12 Ch8 Cost and Income Approaches quiz Flashcards
An appraiser is valuing a unique home built in 1928. The appraiser uses the Marshall & Swift Residential Cost Handbook to estimate cost new. The cost figures in the Handbook would be an indicator of
Replacement cost
Fannie Mae still requires the cost approach on appraisals of complex properties.
FALSE
If you are appraising an older, highly unique property, and you determine that the sales comparison and income approaches cannot be developed
The cost approach may be the only way to value the property
When appraising an owner-occupied single family home, an appraiser is required under USPAP to develop
Whatever approach(es) are necessary
One of the strengths of the cost approach is
It can be performed on any type of property
What is defined as the cost to construct a substitute for the building being appraised, using modern materials and current standards and design?
Replacement cost
Which statement is TRUE regarding the cost approach for residential mortgage lending appraisals?
Fannie Mae does not require the cost approach
What is defined as the cost to construct an exact duplicate or replica of the building being appraised, using the exact same materials and design?
Reproduction cost
Why might the cost approach be difficult to use in a depressed market?
It could be difficult to estimate economic obsolescence. Way back in Chapter 1, we said a property may also be complex because of atypical market conditions. But these would be hard to measure, and it would be difficult to calculate the amount of economic obsolescence that may be occurring at that point in time. Published cost sources may still be accurate; it is the economic obsolescence that would be difficult to quantify. Depressed markets are not always older urban areas.Ch 9, Cost Approach Applicability
When is the cost approach MOST applicable?
When the home is newer and of standard construction, When land value is readily obtainable, When there is not a lot of unusual depreciation
You are appraising a small new home, with 1,120 square feet, which sold for $189,000. During the appraisal process you estimate the site value at $30,000 and the site improvements at $7,000. What is the indicated cost per square foot of the dwelling?
$135.71
A one-acre property with an old home was purchased for $200,000. The owner razes the home at a cost of $20,000, and constructs a new home on the property at a cost of $650,000. What is the indicated site value?
- If a property is purchased for development to another use and the existing improvements are to be razed and removed, the cost of removing the improvements should be added to the purchase price in order to determine the total cost of acquiring the land. The appraiser may need to apply this analysis to comparable sales when estimating the land value of the subject. $200,000 + $20,000 = $220,000.Ch 9, Cost to Raze and Remove
A new home with 2,575 square feet sold for $632,000. Similar lots in the subject’s subdivision are selling for $180,000, and the site improvements are worth $12,000. What is the indicated cost per square foot of the dwelling?
170.87. $632,000 - $180,000 - $12,000 = $440,000. $440,000 / 2,575 = $170.87 Ch 9, Market Extraction of Building Costs
When analyzing the cost of a new home, built of standard materials, with standard techniques and design
Replacement cost and reproduction cost may be the same
The contract cost for constructing a house seven years ago was $485,000. The index for that time was 112.2. The current index is 156.9. What would the cost of the house be today?
- 156.9 / 112.2 = 1.3984 x $485,000 = $678,222. Ch 9, Cost Index Trending
You are appraising a unique home, which was constructed to resemble a lighthouse. The owner provides you a copy of the construction contract from 8 years ago stating that the home was built for $880,000. What is probably your BEST option for estimating cost new today?
Use cost index trending
A new home sold for $500,000. By analyzing comparable sales, you estimate the land value to be $120,000 and the site improvements to be worth $30,000. The house contains 3,250 square feet of GLA. What is the indicated cost per square foot of the dwelling?
107.69. $500,000 - $120,000 - $30,000 = $350,000. $350,000 / 3,250 = $107.69 Ch 9, Market Extraction of Building Costs
The cost of constructing a home 10 years ago was $180,000. The cost index at that time was 101.5. The current index is 155.6. What would be the cost of the home today?
- 155.6 / 101.5 = 1.533 x $180,000 = $275,940 Ch 9, Cost Index Trending
A one-acre property, improved with an old home, was purchased for $310,000. The purchaser immediately razes the home at a cost of $35,000, and salvages $10,000 worth of materials from the home, including bricks, copper, and aluminum. The purchaser then constructs a new home at a cost of $880,000. What is the indicated site value of this property?
- $310,000 + $35,000 - $10,000 = $335,000. Ch 9, Cost to Raze and Remove
You are appraising a property with substantial structural deficiencies. Your lender client has requested a cost to cure the deficiencies. Who is qualified to provide such an estimate?
A contractor
A new building is depreciating at an annual rate of 4%. What is its total economic life?
25 years
A 75-year-old house recently sold for $220,000. The reproduction cost of the improvements today would be $250,000, and total depreciation is estimated at 70%. By extraction, what is the land value?
- $250,000 x 0.3 (subtracting 70%) equals $75,000 improvement value. $220,000 = $75,000 = $145,000. Ch 9, Extraction Method
A 10 year old home recently sold for $320,000. The site value is $110,000. The cost new of the home would be $250,000. What is the annual straight-line depreciation percentage indicated by this property?
1.6%. $320,000 - $110,000 = $210,000 depreciated value of improvements. $250,000 (cost new) - $210,000 = $40,000 lump sum depreciation. $40,000 / $250,000 = .016 or 16%. 16% divided by 10 = 1.6% annually. Ch 9, More on Market Extraction Method
A 10 year old home recently sold for $320,000. The site value is $110,000. The cost new of the home would be $250,000. What is the percentage depreciation indicated by this property?
62.5 years. $320,000 - $110,000 = $210,000 depreciated value of improvements. $250,000 (cost new) - $210,000 = $40,000 lump sum depreciation. $40,000 / $250,000 = .16 or 16%. 16% divided by 10 = 1.6% annually. 100% divided by 1.6% = 62.5. Ch 9, More on Market Extraction Method
A new home is depreciating at an annual rate of 2%. How many years will it take before it loses 100% of its value?
50 years. 100% / 2% = 50 Ch 9, More on Market Extraction Method
You have sales of improved properties that indicate your subject property is worth $620,000. You have no vacant land sales. Your research shows that land values in this area are typically 25% of the total property value. What is the land value for the subject property?
- $620,000 / 0.25 = $155,000 Ch 9, Case Study 13 - Allocation
A 10 year old home recently sold for $320,000. The site value is $110,000. The cost new of the home would be $250,000. What is the lump-sum depreciation amount indicated by this property?
$40,000
You are appraising a single-family home in an area where there are very few sales, but there are many rentals. The subject property is rented for $1,100 per month, which is market rent. You find two sales that are over one year old. One sold for $96,000 and was rented for $1,200 per month. The other sold for $108,000 and was rented for $1,350 per month. What would be the indicated value of the subject?
- $96,000 / $1,200 = 80 GRM. $108,000 / $1,350 = 80 GRM. Based on these two sales, 80 would be an appropriate GRM, so $1,100 x 80 = $88,000. Ch 9, Income Approach
A property sold for $725,000. The site was valued at $235,000, and the cost new of the improvements was $618,000. By market extraction, what is the percent of depreciation in the building?
20.70%
A 10 year old home recently sold for $320,000. The site value is $110,000. The cost new of the home would be $250,000. What is the percentage depreciation indicated by this property?
16%. $320,000 - $110,000 = $210,000 depreciated value of improvements. $250,000 (cost new) - $210,000 = $40,000 lump sum depreciation. $40,000 / $250,000 = .016 or 16%. Ch 9, Market Extracted Depreciation
What type of approach would most often be applicable to single-unit residential properties?
Gross Rent Multiplier (GRM) Analysis
A property sold for $725,000. The site was valued at $235,000, and the cost new of the improvements was $618,000. By market extraction, what is the percent of depreciation in the building?
20.70%
If the costs are unknown or are difficult to determine, the appraisal can be done using:
A hypothetical condition
A method of estimating land value applied by capitalizing ground rent at a market-derived rate is the definition of:
Ground Rent Capitalization Method
Which of the following methods uses land-to-value ratios based on improved sale comparables?
Allocation
An estimate of the cost to change is needed when an appraisal assignment includes all of the following items
Functional utility problems, Cost to convert to an alternative use, Cost to update components to meet market expectations and cost to convert from apartments to condos. (Ch. 8, Cost to Change)
An addition to a home that was completed without permits is an example of:
A building code violation. A property with building code violations is another area that may need to be addressed. An example of this type of situation would be an addition to a home that was completed without permits. (Ch. 8, Cost to Cure)
Which of the following methods divides up and capitalizes the income between land and improvements?
Land Residual
