Chapter 16 Flashcards
anticipation
expectation or belief that
future benefits or changes
will affect the value of a
property, influencing the
decisions of buyers, sellers,
and investors.
appraisal
unbiased estimate or
opinion of the value of a
property, conducted by a
qualified appraiser using
established methods and
techniques.
assemblage
The process of combining
two or more adjacent parcels
of land to create a larger,
more valuable property, often
for redevelopment or
increased utility.
broker’s
opinion of
value
An informal estimate of the
value of a property provided
by a real estate broker or
agent, based on their
knowledge of the local
market and recent sales
activity.
capitalization
rate
The capitalization rate, or cap
rate, is the rate of return used
to estimate the value of
income-producing properties
based on their expected
income and risk. It is
calculated by dividing the
property’s net operating
income (NOI) by its purchase
price or value
comparable
A comparable, also known as
a comp, refers to a property
that is similar to the subject
property being appraised.
Comparables are used by
appraisers to determine the
market value of the subject
property by analyzing recent
sales of similar properties in
the same area
comparative
market
analysis
A comparative market
analysis is an evaluation of
similar, recently sold
properties (comparables) in
the same area used to help
determine the market value
of a property. It helps sellers
set a listing price and buyers
make competitive offers.
conformity
The principle stating that the
value of a property is
maximized when it is in
harmony with its
surroundings, conforming to
the size, style, and quality of
neighboring properties.
contribution
The concept that the value of
a particular improvement or
feature of a property is
determined by its
contribution to the overall
value of the property, rather
than its cost.
cost
approach
The cost approach is a
method used by appraisers
to estimate the value of a
property by determining the
cost to replace or reproduce
it, adjusting for depreciation.
depreciation
Depreciation is the decrease
in value of a property over
time due to factors such as
wear and tear, age,
obsolescence, or changes in
market conditions.
Financial
Institutions
Reform,
Recovery, and
Enforcement
Act (FIRREA)
FIRREA is a federal law
enacted in 1989 in response
to the savings and loan crisis,
which established guidelines
and regulations for the
appraisal industry and
created the Appraisal
Subcommittee (ASC) to
oversee state appraisal
licensing and certification
programs
gross income
multiplier
The gross income multiplier
is similar to the gross rent
multiplier but is used to
estimate the value of
properties based on their
gross income from sources
other than rent, such as retail
sales or gross receipts
gross rent
multiplier
The gross rent multiplier is a
formula used to estimate the
value of a rental property
based on its gross rental
income. It is calculated by
dividing the property’s
purchase price by its gross
rental income
highest and
best use
The most profitable, feasible,
and legal use of a property
that maximizes its value and
generates the highest
returns, considering factors
such as zoning regulations,
market demand, and
physical characteristics.
income
capitalization
approach
The income capitalization
approach is a method used
by appraisers to estimate the
value of a property based on
its potential to generate
income, typically used for
income-producing properties
such as rental properties or
commercial buildings
market
value
The most probable price that
a property would sell for in an
open and competitive
market, assuming a willing
buyer and seller, with both
parties having reasonable
knowledge of relevant facts
and no undue pressure to
buy or sell
net operating
income
Net operating income is the
total income generated by a
property from rents or other
sources, minus operating
expenses such as
maintenance, utilities, and
property taxes
progression
The increase in the value of a
lesser-quality property due to
its association with higher-
quality neighboring
properties, leading to an
upward adjustment in its
value
reconciliation
The process of reviewing and
analyzing multiple valuation
methods or opinions to arrive
at a final estimate of a
property’s value, considering
their strengths, weaknesses,
and relevance.
regression
The decrease in the value of a
higher-quality property due to
its association with lower-
quality neighboring
properties, leading to a
downward adjustment in its
value
replacement
value
The cost of replacing a
property with a similar
property of equal utility and
functionality, accounting for
depreciation, obsolescence,
and market conditions.
reproduction
value
The cost of replicating a
property exactly as it
currently exists, using the
same materials, design, and
craftsmanship, regardless of
depreciation or market
conditions
subdivision
The division of a larger parcel
of land into smaller individual
lots or parcels, typically for
residential or commercial
development.
sales
comparison
approach
A method used to estimate
the value of a property by
comparing it to similar
properties that have recently
sold in the same area,
making adjustments for
differences in size, condition,
and amenities.
substitution
The principle stating that a
rational buyer will not pay
more for a property than the
cost of acquiring a
comparable substitute
property with similar utility
and benefits
transferability
The ease with which a
property or asset can be
bought, sold, or transferred
from one party to another
without significant
restrictions or complications.
Uniform
Standards of
Professional
Appraisal
Practice
(USPAP)
USPAP is a set of standards
and guidelines established by
the Appraisal Standards
Board (ASB) of The Appraisal
Foundation for the
performance and reporting of
real estate appraisals in the
United States. It ensures
consistency, competency,
and ethical conduct among
appraisers
The principal shortcoming of the gross rent multiplier approach to estimating value is that
numerous expenses are not taken into account
The steps in the income capitalization approach are:
estimate net income, and apply a capitalization rate to it
A person paid $150,000 for a house with the intention of renting it out for $1,000 per month. The economic principle that led the person to pay this price based on the property’s ability to generate this future income is known as
anticipation
A strength of the income capitalization approach is that it
uses a method that is also used by investors to determine how much they should pay for an investment property
What is the difference between the appraised value of a property and its mortgage value, if any?
The appraised value is an appraiser’s estimate; mortgage value is the value a lender imputes to the property as collateral
A home is located in a neighborhood where homeowners on the block have failed to maintain their properties. This is an example of
incurable economic obsolescence
The income capitalization approach to appraising value is most applicable for which of the following property types?
Apartment buildings
In the final step of an appraisal, the appraiser reconciles the value estimates derived by the various appraisal approaches by
weighing the applicability of the approaches and considering the quality of data supporting each approach
In the sales comparison approach, an adjustment is warranted if
the seller offers below-market seller financing
The principal factors for sales comparison and adjustment
sale, location, physical characteristics, and transaction characteristics
The steps in the market data approach are
select comparable properties, adjust the comparables, estimate the value
The principle underlying depreciation from physical deterioration is that
a property loses the same increment of value each year over the economic life of the property
Which of the following statements properly describes the methodology of the cost approach to appraisal?
Add the estimated land value and cost of improvements and subtract the accrued depreciation of the improvements
Net operating income is equal to
potential gross income minus vacancy and credit loss minus expenses
A certified appraiser is one who has received certification by
the state in which the appraiser operates
One of the strengths of the cost approach is that it
is very accurate for a property with new improvements that represent the highest and best use
A strength of the income capitalization approach is that it
uses a method that is also used by investors to determine how much they should pay for an investment property
If a client suspects improper bias in their appraisal, what action can be taken?
File a complaint with the appraisal complaint National hotline, HUD, CFPB, or local housing or civil rights authorities**
