Chapter 1 Flashcards
What is an Appraisal?
Answer: An opinion by a professional about the value of the property.
The value of a commercial property is primarily based on which of the following?
Answer: Net Operating Income (NOI)
What are the total expenses of a property with an effective gross income of $850,000 and an NOI of $400,000?
Answer: $450,000
What is the NOI of a property that was purchased for $2,400,000 at a capitalization rate of 10%?
Answer: 240,000
If an inventor purchased property for $2,000,000 using all cash, what would be their return on investment in year one if the property yielded $260,000 in cash flow?
Answer: 13%
What is the purchase price of a property if an investor were to earn a 10% cash-on-cash return on $350,000 in cash flow after year one?
Answer: $3,500,000
An investor purchased a property of $2,600,000 using all cash. What is the NOI on the property after year one if the investor earned a 10% cash-on-cash return?
Answer: $260,000
The NOI plus the total expenses of a property equals which of the following?
Answer: Effective Gross Income
An investor is looking to purchase a property for $2,500,000. If the property has an NOI of $150,000 what is the going cap rate?
Answer: 6%
Which of the following documents is used to project the future performance of a property?
Answer: Pro-forma
Which of the following is an example of an expense found on a pro-forma?
Answer: All of these🡪 Property taxes, management fees, marketing expenses
According to the IRS, a multi-family property depreciates over how many years?
Answer: 27.5
If a unit is not being rented, it should be classified as a/an…?
Answer: Vacancy
Potential gross income minus vacancies, concessions and loss to lease, plus other income equals…?
Answer: Effective gross income
There are 12 buyers looking for homes in the same neighborhood. There are only 8 homes in the neighborhood. What happens to the property value?
Answer: The value of the properties is higher because of demand.
What are the four factors that influence value?
Answer: Social, economic, construction costs, governmental.
Is data from recent sales enough to establish value?
Answer: No, combining recent sales only gives you an estimate.
Do higher property taxes impact home values?
Yes, the properties will be less valuable.
What is the principle of anticipation?
Answer: The benefits the property may offer buyer.
What is the principle of conformity?
Answer: The more unique new homes are, the lower the value.
What is the principle of contribution?
Answer: When the amenities work for the target home buyer.
What is the principle of regression?
Answer: When higher valued properties lose values because of their association to lesser valued properties.
A Victorian home is built in a neighborhood that is almost all split-level ranches. Is the Victorian home more valuable?
Answer: No, the property does not conform and therefore will be worth less than it might otherwise be.
There are 100 three-bedroom homes available, and there are 200 buyers, what happens to the property value?
Answer: Goes up because of demand
What occurs when a subdivision built 10 years ago suddenly has a brand-new home added?
Answer: The newer home will have a lower value because the other homes are not as new or modern.
What value is used for establishing taxes?
Answer: Assessed value
How does an appraiser identify properties when using the Sales Comparison Approach?
Answer: Public records such as the clerk in the county and MLS services.
Does it matter if a sale was forced because of foreclosure or divorce?
Yes, this is considered a “fire sale” and may not be a true reflection of value.
What value is most commonly used for commercial property?
Answer: Value in use
The formula for the cost approach is Value= Replacement Cost- depreciation + value of land?
Answer: True
A builder purchases land for $30,000. It costs him $50,000 for materials to build a home. The cost of labor is $30,000. Loan costs came up to 10,000. Fees and taxes were $10,000. If he sells the home for $130,00 will he make a profit?
Answer: No, he will break even.
The cost approach is primarily used to value which of the following properties?
Answer: Schools
How often is the square foot method of valuation used?
Answer: Seldom because it is the least accurate.
Which method of cost of development is used least?
Answer: Quantity survey
In what cases is the cost approach to appraisal used?
Answer: FNMA Manufactured Housing loans, special use buildings, property in the process of being built, or property to be rebuilt
What property expenses are fixed?
Answer: Taxes and insurance
Are mortgage payments deducted from net income when using the income approach?
Answer: No, they are not included.
An office building is valued using the…?
Answer: Income method
Is the income capitalization approach the most accurate method in an appraisal?
Answer: No, it is not always the most accurate.
Which of the following numbers is used to calculate the value of a property using the income capitalization approach?
Answer: Net operating income
What value is used during the reconciliation process?
Answer: All three values (value derived from the sales comparison approach, cost approach, income capitalization approach)
What is an arm’s length sale?
Answer: When the buyer and seller are unrelated
Why do investors specifically like to buy real estate?
Answer: Hedge against inflation
Is real estate a risky investment?
Answer: No, long-term investing is rather low-risk.
What defines how much risk a property presents?
Answer: Capitalization rates
Two acres of land with grapevines are best described as…?
Answer: Land
Generally, can a building be built to block the ocean view of an existing home?
Answer: Yes, there is no right to view.
The right to sell real estate is also called the right to…?
Answer: Dispose
Which would be an acceptable exercise of the right of use?
Answer: Hosting a casual dinner party with family members.
What are restrictive covenants?
Answer: Restrictions on the use of land that stay with the property from owner to owner.
A pig farm moves into a residential neighborhood. The neighbors filed a lawsuit to make the pig farm go away. Who will win?
Answer: The neighbors, because the pig farm is interfering with their right of quiet enjoyment, and the neighbors were there first.
Roger owns a house in a subdivision with restrictive covenants. The covenants say that all houses in the subdivision must be painted blue. Roger is a huge Atlanta Falcons fan and paints his house red. The Homeowners Association sues Roger for violating the covenants. Who will win?
Answer: The Association. Roger’s deed and right of ownership are subject to the covenants.
Jim bought real property from Dale. Long before Dale owned the property, the Local Power Company purchased an easement from an earlier owner to run power lines underneath the land. The easement is recorded in the real estate records. Jim decides that he doesn’t like the power company using his property and files a lawsuit to kick them off and remove the powerlines. Who wins?
Answer: The power company, because their easement is a matter of record, and Jim bought the property with the easement rights.
When land only is listed for sale, what is included?
Answer: Land and everything underneath the land
When land only is listed for sale, what is included?
Answer: Improvements made to the land
Copper wiring in a house is generally considered what?
Answer: Fixture
How does a lien holder place a lien on a movable property?
Answer: Filing a UCC-1 statement with the appropriate state authority
When a commercial property owner sells his building, display cases for jewelry that are not nailed down generally…?
Answer: Go out with the seller as trade fixtures
When land is being sold, timber growing on the land is generally considered what?
Answer: Emblements
Boyd is buying a house from Stella. They sign a contract for the purchase and sale of real estate. They write into the contract that Stella’s piano, something that can easily be moved on its wheels, is part of the sale and stays with the house when Stella leaves. After closing, what happens to the piano?
Answer: Boyd keeps the piano in his new house
Biff is buying a house from Sloan. As they’re deciding which items in the house stay and which go, they come upon a heavy table. The table can be used in any large room but has been in the house for 100 years. The contract says that all movable property is to be removed and taken by the seller. Who gets the table?
Answer: Sloan, because the table is adaptable to another setting.
Brenda is buying a house. She loves the furniture and decorations in the house. How should she write the contract?
Answer: All personal property stays with the house.
The limited amount of useful land in the world is the characteristics of…?
Answer: Scarcity
Because land is unique, the value of land…?
Answer: Increases
What will a luxurious name brand do to a property’s value?
Answer: Increase the value
To increase housing values, a town might try what?
Answer: Improve highways to local commercial centers to make it easier to get to work.
Which addition to a house would most likely increase the value?
Answer: Adding a useful extension with more bedrooms that is architecturally attractive
Frank is building an architecturally ugly and not very functional house on his land. What will that do to the value of the property?
Answer: Decrease the value.
Bill, a real estate investor, is considering buying land in two places. The middle of the New York City business district and rural Oklahoma. Which is likely to be more expensive?
Answer: NYC, as it is highly sought after by buyers.
A person’s ability to pledge their real estate as collateral is known as the right to…?
Answer: Encumber
