Chapter 16 Real Estate Appraisal
An investment property has three units which rent for $1,200 per month, per unit. The vacancy and collection losses are 5%. Property taxes are $5,000, insurance is $5,000, and all other expenses are $10,000. Reserve for replacements is $2,000. Using a cap rate of 6%, estimate the value of the property. Round your final answer to the nearest thousand. (a) $41,000 (b) $43,000 (c) $317,000 (d) $397,000
(c) $317,000 PGI= 3 x $1200 x 12=43,200. VCL=5% of PGI, or .05x$43,200=$2160 PGI=VCL=$43,200-$2160=$41,040. Subtract all three types of OE. $41,040-$5000 Tax - $5000 Ins - $10,000 OE - $2000 Reserve = $19,040 Value=$19,040(income)/.06 (Rate) = 317,333.33
Calculate the reproduction cost of the following property using the Cost/Depreciation Approach to Value: the lot measures 100' x 100', and land in the area sells for $40 per square foot. The structure measures 50' x 90' and construction costs in the area are estimated to be $90 per square foot. The building is 10 years old and has a useful life of 50 years. (a) $900,000 (b) $405,000 (c) $400,000 (d) $180,000
(b) $405,000
A residence has a living area measuring 42 ft by 38 ft and a garage that measures 24 ft by 22 ft. An appraiser feels that today's cost to reproduce the living area would be $63.00 per square foot and to reproduce the garage would be $19.00 per square foot. The home, which is 5 years old, is estimated to have a useful life of 50 years. Based on this information, what is the depreciated cost of the property? Hint: Start by calculating the current reproduction cost of the property. (a) $11,058 (b) $99,522 (c) $110,580 (d) $121,638
(b) $99,522
A new airport built in proximity to a residential neighborhood may cause properties to lose value due to which of the following? (a) Physical deterioration (b) External obsolescence (c) Functional obsolescence (d) Proximity obsolescence
(b) External obsolescence
If an owner built a 6 bedroom house in an area surrounded by two bedroom houses, this would be considered an over-improvement. For appraisal purposes, what would an over improvement create? (a) Physical deterioration (b) Functional obsolescence (c) External obsolescence (d) Excess depreciation
(b) Functional obsolescence
As used by an appraiser, what does the term "price" refer to? (a) The asking price in the listing contract (b) The amount of money paid by a buyer to a seller in a transaction (c) The market value (d) The total cost of land, labor, and materials
(b) The amount of money paid by a buyer to a seller in a transaction
What will happen to the value of a property if the capitalization rate remains the same, but the net operating income is reduced? (a) The value will increase. (b) The value will decrease. (c) There will be no change in the value. (d) The value cannot be determined without knowing the dollar amount of the operating expenses.
(b) The value will decrease
If net operating income is $4,000 and the capitalization rate is 16%, what is the value of the investment property? (a) $21,000 (b) $24,360 (c) $25,000 (d) $64,000
(c) $25,000
An appraiser has selected a comparable sale for inclusion in an appraisal that recently sold for $95,000. The comparable has 3 bedrooms, 2 baths and a pool. The subject has 4 bedrooms, 2 baths and no pool. Analysis by the appraiser indicates a bedroom is worth $10,000 and a pool is worth $7,500. What is the adjusted sales price of the comparable property? (a) $77,500 (b) $92,500 (c) $97,500 (d) $112,500
(c) $97,500
What is the capitalization rate of an investment property that has a value of $450,000 and income of $56,250? (a) 8% (b) 12% (c) 12.50% (d) 87.50%
(c) 12.50%
The various approaches to estimating value are based upon which of the following principles? (a) Alignment (b) Retribution (c) Substitution (d) Capital Investment
(c) Substitution
For the purposes of calculating net operating income, which of the following would be considered an operating expense? (a) Mortgage payment (b) Mortgage principal payments (c) Water bill (d) Capitalization rate
(c) Water bill
A warehouse sold for $740,000. If market evidence indicates an annual gross income multiplier (GIM) of 8 is appropriate, how much income should be produced? (a) $1,081.50 (b) $59,200.00 c) $80,937.50 (d) $92,500.00
(d) $92,500.00
A residence recently sold for $300,000 that was rented for $2,850 per month. What is the monthly gross rent multiplier? (a) 87 (b) 88 (c) 95 (d) 105
(d) 105
The monthly rent of a residence that recently sold for $91,800 is $850. What is the monthly gross rent multiplier? (a) 0.09 (b) 9 (c) 10.8 (d) 108
(d) 108
A homeowner visited a resort which contained a beautiful pool with caves and a lazy river. The homeowner then spent $100,000 to create a similar setting in their own yard. When the property was appraised for financing purposes, the appraiser only allocated $10,000 for the pool. What is this an example of? (a) An un-informed appraiser (b) Straight line depreciation (c) Accelerated depreciation (d) An over improvement
(d) An over improvement
Which approach to value is typically used to estimate the value of special purpose properties? (a) Comparable Sales or Sales Comparison approach (b) Income Capitalization approach (c) Gross Income Multiplier Approach (d) Cost Depreciation Approach
(d) Cost Depreciation Approach
A comparable property recently sold for $575,000, with a golf course view. The subject property is similar in all other respects, but has no golf course view. In this area a golf course view is estimated to add $15,000 to the value of a property. Which would be the correct adjustment? (a) Increase the adjusted selling price of the subject property to $590,000. (b) Decrease the adjusted selling price of the subject property to $560,000. (c) Increase the adjusted selling price of the comparable to $590,000. (d) Decrease the adjusted selling price of the comparable to $560,000.
(d) Decrease the adjusted selling price of the comparable to $560,000.
When making adjustments based on the following information, what should be done with the $2,000? Comparable sales price... $40,000 Comparable property.........Two-car garage Subject property................No garage Garage value....................$2,000 (a) It should be added to the price of the comparable property. (b) It should be added to the price of the subject property. (c) It should be subtracted from the price of the subject property. (d) It should be subtracted from the price of the comparable property.
(d) It should be subtracted from the price of the comparable property.
Using the income approach, a capitalization rate can be derived from which of the following? (a) Tables published nationally by appraisal organizations (b) Rate schedules maintained by lending institutions (c) The interest rate paid on Treasury bills (d) The relationship between sale prices and income of similar properties
(d) The relationship between sale prices and income of similar properties
If income remains constant and the capitalization rate is reduced, what is the effect on value? a) insufficient information is provided to determine the effect. b) The value decreases c) The value increases d) There is no effect on the value
c) The value increases Knowing the NOI and the Cap Rate, you can find the Market Value using the IRV formula: I/R=V. If income forecast to be $12,000 and cap rate is 10%, the estimate market value of property would be: $12,000/.10=120,000. But if income remains constant and Cap Rate is reduced to 9%, the market value increases: 12,000/.09=133,333
Principle of substitution:
when a higher priced property is constructed or an existing property is over-improved in an area that consists of lower-priced properties EX: house is worth 95k and buyers in the market can obtain a substitute property with eh same features and utilities for 90k, therefore sellers property has value of apprx; 90K, no 95K
What are the characteristics of value in an appraisal?
D emand U tility S carcity T ransferability
Replacement cost approach for appraisal(CD APPROACH)
Estimated cost at current prices to construct a comparable building with equal utility to the subject building by using modern materials, design, and features.
Reproduction cost approach for appraisal (CD APPROACH)
Is the estimated cost to construct at current prices an exact duplicate or replica of the building that is being appraised by using the same materials, design and layout of the subject property.
External Obsolescence
Loss in value caused by factors beyond the boundaries of the subject property ex: if you live near a landfill
What is the market value?
Market value is the value to a typical buyer and a typical seller. This is the MOST COMMON type of value that is estimated by appraisers.
Direct capitalization is a mathematical process in which future income is converted into a present value. What is the formula?
PGI (potentional gross income) - V&C (vacancy and collection losses %) + OI (other income) gives you the EGI (effective gross income) EGI (effective gross income) - OE(operation expenses gives you the NOI (net operating expenses)
Increase in value resulting from an assemblage, or combining, of two or more adjacent parcels of land under one owner is called____________________
PLOTTAGE VALUE
What are the three approaches to value during an appraisal?
Sales comparison approach ** cost-depreciation approach income approach
What is the principle of highest and best use?
State that the best use for the property, known as its highest, best and most profitable use, s that which will most likely produce the greatest net return to the lander over a given period of time
What is market value? a) The amount a buyer is willing to pay. b) The amount a seller is willing to accept c) The amount that should be paid d) The amount that was previously paid
The amount that should be paid.
Which of the following conditions is necessary for the sales price of a property to equal its market value? a) The parties cannot be dealing with a self-interest. b) The property would have to be exposed to the market for an unreasonably short time. c) There can be no existing liens against the title. d) The transaction must involve a willing and informed buyer and seller.
The transaction must involve a willing and informed buyer and seller.
Gross multiplier technique
Use gross rent or income instead of net operating income (NOI) to estimate the value of properties. Comparable sales price/ gross monthly rent
Estimate the value of the subject property by dividing the net operating income that you find using the capitalization technique NOI/ overall capitalization rate
Value(v)= Net operating income / capitalization rate (V=NOI/Cap Rate)
An investment property has a value of $300,000. If the capitalization rate is 12%, what is the net operating income? (a) $36,000 (b) $250,000 (c) $264,000 (d) $300,000
(a) $36,000
An appraiser is appraising a three-bedroom home that has only one bathroom. The standard for the neighborhood is two bathrooms. From an analysis of the market, the appraiser believes a bathroom contributes $4,000 to the value of a home. If a comparable property having three bedrooms and two baths recently sold for $126,000, and is similar in all other respects to the subject property, what value should be estimated for the subject property? (a) $118,000 (b) $122,000 (c) $126,000 (d) $130,000
(b) $122,000
What is the basis for the principle of substitution? a) An informed buyer will pay no more for a property than the cost of acquiring another equally desirable property with the same or equal utility. b) Properties will typically hold their value when properties in a neighborhood tend to be similar and conform to common standards c) Although a property may have multiple potentials uses, one will be the highest and best use. d) Smaller properties in a neighborhood of large properties will tend to increase in value, while larger properties in an area of smaller properties will tend to decrease in value over time.
a) An informed buyer will pay no more for a property than the cost of acquiring another equally desirable property with the same or equal utility.
Functional obsolescence includes which of the following? a) An over improvement b) Broken windows c) A waste water treatment plant next to the subject property d) A property located in the glide path to an airport?
a) An over improvement
What estimate is a result of income divided by a capitalization rate? a) Market value b) The effective gross income c) Reproduction cost d) The amount of accrued depreciation
a) Market value Income/Rate=Market Value
How is investment value best defined? a) The value to an individual b) The highest price a property would sell for in an open market? c) The value based on the use of the property d) The minimum value of a business opportunity
a) The value to an individual
Appraisal Cost definition:
actual or estimated amount required to create, produce, or obtain a property
What is the sales-comparison approach
also refereed to as the comparable sales approach it is used to estimate the value indicated by the recent sales of comparable properties in the market
Appraisal Price definition:
amount that is actually paid in a real estate transaction
Appraisal Value definition:
amount that remains after all assets of a business have been sold in a hurried, but not forced, sale and all liabilities have been paid. (value of failing business)
How is a gross rent multiplier calculated? a) Multiply comparable property sales price by comparable property rent. b) Divide comparable property sales price by comparable property rent. c) Multiply comparable property sales price by subject property rent. d) Divide comparable property sales price by subject property rent.
b) Divide comparable property sales price by comparable property rent. The "IRV" formula provides a simple way to derive capitalization rates from comparable sales, estimate the value of a subject prop., or estimate the income required from an investment property. This approach is not used in 1-4 family rentals. GRM is used instead. GRM=Comparable Sales Price /Gross Monthly Rent.
All of the following methods may be used to estimate replacement/reproduction cost, EXCEPT: a) Quantity survey b) Economic age-life c) Unit-in-place d) Comparative unit
b) Economic age-life
Which appraisal approach would be given greater weight when appraising an apartment complex? a) Cost-depreciation b) Income approach c) Comparable sales d) Land residual
b) Income approach
What type of value does an appraiser most commonly estimate? a) Book b) Market c) Insurable d) Condemnation
b) Market
Which appraisal approach is most suitable for estimating the value of a single-family property? (a) Cost-depreciation (b) Sales comparison (c) Income residual (d) Land residual
b) Sales comparison The Comparable sales approach is usually the most applicable method for appraising residential properties. It is the basis for the value estimates used by real estate brokers and sales associates.
