Section 7 - Sales Comparison, Cost and Income Approaches
A subject property has an estimated annual net operating income of $90,000. assuming a market derived capitalization rate of 9.7, the value of the subject property is estimated at $9,700,000
The statement is false. The estimated value is $90,000 NOI / .097 capitalization rate or $927,835.05
What is the cost approach?
The theory that a knowledgeable purchaser will not pay more for property than the cost of acquiring a similar site and constructing an acceptable substitute structure
what is the formula for net operating income
effective gross income - operating expenses
what is the breakdown method for depreciation?
estimating each category of depreciation separately and adding them together
true or false: mortgage interest on a business loan is entered as an expense on the reconstructed operating statement?
false mortgage loan interest is personal and unique to each owner
The annual net operating income of an income producing property is $114,000 The property sale price was $1,200,000. The overall capitalization rate is 9.2
false... the overall capitalization rate is $114,000 NOI / 1,200,000 dollar sale price equals 9.5 capitalization rate
What approach to value is used for owner occupied properties in an area with little market activity or special purpose properties that are not exchanged frequently?
cost approach
a multi-family unit consists of 20 2-bedroom apartments that rent for $700 per month and 15 three-bedroom apartments that rent for $825 a month. The vacancy and collection loss is estimated to be 6%. Management is 5% of effective gross income. what is the management expense?
$14,876 PGI - V&C = EGI EGI x .05 =
a multi-family unit consists of 20 2-bedroom apartments that rent for $700 per month and 15 three-bedroom apartments that rent for $825 a month. The vacancy and collection loss is estimated to be 6%. Management is 5% of effective gross income. what is the vacancy and collection allowance?
$18,990 6% * PGI of $316,500
Comp c is located in magnolia terrace which is not as convenient to shopping in schools as dogwood terrace. therefore the appraiser estimates a 5% adjustment for location. The appraiser also has to determine that the comparable has a sprinkler system and superior landscaping valued at $5,000. The transaction price was $225,000. what is comp Cs adjusted sale price?
$231, 250 $225,000 * 05 = 11,250 $11,250 - $5,000 = $6,250 $225,000 + $6,250 = $231,250
Comp a, a three bedroom two bath home with a screened in porch sold for $226,000. The appraiser valued the porch at $5,000 and estimated the bedroom at $15,000. what is comp A's adjusted sales price?
$236,000 $226,000 sale price + $15,000 - $5,000 equals $236,000
a multi-family unit consists of 20 2-bedroom apartments that rent for $700 per month and 15 three-bedroom apartments that rent for $825 a month. The vacancy and collection loss is estimated to be 6%. Management is 5% of effective gross income. what is the potential gross income?
$316,500 20 units * $700 per month * 12 months equals $168,000 15 units * $825 a month * 12 months equals $148,500
what are the 3 accepted methods of estimating the adjustment for accrued depreciation?
1 - breakdown method 2 - market extraction method 3 - age life method
what are the three expenses that are not included on a reconstructed operating statement?
1- business income tax 2- allowable depreciation 3- interest on mortgages or loans
What are the 6 transactional characteristics of property?
1- conditions of sale 2- financing terms 3- sales concessions 4- market conditions 5- personal property 6- location
What are the 4 steps in the cost approach?
1- estimate cost of improvement 2- estimate depreciation and deduct from cost 3- estimate site value 4- add site value and improvement value to depreciate it cost
What are the 3 methods used to estimate building costs?
1- quantity survey method 2- unit in place method 3- comparative unit method
T/F - Market conditions are adjusted to determine the normal sale price.
False - only conditions of sale, financing terms, and sales concessions are adjustments
T/F - Typically an appraiser can find equally desirable comps and therefore simply averages the various adjusted sales price of comps into an indicated value of the subject prop.
False - there may be all kinds of differences so must use reconciliation
The cost appreciation approach most likely is considered to be very important in what situation?
If the subject property is a new home in a developing subdivision
what does reconciliation?
The process of evaluating and weighting each value indication obtained from the three approaches to value
What is the most commonly used method of estimating the reproduction or replacement cost?
The comparative unit method
What is the unit in place method?
A calculation of the cost of materials and labor for each component of a structure
What is external obsolescence?
A loss of value due to influences originating outside the properties boundaries
What is functional obsolescence?
Anything that is inferior due to operational inadequacy's, poor design, or changing tastes
What is the comparative unit method?
Appraiser multiplies the cost per square foot of a recently built comparable structure by the number of square feet in the subject property
What is the quantity survey method?
An inventory of all labor, materials, products, and indirect cost plus builder profit required to reproduce a building
What is the successive sales analysis?
Analyzing 2 or more sales of the same property over a period of time
T/F - Market price is not generally considered to be evidence of market value.
False
what is the formula for capitalization rate?
NOI / market value
What is the most appropriate type of cost of improvements when the subject property suffers from functional obsolescence?
Replacement cost
Don't be sold for $218,900. it has a fireplace and professional landscaping and is 120 ft² smaller than the subject property. calculate the adjustment for square footage at $90 per square foot. The fireplace adjustment is $2,500 and the landscaping is valued at $3,000. what is comp b's adjusted sale price?
The answer is $224,200.
A home was sold for $318,500. The buyer secured the conventional mortgage. because they did not have enough cash to pay the discount points, the seller paid $3,000 of the buyers points at closing. what is true of this situation?
The appraiser should subtract $3,000 from the comparables transaction price
What is the sales comparison approach?
The sales comparison approach is based on the theory that a knowledgeable purchaser will pay no more for a property than the cost of acquiring an equally acceptable substitute property
A comp has more sq footage than the subject property. The appraiser should make a ____________ adjustment to the comps transaction price.
True
T/F - The sales comparison approach is considered the most reliable approach for valuing SF homes.
True
what is the market extraction method for depreciation?
assume depreciation for each comp and get a depreciation per square foot number
The method of estimating building costs that typically relies on published cost manuals for a cost per square foot, then adjust for local building costs is
comparative unit
The ____________ approach is useful when valuing owner-occupied property in an area with little sales activity.
cost
The ____________ approach is applicable for valuing business structures for hazard insurance purposes.
cost (requires land and improvements to be valued separately)
When an appraiser adjusts for conditions of sale, sale concessions and non-market financing, the resulting figures referred to as the
normal sale price
what is the formula for potential gross income?
number of units x monthly rent per unit x 12 months
The most reliable method to estimate an adjustment for location is _______________ cost.
paired-sales analysis
what is the formula for effective gross income?
potential gross income - vacancy and collection loss
what is the formula for the reconstructed operating statement?
potential gross income - vacancy and collection loss = effective gross income effective gross income minus operating expenses = NOI
what is the formula for vacancy and collection loss?
potential growth income x estimated percentage for vacancy and collection loss
The process of estimating revenues and expenses for an income producing property results in a statement of income and expenses that is applicable for appraisal, referred to as a
reconstructed operating statement
what is the gross income multiplier (gim) analysis?
the ratio between a properties gross annual income and the sale price of the property Sale price / Gross annual income
what is the gross rent multiplier (grm) analysis?
the ratio between a properties gross monthly rental income and the sale price of the property Sale price / Gross monthly rent
what is the income approach?
the theory that a knowledgeable purchaser would pay no more for a property than the present value of the expected future income generated from that property
true or false: management expense is a variable expense that is typically estimated as a percentage of effective grss income
true Management is a variable expense typically expressed as a percentage of the EGI