Appraisals Flashcards
An appraiser has been hired to determine the market value of a single-family home. What is the next step in the appraisal process?
A. Determine the scope of work
B. Reconcile data
C. Identify the problem
D. Determine highest and best use
A. Determine the scope of work
- Since the first step in this appraisal of stating/identifying the problem was already given in the question – determining the market value of a single-family home – the next step would be determine the scope of work
- Reconcile data and report conclusion are the two final steps
A three bedroom home has one very large bedroom.
The owner converts the large bedroom into two smaller bedrooms by building a wall down the middle. It is necessary to pass through one of the new bedrooms to get to the other. An appraiser appraising this home would make an adjustment of value based on what principle?
A. Economic obsolescence
B. Physical obsolescence
C. Functional obsolescence
D. Reconciliation
C. Functional obsolescence
- Economic/external (generally incurable) – Caused by factors not on subject property
- Physical (curable) – Routine maintenance
- Physical (incurable) – Repairs to separate components which deteriorate at different rates
- For example: roof, electric system – Costs more to repair than its pay back
- Functional (curable) – Features of the structure are no longer desirable, but are replaceable
- For example: outdated plumbing fixtures
- Functional (incurable) – Undesirable features which cannot be easily replaced
- Tandem bedrooms – may appear on exam
Which of the following would be a characteristic of value?
A. Obsolescence
B. Depreciation
C. Appreciation
D. Utility
D. Utility
Characteristics of Value (Dust)
– Demand – is need or desire for a specific good or service.
– Utility – is the degree of usefulness to a prospective buyer.
– Scarcity – is the perceived supply of a good or service relative to the demand for it.
– Transferability – is the ability to freely buy, sell, encumber, or dispose of property in any way the owner sees fit.
An estimate of the probable price of property on the date of the appraisal is best termed:
A. Market value
B. Market price
C. Highest and best use
D. Current value
A. Market value
• Value is present worth of future benefits of ownership of a commodity. • Property is purchased with expectation of appreciation • In an appraisal, value is an opinion.
• Market value is most probable price property should bring in a competitive and open market under all conditions requisite to a fair sale.
• Market value versus market price:
– Market value is the estimate of probable price on the date of the appraisal
– Market price is what the property actually sells
• Appraisal is an estimate or opinion of value as of a certain date that is supported by objective data. • It is not a guarantee of value. • Effective date establishes the terms, conditions, and economic circumstances of the value.
An appraisal is not: • Prediction of future worth •Determination of what someone will actually pay •Inspection of the property •Guarantee that the house is free of defects
An older property with plaster walls sustains significant damage in a fire. When renovations take place, plaster walls are replaced with drywall. This would be an example of:
A. Duplication
B. Reconstruction
C. Reproduction
D. Replacement
D. Replacement
• Reproduction – Using same material to remake the
renovations
• Replacement – Using material currently in common use to make the repairs
Price and Cost • Price is the amount someone actually paid for a property. • Cost is the amount needed to develop, produce, or build something.
The price paid and the amount the seller needs to net have no bearing on current property value.
An appraisal subject property has 2 comparables.
House A has 2 positive differences and one negative
difference totaling a $1,500 positive difference to the
subject property. House B has one positive difference
of $1,000 and no negative differences. Which is the
best comparable?
A. Neither, because you don’t adjust the comps, you
adjust the subject
B. House B because it has a $1,000 positive adjustment
C. House B because it has only one adjustment
D. House A because there are no negative differences
C. House B because it has only one adjustment
• Generally, the fewest number of adjustments
are considered most comparable
– Whether the adjustments are positive or
negative is irrelevant
An appraiser prepares an appraisal for the lender.
Subject property is older and has a pool. Comparable property is newer and has no pool. How would the appraiser make necessary adjustments?
A. seller’s property sales price up for age and pool
B. seller’s property sales price down for age and pool
C. comparable property up for age, down for pool
D. comparable property down for age, up for pool
D. comparable property down for age, up for pool
• Sales comparison approach analyzes comparable properties in the same area and adjusts data to account for differences.
– Also called market data approach or comparative analysis approach
– For residential, commercial, industrial, and agricultural properties; the only approach for vacant land
• Sales comparison approach is an approach to
determine value of property.
– Provides foundation for opinion of value
– Generally considered most useful and accurate
– Uses past sales that have closed
• Minimum of 3 comps is required by most secondary market lenders; should be recent sales, usually within 6 months prior to date of appraisal.
An appraiser is adjusting of value for the differences between the subject property and the comparables. The appraiser would always:
A. Make adjustments to the subject property
B. Average the differences
C. Make adjustments to the comparables
D. Use current “for sale” properties for balance
C. Make adjustments to the comparables
• Adjusting properties makes chosen comps come as close as possible to subject property for comparison.
– Subject property never changes.
– If subject is better, add to comparable to make properties equal. (SBA)
– If comparable is better, subtract from comp to make them equal. (CBS)
When appraising vacant land, what appraisal type would the appraiser use?
A. Income
B. Summation of Value
C. Sales Comparison
D. Cost
C. Sales Comparison
When the cost approach is used to determine value, which of the following applies?
A. Replacement cost minus depreciation plus site improvements
B. Replacement Cost minus land
C. Replacement cost minus depreciation plus land plus site improvements
D. comparable property value plus site value
C. Replacement cost minus depreciation plus land plus site improvements
• Cost approach develops an indication of value
using this formula: Cost of Improvements — Depreciation + Value of the Vacant Land and Site Improvements
• Used in new construction, custom homes and special-use or service property where comps are not available
• Depreciation is loss in value for any reason.
– Applied to improvements, not to land
– Curable depreciation - can be fixed and MUST be done
– Incurable depreciation - can not be fixed
If a repair must be done, the repair is curable.
• Causes of depreciation
– Physical deterioration
– Functional obsolescence
– Economic obsolescence
- Calculating Physical Depreciation: Age-Life
- Useful life is the time a building can be used for its intended purpose. • Effective age is how old building appears to be.
- Age-life method compares effective age to useful life.
Effective Age ÷ Economic Life = Age-Life Ratio
A rental property could generate $125,000 in gross annual income. Historically the property had a vacancy
factor of 5%. $2,400 in additional income was realized
from the on-site laundry, annual debt service totaled
$32,000, monthly building expenses were $3,550. What is value of the property using a capitalization rate of 11%.
A. $1,136,363
B. $714,090
C. $1,240,000
D. $423,181
B. $714,090
Income approach
• analyzes rent or income and produces a direct correlation with property value.
– Direct capitalization rate (CAP RATE) to analyze net income stream produced by commercial or investment property
– Net income the property will produce over economic life
– Also called capitalization approach
Net Operating Income
Potential gross income (PGI) - Vacancy and collection losses + Other income = Effective gross income (EGI)
- Operating expenses
• Fixed
• Variable
= Net Operating Income
NOTE: NOI does not consider financing or depreciation.
Purchaser Sally hires an appraisal for a building office
building in Fresno. After comparing other similar
properties his appraiser tells him the property has a
11% CAP Rate. What happens if CAP rate is 12%:
A. The value would Increase
B. Appraiser would only look at NOI
C. The value would Decrease
D. CAP rate is not used on office buildings to determine value
C. Decrease
• Capitalization Rate:
– Is a measurement of Return on Investment
– As cap rate increases, value decreases.
The Appraisal Process steps:
A. Data Analysis, State the Problem, Application of Approaches, Reconciliation, Report Findings
B. Application of Approaches, Reconciliation, Data Analysis, State the Problem, Report Findings
C. State the Problem, Data Analysis, Application of Approaches, Reconciliation, Report Findings
D. Reconciliation, Data Analysis, Report Findings, State the Problem, Application of Approaches
C. State the Problem, Data Analysis, Application of Approaches, Reconciliation, Report Findings
- Step 1: State the Problem. Identifies assignment, determines client and intended users, purpose, effective date, and relevant assumptions.
- Step 2: Data Analysis. Analyzes subject property and market.
- Step 3: Application of Approaches. Values properties using three different approaches.
- Step 4: Reconciliation (Correlation). Reconciles approaches.
- Step 5: Report Findings. Prepares report of conclusions and final value estimate for the subject property.
The type of value the property is taxed at is the:
A. Insured Value
B. Assessed Value
C. Mortgage or Loan Value
D. Residual Value
B. Assessed Value
- Insured Value. Amount a property has been insured for, usually replacement costs, not land.
- Assessed Value. Amount a tax assessor uses to calculate property taxes due (% of market value).
- Mortgage or Loan Value. Amount a lender is willing to let someone borrow to finance, or refinance, property (loan-to- value ratio).
- Salvage/Residual Value. Value asset has at end of its economic life. Land does not lose its intrinsic value over time.
What value components should be present in real property to maximize its value?
A. Supply, Demand, Utility, Transferability
B. Demand, Utility, Scarcity, Transferability
C. Value Appraisal, Demand, Scarcity, Utility
D. Assessed Value, Market Value, Utility, and Demand
B. Demand, Utility, Scarcity, Transferability (DUST)
Value components
- Demand is need or desire for a specific good or service.
- Utility is the degree of usefulness to a prospective buyer.
- Scarcity is the perceived supply of a good or service relative to the demand for it.
- Transferability is the ability to freely buy, sell, encumber, or dispose of property in any way the owner sees fit.
- Influences on value (PEGS**) • _P_hysical (location, topography, resources, climate, etc.) • _E_conomic (cycles, economic base, supply & demand, etc.) • _G_overnmental (zoning, interest rates, etc.) • **Social (demographics, migration, etc.)
