Appraisals (Chapter 8)

Each unit in a duplex, rents for $400 per month, with a sales price of $96,000, the monthly gross rent multiplier would be:

120. ($400 x 2 = (duplex = $800 ); $ 96,000 sales price divided by $800 monthly rent = 120 Gross Rent Multiple (GRM)

Your client wants a 12% return on their investment, the property they are looking to buy rents for $3,000 per month and has annual expenses of $12,000. What should be the most they would pay for the property?

200000. ($3,000 X 12 = $36,000 (Annual Income) - $12,000 (Total expenses) = $24,000 / .12 (Rate of Return) = $200,000)

If the capitalization rate on a building that produces a $200,000 annual income is 10 percent, what is the estimated value of the building?

2000000. (The interest rate into the income equals the investment, so you can use this equation. $200,000/.10 (the rate) = $2,000,000)

The potential gross income of a warehouse is $36,000 per year, and the vacancy rate is 2%. The taxes are $2,000 per year; monthly maintenance costs are $300. Quarterly reserves are $450, debt service is $13,500 annually and depreciation is $3,500 annually. If the capitalization rate is 12% what is the estimated value of the warehouse?

232333. (This question is about the Income Approach to valuing a property. This approach is used on investment properties to determine the market value of a property based on the income it generates. In simplest, this is the process:)

A Building that cost $300,000 to build 10 years ago has depreciated 25% and the land costs are $51,000; what is the current value of the property?

276000. (Take the value of $300,000 times the depreciated amount of the property .75 = $225,000 and add in the land value of $51,000 = $276,000. Land is never depreciated.)

An apartment has an annual income of $53,500. If you must have a 14% rate of return, what is the maximum you can pay for the apartment building?

382143. ($53,500 / .14 = $382,143)

If an investment valued at $350,000 returns 12 percent annually, then what is the amount of income produced by this investment?

42000. (The value multiplied by the return to equal the income. $350,000 x 12% = $42,000)

A mall earns $850,000 per year, and expenses are 35% of that amount. If the property is capitalized at 12% what is the approximate value?

4604167. (First calculate the total expense by multiplying $850,000 X 35% = $297,500. Next calculate the net operating income $850,000 - $297,500 = $552,500. Then take the net income of $552,500 and divide by 12% = $4,604,167.)

An apartment building is valued at $450,000. The investor interested in purchasing is pleased that it has a cap rate of 12%. How much is the net operating income of the building?

54000. (Income = Rate x Value, Rate = 12% = .12, Value = $450,000, Income = $450,000 x .12 = $54,000)

A property appraised at $250,000 and has an assessed value of $200,000. The taxes on the house are $3,000. What would a house with an appraised value of $450,000 and an assessed value of $400,000 pay in taxes?

6000. (The first thing you have to do is find out the mill rate, to do that take the first property's taxes $3,000 and divide by the assessed value of that property $200,000 that will give you the tax rate of .015 or 15 mills; then multiply the .015 X the assessed value of property two: $400,000, and that will give you the taxes on the second property $6,000.)

Mr. Davis was assessed 6 cents per square foot of his property as a special assessment by the city; his property measured 80 X 135. What did the special assessment cost him?

648 (Take the length 135 times the width 80 to get the total square footage = 10800 X .06 = $648)

Donna leases 12 apartments for a total monthly income of $4,500. This figure represents an 8 % annual return. What was the original cost of the property:

675000. (Multiply the monthly income $4,500 by 12 = $54,000 divide that by 8% = $675,000.)

If Jon's property has a net income of $54,800, and returns 8 percent annually on the investment, then what is the property's value?

685000. (Divide the income by the interest rate to equal property value,. $54,800/.08 = $685,000)

The capitalization rate has considerable effect upon the appraised value of property. Which of the following statements is true?

A decrease in the capitalization rate produces an increase in the appraised value.(A decrease in capitalization rate would indicate less risk and, therefore, greater value of the investment.)

The cost approach to appraisal would best be used in which of the following situations?

A new house being constructed in a new subdivision. (Cost approach is used when no comparables exist, such as new construction, library, or a school)

Which of the following would be classified as external obsolescence in the appraisal of real property?

Adverse legislative regulations affecting the property (Economic obsolescence also referred to as "external obsolescence" is always considered to be incurable. It basically refers to is the loss in value resulting from influences external to the property itself. External conditions causing this may be international, national, industry-based, or local in origin. Various external factors affect potential economic returns, thus having a direct impact on the market value of an asset or property.)

Reconciliation refers to which of the following?

Analyzing the results obtained by the different approaches to value to determine a final estimate of value (This is the definition of reconciliation. Analyzing the results from the market data approach, the income approach, and the cost approach to value, and then determining the value of the property.)

Which of the following processes is used in the income approach to value?

Capitalization. (To determine value of income property the appraiser divides the net income by the cost of the property to get the capitalization rate.)

In which of the following approaches to value must land value be computed separately from building value?

Cost approach. (Since it is impossible to replace land, when using the cost approach to value, it is necessary to evaluate the land separately from the building.)

On a service property (i.e., church, school) which approach to value is most reliable?

Cost approach. (Since they do not produce income and are not frequently sold, the only method of appraisal is the replacement or reproduction cost approach. A library or public swimming pool would fall into this category.)

Which of the following represents economic obsolescence?

Loss of value due to nearby adverse zoning change. (Economic obsolescence also referred to as "external obsolescence" is always considered to be incurable. It basically refers to is the loss in value resulting from influences external to the property itself. External conditions causing this may be international, national, industry-based, or local in origin. Various external factors affect potential economic returns, thus having a direct impact on the market value of an asset or property.)

The owner of a commercial warehouse has the building listed for $250,000. The net income of the building is $20,000. An investor wants to buy it at a cap rate of 12%. Will the investor offer the owner the same price as the owner has it listed for? If not, by how much will the owner have to change his price to meet the investor's request for a 12% cap rate? Hint: Income Generated/Rate = Value.

No, $83,333. (Here is the formula using IRV: Income Generated / Rate = Value. Therefore $20,000 / .12 = $166,667 as a value for the property. The list price of $250,000 seems high. Seller would have to lower his price by:$250,000 - $166,667 = $83,333)

Which of the following is not acceptable in figuring the capitalized value of a five-plex?

Principal payments. (Principal and interest payments are not deducted to reach net income for capitalization. The mortgage is know as debt services and not deducted in this process.)

Which of the following would be the most expensive method of appraisal of large, income-producing properties?

Replacement cost approach. (The replacement cost method is normally the most time consuming and expensive method.)

A property with amenities is best appraised by:

comparative analysis. (Amenities are benefits incidental to property ownership, such as views, close proximity to shopping and public transportation or even the prestige that goes with living in a certain area. The only way to estimate what buyers will pay for these benefits is to compare the subject property's amenities against similarly endowed properties that have sold in the recent past.)

The steps in the appraisal process include all of the following except:

considering seller's subjective value. (In order to determine the market value of property it is necessary to gather, verify, analyze and interpret data. The seller's subjective value is not a factor.)

Functional obsolescence may be caused by:

design. (Functional obsolescence is a form of depreciation that can result from an unappealing out-of-date design.)

To find the value of a property, using the income approach to appraisal, if the net operating income was $238,000, and the capitalization rate was 7%, an appraiser would:

divide net income by the capitalization rate. (Income / Rate = Value)

The period of time during which a property may be profitably utilized is known as its:

economic life. (The economic life of a property is the time period during which the property may be profitable. There is no amortized life of a property.)

In the cost approach to estimating value, the type of depreciation that is always considered incurable is:

economic obsolescence. (Economic obsolescence also referred to as "external obsolescence" is always considered to be incurable. It basically refers to is the loss in value resulting from influences external to the property itself. External conditions causing this may be international, national, industry-based, or local in origin. Various external factors affect potential economic returns, thus having a direct impact on the market value of an asset or property.)

In the income approach to value, the net income is determined by deducting the expenses from the:

effective gross income. (Gross income, less bad debt/vacancy factor, equals effective gross income; less operating expenses equals net operating income.)

Capitalization is the process by which annual net operating income is used to:

estimate value. (Capitalization is the process by which annual net operating income is used to estimate value.)

Outmoded plumbing is an example of:

functional obsolescence. (It is curable; an example is a home with five bedrooms and only one bathroom. Not a great set-up but easily remedied by adding on more bathrooms.)

This appraisal approach estimates the value of the present worth of the future rights to the income the property generates by converting the net income of the property into a value. This is known as:

income approach. (The income approach, also called capitalization, is used to appraise investment or income-producing properties.)

When appraising a commercial property, the appraiser is most concerned with:

income. (Commercial property is most generally evaluated though the income approach.)

A house, which is located at the end of runway for a large airport, suffers from

incurable economic obsolescence. (Economic obsolescence is loss in value due to conditions in the area of the property. It is incurable.)

A house, which is located at the end of runway for a large airport, suffers from:

incurable economic obsolescence. (Economic obsolescence is loss in value due to conditions in the area of the property. It is incurable.)

When performing an appraisal of real estate, the appraiser is estimating the property's:

market value. (An appraiser provides an estimate of market value.)

In analyzing gross income of a property, the characteristic of the income that the appraiser is concerned with is:

quantity quality durability (Quantity means adequacy of income. Quality refers to financial stability and credit worthiness of tenants. Durability concerns itself with the terms of the building's leases.)

If an appraiser uses more than one appraisal method and assigns different weights to the results of each, she is using:

reconciliation. (This is the definition of reconciliation as used in appraisals. The different methods yield value figures, the appraiser has to reconcile them to reach a final estimate of value.)

The value of all vacant land is influenced by its best potential use. One of the leading factors or influences in the valuation of urban industrial land is:

size of acreage. (The vital factor for an industrial site is the size of the parcel. Industrial complexes usually require considerable space and are not concerned with exposure to the retail public.)

The replacement cost method of appraising real property:

tends to set the upper limits of value; would be the method used in appraising special purpose properties; is appropriate for newly built improvements where the construction represents the highest and best use. (The replacement cost approach is frequently used to set a ceiling on the value established by the other two approach methods. It is particularly appropriate for appraising newly built improvements where the construction represents the highest and best use of the land. It is also the most appropriate method for appraising service type properties such as public schools, city halls, libraries, etc.)

"Highest and best use" in an appraisal refers to:

the legal use that will yield the greatest return. (Highest and best use of a property would be that use which results in the most efficient and/or profitable use.)

The term depreciation refers to:

the loss of value in real estate due to any cause. (Depreciation is the loss of value in real estate from any cause.)

You would use the comparative method in the appraisal of property:

to compute the land value. (Land cannot be manufactured; therefore the comparative method (market data approach) must be used to arrive at a value of land.)

Find the capitalization rate on a business that is worth $430,000 and rents for $1,500 a month:

0.0419. (First multiply the monthly rent $1,500 by 12 = Annual rental income $18,000. Then divide this by the property value $430,000 = the cap rate 4.19%)

A property's gross income is $27,600 and has monthly expenses of $550. It has been valued at $483,000. What is the capitalization rate?

0.0435. ($27,600 - ($550 X 12 = $6,600) = $21,000 / $483,000 = .0435 or 4.35%)

A building valued at $245,000 contains four apartments that each rent for $370 per month. The owner estimates that net operating income is 65% of gross rentals. What is the capitalization rate?

0.047. ($370 rent x 4 units = $1480 per month income $1480 x 12 months = $17,760 gross income $17,760 x .65 = $11,544 net operating income (I) divided by (V) = rate $11,544 / $245000 = 4.7 %)

An income property has a gross annual income of $14,250 and monthly expenses of $300. It has been valued at $147,000. What is the capitalization rate?

0.072. ($14250 - ($300 X 12) $3600 = $10,650/1$147,000 = .072 or 7.2%)

Find the annual rate of return percentage on an $88,000 investment if the weekly gross income is $225 and monthly expense is $370:

0.0825. (Calculate the annual income which is $225 X 52 = $11,700. Then calculate the annual expenses $370 X 12 = $4,440. Next subtract $4,440 from $11,700 = $7,260 then divide this by $88,000 = 8.25 %)

Which of the following types of depreciation would be most difficult to eliminate?

Economic obsolescence. (Economic obsolescence is considered incurable. No amount of investment can correct an adverse zoning change or blighting influences.)

When using the income approach to value, which of the following items is used to calculate the income?

Gross rents, vacancies, maintenance, management, property taxes, utilities and reserve account expenses. (The items never used as operating expenses in the income approach are (1) principal and interest, (2) depreciation, (3) income taxes, and (4) capital improvements. Answer "d" does not contain any of these items.)

When the capitalization rate used for appraising income property is lowered this reflects that demand for the property likely has:

Increased. (When using capitalization rate to value an income property, the net operating income of the property is used, and there is an inverse relationship between the asking price and cap rate. In other words, the lower the cap rate, the higher the asking price.)

A newly appraised apartment house is valued by the income approach. Under which of the following circumstances would you deduct management cost for the net operating income?

The owner manages the apartments and occupies one of them; A tenant manages the complex in exchange for free rent; Where an occupant/manager of an adjacent apartment house also manages this apartment complex, at no additional cost to the investor. (A prudent investor will consider all expenses to arrive at a net income. Free rent is certainly an expense. Also, that the apartment is presently managed by the owner or by someone else, at no cost, does not alter the fact that management is necessary and a potential operating expense for anyone contemplating a purchase of the property.)

The stability of the value of single-family homes is least protected in a neighborhood where there is:

an increase in the mixture of poor quality homes with good quality homes. (A mixture of average and good quality homes in the same neighborhood would violate the principle of conformity.)