Final Exam

d) subdivision development method

All probable costs of an improvement and construction are calculated to find land value in the a. sales comparison method. b. allocation method. c. abstraction method. d. subdivision development method.

b) potential gross income

An allowance for vacancy and collection losses is usually estimated as a percentage of a. effective gross income. b. potential gross income. c. operating expenses. d. net operating income.

Market Extraction

An estimate of the depreciated cost of the improvements is deducted from the total sale price to arrive at the land value Most applicable when a site has few improvements Frequently used in rural areas

C) $90,750

An investor bought a golf course lot today for $75,000. The lot sold for $100,000 five years ago. If the investor sells the lot 2 years from now at 10% annual compound appreciation rate, what will it be worth? a) $82,500 b) $90,000 c) $90,750 d) $120,000 e) None of the above

Direct Capitalization - Ground Rent Capitalization

Annual income from ground lease is divided by capitalization rate to indicate market value of site Most applicable when comparable rents, rates and factors can be developed from an analysis of sales of leased land

Cost Approach

Basic value principle is Substitution Other important principles are Contribution and Supply & Demand

d) land residual method

Building net income is a consideration in finding land value by the a. sales comparison method. b. allocation method. c. subdivision development method. d. land residual method.

4 tests of highest and best use

1) Physically Possible Limited by site's size, shape, topography 2) Legally Permitted Consideration of zoning, building codes, hazardous areas, CC&Rs 3) Financially Feasible Present or anticipated market conditions 4) Maximally Productive Highest financial return and property price

4 Powers of Government

1) taxation 2) eminent domain (Ex. build highways) 3) police power (Ex. zoning) 4)escheat (Ex. Die without a will property goes to state)

d) index method

A factor representing the percentage increase in construction costs over time is used in the a. quantity survey method. b. square-foot method. c. unit-in-place method. d. index method.

a) $98,000

A small office building has the following characteristics: - Net Operating Income: $65,000 -Operating Expenses: $33,000 -Annual Mortgage Interest: $18,000 Vacancy -Bad Debt Losses: $5,000 What is the Effective Gross Income? a) $98,000 b) $111,000 c) $103,000 d) $121,000

b) 34%

A small office building has the following characteristics: - Net Operating Income: $65,000 -Operating Expenses: $33,000 -Annual Mortgage Interest: $18,000 Vacancy -Bad Debt Losses: $5,000 What is the Operating Expense Ratio? a) 32% b) 34% c) 51% d) 66%

c) $103,000

A small office building has the following characteristics: - Net Operating Income: $65,000 -Operating Expenses: $33,000 -Annual Mortgage Interest: $18,000 Vacancy -Bad Debt Losses: $5,000 What is the Potential Gross Income? a) $98,000 b) $111,000 c) $103,000 d) $121,000

Functional Obsolescence

Caused by presence of currently undesirable layout, design, or other features, or absence of currently desirable features Curable if alteration is economical Incurable if alteration not practical

Physical Deterioration

Caused by wear-and-tear and action of the elements, and usually the most obvious form of depreciation Curable when repairs result in equal or greater increase in overall property value Incurable when repairs are not economical

External Obsolescence - Incurable

Change in land use or natural conditions Change in business environment, such as Loss of jobs due to layoffs or closures Rental Rates Not High Enough to Provide an Adequate Return on Cost

Functional Obsolescence - Incurable

Clear Height is Too Low - Not Cost Effective to Raise Roof Because Cost cannot be Recovered Through Higher Rental Rates

Ranking Analysis

Comparable sales are ranked in descending or ascending order of desirability and each is analyzed to determine its position relative to the Subject Bracketing - process to determine a probable range of values by applying qualitative techniques to group sales or rents

Approaches to value

Cost Approach Income Approach Sales Comparsion Approach

Yield Capitalization - Subdivision Development (DCF)

Costs of developing and subdividing parcel of land are subtracted from total expected sales prices of the separate sites to determine the value of the undivided raw land Most applicable when subdivision development is the highest and bet use of the land and there is market support for immediate absorption Requires many variables, including: sale price projections, absorption rate projections, construction cost projections and profit margin projections

Functional Obsolescence - Curable

Covered Parking - Cost to Provide Covered Parking can be Recovered Through Higher Rental Rates

d) Anticipation and Supply & Demand

Direct Capitalization and Yield Capitalization are based on which of the following principles? a. Substitution and Anticipation b. Anticipation and Balance c. Balance and Substitution d. Anticipation and Supply & Demand

Age Life Method

Effective Age/Economic Age= Accrued Depreciation

Net Operating Income (NOI)

Effective Gross Income less operating expenses

External Obsolescence

Environmental obsolescence Economic obsolescence Locational obsolescence It is any loss of value from causes outside the property and is always considered incurable. Examples: Change in land use or natural conditions Change in business environment, such as Loss of jobs due to layoffs or closures

Interim Use

Existing use is not optimal use, but continued use will defray holding costs & demolition costs until redevelopment is economically feasible EX)parking lot

Operating Expenses

Fixed Expenses - Do not vary with occupancy -Taxes & Insurance -Replacement for reserves Variable Expenses - Change with occupancy -Management Expense -Utilities Reserves for replacement -heating, air conditioning, roof, carpeting

c) 4%

If a building has an estimated remaining economic life of 25 years, its annual recapture rate using the straight-line method is a. 25 percent. b. 40 percent. c. 4 percent. d. 400 percent.

b) 8.75

If an income property sells for $210,000 and has a gross income of $24,000, what is the gross income multiplier? a) 6.5 b) 8.75 c) 10.0 d) 11.4

e) none of the above

If an income property sells for $210,000 and has a gross income of $24,000,What is the overall capitalization rate? a) 0.092 b) 0.111 c) 0.125 d) 0.153 e) None of the above

a) deducting operating expense

In a cash-flow projection, the net operating income is determined by starting with the gross potential income, calculating the effective gross income, and then: a. deducting operating expense. b. deducting depreciation. c. deducting vacancies and bad debts. d. adding depreciation

b) cost approach

In appraising a special-purpose building, such as a post office, the most reliable approach to value would generally be the a. sales comparison approach. b. cost approach. c. income capitalization approach. d. gross income multiplier.

c) accrued depreciation

In computing value by the income capitalization approach, which of the following is not applicable? a. Capitalization rate b. Net operating income c. Accrued depreciation d. Gross income

b) balance

In considering developing a subdivision, a builder determines the optimum lot sizes, house sizes and amenity packages. Which of the following economic principles does this illustrate? a. anticipation b. balance c. contribution d. substitution

c)

In the sales comparison approach, how is the appropriate unit of comparison chosen? a) Price per square foot is always used b) Price per square foot is used except for hotels, for which the price per room is used c) The appropriate unit(s) of comparison that mimic market behavior d) It depends on the extent to which the comparable property differs from the subject property

Rate

Income/Value

Sales Comparison Approach

Information is gathered on Subject property and Comparable properties that have sold or been listed for sale recently Most common technique & preferred method when sales are available Make appropriate adjustments for differences between the Comparable property and the Subject property - we adjust the sale to the subject

Reconciliation Checklist

Is comparable property similar in terms of location and physical characteristics? Does comparable have same highest and best use as Subject? Is comparable in the same market as the Subject? Do sale details match definition of market value? Would buyer of comparable consider Subject as a substitute property?

Financially Feasible - 3 Measures

Land Residual Analysis Feasibility Rent Profitability Index

Consistent Use

Land cannot be valued on the basis of one use while the improvements are valued on the basis of another use

b) allocation method

Land value is treated as a proportion of the total value of improved property in the a. sales comparison method. b. allocation method. c. subdivision development method. d. land residual method.

Property Adjustments

Location Physical Characteristics Economic Characteristics Legal Characteristics Non-realty components of value

Paired Sales Data Analysis

Most common Quantitative Technique Sales or Rental data on nearly identical properties except for one characteristic Forms foundation for Quantitative Adjustment Best example is a sale and re-sale of the same property because all variables other than size and age will be the same on both sale dates. Allows for extraction of an adjustment market conditions

Income Approach

Most reliable with income-producing property Appraiser analyzes property's capacity to generate future benefits (net income) and capitalizes the income into an indication of present value. Based on Anticipation and Supply & Demand

Reconciliation

Narrow multiple transactions into subset of best indications of value Comparables that require fewest adjustments (total % or total $) generally considered best comparables Look at gross adjustment % or $

Value

Net Operating Income/Capitalization Rate Income/Rate

Direct Capitalization - Land Residual Method

Net income attributable to the land is capitalized at a market-derived land capitalization rate to provide an estimate of value Most applicable in testing feasibility of alternative uses of a site in highest and best use analysis

c) value

Net operating income divided by the capitalization rate yields a. effective net operating income. b. gross income. c. value. d. gross sales price.

Physical Deterioration - Curable

New Carpet

Physical Deterioration - Incurable

New Ceiling (Costs to repair exceeds increase in value)

b) unit in place method

One method used to determine reproduction cost is to estimate the costs of the various components of a structure separately, and then add them together to find the total cost. This is called the a. square-foot method. b. unit-in-place method. c. cubic-foot method. d. quantity survey method.

Operating Expense Ratio

Operating expenses/EGI

3 Types of Depreciation

Physical Deterioration Functional Obsolescence External Obsolescence

Financially feasible

Potential Use is Feasible if: Land Value > 0 Market Rent > Feasibility Rent Potential Use is not Feasible if: Land Value <0 Market Rent < Feasibility Rent Maximally Productive Use = Highest of the Financially Feasible Uses

Index Method

Present Index/Index at Time of Construction X Original Cost = Present Cost

Comparative Analysis may employ:

Quantitative Techniques, or Qualitative Techniques Separately or in Combination

Income

Rate X Value

Market Conditions Adjustment

Ratio between sale prices and listing prices Exposure time Listing prices Days on market Trends in rents Number of offers a seller receives Proportion of accepted offers that actually close Number of foreclosures Number of properties on market Number of building permits issued & their aggregate value Terms of available institutional (third party) financing

Allocation method

Ratio of site value is extracted from comparable sales in competitive locations and applied to the value of the improved subject property or comparable properties to develop the site value Applicable when valuing one-unit residential lots where ample sales of both lots and improved homes are available comparison purposes Less accurate for commercial properties For commercial properties can provide a check on reasonableness rather than a formal opinion of site value Other than in valuing residential subdivision lots rarely used as the primary land valuation technique

Transactional Adjustments (MADE SEQUENTIALLY)

Real property rights conveyed Financing terms Conditions of sale Expenditures made immediately after purchase Market Conditions

Cost Approach Formula

Reproduction or Replacement Cost of Improvements - Depreciation on Improvements + Site Value = Property Value

Sales Comparison Approach Procedure

Research competitive market for information on properties that are similar to Subject property Verify/Confirm Information Select most relevant unit of comparison Look for differences between Comparable & Subject that might affect value Reconcile to a Value Conclusion (reconciliation process)

c) nonconforming use

Residential property in an area rezoned for commercial use is an example of a(n) a. conditional use. b. illegal use. c. nonconforming use. d. speculative use.

GRM

Sales Price/Gross Rent

a) sales comparison method

Sales of similar vacant sites are analyzed and compared in the a. sales comparison method. b. allocation method. c. abstraction method. d. All of these

a) net operating income

Subtracting expenses from effective gross income yields the a. net operating income. b. gross income. c. net effective income. d. capitalization rate.

Disposition value

What would property sell for after a Limited Exposure on the market given that the Seller is Compelled to Sell Consummation of a Sale within a Future Exposure Time Specified by the Client Seller is under Compulsion to Sell An Adequate Marketing Period will be made during the Exposure Time Specified by the Client All other conditions of Market Value apply to Disposition Value

Liquidation value

What would property sell for after a Severely Limited Exposure on the market given that the Seller is Extremely Compelled to Sell Consummation of a Sale in a Short Time Period Seller is under Extreme Compulsion to Sell A Normal Marketing Period is not Possible due to Brief Exposure Period All other conditions of Market Value apply to Liquidation Value

b) effective gross income

When a property's vacancy and collection losses are subtracted from the property's potential gross income, which of the following is derived? a. Cash flow b. Effective gross income c. Net operating income d. Taxable income

b) interim use

When a site's highest and best use is forecast to change in the near future, the present use is considered a(n) a. restricted use. b. interim use. c. speculative holding. d. temporary use.

b) added; subtracted

When the sales comparison approach to value, an appraiser may identify differences between the subject property and the comparables. If so, the value of a negative feature present in the comparable but not present in the subject property is ____ while the dollar value of a positive feature in the comparable but not in the subject property is _____. a) subtracted; added b) added; subtracted c) subtracted; subtracted d) added; added

d) Mortgage payments

Which of the following categories of expenses is not included as an operating expense? a. Maintenance b. Utilities c. Management fees d. Mortgage payments

a) substitution

Which of the following commonly accepted economic principles is used to explain that when several parcels of property with substantially the same utility are available on the market, the one with the lowest asking price will attract the greatest demand? a. substitution b. contribution c. balance d. anticipation

b) estimating depreciation

Which of the following is NOT a step in Yield Capitalization? a. Selecting a projection period b. Estimating depreciation c. Forecasting future cash flows d. Selecting an appropriate yield (discount) rate

b) property management

Which of the following operating expenses is not normally considered a fixed expense? a. Real estate taxes b. Property management c. Fire insurance d. Flood insurance

a) they can never be the same

Which of the following statement is FALSE regarding the "going-in" capitalization rate and the terminal capitalization rate: a. They can never the same. b. They may be the same. c. The terminal capitalization rate is likely to be higher than the going-in capitalization rate. d. None of the above

b) substitution

Which principle of value suggests that the maximum value of property generally cannot exceed the cost of its replacement? a. balance b. substitution c. anticipation d. opportunity cost

b)

Which statement is true? a. The sales comparison approach is the most reliable method of site valuation. b. There are no basic differences between the data valuation of improved properties and unimproved sites in the sales comparison method. c. Vacant land cannot be valued by the sales comparison method. d. Adjustments are always applied to the value of the subject

a)

Widespread use of appraisal report forms has resulted in frequent use of a. square-foot method of calculating reproduction cost. b. unit-in-place method. c. quantity survey method. d. index method.

b) $304,500

With a present index of 462, an index at time of construction of 220, and an original cost of $145,000, the present cost of a structure using the index method is: a) $69,048 b) $304,500 c) $319,000 d) $350,900

c) $412,500

You are appraising a building and have concluded the replacement cost new is $550,000, the property has an effective age of 10 years and a remaining economic life of 30 years. What is the depreciated replacement cost of the building? a) $495,000 b) $366,667 c) $412,500 d) $550,000

a) $687,500

You are appraising a building and have concluded the replacement cost new is $750,000, the depreciation due to incurable physical deterioration is 25%, the depreciation due to external obsolescence is 10% and the underlying land value is $200,000. What is the value indicated by the Cost Approach: a) $687,500 b) $562,500 c) $487,500 d) $617,500

b) $227,500

You are appraising a single‐family residence with a two stall garage without a pool. Six months ago, a similar house in the same neighborhood sold $250,000; however, the comparable sale had a pool and a three car garage. In analyzing the market, you arrive at the following three conclusions: 1. The market trend in prices is upward 10% per year in this neighborhood. 2. On average, houses with swimming pools sell for $25,000 more than houses without swimming pools. 3. On average, houses with three stall garages sell for $10,000 more than houses with two stall garages. From these conclusions, what is the adjusted sale price for this sale? a) $225,000 b) $227,500 c) $297,500 d) $322,500

Appraisal

assessment of value at a specific point in time

Replacement Cost

current cost of improvements having the same utility and general quality as the subject improvements

Bracketing

process to determine a probable range of values by applying qualitative techniques to group sales or rents

IRR

the rate at which the present value of future cash flows are exactly equal to the initial cash investment.

b) $19.00

You are appraising a vacant lot for a retail site. Six months ago, a comparable site sold for $20.00 per square foot. In analyzing the market, you arrive at the following four conclusions: 1. The market trend in prices is downward 10% per year since the comparable site was sold. 2. The sale property is 5% superior to the Subject with respect to location 3. The sale property is 15% inferior to the Subject with respect to physical features 4. The sale property is 10% superior to the Subject with respect to legal condition From these conclusions, what is the indicated market value of the Subject sale? a) $18.00 b) $19.00 c) $21.00 d) none of the above

c) $148,500

You are appraising a vacant lot for a single-family residence. One year ago, a comparable site sold for $125,000. In analyzing the market, you arrive at the following three conclusions o The subject site is 10 percent more valuable as a result of price increases over the year since the comparable site was sold o The subject site is 8 percent less valuable than the comparable site with respect to physical features. o The subject site is 16 percent more valuable than the comparable site with respect to location. From these conclusions, the indicated market value of the subject site is: a) $115,000 b) $126,500 c) $148,500 d) $159,500

c) $150,937

You are appraising a vacant lot for a single‐family residence. 18 months ago, a comparable site sold for $125,000. In analyzing the market, you arrive at the following three conclusions: 1. The market trend in prices is upward 10% per year since the comparable sold. 2. The sale property is 10% superior to the Subject with respect to physical features. 3. The sale property is 15% inferior to the Subject with respect to Utilities. From these conclusions, what is the adjusted sale price for this sale? a) $128,563 b) $150,000 c) $150,937 d) none of the above

c) 33.3%

You are appraising a warehouse using the cost approach to value method. You have estimated that the effective age of the building is 15 years and the total economic life is 45 years. Using the age-life method, total depreciation expressed as a percentage is (rounded): a) 25 percent b) 66.7 percent c) 33.3 percent d) 75 percent

c) 8.33

What is the annual gross rent multiplier for a residential rental property that produces $2,000 per month rental income and had a sales price of $200,000? a. 1 b. 10 c. 8.33 d. .012

a) reproduction cost

What term refers to the cost of an exact duplication of the structure? a. Reproduction cost b. Replacement cost c. Construction cost d. Direct cost

a) leasehold

What type of an estate does a tenant have? a. Leasehold b. Fee simple c. Fee tail d. Reversionary

Reproduction Cost

$$ required to construct exact duplicate of the subject improvements at prices current as of the effective date of the appraisal

Inherent Assumptions of Market Value

(1) Buyer and seller are typically motivated; (2) Both parties are well informed or well advised, and acting in what they consider their best interests; (3) A reasonable time is allowed for exposure in the open market; (4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) . The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

a) condemnation of a property

What is not a use of police power? a. Condemnation of a property b. State laws c. Environmental regulations d. Licensing of real estate agents

c) vacancy and collection losses

The difference between potential gross income and effective gross income is a. operating expenses. b. market rent. c. vacancy and collection losses. d. variable expenses.

b) $103,000

The following questions are based on the following information. A small office building has the following characteristics: - Net Operating Income: $65,000 -Operating Expenses: $33,000 -Vacancy and Bad Debt Losses: $5,000 -Capitalization Rate: 6% What is the Potential Gross Income? a) $98,000 b) $103,000 c) $111,000 d) $121,000

d) $1,083,333

The following questions are based on the following information. A small office building has the following characteristics: - Net Operating Income: $65,000 -Operating Expenses: $33,000 -Vacancy and Bad Debt Losses: $5,000 -Capitalization Rate: 6% What is the indicated value? a) $600,000 b) $650,000 c) $1,000,000 d) $1,083,333

d)

The internal rate of return is that discount rate at which: a. cash flow consists of income from operations plus the sales price or salvage value at the end of the analysis. b. the future worth of present cash flow is exactly equal to the initial cash investment. c. the present value of future cash flows is larger than the initial cash investment. d. the present value of future cash flows are exactly equal to the initial cash investment.

c) quantity survey method

The most detailed and time consuming method of estimating the cost of reproducing a building is the a. index method. b. square-foot method. c. quantity survey method. d. unit-in-place method.

d) effective gross income

The operating expense ratio for income-producing property can be calculated by dividing operating expenses by a. net income. b. debt service. c. cash flow. d. effective gross income.

b) reconstructing the operating statement

The process of eliminating inapplicable expenses and adjusting the expenses that remain is called a. developing the capitalization rate. b. reconstructing the operating statement. c. finding effective gross income. d. the market extraction method.

Highest and Best Use

The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value The reasonably probable use the produces the most benefits and the highest land value at any given time

c) yearly reserve for replacement

The replacement cost of a heating system, divided by its remaining useful life in years, yields the amount that an appraiser should consider as a a. variable expense. b. fixed expense. c. yearly reserve for replacement. d. reversion value.

b) substitution

The valuation principle on which the cost approach to value is based is a. balance. b. substitution. c. supply and demand. d. anticipation.

Potential Gross Income (PGI)

Total income attributable to real property at full (100%) occupancy before vacancy loss & operating expense loss

Effective Gross Income (EGI)

Total income attributable to real property at full (100%) occupancy less vacancy loss

d) all of the above

Under the principle of Contribution, an item can have a value that is: a. below market value b. above market value c. approximately equal to market value d. all of the above

Direct Capitalization

Used primarily for single-family residences that are not usually purchased as income-producing properties Occasionally used for small apartment projects Does not consider expenses

a. economic life

Useful life is the same as a. economic life. b. physical life. c. effective age. d. remaining economic life.

Trend Analysis

Useful when sales of highly comparable properties are lacking, but a broad database on properties with less similar characteristics is available

a) balance

What economic principle suggests that the values of the property is created and maintained when there is equilibrium in the supply, demand, location and so forth of real estate? a. balance b. equilibrium c. substitution d. surplus productivity

c) The property will escheat to the state

What happens to property if a person dies without a will and has no heirs? a. The property will pass testate. b. The property will pass intestate though descent. c. The property will escheat to the state. d. The property will be distributed by an executor.

c) fee simple estate

What is an example of a freehold estate? a. Leasehold b. Chattel Real c. Fee Simple Estate d. Estate in Remainder

a) interest rate

What is i in the formula for calculating the Future Value of $1? a. The interest rate b. The income rate c. The net operating income d. None of the above

d) the number of periods

What is n in the formula for calculating the Present Value of $1? a. The net operating income b. The effective age of the property c. The interest rate d. The number of periods