Chapter 3: Property Value and Appraisal

Question 1

Market Value

Answer 1

The most probable price of a property

Question 2

4 Characteristics of Property Value

Answer 2

DUST
Demand
Utility
Scarcity
Transferability

Question 3

Appraiser Principle 1/10: Highest and Best Use

Answer 3

The legal use that gives the greatest return in money and/or amenities. Can be considered the most important detail by an appraiser.

Question 4

Appraiser Principle 2/10: Principle of Substitution

Answer 4

Sets an upper limit on price. Max. value of a property is
set by the cost of acquiring a similar substitute property.

An overpriced property will not sell.

Question 5

Appraiser Principle 3/10: Principle of Conformity

Answer 5

Max. value is found when properties are the same or have a reasonable degree of similarity. (Price range, amenities, size, etc.)

Question 6

Appraiser Principle 4/10: Principle of Increasing and Decreasing Returns

Answer 6

Invest in improving property whenever money invested will increase the value and stop when it doesn’t.

The result of over-improving a property is also referred to as the Law of Diminishing Returns.

Question 7

Appraiser Principle 5/10: Principle of Contribution

Answer 7

The value of a part is determined by its contribution to the
total value of the property rather than by its cost.

(Pool is 50k, but only raises the value by 20k)

Question 8

Appraiser Principle 6/10: The Principle of Regression

Answer 8

the presence of lower-valued or declining-valued properties

in the neighborhood leads to a decline in the value of your property.

Question 9

Appraiser Principle 7/10: The Principle of Progression

Answer 9

The presence of higher-valued properties will increase the value of your property

Question 10

Appraiser Principle 8/10: The Principle of Competition

Answer 10

An increase in competition will result in decreased profits
for current providers. Competition lowers prices.

(2 restaurants on same block)

Question 11

Appraiser Principle 9/10: The Principle of Anticipation

Answer 11

Purchase price is affected by the expectation of future

appeal and benefits

Question 12

Appraiser Principle 10/10: The Principle of Balance

Answer 12

Mixed land use should result in max. value for all properties involved (master-planned communities demonstrate this principle).

Question 13

Steps of the Appraisal Process

Answer 13

1. PURPOSE: State the purpose of the appraisal.
2. INFORMATION: Collect and verify information about the property.
3. ESTIMATED VALUE: Estimate value using as many approaches as needed to get the best result, but at least 3
4. RECONCILE ESTIMATES: Reconcile the estimates by determining weighted averages. This step is necessary because
   the third step will result in up to three different values. Determines exact number.
5. REPORT: Prepare the report. It may be oral, in a letter, on a form, or a narrative report

Question 14

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)

Answer 14

Passed to regulate the appraisal industry nationwide. This law requires the use of a state-licensed or state-certified appraiser to perform any appraisal used in connection with a federally related transaction of property
valued above the statutory limit.

Question 15

Uniform Standards of Professional Appraisal Practice (USPAP)

Answer 15

Outlines how appraisals are developed and communicated. All appraisers must adhere

Question 16

3 Basic Approaches to Appraisal

Answer 16

1. Market Data Approach
2. Cost Approach
3. Income Approach

Question 17

Appraisals: Market Data Approach

Answer 17

It involves comparisons with known sales in the same area. + -

Appraiser adds (+) to the value of comparables when the subject property has more amenities and subtracts (-) from the comparables when the subject property has less

Question 18

Appraisals: Income Approach/Capitalization Method

Answer 18

Used for income-producing properties.

Net Annual Income, which may also be called the Net Operating Income or NOI, is used to determine value

Question 19

Appraisals: Cost Approach

Answer 19

Used for unique properties - churches, govt. buildings

Also used when there are no comparables for a particular property

Question 20

Cost Approach Equation to Determine Value

Answer 20

Land Value + Building Reproduction Cost - Depreciation = Value

OR

Land Value + Replacement Cost - Depreciation = Value

Question 21

Reproduction Cost vs Replacement Cost

Answer 21

Reproduction cost would be the cost to exactly duplicate a building.

Replacement cost is the cost to
build a building of similar size and usefulness using today’s methods and materials.

Question 22

What are the 3 types of depreciation in the cost approach?

Answer 22

Physical Deterioration
Functional Obsolescence
Economic Obsolescence

Question 23

Physical Deterioration

Answer 23

Ordinary wear and tear. It is curable. LEAST IMPACT on the

appraisal - all buildings have it (chipped paint, worn flooring).

Question 24

Functional Obsolescence

Answer 24

often or mostly curable (inferior materials to cut costs, curb appeal, not enough baths/bedrooms, an unpopular
floorplan, property that lacks updating for modern technology).

Question 25

Economic/External/Environmental Obsolescence

Answer 25

Loss of value due to outside factors. Is incurable (zoning, air pollution, noise, traffic, jobs, etc.)

Question 26

Generally, if a property has rent, which appraisal approach would you use?

Answer 26

Income Approach

Question 27

Potential Gross Income

Answer 27

Total Rental Income at 100% Occupancy

Question 28

Actual/Effective Gross Income

Answer 28

actual rent collected (-) vacancies/ uncollected rent

Question 29

Net Rent/Net Operating Income

Answer 29

Actual Gross (-) Expenses

Question 30

What is used to calculate the Gross Rent Multiplier(GRM) for a neighborhood?

Answer 30

Avg. Price ( / ) Avg. Monthly Rent = GRM

Question 31

How would you use the GRM to indicate the value for a property?

Answer 31

(GRM x Rent = Price)

Question 32

Comparative/Competitive Market Analysis (CMA)

Answer 32

compares a subject property to current listings, recent sales,
and even expired listings of unsold properties

Question 33

Assessed Value

Answer 33

the value of your property for tax purposes

Question 34

How do you calculate yearly taxes?

Answer 34

The tax rate x the assessed value

= yearly taxes

Question 35

Tax rates are often expressed as dollars per what of valuation?

Answer 35

Hundred.

In that case, a tax rate of $2.50
means the property owner will pay $2.50 of tax for every $100 of taxable value

Question 36

What is a mill rate?

Answer 36

A tax rate per thousand.

Therefore, a rate of 25 mills means the property owner will pay $25 of tax for every $1000 of taxable value

Question 37

Special Assessment Tax

Answer 37

charged to only those property

owners in a neighborhood who benefit from a local government improvement such as curbs or sidewalks in a neighborhood

Question 38

Municipal/Property Improvement District

Answer 38

The property owner will receive a tax bill, similar to a special assessment until the improvement
is paid for or the improvement district designation is removed. Can be temporary or permanent.