Chapter 3 - Property Value and Appraisal

Question 1

There are four basic characteristics of value: (DUST)

Answer 1

Demand, utility, scarcity, transferability

Question 2

Demand

Answer 2

there must be a demand for the item and the purchasing power to acquire it.

Question 3

Utility

Answer 3

the item must be needed or wanted.

Question 4

Scarcity

Answer 4

there must be a limited supply.

Question 5

Transferability

Answer 5

the item must be able to be sold – ownership rights must be transferable.

Question 6

Appraisers use principles of value to help them arrive at their final opinion. These principles of value
include:

Answer 6

Highest and Best Use, Principle of Substitution, Principle of Conformity, Principle of Increasing and Decreasing Returns, Principle of Contribution, The Principle of Regression, The Principle of Competition, The Principle of Change, The Principle of Anticipation, the Principle of Balance

Question 7

Highest and Best Use

Answer 7

• the legal use that gives the greatest return in money and/or amenities. Highest and best use can be considered the most important detail by an appraiser.

Question 8

Principle of Substitution

Answer 8

sets an upper limit on price. Maximum value of a property is
set by the cost of acquiring a similar substitute property. This principle is used to demonstrate the need to price correctly. An overpriced property will not sell

Question 9

Principle of Conformity

Answer 9

states that maximum value is found when properties are the

same or have a reasonable degree of similarity. (Price range, amenities, size, etc.)

Question 10

Principle of Increasing and Decreasing Returns

Answer 10

invest in property whenever each
dollar invested will return a dollar or more of increased value and stop when each dollar
invested returns less than a dollar in value. The result of over-improving a property is also
referred to as the Law of Diminishing Returns.

Question 11

Principle of Contribution

Answer 11

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

Question 12

The Principle of Regression

Answer 12

the presence of lower-valued or declining-valued properties
in the neighborhood leads to a decline in the value of your property. Conversely, the presence of higher-valued properties will increase the value of your property, and this is called
the Principle of Progression.

Question 13

The Principle of Competition

Answer 13

an increase in competition will result in decreased profits
for current providers. Competition lowers prices. Success leads to competition. For example, a very profitable restaurant will usually find a competitor opening

Question 14

The Principle of Change

Answer 14

change is constant and is reflected in values. Appraisers must
make adjustments for changes in market conditions and for time. An appraisal is only considered to be good for six months

Question 15

The Principle of Anticipation

Answer 15

the purchase price is affected by future appeal and benefits

Question 16

The Principle of Balance

Answer 16

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

Question 17

APPRAISAL PROCESS

Answer 17

1. State the purpose of the appraisal.
2. Collect and verify information about the property
3. Estimate value using all three approaches, or as many approaches as needed to get the best
   result.
4. Reconcile the estimates by determining weighted averages. This step is necessary because
   the third step will result in up to three different values. Reconciliation completes the process of determining an exact number rather than a range of value.
5. Prepare the report. It may be oral, in a letter, on a form, or a narrative report.

Question 18

METHODS OF ESTIMATING VALUE AND BROKER PRICE OPINIONS (BPO)

Answer 18

There are three basic approaches to appraisal: market data or sales comparison, income or capitalization method, and replacement or reproduction cost approach

Question 19

market data approach

Answer 19

used primarily in residential appraisals. It involves comparisons with known sales in the same area. An appraiser should have 3-5 sales no more than
six months old. In using this approach, the appraiser will add to the value of comparable
when the subject property has more amenities and deduct from the comparable when the
subject property has less.

Example: An appraiser has been asked to determine the market value of a residential property. The 
house has 3 bedrooms and 2-1/2 baths. The first comparable has 4 bedrooms and 2-1/2 baths and 
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Chapter 3
Property
Value
and Appraisal
sold for $290,000. The second comparable has 3 bedrooms and 2 baths and sold for $275,000. The 
appraiser has determined that an extra bedroom is valued at $10,000 and a half bath is valued at 
$5,000. 
Subject
3 BR
2 ½ Bath
Comparable 1 -
4 BR
2 ½ Bath
 $290,000
- $10,000
no change
$280,000
Comparable 2 -
3 BR
2 Bath
$275,000
no change
\+ $5,000
$280,000
The subject is appraised at $280,000 based on the adjusted values of the comparables.
(NOTE: If the adjusted values of all comparables are not the same, an average of the adjusted values 
will provide the correct answer)

Question 20

The cost approach

Answer 20

The cost approach is used for unique properties, such as churches or government buildings.
It is also used when there are no comparables for a particular property.
Land Value + Building Reproduction Cost - Depreciation = Value
- OR –
Land Value + Replacement Cost - Depreciation = Value
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.
The appraiser considers three types of depreciation in the cost approach - physical deterioration,
functional obsolescence, and economic or external obsolescence.
• Physical deterioration is ordinary wear and tear. It is curable. This has the least impact on the
appraisal because all buildings have it (chipped paint, worn flooring).
• Functional obsolescence is brought about by factors in the property. It is 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).
• Economic obsolescence is a loss of value due to outside factors. This is also called external
obsolescence and is incurable (zoning, air pollution, noise, traffic, jobs, etc.) It is also called
environmental obsolescence.

Question 21

The income approach

Answer 21

or capitalization method is used for income-producing properties.
The highest weighted criteria for an appraiser using this approach is the Net Annual Income, which may also be called the Net Operating Income or NOI.
Generally, if a property has rent, then use the income approach.
It involves a math formula using the “T” for the calculations.
Net annual income = capitalization rate (rate of return) × market value. A simple way to remember
this is IRV. Income = rate x value.
Net Annual Income
Cap rate/rate of return Market Value
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Chapter 3
Property
Value
and Appraisal
The potential gross income for an investment property is the total rental income at 100% occupancy.
The actual gross income or effective gross income is the actual rent collected after subtracting for
vacancies or uncollected rent.
The net rent or net operating income is the actual gross less expenses.

Question 22

A Comparative Market Analysis (CMA)

Answer 22

) Is a tool used by licensees to help sellers determine a realistic price for their property. A CMA compares a subject property to current listings, recent sales,
and even expired listings of unsold properties. The information from expired listings is the least
important part of the CMA. The result of a CMA is a range of value for a property rather than an
exact price. It is not an appraisal. This is also called a competitive market analysis.

Question 23

municipal improvement district

Answer 23

also called a property improvement district, 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. In other words, this can be temporary
or permanent.