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UBC Real Estate Trading Services Licensing Course > Chapter 6.2 + 6.3: Comparative & Cost Methods > Flashcards

Chapter 6.2 + 6.3: Comparative & Cost Methods Flashcards

1
Q

Reminder, the comparative method is for what types of property

A

Residential (houses and condos)

Empty lots

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2
Q

The comparative method is based on the theory ________________, meaning what?

A

Substation

Meaning similar properties which have recently sold are comparable

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3
Q

The ______________ method relied on market evidence from similar properties

A

Comparative method

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4
Q

The comparative method reflect market behaviour and requires a ________________________ from the appraiser

A

A minimum of subjective opinion

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5
Q

With the comparative method, buyers are _______________ about current sale transactions

A

Well informed!

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6
Q

“Similar” means what?

A

With respect to factors judged important by buyers and sellers

Such as pools, Suites , etc

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7
Q

Recent means what?

A

When the market conditions remain stable

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8
Q

Arm’s length transaction means what?

A

No previous relationship from the parties

New strangers 

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9
Q

Consumer price index (CPI)

Shelter price index (SPI)

A

Irrelevant to the appraisal of one particular property since changes in the value of consumer products are not necessarily the same as changes in the value of property

In short: under no circumstances can be used to adjust the sales price

Irrelevant to appraisal 

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10
Q

What is a rating grid

A

The subject property is the basis and all comparables must be adjusted to it

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11
Q

Adjustment for value has 3 types of properties, what are the names for these?

A

Inferior property
Subject property
Superior property

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12
Q

IASS formula

A

Inferior add

Superior subtract

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13
Q

To use the IASS formula, your subject property has an additional bedroom and bathroom then the comparable, therefore the comparable property is __________ and you will need to ________

A

Inferior

Add

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14
Q

The cost method typically looks at ________ / _________ properties

A

Unusual / unique properties

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15
Q

When using the cost method the homes will not appear on the ______

A

MLS - multiple listing service

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16
Q

To use the cost method you have to ensure the property does not produce a _____________

A

Income

Not an investment property

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17
Q

What are the types of properties you find using the cost method

A

Temples, churches, pulp mills, windmills, concrete plant, one-of-a-kind houses

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18
Q

The infrequency of use with the cost method assumes what

A

The assumption that cost equals value is not necessarily correct

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19
Q

You should never use the cost method for __________

A

Land!

Use comparable method

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20
Q

__________ does not depreciate

A

LAND

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21
Q

To value a commercial property, the appraiser will look at:

A
  • current leases
  • registered mortgages
  • physical characteristics of the building

But not the expected / forecasted revenue predicted by buyer

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22
Q

If a new building represents the highest and best use, then what?

A

Cost = value

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23
Q

If the cost of constructing a building is a _________ than what it’ll be worth on completion new development will ________ until building values rise 

A

greater

Stop

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24
Q

If it costs ______ to construct a building than what a building will be worth on completion, there will be an ________________________

A

Less

There will be an increase in new development

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25
Q

Square footage x price =

A

Cost of building

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26
Q

Formula!

Market Value =

A

Cost of improvements (building) - depreciation + land value = market value

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27
Q

Historic cost

A

The cost incurred when the building was erected

Wayyy back in the day, we usually never care for this 

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28
Q

Current cost

A

Cost to construct the building as of the date of appraisal

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29
Q

Reproduction cost

A

To build an exact replica of the building

We usually never use this

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30
Q

Replacement cost

A

Modern equivalent today

Not exact replica if not possible

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31
Q

Depreciation type: age-life method 

A

Relationship between a building‘s age and it’s expected life

32
Q

Formula!!

% depreciation =

A

Effective age / economic life

33
Q

Example of a percentage of depreciation question

Replacement cost = 500,000
Actual age of 15 years
Economic age of 10 years
Economic life of 50 years 

A

% of depreciation = effective age / economic life

So 10/50 = 0.2 or 20% (20% for 10 years)

Age-life depreciation: $500,000 x 0.20 = $100,000

Depreciated replacement cost: $500,000-$100,000 = $400,000

34
Q

The four components of the breakdown method, types of depreciation

A

Physical
Functional
Curable
Incurable

35
Q

Breakdown Method: physical

A

Loss of market value caused by physical wear and tear

36
Q

Breakdown Method: functional

A

Loss in value caused by outmoted or inadequate design

37
Q

Breakdown Method: curable

A

Can be corrected economically

38
Q

Breakdown Method: incurable

A

Cannot fix

39
Q

Breakdown Method: Physical curable

A

Can be fixed

Example: paint, wallpaper 

40
Q

Breakdown Method: physical incurable

A

Cannot be fixed economically

Such as foundation / structural problems 

41
Q

Breakdown Method: functional curable

A

Can be replaced cost effectively

Such as bathroom Fixtures 

42
Q

Breakdown Method: functional incurable

A

Cannot be fixed economically

Examples: floor plans, narrow hallways

43
Q

The income method is also known as

A

Investment method

44
Q

The income method is used for what kind of properties

A

Income producing properties such as rental and commercial real estate

Such as warehouses, leasehold interest, apartment buildings

Never single family residence 

45
Q

Under the income method… The life of the building is based on __________________ so no depreciation is used

A

economic factors

46
Q

Formula

Yield =

A

Net operating income / sale price

47
Q

Yield is also known as

A

Rate of return

48
Q

Formula

Sale price =

A

Net operating income (NOI) / capitalization yield

Notice how NOI is always first

49
Q

Capitalization yield = 

A

(1st % + 2nd %) / 2

Just a simple average of the numbers

50
Q

__________________: does not consider depreciation, income tax, or debt service

A

Net operating income

51
Q

_________________: an average yield of all buildings being compared

A

Capitalization yield

52
Q

Formula

Gross potential revenue =

A

GPR - vacancy and bad debt
=Gross realized revenue
GRR - expenses
= net operating income

53
Q

To break it down

Gross potential

A

Gross potential - vacancy and bad debts - expenses = net operating income (NOI)

54
Q

To break it down

Gross realized

A

Gross realized - expenses = net operating income (NOI)

55
Q

______________ must be paid regardless of use

A

Fixed expenses

56
Q

Examples of fixed expenses

A
  • real property taxes (not income taxes)
  • insurance policies

Always gotta pay these

57
Q

There are plenty of variable expenses, what are some of them?

A
  • management
  • utilities (electricity, gas, water, sewer)
  • maintenance and repair
  • cleaning / janitorial
  • grounds and parking area maintenance
  • wages
  • garbage removal
  • decorating
  • advertising
  • replacement reserves

But, no interest on mortgage payments! 

58
Q

____________________: repairs that are done on a periodic basis, an appropriate annual allowance should be made it to cover the total periodic cost

A

Cyclical repairs

59
Q

__________________: an annual sum set aside for replacement, repairs, and renovations

A

Replacement reserves

Examples: Stoves, fridges, washing machines, carpeting… Short life items

60
Q

Which of the following statements regarding the comparative method of appraisal is true

A

The comparative method reflects market behaviour and requires a minimum of subjective opinion from the appraiser

61
Q

The comparative method of appraisal is based on analysis of recent sale prices for similar properties. Which of the following best defines the word recent

A

A period of time, immediately preceding the appraisal date, during which property values in the region have remain stable

62
Q

An appraiser is using the market data approach for his appraisal of a single-family house. By proper adjustment the appraiser can use sales prices of all the following properties for comparison purposes except

A

Houses recently sold between related parties

This is not an arms length transaction

63
Q

In the comparative method of appraisal, it is most important that the subject building and the comparable building be

A

Similar with respect to factors that have a major influence on buyers and sellers

64
Q

You have partially completed an appraisal report that you need to fill in. The 2300 square-foot subject property has four bedrooms. The house next-door is similar in all respects except for the number of bedrooms and square footage. The 2200 square-foot comparable sold for $321,000 and has three bedrooms. If the market value of a bedroom is $3200 and above an 1800 square-foot benchmark, each 100 ft.² is worth $5000, the adjustment sale price for this comparable is:

A

$329,200

65
Q

You have partially completed an appraisal report that you need to fill in. The house next-door to the subject property is similar in all respects except for the number of bedrooms and square footage. This 2300 square-foot comparable sold for $250,000, has four bedrooms, and was adjusted plus $4200 for bedrooms and plus $15,000 for square footage. If the market value of a bedroom is $4200 and each 100 ft.² is worth $5000, it can be concluded that the subject property has

A

Five bedrooms and 2600 ft.²

66
Q

Which of the following is true where a comparable property is sold subject to a vendor supplied mortgage at an interest rate lower than the current market rate

A

The comparable sale price must be adjusted downwards

67
Q

The cost approach of appraisal is not generally used to value what

A

Vacant lots

Never used to cost method for land

68
Q

Reproduction cost is best defined as

A

The current cost of construction an exact replica of the subject building

69
Q

The loss in value caused by outmoded or inadequate design in buildings is

A

Functional depreciation

70
Q

In using the cost method of appraisal, the major difficulty is experienced in calculating

A

Incurable physical depreciation

71
Q

In appraisal, an outdated feature that can be corrected economically is best known as

A

Functional curable depreciation

72
Q

The investment method of appraisal is generally used for

A

Properties that produce rental income

73
Q

Your property is listed for sale with a net operating income of $15,763 per annum, that is assumed to be perpetual and constant. The market capitalization rate is 9.5% per annum. What is the maximum price of prudent investor should pay for this property

A

$165,926.32

Sales price = NOI / cap yield 

74
Q

Which of the following describes a replacement reserve

A

It is an annual sum set aside for replacement, repairs, and renovations

75
Q

What of the following items are deducted from gross potential revenue to arrive at Gross realized revenue when preparing an appraisal using the income method

A

Vacancy and bad debt allowance

76
Q

Which one of the following items is deducted from gross realized income to arrive at net operating income when preparing an appraisal using the income method

A

Real property taxes

77
Q

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

A

Gross potential revenue

Note – – if it is 100% it is important that it has potential revenue as potentially they can fill 100%

UBC Real Estate Trading Services Licensing Course (24 decks)

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