Chapter 5: Multi-Family Property Valuation Flashcards
Which of the following statements regarding highest and best use is FALSE?
1.) For income-producing asset, the income approach is predominant, with the direct comparison approach a useful secondary approach.
2.) If the highest and best use for a property is individual condominium units, lenders will never require the valuation of the property as an un-subdivided investment property.
3.) If highest and best use is subdivision and sale of individual condominium units, the primary valuation technique is direct comparison, with the cost approach relied on for corroboration when valuing a new development.
4.) The outcome of an analysis of highest and best use for a multi-family property will drive the valuation method and relevant market information.
2.) If the highest and best use for a property is individual condominium units, lenders will never require the valuation of the property as an un-subdivided investment property.
When using the income approach of appraisal to value multi-family properties, one of the first steps is to estimate the total annual gross effective income by deducting allowances for vacancy and bad debt from the estimate of total market gross annual income potential of the subject property. What is the next step?
1.) Select an appropriate method of direct capitalization, e.g., gross income multiplier, capitalization rate
2.) Calculate the net operating income (NOI) of the subject property by deducting the annual operating expenses from the annual effective gross income.
3.) Convert the appropriate annual income estimate using the correct mathematical technique into an indication of value
4.) Research and analyze the subject’s actual annual expenses in combination with market norms to develop an annual normalized operating expense estimate for the subject
4.) Research and analyze the subject’s actual annual expenses in combination with market norms to develop an annual normalized operating expense estimate for the subject.
Which of the following statements regarding gross income multipliers is TRUE?
1.) Gross income multipliers are percentages, or decimal fractions, that are divided into the net operating income to indicate the capital value of real property
2.) Gross income multipliers can only be derived from, and applied to, the effective gross income associated with commercial property.
3.) The gross income multiplier is always the same as the gross rent multiplier.
4.) Effective gross income is most frequently used when calculating the gross income multiplier because it represents the income reasonably expected from the property given market levels of rent and vacancy.
4.) Effective gross income is most frequently used when calculating the gross income multiplier because it represents the income reasonably expected from the property given market levels of rent and vacancy.
Which of the following is NOT a weakness of using the gross income multiplier (GIM) to value multi-family properties?
1.) It will only be reasonable to apply a GIM when the ratio of operating expenses (borne by the landlord) to effective gross income for the subject property is exactly the same as the ratio for the comparable properties from which the multiplier is obtained.
2.) It is much more difficult to adjust for slight variations in risk between properties since gross income multipliers do not reflect investment risks.
3.) Investors are indifferent as to whether to use capitalization rates or gross income multipliers, as these result in the same rate of return and payback period.
4.) Attention must be paid to the use of current contractual rents versus market rents in calculating GIM. The GIM assumes that rental income is stable and perpetual, so rent increases over time may need to be considered.
3.) Investors are indifferent as to whether to use capitalization rates or gross income multipliers, as these result in the same rate of return and payback period.
Which of the following appraiser tips regarding multi-family valuation is FALSE?
1.) The most reliable comparables are always market sales
2.) When using cap rates or multipliers, ensure that similar buildings with similar expense ratios are used or it can skew the end results
3.) Reported income from the property is a reliable source of data
4.) Income measures that account day-to-day expenses necessary to operate are generally preferred - cap rates are more informative that multipliers
3.) Reported income from the property is a reliable source of data
Which of the following statements regarding the direct comparison and cost approaches for multi-family residential property appraisal is FALSE?
1.) Buyers in the single-family residential marketplace or for strata warehouses and retail space function almost exclusively using the direct comparison approach, where recent prices paid in the market for comparable properties provide the best indication of what the subject property will most probably sell for.
2.) When using the direct comparison approach, the final step is to adjust for the property specific items such as structural repair, extraordinary vacancy levels, or below market rent structure
3.) A cost-based analysis important to test marketability of proposed construction
4.) The cost approach can be valid as a test of market value when reliable estimates of land value and construction costs exist and sufficient mark evidence exists to permit a reliable estimate to depreciation
3.) A cost-based analysis is important to test marketability of proposed construction
-cost-based tests feasibility not marketability
Richard recently purchased a multi-family property for $4.5 million. If Richard valued the property using a gross income multiplier, and the effective gross income of the property was $500,000 per year, what was the effective gross income multiplier used by Richard?
1.) 10
2.) 9
3.) 7.5
4.) 11
2.) 9
When stabilizing the income for a rental apartment building, it is critical to understand what is included in the tenant’s rent and the terms of the lease. The tenant’s obligations under the lease typically include ____ and the landlord’s obligations under the lease typically include _____.
1.) interior cleaning; upkeep of grounds
2.) mechanical and structural repairs; interior cleaning
3.) real estate taxes, tenant insurance
4.) building/property insurance; exterior cleaning
1.) interior cleaning; upkeep of grounds
Suppose Craig is a CRA who has been asked to appraise a 48-unit rental apartment building in Prince George, BC. To accept the assignment, what step must Craig take?
1.) Nothing; Craig can accept the assignment as is
2.) Have the client sign a certificate waiting Craig of liability
3.) Request approval from the Real Estate Council of British Columbia
4.) Find an AACI to oversee and co-sign the report
4.) Find an AACI to oversee and co-sign the report
You have been tasked with appraising the value of a 24-unit apartment building in Surrey, BC. The subject property’s normalized net operating income for the past year was $243,560. By looking at comparables, you have estimated that capitalization rates in the area for similar properties typically range from 6.5% to 6.7%, so you have decided to apply a cap rate of 6.6% to the subject property. Given this information, what is the subject property’s value?
1.) $2,875,000
2.) $3,690,300
3.) $4,104,600
4.) $4,245,500
2.) $3,690,300
Jorge has valued a multi-family apartment building using both the direct comparison and income approaches of appraisal. however, he notes that the values provided by each approach differ significantly. Given that Jorge used the property’s reported net operating income, what can he do to reconcile the two values?
1.) Check the reasonableness of the reported effective gross income
2.) Check the operating expense ratio for the subject and comparables
3.) Review operating expenses with respect to trends, market conditions, consistency and comparability to other similar properties
4.) All of the above
4.) All of the above
Which of the statements regarding operating expenses for multi-family property valuation is FALSE?
1.) if utility expenses have been quite consistent over the years, a simple trending or extrapolation can be used to estimate future amounts.
2.) Some operating expenses are generally fixed in nature and may not vary with income levels
3.) If there is a huge spike in repairs and maintenance expenses in a single year, it may be due to one-ff capital item, like a roof, or boiler, or a systematic window replacement program
4.) It is acceptable for a property owner to omit professional fees as an expense item if the owner includes the rental building in with other business expenses, even if this is a typical line item on financial reports for this type of rental building and included for comparable properties.
4.) FALSE - It is acceptable for a property owner to omit professional fees as an expense item if the owner includes a rental building in with other business expenses, even if this is a typical line item o financial reports for this type of rental building and included for comparable properties
Shannon is assisting you in appraising a small 15-unit residential apartment property. The operating expense information for the subject property has not been presented consistently from year to year, so there are gaps in the financials. Which of the following statements is TRUE?
1.) Gross income multipliers would be more useful in this situation than capitalization rates
2.) Capitalization rates would be more useful in this situation than gross income multipliers
3.) Neither gross income multipliers nor capitalization rates are useful in this situation
4.) Gross income multipliers and capitalization rates are both equally useful in this situation
1.) Gross income multipliers would be more useful in this situation than capitalization rates
Just prior to the sale of a fourplex property which was appraised using the income approach, the building requires an immediate exterior repair expense of $35,000. This is similar to an “expenditure made immediately after the purchase.” However, in this instance, as the work is not yet done, it must be deducted as a cost to cure. How should this one-time expense be treated?
1.) It must be added to operating expenses
2.) It must be deducted from the net operating income
3.) It must be deducted from the value indicated by the income approach
4.) It can be ignored as it is a one-time expense
3.) It must be deducted from te value indicatedby the income approach
Which of the following is NOT a quantitative adjustment technique used in the appraisal of multi-family apartment projects?
1.) Paired data
2.) Group data
3.) Ranking analysis
4.) Cost analysis
3.) Ranking analysis
