Ch 14: Principles of Value/Methods of Valuation

Question 1

What are the three common methods to determine a reasonable asking price for a property?

Answer 1

Comparative market analysis (CMA) - also referred to as a competitive market analysis
BPO or Broker’s Price Opinion
Appraisal

Question 2

What is the main limitation of a CMA?

Answer 2

It must be done for an actual or potential client – whether a transactional party (buyer/seller/lessor/lessee) or someone making substantive decisions on whether to list or acquire a particular property.

Question 3

A broker price opinion may be prepared by a broker, associate broker, or salesperson only for use in conjunction with what?

Answer 3

A property owned by a lender after an unsuccessful sale at a foreclosure auction
A modification of a first or junior mortgage or equity line of credit
A short sale of a property
An evaluation or monitoring of a portfolio of properties

Question 4

How does USPAP define an appraisal?

Answer 4

The act or process of developing an opinion of value

Question 5

Describe market value.

Answer 5

Market value is the highest price that a buyer would pay and the lowest price that the seller would accept for the property.

Question 6

List three types of value other than market value.

Answer 6

Appraised value
Assemblage value
Assessed value
Book value
Capitalized value
Condemned value
Depreciated value
Insured/Insurable/Insurance value
Investment value
Leased fee value
Liquidation value
Mortgage/ Mortgage Loan/Loan value
Plottage value
Rental value
Replacement value

Question 7

Explain the principle of value known as conformity.

Answer 7

This principle says that a property is at its highest value when it conforms with and fits into its surroundings. If a three-bedroom, one-bath home is in a neighborhood where all the homes have two bathrooms, it might be wise for the owner to consider installing a second bathroom.

Question 8

What is utility in regards to real estate valuation?

Answer 8

Utility is the capacity of an item to satisfy some want, need, or desire. Residential users of real estate need shelter. Utility and desirability create supply of and demand for a commodity, while scarcity and purchasing power limit them.

Question 9

List the four basic sources of influence on all aspects of human activity.

Answer 9

Social trends
Economic conditions and circumstances
Governmental controls and regulations
Physical and environmental conditions

Question 10

How do cultural norms influence choices in the marketplace?

Answer 10

Cultural norms, by influencing the personal values of individuals, influence the choices they make in the marketplace. Cultural norms create various levels of social pressure on those making a purchase.

Question 11

List the economic characteristics of land.

Answer 11

Area preference (situs)—market appeal of location and environment
Availability—relative scarcity or abundance
Improvements—quality and suitability for use
Permanence of investment—stability of value over time

Question 12

What are the four phases of standard market cycles?

Answer 12

Growth, Peak, Decline, Recovery

Question 13

What is one example of how income and capital gain taxation affect real estate valuation?

Answer 13

One example is that income taxes control the availability of disposable income for real estate purchases.

Question 14

Why is government influence at the state level less extensive than at the federal and local levels?

Answer 14

Because state governments delegate many of their constitutionally-granted powers to the county and municipal levels of government

Question 15

Explain what happens to a property that does not conform to zoning and/or building codes.

Answer 15

Property that does not conform to these requirements loses value in that a new owner will have to expend funds to bring it into compliance.

Question 16

What six geographical and environmental issues affect value?

Answer 16

Climate, soil, water, air quality, wind patterns, and environmental hazards

Question 17

What type of value is established by subtracting accumulated depreciation from the purchase price or cost of a property?

Answer 17

Depreciated value

Question 18

What describes the ability of people in the market to exchange cash or its equivalent for goods and services?

Answer 18

Purchasing power

Question 19

What is not one of the four basic sources of influence, regarding value, that effect all aspects of human activity?

Answer 19

Religious practices

Question 20

What type of inflation is caused by a seller’s market?

Answer 20

Demand inflation

Question 21

What creates the greatest opportunity to sell a home quickly?

Answer 21

Correct pricing

Question 22

What term describes public control on property ownership?

Answer 22

Eminent domain

Question 23

What creates interest in a demand for new mechanical systems, recycled materials, insulation and construction methods and special water consumption devices?

Answer 23

Environmental consciousness

Question 24

Who sets the listing price on a home for sale?

Answer 24

The seller

Question 25

Under the principle of supply and demand, what describes a time of financial prosperity and high demand?

Answer 25

Growth

Question 26

What describes the state’s right to take ownership of property left by an heir-less and intestate deceased owner?

Answer 26

Escheat

Question 27

The appraiser’s opinion of a property’s value is known as:

Answer 27

appraised value.

Question 28

What term describes when financial growth has it’s maximum sustainable level?

Answer 28

Peak