Chapter 6.2 + 6.3: Comparative & Cost Methods Flashcards by Richie Sakhon

Reminder, the comparative method is for what types of property

Residential (houses and condos)

Empty lots

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

Substation

Meaning similar properties which have recently sold are comparable

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The ______________ method relied on market evidence from similar properties

Comparative method

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

A minimum of subjective opinion

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

Well informed!

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“Similar” means what?

With respect to factors judged important by buyers and sellers

Such as pools, Suites , etc

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Recent means what?

When the market conditions remain stable

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Arm’s length transaction means what?

No previous relationship from the parties

New strangers

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Consumer price index (CPI)

Shelter price index (SPI)

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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What is a rating grid

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

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

Inferior property
Subject property
Superior property

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IASS formula

Inferior add

Superior subtract

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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 ________

Inferior

Add

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The cost method typically looks at ________ / _________ properties

Unusual / unique properties

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

MLS - multiple listing service

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

Income

Not an investment property

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

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

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The infrequency of use with the cost method assumes what

The assumption that cost equals value is not necessarily correct

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You should never use the cost method for __________

Land!

Use comparable method

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__________ does not depreciate

LAND

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

current leases
registered mortgages
physical characteristics of the building

But not the expected / forecasted revenue predicted by buyer

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

Cost = value

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

greater

Stop

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

Less

There will be an increase in new development

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Square footage x price =

Cost of building

Formula! Market Value =

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

Historic cost

The cost incurred when the building was erected Wayyy back in the day, we usually never care for this

Current cost

Cost to construct the building as of the date of appraisal

Reproduction cost

To build an exact replica of the building We usually never use this

Replacement cost

Modern equivalent today Not exact replica if not possible

Depreciation type: age-life method

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

Formula!! % depreciation =

Effective age / economic life

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

% 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

The four components of the breakdown method, types of depreciation

Physical Functional Curable Incurable

Breakdown Method: physical

Loss of market value caused by physical wear and tear

Breakdown Method: functional

Loss in value caused by outdated or inadequate design

Breakdown Method: curable

Can be corrected economically

Breakdown Method: incurable

Cannot fix

Breakdown Method: Physical curable

Can be fixed Example: paint, wallpaper

Breakdown Method: physical incurable

Cannot be fixed economically Such as foundation / structural problems

Breakdown Method: functional curable

Can be replaced cost effectively Such as bathroom Fixtures

Breakdown Method: functional incurable

Cannot be fixed economically Examples: floor plans, narrow hallways

The income method is also known as

Investment method

The income method is used for what kind of properties

Income producing properties such as rental and commercial real estate Such as warehouses, leasehold interest, apartment buildings Never single family residence

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

economic factors

Formula Yield =

Net operating income / sale price

Yield is also known as

Rate of return

Formula Sale price =

Net operating income (NOI) / capitalization yield Notice how NOI is always first

Capitalization yield =

(1st % + 2nd %) / 2 Just a simple average of the numbers

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

Net operating income

_________________: an average yield of all buildings being compared

Capitalization yield

Formula Gross potential revenue =

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

To break it down Gross potential

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

To break it down Gross realized

Gross realized - expenses = net operating income (NOI)

______________ must be paid regardless of use

Fixed expenses

Examples of fixed expenses

- real property taxes (not income taxes) - insurance policies Always gotta pay these

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

- 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!

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

Cyclical repairs

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

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

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

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

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

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

Houses recently sold between related parties This is not an arms length transaction

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

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

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:

$329,200

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

Five bedrooms and 2600 ft.²

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

The comparable sale price must be adjusted downwards

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

Vacant lots Never used to cost method for land

Reproduction cost is best defined as

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

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

Functional depreciation

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

Incurable physical depreciation

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

Functional curable depreciation

The investment method of appraisal is generally used for

Properties that produce rental income

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

$165,926.32 Sales price = NOI / cap yield

Which of the following describes a replacement reserve

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

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

Vacancy and bad debt allowance

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

Real property taxes

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

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