Chapter 16 Flashcards by Kelley Trinidad

anticipation

expectation or belief that
future benefits or changes
will affect the value of a
property, influencing the
decisions of buyers, sellers,
and investors.

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appraisal

unbiased estimate or
opinion of the value of a
property, conducted by a
qualified appraiser using
established methods and
techniques.

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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.

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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.

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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

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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

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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.

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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.

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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.

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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.

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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.

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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

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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

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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

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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.

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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

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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

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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

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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**