate on the debt encumbering the property. the value of the property based on its gross operating income. the property owner's net worth

the value of a property based on its net operating income (NOI). The capitalization method uses an income-producing property's net operating income (NOI). The gross rent multiplier (GRM) method uses the gross rent generated by an incomeproducing property.

All of these are good reasons for making a separate site valuation, except: to apply a residual technique. to determine building obsolescence. for taxation purposes. to apply the gross rent multiplier (GRM) technique.

to apply the gross rent multiplier (GRM) technique. Answer choice D is the exception. The other choices might be appropriate reasons for a separation of site and improvements, whereas the gross rent multiplier (GRM) approach requires nothing other than calculating the rent multiplied by a multiplier to arrive at a value.

The relationship between the thing desired and the potential purchaser could be described as: value. the present worth amortized. depreciation. cost.

value. Value is the relationship. Cost is simply the price.