Law & Practice 8
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
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 build improvements where the construction represents the highest and best use
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 are rented for $370 each 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%)
If a property's annual net income is $24,000, and it is valued at $300,000, what is the capitalization rate?
0.08 ($24,000 (Net Income) / $300,000 (Value) = 8% (Rate)
An apartment building has potential gross annual income of $50,000. The vacancy factor is 5%. The maintenance expenses are $1,000 per month. The property taxes are $3,500 per year. The insurance is $2,500 per year. The reserve account is built at a rate of $200 per month. The mortgage payments are $1,500 per month. If the value of the building is $338,750, what is the capitalization rate?
0.08 (Gross rents $50,000 - vacancy (5%) $50,000 x .05 - 2,500 = $47,500 (Maintenance $1,000/mo x 12 =) $12,000 + (Property taxes) $3,500 + (Insurance) $2,500 + (Reserve acct. $200/mo x 12 =) $2,400 = Total $20,400 $47,500 - $20,400 = $27,100 R = I / V R = $27,100 / $338,750 = .08 = 8%)
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 %)
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)
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?
2,000,000 The interest rate into the income equals the investment, so you can use this equation. $200,000/.10 (the rate) = $2,000,000
Your client wants a 12% return on their investment, the property they are looking to buy nets $3,000 per month and has annual expenses of $12,000. What should be the most they would pay for the property?
200,000 $3,000 X 12 = $36,000 (Annual Income) - $12,000 (Total expenses) = $24,000 / .12 (Rate of Return) = $200,000
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?
232,333 (Step 1) $36,000 Potential Gross Income is given by the question Step 2) $36,000 (Potential Gross Income) X .98 (100% - Vacancy Rate of 2%) = $35,280 (Effective Gross Income) Step 3) $35,280 (Effective Gross Income) - $2,000 (Taxes) - ($300 (monthly maintenance) X 12 = $3,600 (Annual Maintenance)) - ($450 (Quarterly Reserves) x 4 = $1,800 (Annual Reserves)) = $27,880 (NOI) Step 4) $27,880 (NOI) / 12% (Cap Rate) = $232,333 (Market Value of Property)
A property has a monthly net income of $1800, and an appraiser believes a 9 percent rate of return is appropriate for the property. Its value would be estimated at:
240,000 $1800 x 12 (months) = $21,600 (annual net income) / .09 (9%) = $240,000 estimated value
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?
382,143 $53,500 / .14 = $382,143
A house valued at $110,000 is assessed at 30% of its value. The school tax is 12 mills, what is the annual tax?
396 (First multiply the Value $110,000 X the assessed rate of 30% = $33,000 then multiply this times the mill rate .12 = $396.00)
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?
4,604,167 (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.)
If an investment valued at $350,000 returns 12 percent annually, then what is the amount of income produced by this investment?
42,000 (The value multiplied by the return to equal the income. $350,000 x 12% = $42,000)
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?
54,000 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?
6,000 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:
675,000 (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?
685,000 Divide the income by the interest rate to equal property value,. $54,800/.08 = $685,000
Reconciliation refers to which of the following?
Analyzing the results obtained by the different approaches to value to determine a final estimate of value
Which of the following steps performs the unit-in-place method?
Finding the cost of installing the plumbing, roof, structure and foundations, (per unit of measure), to estimate value
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
Which of the following represents economic obsolescence?
Loss of value due to nearby adverse zoning change
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)
When appraising property, which of the following would be least important when using the replacement cost approach?
Rental cost per square foot
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
Which of the following would be classified as external obsolescence in the appraisal of real property?
adverse legislative regulations affecting the property
In the cost approach, the appraiser makes use of:
an estimate of the replacement cost of the building
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
Functional obsolescence may be caused by:
change in zoning
A property with amenities is best appraised by:
comparative analysis
The steps in the appraisal process include all of the following except:
considering seller's subjective value
In which of the following approaches to value must land value be computed separately from building value?
cost approach
Physical deterioration results from:
deferred maintenance
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
The period of time during which a property may be profitably utilized is known as its:
economic life
Which of the following types of depreciation would be most difficult to eliminate?
economic obsolescence
In determining the value of a 20-unit apartment property, the appraiser has established the gross income from rents. After deducting the loss for vacancies and collection losses from this gross income, he would have established the:
effective gross income
In the income approach to value, the net income is determined by deducting the expenses from the:
effective gross income
Capitalization is the process by which annual net operating income is used to:
estimate value
Outmoded plumbing is an example of:
functional obsolescence
When appraising a commercial property, the appraiser is most concerned with:
income
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
A house, which is located at the end of runway for a large airport, suffers from
incurable economic obsolescence
An appraiser uses several approaches in estimating the value of a parcel of real estate. These consist of replacement cost and:
market comparison data and income approaches
When performing an appraisal of real estate, the appraiser is estimating the property's:
market value
4-3-2-1 is a familiar approach to one facet of real estate practice. It normally refers to which of the following?
method use in appraising vacant land of different depths
Deferred maintenance is best represented by:
peeling paint on the exterior of a house
Depreciation, defined as loss of value from any cause, is generally divided into three classes. The loss of value due to wear and tear and action of the elements is called:
physical deterioration
Typically, the least important factor influencing the value of an owner-occupied home would be:
potential rental income
Which of the following is not acceptable in figuring the capitalized value of a five-plex?
principal payments
In analyzing gross income of a property, the characteristic of the income that the appraiser is concerned with is:
quantity, quality, and durability
If an appraiser uses more than one appraisal method and assigns different weights to the results of each, she is using:
reconciliation
Which of the following would be the most expensive method of appraisal of large, income-producing properties?
replacement cost approach
Whenever possible all three approaches to value are used. The comparison approach is given greater weight than the others are when appraising:
single-family dwellings
"Highest and best use" in an appraisal refers to:
the legal use that will yield the greatest return
The term depreciation refers to:
the loss of value in real estate due to any cause
What is the appraiser's most important consideration in estimating the value of commercial property?
the net income
You would use the comparative method in the appraisal of property:
to compute land value
