CE Edge Prep - Property Valuation and Financial Analysis
An appraiser used the cost approach to estimate a property's value at $220,000. The site value was $50,000, and the total depreciation estimate was $4,000. How do you calculate the estimated cost of improvements?
- $174,000 - To estimate value, an appraiser adds the site value to the estimated cost to replace improvements then subtracts the estimated depreciation. $220,000 ‒ $50,000 + $4,000.
What is the definition of "before-tax cash flow"?
- Cash flow before taking income taxes into account.
How do you calculate debt coverage ratio?
- Divide net income by debt service
What does the Financial Institutions Reform, Recovery, and Enforcement Act require?
- FIRREA states that federally related appraisals must be conducted by an appraiser who's licensed or certified by the state. - Residential properties valued at $400,000 or less are exempt from federal appraisal requirements in federally related transactions.
What does the income approach to value rely on when valuing properties that are five (5) or more units?
- Gross income multiplier
Describes the state of the market during the recovery phase of the real estate cycle?
- High but stabilized unemployment and a high number of foreclosures. - During the recovery phase, we've passed our low point & unemployment rates & foreclosures begin to level off before improving.
define "potential gross income"?
- Income that a property could bring if fully leased
Which of the following items directly influences real estate demand?
- Loan availability - Demand is directly influenced by factors such as employment levels and wages, interest rates, population changes, confidence in the market, and availability of loans.
To make valid computations of adjustments for the sales comparison approach to value, elements of comparison must be applied in a specific order. Which one of these elements listed is applied last?
- Physical characteristics - The elements considered in the sales comparison approach are applied in a specific order: 1. financing terms/cash equivalency, 2. conditions of sale, 3. market conditions at the time of contract & closing, 4. location 5. physical characteristics.
In investments, there are two types of depreciation, and each is defined by a particular event. What event is tax depreciation tied to?
- Tax depreciation and cost recovery - Tax depreciation is tied to cost recovery.
Jennifer is the owner of the single-family residence in which she resides. How long can she take to depreciate her property?
- Zero years (personal residences cannot be depreciated) - Depreciation is limited to investment properties. Owners can't depreciate a personal residence or vacation home.
Cash of financing?
1. financing terms/cash equivalency, 1st most important
What order are elements of comparison applied when adjusting comps for a sales comparison approach to value?
1. financing terms/cash equivalency, 2. conditions of sale, 3. market conditions at the time of contract & closing, 4. location 5. physical characteristics.
Motivated seller or unmotivated seller?
2. conditions of sale, 2nd most important
Hot market or cold market?
3. market conditions at the time of contract & closing, 3rd most important
Good area or area? What is the quality of neighborhood?
4. location 4th most important
Is is a pretty house or ugly house?
5. physical characteristics. 5th most important
What does "cash-on-cash return" mean?
A comparison of before-tax cash flow to cash invested This can be presented as a ratio or percentage.
How do appraisers make adjustments to comps with the sales comparison approach?
All adjustments are made to the comparable properties' sales prices to make them as similar as possible to the subject property. The goal is to artificially modify the sales price of the comparables to create the same value for features, location, condition, and even timing of the sale as the subject property
In the sales comparison approach, using comparables that are five and 15 years old when appraising a subject that is 10 years old is an example of what?
Bracketing - 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.
Which category of appraiser can appraise any residential property without any limitations related to value or complexity, but only non-residential properties valued below $250,000?
Certified residential appraisers can appraise residential properties of any value and any complexity. They do, however, have limitations on non-residential properties they can appraise.
Which economic principle pertains to how a change in a property affects its value as a whole?
Contribution pertains to how a change in a property impacts the value as a whole. Does converting a garage into a family room contribute to or detract from value?
Which of these is defined by "income received before expenses are deducted"?
Gross income is income received before expenses are deducted. Effective gross income is income after losses from vacancies and credit losses are deducted.
Define "effective gross income"
Income minus vacancy loss and credit loss = effective gross income. It's not net income yet because we haven't accounted for operating expenses.
What type of value may consumers be interested in if they are looking for the potential rate of return?
Investment value This relates to the expected rate of return on investment in a property.
Define straight-line depreciation.
It's the depreciation of real property in equal amounts over the dedicated lifespan of the property that's allowed for tax purpose. Includes the sales price plus any acquisition costs, such as title insurance, and capital improvements. Loan costs are not included in the basis, but something like electrical system upgrades are capital improvements and can be included.It's
A property has 10 units and is 90% occupied. Rent is $500 per month. Total vacancy and collection loss equals 10%. What's the potential gross income?
Potential gross income is the income the property would realize if it were fully rented. 10 units × $500 = $5,000 per month × 12 months = $60,000.
Malcolm purchased an old convenience store, and after renovations will open a small vegan grocery. He paid $517,000, of which $417,000 was for the building, and renovations cost him $107,000. What does the amount $524,000 represent?
The acquisition cost of an investment property plus any improvements or renovations is the investment's depreciable basis.
With the cost approach to value, what is the replacement cost?
The replacement cost reflects the cost to build a functionally equivalent property, as opposed to the reproduction cost, which is the cost to build an exact replica of the subject, with the same materials and deficiencies.
Gary, your investor client, has an annual net income of $50,000. His annual debt service is $12,500. What is his debt coverage ratio?
To get the debt coverage ratio, divide the net income by the debt service ($50,000 ÷ $12,500 = 4.0). The higher the debt coverage ratio, the more profitable the enterprise.
What element of comparison should you consider 2nd when adjusting comps?
conditions of sale,
What element of comparison should you consider 1st when adjusting comps?
financing terms/cash equivalency,
What is the formula to determine net operating income?
gross income - operating expenses = net operating income. Other expenses like loan interest and debt repayment aren't included in this calculation.
Define Gross income
income received before expenses are deducted.
What element of comparison should you consider 4th when adjusting comps?
location
What element of comparison should you consider 3rd when adjusting comps?
market conditions at the time of contract & closing,
What element of comparison should you consider 5th when adjusting comps?
physical characteristics.
