Appraisals

Question 1

What is an appraisal?

Answer 1

An estimation of value.

Based on the property inspection date.

Question 2

Real estate agents give what kind of appraisals?

Answer 2

BPO. (Broker price Opinion)
Lender may ask for it for market pricing in anREO or short sale.

Provides an actual value

CMA. (Comparative market Analysis) is not an appraisal
Compares recent sales, pending sales and current listings of similar properties of the same neighborhood to establish property value

Provides a range of values

Question 3

Types of Value

Answer 3

1. Market Value
2. Assessed Value. Tax. Depends on mileage rate is amt. per thousand
3. Book Value: accounting purposes
   Original cost of structure minus depreciation ( 27.5 yrs. for residential and 39
   Years for commercial)
   Add value for improvements
   Add the value of the land to value of depreciated structure together with
   Improvements
4. Insurance Value: Insurance value determines the insurance value needed for
   Improvements.
5. Mortgage Loan Value: loan value compared to property value
6. Leased Fee Value: This value is the fee simple interest encumbered by a lease. This is lessor’s interest.
7. Leasehold Value: this value is the interest held by tenant. This is the lessee’s interest.

Together the leased fee value + the lease hold value= fee simple valu.

Question 4

Principals for Determining Value

Answer 4

S T U D

S: scarcity
T: transferability
U: utility
D: demand

Question 5

Basic Principles for Appraising Property

Answer 5

1. Principle of Highest and Best Use
2. Principle of Contribution
3. Principle of Substitution valuing residential property in neighborhood
4. Principle of Change
5. Principle of Competition
6. Principle of Conformity. Similar properties given a market. Similarities include
   Type, size, style, age, quality etc. Conformity maximizes value.
7. Principles of Progression and Regression
8. Principle of Supply and Demand
9. Principle of Anticipation
10. Principle of Increasing and Decreasing Returns

Question 6

Types of Depreciation

Answer 6

1. Deterioration
2. Functional Obsolescence(out-dated) this depreciation is “curable”
3. Economic(external or Environmental) Obsolescence is “incurable”
   Owner has no control of outside influences.

Question 7

Appraisal Approaches

Answer 7

1. Market Sales Approach aka Market Data aka Market Comparison Approach
2. The Cost Approach
3. The income Approach
   - capitalization
   - gross rent multiplier

Question 8

What is Market Sales Approach

Answer 8

Comparison of sold properties to subject property

Question 9

Calculating comparable properties

Answer 9

CIA

C: comparable
I: inferior
A: add

CBS

C: comparable
B: better
S: subtract

Question 10

Cost Approach to appraisal (summation)

Answer 10

Based on construction
Used for new construction

Reproduction vs. replacement
Follows ANSI method

Question 11

Income Approach income producing properties

2 approaches to valuation

Answer 11

1. Capitalization

2. Gross Rent Multiplier

Question 12

Formula for Capitalization.

Most widely used for valuation of in come producing property

More accurate approach as it takes into consideration expenses.

Answer 12

Capitalization Rate= Net Operating income / sales price (value)

Question 13

Formula for Gross Rent Multiplier (GRM)

Answer 13

GRM=. Sales Price / Gross annual Rent

Question 14

Capitalization Approach computes

Present value extended over a period of time.

Answer 14

1. Economic life (remaining useful life)
2. Capitalization Rate (cap rate) rate of interest used to calculate present value of future periodic payments . how quickly an investment will pay for itself
3. Net Operating Income. Income generated from the business after operating expenses

Question 15

Need to know how to be able to calculate,
Cap rate
The net operating income
Value

Answer 15

Net Operating Income= sales Price (value) x Capitalization Rate

Sales Price (Value) =. Net Operating Income / Capitalization Rate

Question 16

To figure out Net operating expense

Answer 16

Gross income =
Step 1. # of units x rent x 12 mos. = total yearly rent
Step 2. Vacancy rate% x total yearly rent and deduct from yearly rent
Step 3. Deduct expenses =

Net operating income

Question 17

Non deductible expenses are

Answer 17

DIM

D. Depreciation
I. Income taxes
M. Mortgage loan payments. ( principal and interest)

Question 18

How is capitalization rate calculated?

Answer 18

1) Investor wants to receive 6% rate of return ON his investment.
2) calculating a return OF his investment through depreciation.

For example if improvement has a 25 yr economic life then 100%. / 25=4%

Adding the return ON his investment(6%) to the rate of return OF his investment (4%)= 10% capitalization rate.

If land is vacant it cannot be depreciated therefore the capitalization rate is the interest rate alone. (Return ON investment)

Question 19

3 formulas needed for CAPITALIZATION

Answer 19

NOI= sales value x cap rate

Sales value = NOI / cap rate

Cap rate= NOI / sales value

Question 20

GROSS RENT MULTIPLIER formula

Answer 20

GRM=. Sales Price (value) / Gross annual income

This is 1-4 family

GIM= Sales Price (value) / Gross Annual

This is for multi- family, commercial, industrial and can include all income

SALES (Value) = GROSS annual Income. X. GRM

Question 21

GROSS INCOME MULTIPLIER

Answer 21

GIM=. gross income multiplier.

Used for multi-family, commercial or industrial

It is based on gross annual income. And can include other sources of income