Chapter 13 (Practice)

If a property has an effective gross income of $1,250,000 and expenses totaling $680,000, what is the net operating income?

$570,000 (Dollars)

Principle of Contribution

A component part of a property is valued in proportion to its contribution to the value of the whole. Holds that maximum values are achieved when the improvements on a site produce the highest (net) return, commensurate with the investment.

Sales Comparison Approach

A valuation method which compares a subject property's characteristics with those of comparable properties which have recently sold in similar transactions.

What is an appraisal?

An opinion by a professional about the value of a property.

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

Debt service

Appraisal

Estimate of value property

Principle of Conformity

Holds that the maximum of value is realized when a reasonable degree of homogeneity of improvements is present. Use conformity is desirable, creating and maintaining higher values.

Is real estate a risky investment?

No, long-term investing is rather low risk.

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

Office building

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

Office buildings

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

Positive leverage

Which of the following lists the amount of revenue a property would generate if 100% of the units were continuously rented?

Potential gross income

What goes into a land valuation?

Shape, location, size of lot and frontage are considered

What is the principle of substitution?

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

Reconciliation

The final stage in the appraisal process where the appraiser reviews the data and estimates the subject property's value.

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.

An appraisal comes in at $300,000, and the seller has the property listed for $350,000. What should he do?

The sales price should be reduced to be in line with the value.

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.

How does an appraiser get vacancy and missed payments data?

They use information from similar recent sales.

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.

principle of Anticipation

affirms value is created for the future

financing considerations

secure financing to facilitate purchase

Investment value

specific value of investment to particular investor or class of investors

Demand

the more popular the more interested = increase in value

What is the principle of conformity?

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

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

vacancy

Assessed Value

value assined by municipalites

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

8%

Principle of Substitution

Affirms that 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.

Cost Approach

An analysis in which a value estimate of a property is derived by estimating the replacement cost of the improvements, deducting therefrom the estimated accrued depreciation, then adding the market value of the land.

Highest and Best Use

An appraisal phrase meaning that use which at the time of an appraisal is most likely to produce the greatest net return to the land and/or buildings over a given period of time; that use which will produce the greatest amount of profit. This is the starting point for an appraisal.

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

Capitalization rate

Why do investors specifically like to buy real estate?

Hedge against inflation.

A town has decided to build a school and a playground in a neighborhood. Property values are increasing. Why does this occur?

In anticipation of the school and playground, more families are interested in homes.

An office building is valued using the...?

Income method

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

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

No, because it lacks utility

Is real estate a liquid asset?

No, it is not easy to sell quickly.

This principle affirms the value is created by anticipated benefits to be derived in the future...?

Principle of anticipation

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

Pro-forma

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

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

What is the principle of anticipation?

The benefits the property may offer buyer.

What is net operating income?

The income minus the expenses of a property.

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.

Principle of Progression

The worth of a lesser valued residence tends to be enhanced by association with higher valued residences in the same area.

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.

Transfer of Property

When selling and buying of property is involved

Scarcity

When things are in high demand but not enough availabilty

A large apartment complex collects parking fees, pet fees, and laundry fees. Are these included in gross operating income?

Yes, all fees along with rental income is taken into consideration.

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.

Parties best interest

what either party wants and meeting in middle

market value

what it is worth in the market

Financial Reasons

when buyer is borrowing money and considering refinancing

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.

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.

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.

Three cases of appraisal

Transfer of property, financial reasons and tax purposes

Mortgage value

amount of mortgage property

equal motivaition

both parties are motivated

consideration

buyer willing to pay

Transferability

clear clean title! properties have encumbrance such as right of way

Value in Use

commercial properties. Determination by current use of property.

Tax purposes

during estate planning process

principle of change

holds that is of the future not the past

Insured Value

insurance companies will assess the parts of a home that may be destroyed to determine coverage needed

Appraiser

person who is appraising property

pricing of property sold

price must be considered normal

Utility

the more useful the higher the value

exposure on market

time and exposure

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

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