Ch 16: Types of Appraisal

Question 1

What is the first step in the appraisal process?

Answer 1

Define the problem

Question 2

Describe the difference between specific and general data.

Answer 2

Specific data is information and details about the subject property and the comparables.

General data is information about the property’s location – its country, region, city, and neighborhood.

Question 3

Explain reconciliation.

Answer 3

After determining the three separate estimates, the appraiser must reconcile the various estimates to create a statement of the property’s final value estimate.

Question 4

What forms can appraisal reports take?

Answer 4

Short- or Long-Form Narrative Reports
Form Reports
Letter or Oral Reports

Question 5

What does the sales comparison approach require an appraiser to do?

Answer 5

It requires an appraiser to make direct comparisons between the subject property (the one being appraised) and other sold or listed (for sale) properties.

Question 6

What are the five steps of the sales comparison approach?

Answer 6

Study the market.
Collect and verify data.
Analyze and compare properties.
Adjust the prices of the comparables.
Reconcile the newly adjusted prices.

Question 7

What are the two analytical tools used in data analysis and comparison?

Answer 7

Elements of Comparison
Units of Comparison

Question 8

What are the criteria for using the “matched pairs” technique?

Answer 8

The appraiser must choose two sales in the market. One sale must contain the item for which the adjustment is being sought. The other must not contain that adjustment item.

Question 9

What is the income approach?

Answer 9

The income approach is a valuation method used to estimate the value of income-producing real estate: commercial properties and investment properties.

Question 10

What are the five steps that make up the income approach?

Answer 10

Step 1. Estimate potential gross income

Step 2. Estimate effective gross income

Step 3. Calculate the net operating income

Step 4. Select a capitalization rate

Step 5. Apply the capitalization rate

Question 11

After estimating the property’s annual potential gross income, then deducting an appropriate, market-based allowance for losses due to vacancies and collections, the remainder is termed what?

Answer 11

The property’s effective gross income

Question 12

What types of expenses are NOT considered operating expenses?

Answer 12

Operating expenses do not include debt service, expenditures for capital improvements, or expenses not related to operation of the property.

Question 13

What is the definition of capitalization rate?

Answer 13

Capitalization rate is the rate of the return on an investment.

Question 14

The income capitalization formula can be converted to similar equations that solve for a property’s cap rate or income. What are the three formulas?

Answer 14

Income/Rate = Value
Income/Value = Rate
Value x Rate = Income

Question 15

What is the formula for determining the gross rent multiplier?

Answer 15

Sales Price ÷ Gross Rent = Gross Rent Multiplier

Question 16

List one advantage to using the income approach over the other two value approaches.

Answer 16

There is no need for market transactions because this approach does not use comparable market info, but instead, gathers the future returns from the owner.

Question 17

What is replacement cost?

Answer 17

It is the cost of creating a structure and other improvements that provide the same or very similar usefulness, but using current material and design standards, based on the current prices for materials and labor.

Question 18

What is meant by reproduction cost?

Answer 18

This is the cost of constructing an exact duplicate of the subject building, at current prices.

Question 19

Define depreciation.

Answer 19

Depreciation is the difference between the current cost of an improvement on the date of the appraisal and the value of the improvement in place on the property.

Question 20

Describe the difference between external and functional obsolescence.

Answer 20

External obsolescence is caused by changes external to the property, such as the decline of value in a neighborhood.

Functional obsolescence is caused by changes within the property, such as a poor floor plan or mechanical inadequacy or over-adequacy.

Question 21

Define external obsolescence.

Answer 21

External obsolescence is the loss of value to a property’s improvements that is caused by factors that are external to (or outside of) a property’s boundaries.

Question 22

Why must an appraiser be careful when using an age of life method of depreciation?

Answer 22

Appraisers must be extremely careful in using this method because errors are not uncommon when estimates are significantly based on observation.

Question 23

Which method for estimating a building’s replacement or reproduction costs is generally the most accurate cost estimator and the one normally used by builders, contractors, and cost estimators?

Answer 23

Quantity survey method

Question 24

What are the three most reliable sources for obtaining cost data?

Answer 24

Cost Services
Cost Indices
Cost Data File

Question 25

What is the formula for determining the gross rent multiplier?

Answer 25

Sales Price ÷ Gross Rent

Question 26

The sales comparison approach to value is also called the:

Answer 26

market approach.

Question 27

Which of the following is NOT a disadvantage of using the income approach?

Answer 27

It requires an objective cash flow allocation.

Question 28

The ratio to convert annual income into market value is called:

Answer 28

gross income multiplier.

Question 29

Unit-in-place methods are made in terms of what?

Answer 29

Standard costs for each of the building components as installed

Question 30

When information is available on a sufficient number of comparable sales, offerings, and listings in the current market, the resulting pattern is the best indication of what?

Answer 30

Market value for the subject property

Question 31

One method an appraiser uses to estimate a building’s replacement or reproduction cost is the square foot or cubic foot method which is also called:

Answer 31

the comparative-unit method.

Question 32

The procedure for developing the estimated value of the improvements requires the conversion of:

Answer 32

“cost to construct” figures to market figures.

Question 33

What technique separates depreciation charges based on origin of the loss, with each component estimated separately through either observation or the engineering method?

Answer 33

Breakdown method

Question 34

What is the term given to the ratio of the monthly or yearly rent divided into the property’s selling price?

Answer 34

Gross Rent Multiplier

Question 35

Which statement is TRUE about data collection?

Answer 35

It is comprised of an orderly set of procedures that establish the precise manner in which data is collected and analyzed.

Question 36

What is not a method by which an appraiser can estimate a building’s replacement or reproduction cost?

Answer 36

Quality assurance method

Question 37

A disadvantage when using the income approach is:

Answer 37

by translating theory into practice, the appraiser is forced to use limiting assumptions.

Question 38

The quantity survey method is the one generally used by whom?

Answer 38

Contractors and builders

Question 39

One advantage to using the income approach is that it:

Answer 39

illustrates the relationship between the returns of investment on a security and the returns on the overall market portfolio.

Question 40

External obsolescence can be caused by:

Answer 40

a decline in the neighborhood’s value.

Question 41

The cost approach is based on:

Answer 41

the assumption that the cost to produce a building plus the cost to acquire and improve the site makes it suitable for building, which is a good indication of what the property is worth.

Question 42

How many sales must the appraiser choose to use the matched pairs technique?

Answer 42

2

Question 43

Which appraisal approach is a method of estimating value based on the economic principle of substitution?

Answer 43

Sales comparison

Question 44

To the real estate appraiser, the income approach attempts to:

Answer 44

calculate how much money this property can be expected to earn in the future.