Chapter 7- Sales Comparison, Cost Depreciation, And Income Approaches Flashcards
When is a market conditions adjustment necessary?
Whenever, since the time the comparable sales were transacted, property values in a given market have either appreciated or depreciated.
Explain how to calculate the monthly rate of change for market conditions.
Resale price - Initial Sales Price = Difference in Price
Difference in Price / Initial Sales Price = Percentage Change
Percentage Change / Number of Months between sales =
Monthly rate of change
Always expressed as a percentage
Explain how to calculate adjustments made in the comparable approach.
Always adjust TOWARD the subject property. CIA vs. CBS
Appraiser adjusts for financing and conditions of sale BEFORE adjusting for market conditions (change in value since date of sale)
Explain the difference between reproduction cost and replacement cost.
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Explain the difference between reproduction cost and replacement cost.
Reproduction cost is the cost to rebuild the property with the same exact tools, methods, and materials that were used originally to build the improvements. Includes the current cost of older construction methodologies. It is an exact copy.
Replacement Cost is the dollar amount it would take to construct improvements of equal utility to those that are being appraised. Considers modern materials and building techniques. Not an exact copy.
Explain the methods used in determining reproduction cost.
Quantity Survey Method: detailed inventory of all labor, materials, products and indirect costs, plus the builder’s profit, required to reproduce a building. All sticks, bricks and profit.
Unit-in-place method: Appraiser calculates the cost of materials and labor for each component of a structure only. Breaks the structure down to units, determines the number of units needed to construct it, then multiplies the units.
Comparative-unit method (or square-foot method): Most common. determines the cost-per-square-foot of a recently built comparable structure (the benchmark structure) and multiplies it by the number of square feet in the subject property.
The three types of depreciation using the cost approach:
Physical Deterioration: includes ordinary wear and tear caused by use, lack of use, deferred maintenance, exposure to elements, and physical damage. May be curable or incurable deterioration. If correction of the defect will add as much in added value as the cost to correct, then it’s curable. If it will cost more to fix than it will add in worth, then it’s incurable.
Functional Obsolescence: Anything that is inferior due to operational inadequacies, poor design, or changing tastes and preferences, or overimproved.
External Obsolescence: Any loss of value due to influences originating outside the property’s boundaries. (i.e. an expressway built next to a subdivision). Incurable. Only that portion allocated to the improvements is deducted in the cost-depreciation approach.
How do you calculate the accrued depreciation of a property using the lump sum, age-life method?
Effective Age / Economic Life Multiplied by Reproduction or Replacement cost new equals accrued depreciation.
How is GRM or GIM determined?
Divide the sales price by the annual gross income (GIM) or annual gross rents (GRM)
GRM looks at rents only and excludes any other income produced by the property.
What is the difference between fixed and variable expenses?
Fixed:
Variable:
What is the difference between fixed and variable expenses in appraisals?
Fixed: Do not fluctuate with occupancy and must be paid whether the property is occupied or not. (property taxes and insurance)
Variable: Vary with the level of occupancy. (management fees, utilities, repairs, etc.)
Use OAR to determine value of an income-producing property.
NOI/Cap Rate or OAR = Value
