Ch 16: Types of Appraisal Flashcards
What is the first step in the appraisal process?
Define the problem
Describe the difference between specific and general data.
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.
Explain reconciliation.
After determining the three separate estimates, the appraiser must reconcile the various estimates to create a statement of the property’s final value estimate.
What forms can appraisal reports take?
Short- or Long-Form Narrative Reports
Form Reports
Letter or Oral Reports
What does the sales comparison approach require an appraiser to do?
It requires an appraiser to make direct comparisons between the subject property (the one being appraised) and other sold or listed (for sale) properties.
What are the five steps of the sales comparison approach?
Study the market.
Collect and verify data.
Analyze and compare properties.
Adjust the prices of the comparables.
Reconcile the newly adjusted prices.
What are the two analytical tools used in data analysis and comparison?
Elements of Comparison
Units of Comparison
What are the criteria for using the “matched pairs” technique?
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.
What is the income approach?
The income approach is a valuation method used to estimate the value of income-producing real estate: commercial properties and investment properties.
What are the five steps that make up the income approach?
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
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?
The property’s effective gross income
What types of expenses are NOT considered operating expenses?
Operating expenses do not include debt service, expenditures for capital improvements, or expenses not related to operation of the property.
What is the definition of capitalization rate?
Capitalization rate is the rate of the return on an investment.
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?
Income/Rate = Value
Income/Value = Rate
Value x Rate = Income
What is the formula for determining the gross rent multiplier?
Sales Price ÷ Gross Rent = Gross Rent Multiplier
List one advantage to using the income approach over the other two value approaches.
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.
What is replacement cost?
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.
What is meant by reproduction cost?
This is the cost of constructing an exact duplicate of the subject building, at current prices.
Define depreciation.
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.
Describe the difference between external and functional obsolescence.
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.
Define external obsolescence.
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.
Why must an appraiser be careful when using an age of life method of depreciation?
Appraisers must be extremely careful in using this method because errors are not uncommon when estimates are significantly based on observation.
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?
Quantity survey method
What are the three most reliable sources for obtaining cost data?
Cost Services
Cost Indices
Cost Data File
What is the formula for determining the gross rent multiplier?
Sales Price ÷ Gross Rent
The sales comparison approach to value is also called the:
market approach.
Which of the following is NOT a disadvantage of using the income approach?
It requires an objective cash flow allocation.
The ratio to convert annual income into market value is called:
gross income multiplier.
Unit-in-place methods are made in terms of what?
Standard costs for each of the building components as installed
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?
Market value for the subject property
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:
the comparative-unit method.
The procedure for developing the estimated value of the improvements requires the conversion of:
“cost to construct” figures to market figures.
What technique separates depreciation charges based on origin of the loss, with each component estimated separately through either observation or the engineering method?
Breakdown method
What is the term given to the ratio of the monthly or yearly rent divided into the property’s selling price?
Gross Rent Multiplier
Which statement is TRUE about data collection?
It is comprised of an orderly set of procedures that establish the precise manner in which data is collected and analyzed.
What is not a method by which an appraiser can estimate a building’s replacement or reproduction cost?
Quality assurance method
A disadvantage when using the income approach is:
by translating theory into practice, the appraiser is forced to use limiting assumptions.
The quantity survey method is the one generally used by whom?
Contractors and builders
One advantage to using the income approach is that it:
illustrates the relationship between the returns of investment on a security and the returns on the overall market portfolio.
External obsolescence can be caused by:
a decline in the neighborhood’s value.
The cost approach is based on:
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.
How many sales must the appraiser choose to use the matched pairs technique?
2
Which appraisal approach is a method of estimating value based on the economic principle of substitution?
Sales comparison
To the real estate appraiser, the income approach attempts to:
calculate how much money this property can be expected to earn in the future.
