Real Estate - Section 16
Improper maintenance of property What type of depreciation does this reflect?
Physical deterioration
Building codes, zoning laws, and environmental legislation are examples of which force that influences property value?
Political/governmental
a national organization comprised of representatives of major appraisal organizations and those of related industries.
The Appraisal Foundation
Each appraisal approach relies on something different to determine value. What does the cost approach measure?
Cost to rebuild the property
Related to depreciation, what are the two types of physical deterioration?
Curable and incurable
transactions for sale, lease, purchase, investment, refinancing, or exchange of real property in which a federal financial agency or regulatory authority is involved.
federally related transaction
The ______ approach uses a process of comparison with similar properties that have a known sale price to determine a subject property's market value.
sales comparison
What is the most reliable of the three approaches when appraising single-family homes for market value?
sales comparison approach
What does the principle of substitution say?
says that the value of a property is equal to the value of an equivalent substitute property.
What is an appraisal?
An opinion or estimate of a property's value as of a specific date
When a change in a property impacts the value as a whole
contribution
Attitudes and ideals related to human nature (marriage, education, population growth or decline) fall under the "_____" force. Items more monetarily driven, such as interest rates, employment, and development trends, are _____.
social; economic
Ted will have a hard time getting his asking price, especially now that a similar house with the same floor plan and finishes just sold for $10,000 less. What principle of value does this relate to?
substitution
the period of time for which a structure can be used for the purpose for which it was originally intended.
the Economic or Useful life
Speaks to the property's function
utility
Reflects the market supply, or lack thereof
Scarcity
What it would cost to recreate a property
cost
Process of forming an opinion of a property's value
valuation
Let's put some numbers on the features that an appraiser would adjust for in the sales comparison approach. For this example, the subject property has four bedrooms, two-and-a-half bathrooms, a two-car garage, a finished basement, but no pool. The comparable has four bedrooms, two-and-a-half bathrooms, a two-car garage, unfinished basement, and a pool. The comparable sold for $350,000 last month. Assume that a pool is valued $3,000 and a finished basement is valued at $15,000. Using these values, what's the market value of the subject property?
$362,000
Residential properties in federally related transactions valued at $_____ or less are exempt from these federal appraisal requirements.
$400,000
A 20-unit apartment building sells for $5 million. The property can bring in $400,000 in annual gross income. What is the gross income multiplier (GIM)?
12.5
If a property's income value is $200,000 and it's earning a net operating income of $40,000, what is the cap rate?
20%
What does DUST stand for?
o Demand o Utility o Scarcity o Transferability
What's the first step in the overall process that the appraiser uses with the sales comparison approach?
Analyze the subject property to identify its characteristics, particularly those that are in demand in the current market.
- Costs $400+ - Performed by a state-licensed or certified appraiser - Multiple methods of performing the appraisal are used, including sales comparison and cost. Appraisers may also use the income approach for income-producing properties. - Very detailed - Prepared for the lender, buyer, seller, or sometimes the courts What type of valuation do these describe?
Appraisal
- Minimal cost ($50 - $200), which must be paid to the licensee's broker - Performed by a real estate licensee - Comparable sales method is used - Basic to moderate level of detail - Prepared for a lender (in a foreclosure or short sale situation) or a relocation company What type of valuation do these describe?
BPO - Broker's Price Opinion
usually ordered by a lender in a foreclosure situation. They don't want to shell out the bucks for a full appraisal, so they'll hire some real estate broker to give them an opinion of price.
Broker's Price Opinion (BPO) Basically, it's just a CMA with a different name for a different purpose. Sometimes a relocation company will ask a broker to do a BPO.
- Free - Performed by a real estate licensee - Comparable sales method is used - Basic to moderate level of detail - Prepared for a seller or a buyer What type of valuation do these describe?
CMA - Comparative Market Analysis
In situations where a property has no economically viable reproduction cost, what can the appraiser do?
Calculate the replacement cost of the structure instead.
an unbiased estimate or opinion of the market value of real property by a real estate licensee who isn't a licensed or certified appraiser. It's usually provided to a seller, though they're sometimes done for another party.
Comparative Market Analysis (CMA)
After analyzing the subject property, the appraiser will identify some comparable properties that have been recently sold. What's next?
Compare the comparables to the subject property and make adjustments to the sales price of the comparables where they are different.
_______ says that value is created and maintained when the characteristics of a property fit in with its surroundings.
Conformity
Which factor influences property value and addresses questions such as, "What's the market like?" and "Are there more buyers than sellers, or vice versa?"
Demand
Calculate the projected net operating income for a property over the next year, then apply a capitalization rate. What method for converting a property's income potential to current value does this describe?
Direct capitalization
Airport noise What type of depreciation does this reflect?
External depreciation external depreciation doesn't mean the exterior of the house, but something that is external to the property itself.
What four external forces influence a property's value?
Environmental Social Political Economic
To be able to make valid computations of adjustments, the elements of comparison must be applied in a particular order. Which element must be applied first?
Financing terms and cash equivalency In order to adjust the sale prices of the comparable properties, the appraiser must apply the elements of comparison in this order: 1. financing terms and cash equivalency, 2. conditions of sale, 3. market conditions, 4. location, and 5. physical characteristics.
A form of depreciation or loss in value caused by defects in design is called _______.
Functional obsolescence
House is overbuilt for the area What type of depreciation does this reflect?
Functional obsolescence
Divide the sales price of a comparable property by its gross rental income. Use the result on the subject property to determine a value. What method for converting a property's income potential to current value does this describe?
Gross Rent Multiplier
Divide the sales price of a comparable property by its total gross income. Use the result on the subject property to determine a value. What method for converting a property's income potential to current value does this describe?
Gross income multiplier
Jane owns an empty warehouse. She's contemplating whether she stands to profit more by keeping the industrial property or converting it to residential condominiums. What principle of value does this relate to?
Highest and best use
After an appraiser analyzes the subject property first when using the sales comparison approach, What's next?
Identify comparable properties that have been recently sold.
Identifying the purpose of the appraisal leads the appraiser to do what next?
Identify data needed
Each appraisal approach relies on something different to determine value. What does the income approach analyze?
Income the property could generate
With this method of finding reproduction cost, the appraiser applies a factor that represents the construction costs, up to the appraisal date, to the subject building's original cost.
Index Method
An appraiser's first step in the valuation process is to identify the problem. What are two benefits of stating the problem up front?
It informs the appraiser's approach. It helps the appraiser identify the type of data required.
In which four of these scenarios would an appraiser likely use the cost approach? Movie theatre Winery and vineyard Newly constructed home 10-year-old home in an established neighborhood $10 million property
Movie theatre Winery and vineyard Newly constructed home $10 million property
To calculate the value of a house by the income approach, if you know the GRM derived from the comparables is 110, you would:
Multiply the gross monthly rent by 110
With this method of finding reproduction cost, the appraiser adds the itemized costs—including direct and indirect expenses—of building or installing all of a new structure's component parts.
Quantity survey method
When a property's value is dropping because the neighboring property's yard is filled with trash, it's an example of ______.
Regression
Reflects the cost to build a functionally equivalent improvement
Replacement cost
Cost to build an exact replica of the subject with the same materials and deficiencies
Reproduction cost
This type of value Assumes the land is vacant and bases opinion on highest and best use
Site value
With this method of finding reproduction cost, the appraiser multiplies the cost per square foot of a recently constructed comparable structure by the number of square feet in the subject building. Generally, appraisers use this method to estimate construction costs.
Square-foot method
What well-known economic principle says that a property's value is determined by what it would cost to purchase a similar property?
Substitution
The three approaches are based on certain principles of value. On which value principle is the sales comparison approach based?
Substitution The sales comparison approach tries to find equivalent substitute properties, and uses adjustments as needed to make sure they're comparing apples to apples. When it's done properly, it's a reliable indicator of market value.
The economic principle that tells us that when supply goes up, price goes down is commonly referred to as what?
Supply and demand
FIRREA has requirements related to the appraisal of federally related transactions. What does FIRREA require?
That federally related appraisals must be conducted by an appraiser who's either a licensed or certified appraiser
this approach to value estimates the present value of any future benefits of owning a particular property.
The income approach (also known as the income capitalization approach)
requires that federally related appraisals be conducted by a state-licensed or certified appraiser.
Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)
The ease with which the deed can be transferred and the property put to the desired use
Transferability
What standards do appraisers follow?
Uniform Standards of Professional Appraisal Practice
With this method of finding reproduction cost, the appraiser multiplies the cost per unit of measure of each component part of the subject property's structure (for example, the material, overhead, labor, and builder's profit) by the number of units of that component part in the subject. The total component cost is the cost of a new structure. (Generally, component parts are provided in square feet, but some parts, like plumbing fixtures, are provided as complete units.)
Unit-in-place method
What a property is worth.
Value
What's the capitalization formula used in the income approach?
Value = net operating income divided by cap rate
what a property is worth to the person using it
Value in Use Ex: Let's say you've got a family estate that's got a lot of history behind it. Its value in use will be higher to members of that family than it might be to a typical buyer.
Each appraisal approach relies on something to help determine a property's value. What does the sales comparison approach rely upon?
Value of similar properties in the market
Apply an expected rate of return to income from the entire holding period to find the current property value. What method for converting a property's income potential to current value does this describe?
Yield capitalization
Unbiased estimate of value of a specific property on a specific date
appraisal
what the local taxing authority thinks it's worth. Appraisers will look at it, but it's not a big factor in their number.
assessed value
a process in which an appraiser determines a probable range of values for a property by comparing a group of comparable sales to the subject.
bracketing The appraiser attempts to include both superior and inferior units of comparison such as age, transaction price, etc. For example, comparables that are five and 15 years old bracket a subject that is 10 years old.
How does the cost approach determine the indicated value?
by estimating the reproduction cost of the new improvement and subtracting the amount of depreciation. Then, the appraiser adds an estimate of the site value as if it were vacant and available to be developed to its highest and best use.
Ted's house is in the middle of an industrial area. The house is more than 100 years old, and this was not an industrial area when the home was built, but the neighborhood still influences the property's value. This is an example of
conformity
Growing up, Larry and his siblings spent every summer day splashing around in their in-ground pool. Now that he's responsible for maintaining the pool, it's just not as fun. When a crack developed, he decided to fill in the pool rather than repair it. But now that he's considering selling his childhood home, he's wondering what effect that action had on the property's value. This is an example of
contribution
Which economic principle pertains to how a change in a property affects its value as a whole?
contribution
The ____ approach to finding appraised value measures value as a cost of production, including the acquisition of the land and the construction costs.
cost
refers to an item that can be repaired or replaced, and where the cost to cure the item is less than or the same as the anticipated increase in the property's value after the item is cured.
curable depreciation
Relates to a property's popularity
demand
What does Federally Related Transaction NOT include?
does NOT include loans that are guaranteed (VA) or insured (FHA) by the federal government, nor does it refer to loans that will be sold to a GSE (such as Fannie Mae or Freddie Mac).
Study of a property, potentially for land use or marketability
evaluation
Income Approach technique that is found by dividing the sale price of a comparable property by that property's monthly or annual gross rent to arrive at a single number.
gross rent multiplier (GRM)
____ depreciation includes items not practical to correct.
incurable
An appraiser uses one of 4 basic methods to find the reproduction cost of a structure. What are the four methods?
index square-foot unit-in-place quantity survey
Cost to replace or rebuild a property; Value of importance to insurance companies
insured value
Price at which the property can be loaned on or sold for at a foreclosure sale; of great importance to a lender.
mortgage value
What steps does an appraiser follow when conducting the sales comparison approach?
o Analyze the subject property to identify its characteristics, particularly those that are in demand in the current market. o Identify comparable properties that have been recently sold. o Compare the comparables to the subject property and make adjustments to the sales price of the comparables where they are different. o Use the data to arrive at an opinion of value for the subject property on the date of appraisal.
To be able to make valid computations of adjustments, the elements of comparison must be applied in this order:
o Financing terms and cash equivalency o Conditions of sale o Market conditions o Location o Physical characteristics
What circumstances is the cost approach often used in?
o NEW CONSTRUCTION of both residential and commercial property o UNIQUE PROPERTIES, such as highly energy-efficient houses, residential acreage with excess land, and high-dollar houses with many amenities o SPECIAL PURPOSE COMMERCIAL USES, such as hospitals, some manufacturing plants, hotels, and other single-purpose properties
What are the 3 types of depreciation?
o Physical depreciation o Functional obsolescence o External depreciation or "economic obsolescence"
Mario can't give away a quarter-acre lot. Everyone is looking for more land. So he combines two parcels to make half-acre lots, which are selling like hotcakes. What principle of value does this relate to?
plottage
The joining or assemblage of two neighboring land parcels increases the property value.
plottage
What a buyer has paid for a property and what the seller has accepted
price
Sure, it may be the cheapest house on the block, but this is one of the most desirable neighborhoods in the city. That alone drives up value. This is an example of
progression
Trudy loved her new neighbors. The investor couple bought every available house on Trudy's block and was working hard to renovate them and increase their value. Trudy decided that she'd sit back, relax, and let her property's value go up, too, thanks to _______.
progression
the value a lower-quality property gains by being near a higher-quality property.
progression
What an eyesore! You'd think if the bank had any interest in selling the property it foreclosed on, it'd make it a little more presentable. Broken glass, debris in the yard, overgrown weeds. This house is driving down the value of everything in view. This is an example of
regression
the value a higher-quality property loses by being near a lower-quality property.
regression
Which factor that influences value considers the property's function?
utility
