Appraisal Approaches

Question 1

This approach uses a process of comparison with similar properties that have a known sale price to determine a subject property’s market value. This is the most reliable of the three approaches when appraising single-family homes for market value.

Answer 1

The Sales Comparison Approach

Question 2

The sales comparison approach relies on the value principle of ___, which says that the value of a property is equal to the value of an equivalent substitute property.

Answer 2

Substitution

Question 3

Steps when conducting the sales comparison approach:

Answer 3

1. Analyze the subject property to identify its characteristics, particularly those that are in demand in the current market.
2. Identify comparable properties that have been recently sold.
3. Compare the comparables to the subject property and make adjustments to the sales price of the comparables where they are different.
4. Use the data to arrive at an opinion of value for the subject property on the date of appraisal.

Question 4

Categories of Comparison

Answer 4

Elements of comparison and Units of comparison

Question 5

Analyze comparables’ locational/physical property characteristics and transaction differences. They explain why different prices

Answer 5

Elements of comparison

Question 6

Allow the comparison to be standardized. Units may be price per square foot, per apartment unit, per acre, etc.

Answer 6

Units of comparison

Question 7

The appraiser identifies at least three comparables to use, then makes adjustments to the sales price of the comparable properties to estimate the value of the subject property.

Answer 7

If the subject property has a superior amenity (a two-car garage while the comparable property has a one-car garage, for example), the sales price of the comparable property is increased by an appropriate amount or factor.
If the subject property is inferior in an area (for example, the yard is not well-maintained, while the comparable property is beautifully landscaped), the sales price of the comparable property is decreased.
The amount of the adjustment is based on the value of the item in the market. For example, if the comparable home has a fireplace and the subject property doesn’t, and homes with fireplaces sell on average for $1,000 more, then the comparable property’s sales price is adjusted down by $1,000.

Question 8

To be able to make valid computations of adjustments, the elements of comparison must be applied in this order:

Answer 8

1. Financing terms and cash equivalency
2. Conditions of sale
3. Market conditions
4. Location
5. Physical characteristics

Question 9

This is often offered by builders for new construction or as seller concessions in resale transactions.

Answer 9

Financing terms and cash equivalency

Question 10

Was it an arm’s length transaction? Were personal items included, or fixtures excluded?

Answer 10

Conditions of sale

Question 11

Underwriters assume appraisers understand the local marketplace, and will accept comparables that exceed distance, time, or other guidelines, if the appraiser supports the decision with written, detailed explanation that demonstrates that local expertise.

Answer 11

Location

Question 12

This includes the site, view, construction quality, amenities, size, etc.

Answer 12

Physical characteristics

Question 13

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. The appraiser attempts to include both superior and inferior units of comparison such as age, transaction price, etc.

Answer 13

Bracketing

Question 14

The ___ approach to finding appraised value measures value as a cost of production, including the acquisition of the land and the construction costs. Its reliability depends on valid reproduction cost estimates (i.e., the cost of rebuilding) and appropriate
depreciation estimates.

Answer 14

The Cost Approach

Question 15

The cost approach is often used in three circumstances:

Answer 15

New construction of both residential and commercial property

Unique properties, such as highly energy-efficient houses, residential acreage with excess land, historic houses, and high-dollar houses with many amenities

Special-purpose commercial uses, such as hospitals, some manufacturing plants, hotels, and other single-purpose properties

Question 16

The cost approach, site value is based on the opinion of the subject’s _____ , as though the land is vacant.

Answer 16

Highest and best use

Question 17

The ___ reflects the cost to build a functionally equivalent improvement.

Answer 17

The replacement cost

Question 18

The ___ is the cost to build an exact replica of the subject, with the same materials and deficiencies.

Answer 18

The reproduction cost

Question 19

The Three Types of Depreciation

Answer 19

Physical depreciation
Functional obsolescence
External depreciation or “economic obsolescence”

Question 20

___ is a loss in value caused by deterioration in physical condition.

Answer 20

Physical depreciation

Question 21

___ is a loss in value caused by defects in design, such as a poor floor plan or atypical or inconvenient sizes/types of rooms. Examples include houses where there are bedrooms on a level without a bath(s), or where the only access to a bedroom is through another bedroom.

Answer 21

Functional obsolescence

Question 22

___ is a loss in value caused by an undesirable or hazardous influence offsite. Examples are heavily trafficked areas, industrial odors, or airport noise

Answer 22

External depreciation or “economic obsolescence”

Question 23

__ refers to an item that can be repaired or replaced, and where the cost to cure the item is less than or the same as the anticipated increase in the property’s value after the item is cured. This includes items of deferred maintenance such a painting or repair of faucets. The cost to cure should be reasonable and economically feasible.

Answer 23

Curable depreciation

Question 24

___ includes items not practical to correct. Examples are a furnace or a roof that hasn’t reached the end of its economic life.

Answer 24

Incurable depreciation

Question 25

To estimate the cost of improvements, residential appraisers usually follow these steps:

Answer 25

Use published indexes and tables to source the data, such as Marshall & Swift Tables™.

The cost is then adjusted by its loss in value due to depreciation from all causes.

Accurate site value is required as a separate figure. (The sales comparison approach is used most commonly to estimate this value.)

Question 26

Assumes the land is vacant and bases opinion on highest and best use

Answer 26

Site value

Question 27

The ___ approach estimates the present value of any future benefits of owning a particular property.

Answer 27

The income approach

Question 28

The income approach is based on the value principle of ___

Answer 28

anticipation

Question 29

dividing the sale price of a comparable property by that property’s monthly or annual gross rent to arrive at a single number, which is your the _______

Answer 29

gross rent multiplier

Question 30

The GRM is then multiplied by the subject property’s anticipated monthly or annual gross rent to arrive at a __

Answer 30

property value

Question 31

___ is essentially the same as GRM, but it uses all sources of income from the property rather than only rent. The multiplier is found from a comparable property by dividing the sales price by the property’s annual gross income from all sources. You can then apply the multiplier to the subject property’s income to determine value. Larger properties generally have multiple income sources—such as laundry, vending machines, or parking meters—rather than smaller income properties, where rent is often the only source of income.

Answer 31

Gross income multiplier (GIM)

Question 32

This method calculates a net operating income (NOI) for a property over the next year, then applies a capitalization rate to that income to derive a market value for the property. The capitalization rate is found by analyzing the sales price and income of comparable properties. The formula to calculate cap rate is R = I ÷ V, where R is the cap rate, V is the property value (the sales price of a comparable), and I is the net operating income. Direct capitalization is generally appropriate for small- to medium-sized properties and those with stable forecast net income.

Answer 32

Direct Capitalization

Question 33

This method is similar to direct capitalization, but projects farther into the future than one year. It also considers the potential value of the property upon resale. An expected rate of return is applied to income from the entire holding period to find the current property value. Think of it as the total return of the investment expressed in an annual rate. Yield capitalization is most often used for larger properties where the investor wants a value based on long-term holdings, along with the effect of debt repayment and potential resale of the property on the ultimate return on investment.

Answer 33

Yield Capitalization

Question 34

Divide the sales price of a comparable property by its gross rental income. Use the result on the subject property to determine a value.

Answer 34

Gross rent multiplier

Question 35

Divide the sales price of a comparable property by its total gross income. Use the result on the subject property to determine a value.

Answer 35

Gross income multiplier

Question 36

Calculate the projected net operating income for a property over the next year, then apply a capitalization rate.

Answer 36

Direct capitalization

Question 37

Apply an expected rate of return to income from the entire holding period to find the current property value.

Answer 37

Yield capitalization