Chapter 16 - Direct Comparative And Cost Approaches Of Appraisal

Question 1

What is the objection to using reproduction cost?

The objection to using reproduction cost is that it may be impossible to provide an identical reproduction of an older building.

Often the material and equipment used years ago are not available today.

If they are available, the specialized labour required may no longer exist, and with changes in construction techniques, designs and tastes also change.

Therefore, an exact replica might cost more to construct than its contemporary equivalent, but worth less when finished.

Question 2

In appraisal, two properties are similar if:

the actual differences between the properties will not have a material effect on their selling price.

Question 3

Corner lots have greater value than inside lots.

True or false

True

• preferred because they may offer extra light and air
• corner lot may have lack of privacy and quietness
• maybe a narrower lot.
• inside lots maybe wider

The appraiser maybe guided by their knowledge of an imperfect market since there is no definitive rule to follow

Question 4

What is an incurable depreciation?

Is depreciation caused by wear and tear (PHYSICAL) or outmoded (FUNCTIONAL) design which can only be corrected at considerable expense and, in fact, correction may be cost prohibitive e.g. narrow hallways.

Question 5

In appraisal, recent is defined as:

that time period just prior to date of valuation over which the demand and supply conditions have remained relatively stable

Question 6

REPRODUCTION COST = REPLICA

REPLACEMENT COST = MODERN EQUIVALENT

REPRODUCTION COST is the cost of providing an exact REPLICA of the subject property, while the REPLACEMENT COST is the cost of a building a MODERN EQUIVALENT of the subject property

Question 7

We subtract from the sale price of the comparable property is superior to the subject property

IASS

Question 8

Outmoded design that is economically feasible to correct is an example of CURABLE DEPRECIATION.

Question 9

The actual amount of money spent at the time the asset was PURCHASED or the improvements were BUILT is known as the HISTORIC COST.

Question 10

IASS Formula for comparative Appraisal

IA - Inferior ADD (Comparable Property)

SS - Superior Subtract

Question 11

If comparable has something more superior to offer than you:

Subtract from the Sale Price of that property. Has one extra Bathroom value is 4,000

Comparable Sold for $500,000. Has one more bedroom worth 5,000 
Comp Price                500,000
Less: 1 extra bed.        -5000
Add: 1 extra bath.       +4,000
Subject Comp Value. $499,000

Question 12

Cost Method of Appraisal. Think of buildings like Least used Method
Unusual or Unique Properties like churches, tree house, mill

Infrequency of Used. Least used method
Because the assumption that cost equals value is not necessarily correct

Question 13

Formula for Cost Method

Cost of Building less depreciation. (Sq ft times cost per sq ft less Depreciation)

Plus: Land (Site) Value
Equals Market Value

Question 14

Physical Depreciation

Curable — can be fixed

Incurable — cannot be fixed

Curable (Can be Fixed) ex: Paint, Wallpaper

Incurable (Cannot Fix) ex: foundation, structural problems. Floor plan.

Question 15

Functional Depreciation (Outdated)

Curable (Can be Fixed) ex: Can be replaced Cost Effectively - eg bathroom Fixtures.

Incurable (Can not Fix) ex: like the FLOOR PLAN or narrow hallways.

Question 16

The loss in value caused by outmoded (old design brass taps )or inadequate design in building is

1/ salvage value
2/ physical depreciation
3/ functional depreciation
4/ capital value allowance

Answer:
2/ Functionall depreciation

Question 17

Repacement Cost

Historic Cost - cost incurred when the building was erected

Current Cost - cost to construct building date of appraisal

Reproduction Cost - Exact Replica ***on exam

Replacement Cost - modern Equivalent *** on exam

Historic Cost - cost incurred when the building was erected

Question 18

Comparative Method

Based on the theory of Principle of substitution; grid method

The market value of subject property is equal to prices recently paid for similar properties.
Need decent comparable sales.
— arms length
— recent no defining number. As recent as possible. Can make market adjustments if no recent sales
— need similar but not necessarily identical.

IASS

If Comparable is INFERIOR then you(ADD) value

If the Comparable is SUPERIOR then you (SUBTRACT) value.

Question 19

Comparable Method “Recent “ means

To the period immediately preceding the appraisal date during which values have remained stable.

Demand and Supply remained stable

Market Comparison Process

1. Examine recent sales
2. Choose good comparable
3. Make adjustments for differences (IASS)
4. Reconcile values.

Question 20

Comparable Method - What you use to caculate SUBJECT property

Adjusted Values 
1/ 100000
2/ 90000
3/ 95000
4/ 100000

Total 485,000 / 4 = 97,000. If 100,000 was used as the appraised value of SUBJECT property then that would be ok.

Question 21

In comparable method what is most inportant re Subject Building

Are SIMILAR to factors judged important by BUYERS and SELLERS.

Question 22

Curable functional depreciation

An outdated/outmoded feature that can be correctly economically, such as outdated fixtures.

Question 23

Patent Defect

An outdated/outmoded feature that can be correctly economically, such as outdated fixtures.

P= PRESENT (you can see defect visibly) Is visible. You can see the depreciation.

Question 24

From front door through hallway you can see the bathroom

Is design deficiency todays market
Not an example physical curable

Question 25

Income Method

Used for income properties. Life of building is based on economic factors not depreciation. How much can i earn. The % Yield.

Question 26

Investment (?Income) Method is same as

Income method and used for properties that produce rental income

Question 27

Income method Yield Formula

Yield = Net Operating Income (NOI)
—————————————
Sale Price

Question 28

Income Method - Sale Price / Market Value Formula (on exam)

Sale Price =  Net Operating Income (NOI)
                      —————————————
                      Capitalization Yield (CAP Rate)

Average of multiple properties
Add the CAP rate of each poperty and divide by nimber of properties

Question 29

Net Operating Income Formula

Gross Potential Revenue
Less: Vaxancy and Bad Debt
= Gross Realized Revenue
Less : Expenses
= Net Operating Income (NOI)

Question 30

Income Method - What to do with Immediate Repairs given in the fact pattern

1/ Figure out NOI

2/ apply CAP rate to find Market Value (MV = Sales Price) of property

3/ deduct immediate repair costs from MV.

Question 31

Gross Realized Income

Vacancy and Bad Debt Expenses allready deducted

Question 32

Yield rate multiple Comparable

Average of both properties

Question 33

Expenses deducted from Gross Realized Revenue

Usually only property taxes. Do not deduct income tax or depreciation

Question 34

Which of the following is estimated using actual current rents paid on similar properties based on 100% occupancy?

1/ Gross Potential Revenue 100% Revenue since no deductions at this point.

2/Gross Realized Revenue
3/ Effective Gross Income
4/ Net Operating Income

Question 35

Cost Method of Appraisal Formula

Cost of Building (sqft x cost per sqft. 
- Depreciation 
\+ Land Value (site value)
—-——————————
Equals: Market Value

Functional Depreciation is things you use. Outmoded Outdated. Could be Design.

Physical is walls, structural

Question 36

PHYSICAL DEPRECIATION is due to WEAR AND TEAR
- there is an accumulated loss in value

CURABLE DEPRECIATION

Items that CAN be repaired cost effectively, such as:
— LOOSE BOARDS
— PAINTING WALLS
— BROKEN WINDOW

Question 37

PHYSICAL DEPRECIATION is due to WEAR AND TEAR
- there is an accumulated loss in value

INCURABLE DEPRECIATION

Items that CANNOT be repaired cost effectively, such as:
— FOUNDATIONS
— MAJOR STRUCTURAL PROBLEMS
— SLOPING FLOOR

Question 38

FUNCTIONAL DEPRECIATION is loss in value to OUTMODED OR INADEQUATE DESIGN

FUNCTIONAL CURABLE DEPRECIATION

Items that CAN be replaced cost effectively, such as:
— FIXTURES AND FITTINGS like Brass Fittings or Old Chandeliers, lighting fixtures, wood Fireplace

Question 39

FUNCTIONAL DEPRECIATION is loss in value to OUTMODED OR INADEQUATE DESIGN

*FUNCTIONAL INCURABLE DEPRECIATION

Changes REQUIRED TO MODERNIZE IS NOT COST EFFECTIVE such as:
— ARCHITECTURAL STYLE OF BUILDING like old churches
—Floor Plans
— Narrow Hallways

Question 40

In using the COST Method of Appraisal, the MAJOR difficulty is experienced in calculating:

Incurable - Physical Depreciation like Structural Foundation problem