Unit 16: Real Estate Appraisal

TRUE OR FALSE: A property has a net income of $75,000 and sells for $500,000. The capitalization rate for this property is 20%.

The statement is false. $75,000 net income ÷ $500,000 sale price = .15 or 15% capitalization rate.

A house recently sold for $91,800. The house is a rental property and rents for $850 per month. The monthly gross rent multiplier for this property is 110.

The statement is false. $91,800 sale price ÷ $850 monthly rent = 108 GRM.

TRUE OR FALSE: Cost can be defined as the amount of money for which a good is actually sold.

The statement is false. Cost is the total expenditure required to bring a new improvement into existence plus the cost of the land. Price refers to the amount of money (or its equivalent) for which a good is actually sold.

TRUE OR FALSE: The value for which improvements can be sold at the end of the structure's useful life is called liquidation value.

The statement is false. Liquidation value is the value associated with a rapid sale. Salvage value is the estimated amount for which improvements can be sold at the end of a structure's useful life.

TRUE OR FALSE: Annual income of a rental complex, assuming no vacancies and no unpaid rent losses, is called effective gross income.

The statement is false. Potential gross income is the total annual income a property would produce if it is fully rented and there are no collection losses incurred.

The market value of a subject property using a market area GRM of 125.5 and a gross monthly rent of $2,000 is $251,000.

The statement is true. $2,000 monthly rent × 125.5 GRM = $251,000 market value.

The market value of a subject property using a market area GIM of 13.5 and gross annual income of $38,500 is $519,750.

The statement is true. $38,500 gross annual income × 13.5 GIM = $519,750.

TRUE OR FALSE: The definition of market value assumes that the terms of sale are in cash in U.S. dollars or in comparable financial arrangements.

The statement is true. The definition of market value assumes that payment is made in terms of cash or in terms of comparable financial arrangements.

TRUE OR FALSE: Utilities are examples of variable expenses.

The statement is true. Variable expenses fluctuate based on occupancy level and include utilities, maintenance, management, supplies, and so forth.

What is the formula for accrued depreciation?

effective age ÷ total economic life × reproduction cost new = estimated total accrued depreciation

What is the net operating income formula?

effective gross income (EGI) - operating expenses = net operating income (NOI)

A commercial property produces $50,000 of annual gross income. The property recently sold for $400,000. What is the property's GIM?

$400,000 sale price ÷ $50,000 gross annual income = 8.0 GIM

The appraiser has projected that the subject property can generate a gross annual income of $58,000. What is the estimated market value of the subject property using the market area GIM 8.0?

$58,000 annual gross income × 8.0 GIM = $464,000

TRUE OR FALSE: A property produces an annual net income of $60,000. A client desires a 12% per year rate of return. To meet the investor's goals, the investor should invest approximately $500,000 in the property.

$60,000 net income ÷ .12 rate = $500,000. An investment of $500,000, with an annual net income of $60,000, will produce a 12% rate of return.

Suppose an appraiser estimates that the effective age of a 10-year-old building is four years. The appraiser estimates the cost to reproduce the structure as though new today is $225,000. If the total economic life is 60 years, what is the amount of accrued depreciation?

(4 years effective age ÷ 60 years economic life) × $225,000 reproduction cost new = $15,000 accrued depreciation

What are the characteristics of value?

D Demand U Utility S Scarcity T Transferability

What is the sales comparison approach?

If the property being appraised is a vacant lot in an established neighborhood, the sales comparison approach is considered the most relevant approach to value. The sales comparison approach is also the most relevant approach for estimating the value of single-family homes.

What is the income approach?

If the property is an income-producing property, the income approach usually is given the most importance.

What is the highest and best use?

A principle of value that focuses on the most profitable legal use to which a property can be put.

What are the types of value?

Assessed value is the value used as a basis for property taxation. Insurance value is an estimate of the amount of money required to replace a structure in the event of some catastrophic event such as fire. Investment value is the price an investor would pay, given the investor's own financing requirements and income tax situation. This type of value is personal to a particular investor. Liquidation value is the value associated with a rapid sale. The dollar amount a property should bring in a foreclosure sale is an example of liquidation value. Going-concern value is the value of an income-producing property or business characterized by a significant operating history. Salvage value is the estimated amount for which improvements can be sold at the end of a structure's useful life.

What is the principle of substitution?

Principles of Value Principle of Substitution The principle of substitution states that the maximum value of a property tends to be set by the cost of acquiring an equally desirable substitute property through purchase or construction. This principle of value thus sets an upper limit of value for a property by establishing the cost of acquiring an equally desirable substitute property on the open market.

What are the three approaches for estimating property value?

Sales comparison approach (comparable sales method) Cost approach (cost method) Income approach (income method)

Using the information in the table, reconcile the three indicated values to estimate the value of the subject property. Sales comparison $260,000 65% Cost approach $228,000. 25% Income approach $220,000. 10%

The answer is $248,000. $260,000 × .65 = $169,000. $228,000 × .25 = $57,000. $220,000 × .10 = $22,000. $169,000 + $57,000 + $22,000 = $248,000.

What is the overall capitalization rate formula?

net operating income (NOI) ÷ value (sale price) = overall capitalization rate (OAR)

What is the effective gross income formula?

potential gross income (PGI) - vacancy and collection losses + other income = effective gross income (EGI)

What is the formula for alternate accrued depreciation?

reproduction cost new ÷ total economic life = annual depreciation × effective age = estimated total accrued depreciation The value of the structure today, in its current condition, is estimated by subtracting the accrued depreciation from the reproduction cost new: $225,000 reproduction cost new - $15,000 accrued depreciation = $210,000 depreciated value of the structure

What is the cost approach?

reproduction cost of the structure - accrued depreciation = depreciated value of the structure + estimated value of the site = indicated value of the property The cost approach is considered the most significant for newly constructed homes and for cross-checking the other two approaches. The cost-depreciation approach is also considered the most relevant approach when appraising special-purpose properties such as hospitals, schools, or government buildings.

What is the formula for gross income multiplier?

sale price ÷ gross annual income = gross income multiplier (GIM) gross annual income × market GIM = value

What is the formula for gross rent multiplier?

sale price ÷ gross monthly rent = gross rent multiplier (GRM)