Chapter 6.2 + 6.3: Comparative & Cost Methods Flashcards
Reminder, the comparative method is for what types of property
Residential (houses and condos)
Empty lots
The comparative method is based on the theory ________________, meaning what?
Substation
Meaning similar properties which have recently sold are comparable
The ______________ method relied on market evidence from similar properties
Comparative method
The comparative method reflect market behaviour and requires a ________________________ from the appraiser
A minimum of subjective opinion
With the comparative method, buyers are _______________ about current sale transactions
Well informed!
“Similar” means what?
With respect to factors judged important by buyers and sellers
Such as pools, Suites , etc
Recent means what?
When the market conditions remain stable
Arm’s length transaction means what?
No previous relationship from the parties
New strangers 
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 
What is a rating grid
The subject property is the basis and all comparables must be adjusted to it
Adjustment for value has 3 types of properties, what are the names for these?
Inferior property
Subject property
Superior property
IASS formula
Inferior add
Superior subtract
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
The cost method typically looks at ________ / _________ properties
Unusual / unique properties
When using the cost method the homes will not appear on the ______
MLS - multiple listing service
To use the cost method you have to ensure the property does not produce a _____________
Income
Not an investment property
What are the types of properties you find using the cost method
Temples, churches, pulp mills, windmills, concrete plant, one-of-a-kind houses
The infrequency of use with the cost method assumes what
The assumption that cost equals value is not necessarily correct
You should never use the cost method for __________
Land!
Use comparable method
__________ does not depreciate
LAND
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
If a new building represents the highest and best use, then what?
Cost = value
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
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
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%
