Chapter 13 - Appraisal of Property/Property Valuation

An investor is looking to purchase a property at an 8% cap rate. What would be the purchase price if the property has an NOI of $880,000?

$11,000,000 (Dollars)

What is the NOI of a property that was purchased for $2,400,000 at a capitalization rate of 10%?

$240,000 (Dollars)

An investor purchased a property for $2,600,000 using all cash. What is the NOI on the property after year one if the investor earned a 10% cash-on-cash return?

$260,000 (Dollars)

What are the total expenses of a property with an effective gross income of $850,000 and an NOI of $400,000?

$450,000 (Dollars)

If the capitalization rate on a property is greater than the interest rate on the mortgage, the investor will experience...?

$570,000 (Dollars)

What is the value of a property with an NOI of $320,000 and a going cap rate of 5%?

$6,400,000 (Dollars)

What is the purchase price of a property with an NOI of $460,000 and a capitalization rate of 6%?

$7,666,667 (Dollars)

What is the effective gross income of a property that has an NOI of $400,000 and expenses totaling $520,000?

$920,000 (Dollars)

If an investor purchased a property for $2,000,000 using all cash, what would be their return on investment in year one if the property yielded $260,000 in cash flow?

13 percent

According to the IRS, a multi-family property depreciates over how many years?

27.5

An investor is looking to purchase a property for $2,500,000. If the property has an NOI of $150,000, what is the going cap rate?

6 percent

What is the capitalization rate of a property that was purchased for $9,375,000 and has an NOI of $750,000?

8 percent

Net operating income divided by the purchase price equals the...?

Capitalization rate

What defines how much risk a property presents?

Capitalization rates

Which of the following asset classes is considered the best?

Class A

Which of the following line items in the income section of a pro-forma lists the amount of unrealized income due to offering prospective tenants one months' free rent?

Concessions

What is a cost approach appraisal?

Cost of building a property to given specifications.

Net operating income does NOT take into account which of the following?

Debt service

What happens when a person adds on two bedrooms to an existing two bedroom home, when all the homes in the neighborhood have three bedrooms?

Diminishing returns; the property no longer conforms.

Potential gross income minus vacancies, concessions and loss to lease, plus other income equals...?

Effective gross income

The NOI plus the total expenses of a property equals which of the following?

Effective gross income

The actual income generated from a property before expenses, is known as...?

Effective gross income

An investor's down payment on a property is equal to their initial ........... in the property.

Equity

With each mortgage payment, the owner pays down the principal balance of the loan, thus creating...?

Equity in the property

In what cases is the cost approach to appraisal used?

FNMA Manufactured Housing loans, special use buildings, property in the process of being built, or property to be rebuilt

What happens when interest rates increase?

Fewer people are eligible for mortgages and property values decrease.

If Home Buyer is the cousin of Home Seller, what usually happens with the sale price?

Home Buyer usually pays less for the property.

An office building is valued using the...?

Income method

Which of the following line items in the income section of a pro-forma lists the amount of revenue the owner is losing as a result of renting units below market value?

Loss to lease

What does time-value of money mean?

Money in hand is better than money earned in the future.

What is the formula used when using the income capitalization approach?

Net Operating Income/Capitalization Rate = Market Value

The income a property produces before debt service and any capital expenditures is known as...?

Net operating income

The value of a commercial property is primarily based on which of the following?

Net operating income

What is the formula for capitalization rate?

Net operating income/sales price = capitalization rate

A playground is being built in a neighborhood with primarily senior housing. Is this good for property values?

No, because it lacks utility.

Is data from recent sales enough to establish value?

No, combining recent sales only gives you an estimate.

A builder purchases land for $30,000. It costs him $50,000 for materials to build a home. The cost of labor is $30,000. Loan costs came up to $10,000. Fees and taxes were $10,000. If he sells the home for $130,000 will he make a profit?

No, he will break even

Is real estate a liquid asset?

No, it is not easy to sell quickly.

Is real estate a risky investment?

No, long-term investing is rather low risk.

Are property improvements always a good idea?

No, there is the possibility of diminishing returns.

Are mortgage payments deducted from net income when using the income approach?

No, they are not included.

Which of the following property types are valued using a capitalization rate?

Office building

Income earned from laundry facilities at a rental property will be included under which of the following line items?

Other income

If the capitalization rate on a property is greater than the interest rate on the mortgage, the investor will experience...?

Positive leverage

The top line in the income section of a pro-forma lists which of the following?

Potential gross income

According to this principle, it is the future, not the past, which is of prime importance in estimating value...?

Principle of change

Which of the following principles states that the worth of a lesser valued residence tends to be enhanced by association with higher valued residences in the same area...?

Principle of progression

According to this principle, the maximum value of a property tends to be set by the cost of acquiring an equally desirable and valuable substitute property, assuming no costly delay is encountered in making the substitution?

Principle of substitution

Which of the following documents is used to project the future performance of a property?

Pro-Forma

A property's anticipated income and expenses can be found in which of the following documents?

Pro-forma

What types of properties are appraised using the income capitalization approach?

Property that is expected to generate income for the owner.

What happens to property values if lenders freeze lending?

Property values drop because of a lack of capital.

How does an appraiser identify properties when using the Sales Comparison Approach?

Public records such as the clerk in the county and MLS services.

The capitalization rate is equal to the net operating income divided by the...?

Purchase price

Which method of cost of development is used least?

Quantity survey

What are the three methods for determining the cost of development?

Quantity survey method, unit-in-place method and square foot method

Which valuation method is commonly used to value residential properties?

Sales comparison approach

What is the Sales Comparison Approach?

Sales comparison approach means comparing one property against recent sales of properties in a neighborhood

The cost approach is primarily used to value which of the following properties?

Schools

What are the four factors that influence value?

Social, economic, construction costs, governmental.

What is the principle of substitution?

The ability to acquire another property that is both desirable and similar in a short period of time.

If all the homes sold recently have finished basements and the appraised property has an unfinished basement, what happens?

The appraiser takes the cost of finishing and deducts from the value.

What is the insured value?

The assessment done by an insurance company.

What is the principle of anticipation?

The benefits the property may offer buyer.

Who uses the information contained in an appraisal?

The buyer, seller, lender and insurance company.

What is reconciliation?

The final step in reaching a market value after the appraisal process.

What is net operating income?

The income minus the expenses of a property.

What is the principle of conformity?

The more unique new homes are, the lower the value.

What does utility mean?

The more useful a property, the higher the value.

What occurs when a subdivision built 10 years ago suddenly has a brand new home added?

The newer home will have a lower value because the other homes are not as new or modern.

What costs are considered in valuations based on the cost approach?

The price of the lot and all costs associated with constructing the property to specifications.

A builder buys all the lots of a street abutting a neighborhood and builds luxury homes. Property values in the neighborhood increase; what principle applies?

The principle of progression applies.

A builder buys all the lots of a street abutting a neighborhood and builds mobile homes. Property values in the neighborhood drop; what principle applies?

The principle of regression applies.

A home is up for sale at $275,000. A new home that is similar can be built for $255,000. What principle applies?

The principle of substitution.

There are 100 three-bedroom homes available, and there are 200 buyers, what happens to the property value?

The property values increase because of high demand.

There are four properties an appraiser must value. One is a three unit home, one is a shopping mall, one is an office building, and one is a church. Which ones can be appraised using income capitalization?

The shopping center and the office building.

What happens if a seller is going through a divorce and is forced to sell a home?

The theory of equal motivation would apply; the seller will accept less.

There are 12 buyers looking for homes in the same neighborhood. There are only 8 homes in the neighborhood. What happens to the property value?

The value of the properties are higher because of demand.

If the home for sale has more bathrooms or additional bedrooms than the homes sold, what does the appraiser do?

The value of the subject property will have to be adjusted upwards

If three properties in a neighborhood were sold to the original owner's cousins and siblings, can they be used for a sales comparison?

These are not arms length transactions and the values may not be accurate.

How does an appraiser get vacancy and missed payments data?

They use information from similar recent sales.

What is the purpose of an appraisal?

To arrive at a market value of a given property.

Half of the residents are employed by a large employer in a nearby city, and the employer shutters their doors. What happens to the property in the area?

Typically lower prices because people are moving out.

Can all property be valued using the sales comparison approach?

Typically, this approach is used for residential property.

The seller has a ranch home. There are three ranch homes and three Tudors that have sold in the last six months. What should the appraiser do?

Using the ranch homes is how he would do the comparison.

If a unit is not being rented, it should be classified as a/an...?

Vacancy

What value is most commonly used for commercial property?

Value in use

A new employer opens up in the area and wants to hire 500 people. What happens to property values?

Values will likely increase because of the new demand for homes.

Two shopping centers are up for sale. One has a one-year lease with Walmart, and one has a five-year lease with Tom & Bob's BBQ. Which property is worth more?

Walmart because the company is considered an anchor.

What is highest and best use?

When a property is used in the manner it is best suited for.

What is the principle of progression?

When lower valued properties increase in value because of their association to higher valued properties.

What is an arm's length sale?

When the buyer and seller are unrelated.

Which of the following may be used to reduce the taxable income on a property?

Write-off of interest paid on the mortgage

Does it matter if lenders are not offering loans when using the sales comparison approach?

Yes, it does matter; properties may be valued lower.

Is it easier to use a Sales Comparison Approach when the properties are almost the same?

Yes, style, size, location and age of properties that are similar are easier to compare.

Does a brand new roof make a property more valuable?

Yes, the new roof should increase the value.

Does it matter if a sale was forced because of foreclosure or divorce?

Yes, this is considered a "fire sale" and may not be a true reflection of value.

Replacing a roof is considered which of the following?

capital expenditure

The income capitalization approach is primarily used to value which of the following properties?

office buildings