Chapter 17: Real Property Valuation

Question 1

age-life method

Answer 1

A method of depreciation computed by dividing the replacement cost of a property by the number of years of remaining useful life; also called the straight-line method

Question 2

appraisal

Answer 2

An estimate of the quantity, quality, or value of something. The process through which conclusions of property value are obtained; also refers to the report that sets forth the process of estimation and conclusion of value

Question 3

arm’s length transaction

Answer 3

A transaction where the parties are dealing from equal bargaining positions

Question 4

broker price opinion (BPO)

Answer 4

A comparison of the prices of recently sold homes that are similar to a listing seller’s home in terms of location, style, and amenities; an estimate of market value; also called a comparative market analysis (CMA)

Question 5

capitalization rate

Answer 5

The rate of return a property will produce on the owner’s investment

Question 6

comparable (comp)

Answer 6

Property used in an appraisal report that is substantially equivalent to the subject property

Question 7

comparative market analysis (CMA)

Answer 7

A comparison of the prices of recently sold homes that are similar to a listing seller’s home in terms of location, style, and amenities; an estimate of market value; also called a broker price opinion (BPO)

Question 8

cost approach

Answer 8

The process of estimating the value of a property by adding the appraiser’s estimate of the reproduction or replacement cost of the building, less depreciation, to the estimated land value

Question 9

depreciation

Answer 9

(1) In appraisal, a loss of value in property due to any cause, including physical deterioration, functional obsolescence, and external obsolescence.
(2) In real estate investment, an expense deduction for tax purposes taken over the period of ownership of income property

Question 10

economic life

Answer 10

The number of years during which an improvement will add value to the land

Question 11

economic obsolescence

Answer 11

The loss of value due to factors that are not on the property, in the property, or even within property lines

Question 12

effective age

Answer 12

The apparent age of a building based on observed condition rather than chronological age

Question 13

functional obsolescence

Answer 13

A loss in value to an improvement to real estate arising from functional problems, often caused by age or poor design

Question 14

gross rent multiplier (GRM)

Answer 14

The figure used as a multiplier of the gross MONTHLY income of a property to produce an estimate of the property’s value

Question 15

highest and best use

Answer 15

The possible use of a property that would produce the greatest net income and thereby develop the highest value

Question 16

income capitalization approach

Answer 16

The process of estimating the value of an income-producing property through capitalization of the annual net income expected to be produced by the property during its remaining useful life

Question 17

net operating income (NOI)

Answer 17

The income projected for an income-producing property after deducting losses for vacancy and collection and operating expenses

Question 18

physical deterioration

Answer 18

A reduction in a property’s value resulting from a decline in physical condition; can be caused by action of the elements or by ordinary wear and tear

Question 19

quantity-survey method

Answer 19

The appraisal method of estimating building costs by calculating the cost of all the physical components in the improvements, adding the cost to assemble them, and then including the indirect costs associated with such construction

Question 20

reconciliation

Answer 20

The final step in the appraisal process, in which the appraiser combines the estimates of value received from the sales comparison, cost, and income capitalization approaches to arrive at a final estimate of market value for the subject property

Question 21

replacement cost

Answer 21

The construction cost at current prices of a property that is not necessarily an exact duplicate of the subject property but serves the same purpose or function as the original

Question 22

reproduction cost

Answer 22

The construction cost at current prices of an exact duplicate of the subject property

Question 23

sales comparison approach

Answer 23

The process of estimating the value of a property by examining and comparing actual sales of comparable properties

Question 24

square-foot method

Answer 24

The appraisal method of estimating building costs by multiplying the number of square feet in the improvements being appraised by the cost per square foot for recently constructed similar improvements

Question 25

straight-line method

Answer 25

A method of calculating depreciation for tax purposes, computed by dividing the adjusted basis of a property by the estimated number of years of remaining useful life

Question 26

substitution

Answer 26

An appraisal principle that states that the maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property, assuming that no costly delay is encountered in making the substitution

Question 27

unit-in-place method

Answer 27

The appraisal method of estimating building costs by calculating the costs of all the physical components in the structure, with the cost of each item including its proper installation, connection, et cetera; also called the segregated cost method

Question 28

value

Answer 28

The power of a good or service to command other goods in exchange for the present worth of future rights to its income or amenities

Question 29

gross income multiplier (GIM)

Answer 29

A figure used as a multiplier of the gross ANNUAL income of a property to produce an estimate of the property’s value