CHAPTER 7 -- VALUATION Flashcards by Thomas Clary

What is the final step of appraisal?

After all date has been collected and different appraisal approaches applied, the final step is to reconcile the values.

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What is the first step of valuation?

Define the problem

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What’s the difference between the “date of value” and the “date of appraisal?”

The “date of value” is the date of the inspection, the “date of appraisal” is the date of the final writing or delivery of the appraisal report.

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What date is the appraiser most concerned with?

The date the price was agreed upon.

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What are the three basic styles of written appraisal reports?

1 - Letter Form Report (least formal)
2 - Form Report (summary report, Uniform Residential Appraisal Report) – a checklist form used primarily for lending institutions.
3 - Narrative Report (most comprehensive)

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After the appraiser has collected all the data and applied the appropriate method(s), what is the next step in the appraisal process?

(A) simply average out the value estimates; (B) reconcile or correlate the values found in the different approaches; (C) assign appropriate value to individual estimates and average the total number; (D) given an opinion of value.

(B) reconcile or correlate the values found in the different approaches

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When an appraiser uses the market data approach to appraisal, she would be most interested in the date:

(A) the price was agreed upon; (B) escrow was opened; (C) recording occurred; (D) escrow closed.

(A) the price was agreed upon

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Which type of appraisal report has the following headings: Introduction, Site and Improvement, Analysis, Supporting Data, Opinion of Value?

(A) letter report; (B) form report; (C) narrative report; (D) oral report.

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What is the basis of the market data approach of appraisal?

The Principle of Substitution (used in all appraisal techniques). Also known as the comparison or substitution approach.

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What appraisal license is required to appraise a strip mall valued at $500,000?

(A) certified general real estate appraiser; (B) certified residential real estate license; (C) residential license; (D) trainee license.

(A) certified general real estate appraiser

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When the highest and best use of a property is expected to change, the current use is called:

(A) the temporary use; (B) the interim use; (C) the transitional use; (D) the possible use.

(B) the interim use

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When homes in an area represent the highest and best use of the land and are similar in architectural design, this would best exemplify which of the following principles of appraisal?

(A) change; (B) conformity; (C) contribution; (D) progression and regression.

(B) conformity

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What are the three things which define value (worth) to appraisers?

1 - Relationship between the thing desired and the purchaser
2 - Power of one commodity to attract other commodities
3 - Present worth of future benefits

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An owner of a 40-unit apartment house is considering installing a swimming pool. He seeks a professional opinion from an appraiser. The appraiser would base his opinion upon which principal of appraisal?

(A) contribution; (B) regression; (C) substitution; (D) integration.

(A) contribution

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The value of the best property in a neighborhood is adversely affected by a substandard property nearby. This can be described as the principle of:

(A) balance; (B) regression; (C) contribution; (D) progression.

(B) regression

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Market value is the price a willing buyer will pay and a willing seller will accept with both being fully informed, and the property being exposed to the market for a reasonable period of time. Market value is best expressed:

(A) present value of future income; (B) cost to reproduce improvements new; (C) value of a property is in the eye of the beholder; (D) objective value.

(D) objective value

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What is it called when property gains value due to inflation or an increase in population?

Unearned increment

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Will changes in financing terms affect the value of a property?

No. It will affect the price – but not the value.

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What are the essential elements of value?

D - Demand
U - Utility (ability of the property to satisfy a need or desire)
S - Scarcity
T - Transferability (to be marketable, the property must be transferrable)

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What are three things that are NOT essential elements of value?

Cost
Appreciation
Expectation

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What are the four “Great Forces” influencing value?

1 - Social Ideals and Standards
2 - Economic influences
3 - Environmental and Physical Characteristics
4 - Governmental or Political Influences (NOT PRIVATE)

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The “improved value” of land is:

(A) the current market value of the land and improvements combined; (B) the present value of income to be received from the use of the land in the future; (C) the replacement cost of the improvements minus the depreciation; (D) the difference between the contract rent and the economic rent.

(A) the current market value of the land and improvements combined

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When comparing the value of property and the price of property, changes in financing terms will affect:

(A) value only; (B) price, not value; (C) only properties that have been sold; (D) both value and price.

(B) price, not value

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All of the following are essential elements of value, EXCEPT:

(A) utility; (B) expectation; (C) scarcity; (D) transferability.

(B) expectation

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What corner of intersections are most desirable?

South/West

When developers select land for a residential subdivision they consider topography. Many developers believe that: (A) subdivisions which are built on rolling hills are less attractive aesthetically than those located on flat land; (B) some limited irregularity in topography is generally desirable for residential subdivisions; (C) flat land is more aesthetically desirable than rolling hills; (D) none of the above.

(B) some limited irregularity in topography is generally desirable for residential subdivisions

The position of a building on a lot in relationship to exposure to the rays of the sun, prevailing wind, view, privacy from the street, etc., is known as: (A) elevation; (B) plottage; (C) orientation; (D) assemblage.

The market data approach to appraisal is based upon which of the following? (A) principal of regression; (B) principle of anticipation; (C) principle of contribution; (D) principle of substitution.

(D) principle of substitution

What is the unit of comparison in the market data approach appraisal of a single family home?

The entire property.

What type of approach to appraisal is the LEAST appropriate for appraising older buildings?

The cost approach (replacement approach) due to depreciation becoming difficult to calculate as the building gets older.

What are the four steps of the cost approach?

1 - Estimate the value of the land 2 - Estimate replacement costs of improvements (as if new) 3 - Subtract accrued depreciation from the replacement cost of improvements 4 - Add the value of the land to the depreciated value of the improvements

In the market data approach to appraisal, any differences between the comparables and the subject property are handled in which of the following ways? (A) subject property is adjusted to the standards set by the comparables; (B) the subject property values are averaged to form a price range; (C) the comparables are adjusted to a market average; (D) the comparables are adjusted to the characteristics of the subject property.

(D) the comparables are adjusted to the characteristics of the subject property

When a residential neighborhood is comprised mostly of owner occupied residential properties, it tends to: (A) stabilize values; (B) attract commercial shopping centers to the neighborhood; (C) deteriorate faster than areas with many rental properties; (D) lower property values.

(A) stabilize values

The best appraisal method used by an appraiser to establish the value of a "specific property" would be which of the following: (A) the market data approach; (B) the cost approach; (C) the capitalization or income approach; (D) the gross multiplier approach.

(B) the cost approach

How would the replacement cost of a warehouse be calculated?

The cubic foot method (used in multistory structures when the height between floors varies)

What method is the most detailed and accurate method of estimating cost of new improvements?

Quantity Survey Method

What is the method that adds the cost of the individual units as install, is time consuming, and seldom used?

Unit-in-Place Cost Method

The fastest and easiest method of estimating the replacement cost of improvements is the: (A) reproduction cost; (B) unit-in-place method; (C) quantity survey method; (D) comparative method.

(D) comparative method

What type of depreciation is most difficult to correct? (A) internal obsolescence; (B) economic obsolescence; (C) physical obsolescence; (D) wear and tear.

(B) economic obsolescence

A developer wanted to subdivide land into residential lots. the city planning commission decided to increase the front yard setback by 10 feet. The resulting loss in buildable space caused a loss in value of the lots. This loss in value was a result of: (A) physical obsolescence; (B) functional obsolescence; (C) economic obsolescence; (D) physical deterioration.

What is the major cause of depreciation? Physical deterioration or obsolescence?

Obsolescence

The flight patter at a nearby airport was changed so that planes pass directly over a residential neighborhood. The resulting loss in value to these properties was the result of: (A) economic obsolescence; (B) physical deterioration; (C) functional obsolescence; (D) physical obsolescence.

(A) economic obsolescence

Which of the following would be an example of functional obsolescence? (A) new zoning laws; (B) incompatible land use in the neighborhood; (C) a deteriorated driveway; (D) a one-car garage.

(D) a one-car garage

All of the following factors contribute to obsolescence, EXCEPT: (A) wear and tear from years of use; (B) obsolete equipment; (C) changes in locational demand; (D) misplaced improvements in the neighborhood.

(A) wear and tear from years of use

What is the type of appraisal approach that establishes the present worth of future benefits?

Capitalization (income) approach

What are the three steps to determine value in the capitalization approach of appraisal?

1 - Determine annual net income (net operating income) 2 - Select the appropriate cap rate. 3 - Divide the annual net income by the cap rate to find the value of the property.

What are the three methods of calculating cap rate?

C - Market Comparison B - Band of Investment S - Summation

What are the three steps to determine annual net income (net operating income) in the capitalization approach?

1 - Estimate potential gross income 2 - Subtract vacancies to find the effective gross income (adjusted gross income) 3 - Subtract expenses (t-i-m-m-u-r) -- property Taxes and Insurance, Management, Maintenance, Utilities, Reserves for replacements.

What are the three things not considered in establishing the annual net income?

1 - Loan expenses (principal and interest) 2 - personal income taxes 3 - depreciation

What is the largest fixed operating expense in an income property?

Property tax

How are rental schedules established?

By market comparison.

Determining the appropriate capitalization rate is the most difficult step in the capitalization approach to appraisal. In order to calculate capitalization rate, the appraiser can utilize which of the following methods? (A) market comparison; (B) band of investment; (C) summation; (D) any of the above.

(D) any of the above

In the capitalization approach to appraisal, which of the following expenses is subtracted from the scheduled gross income to arrive at the effective gross income? (A) taxes; (B) vacancies; (C) loan payments; (D) depreciation of improvements.

(B) vacancies

In the capitalization approach, which of the following expenses is NOT deducted from gross income to determine annual net income? (A) electricity; (B) cost of capital; (C) cost of management; (D) replacement reserves.

(B) cost of capital

If capitalization rates increase, what happens to the value of property?

It decreases.

What happens to the owner's equity of the net income remains unchanged, but interest rates increase?

The owner's equity decreases.

How does one arrive at the gross rent multiplier?

Appraisers divide the sale price of comparable properties by their gross monthly or gross annual income. (usually not used because of its inaccuracy).

Two similar buildings are leased on a long term basis, one for a post office and the other for a hardware store. Using the capitalization approach to appraise the properties, the post office would demand: (A) a lower capitalization rate; (B) the same capitalization rate as the hardware store; (C) a higher capitalization rate; (D) the two capitalization rates could not be compared because the properties involve different uses.

(A) a lower capitalization rate

In the appraisal of an income-producing property, to arrive at a capitalization rate, no provision should be made for which of the following: (A) depreciation; (B) federal taxes; (C) return of the investment; (D) return on the investment.

(B) federal taxes

Which of the following best describes an acre? (A) 4,350 sq. ft; (B) 4,840 sq. yrds; (C) 43,500 sp. ft; (D) 50,000 sq. ft.

(B) 4,840 sq. yrds

A developer ordered several truckloads of soil to be used in a new housing project for backfill. The most probably use of this backfill will be: (A) as topsoil for landscaping and beautification purposes; (B) to fill in the old septic tank; (C) to fill in excavations or to brace around foundation walls; (D) to supplement the results of a percolation test.

When building a home, which of the following workers normally install the conduit? (A) roofers; (B) plumbers; (C) electricians; (D) carpenters.

Each of the following is a dangerous gas which may be present in a home, EXCEPT: (A) carbon monoxide; (B) radon; (C) carbon dioxide; (D) formaldehyde.

An elevation sheet for a new subdivision shows which of the following? (A) topography of the land, including slope, elevation of grading of the site; (B) interior views of the homes as they will appear when finished; (C) drawings of the front and side views of the homes as they will appear when finished; (D) aerial views of the homes as they will appear when finished.

In home construction, a "footing" refers to: (A) a masonry beam found under the floorboard; (B) a steel girder to which the floorboards are affixed; (C) the spreading part at the base of a foundation wall or pier; (D) a slab of concrete upon which asphalt is usually laid.

A real estate broker would look at which of the following in order to find the location, size and dimensions of the footings, concrete piers and details of the subfloor area? (A) floor plan; (B) plot plan; (C) elevation; (D) foundation plan.

(D) foundation plan

Water that is suitable for drinking and is not contaminated is said to be: (A) potable water; (B) privy water; (C) alluvium water; (D) avulsion liquid.

(A) potable water

Water seeping up from the ground from an indeterminable source would be described as: (A) riparian water; (B) littoral water; (C) percolating water; (D) appropriation water.

A commercial development that has a single line of store buildings constructed along a major transportation route is described as: (A) a cluster development site; (B) a strip commercial development; (C) neighborhood shopping center; (D) a street commercial zone development.

(B) a strip commercial development

What are the most destructive type of termites?

Subterranean

What state agency would a consumer contact in order to obtain a written report disclosing the presence of wood destroying organisms? (A) Department of Real Estate; (B) Department of Corporations; (C) Structural Pest Control Board; (D) Department of Housing and Community Development.

An appraiser is appraising a home, and notices an abandoned gas station next door. The appraiser should recommend which of the following? (A) a soils report by a civil engineer; (B) a toxic waste report from the EPA; (C) a rezoning of the property; (D) a structural pest control report.

(B) a toxic waste report from the EPA

Which of the following would best describe a turnkey project? (A) a subdivision located in a remote area; (B) a subdivision whose design has been approved by the local planning commission; (C) a construction project that is ready for occupancy; (D) an interior lot located in the middle of a subdivision.

The ultimate test of functional utility is: (A) maintenance costs; (B) design; (C) utility costs; (D) marketability.

(D) marketability

Which of the following appraisal reports would be (is) the most comprehensive and complete? (A) narrative report; (B) abbreviated report; (C) letter form report; (D) short form report.

(A) narrative report

When may an appraiser appraise a property owned by a corporation in which he is a shareholder? (A) never; (B) only when the lender is that corporation; (C) when he discloses his ownership of shares in the appraisal report; (D) only when the action is approved by the board of directors.

The market data approach to appraisal is based upon: (A) the principle of change; (B) the principle of substituion; (C) the principle of confromity; (D) the principle of highest and best use.

(B) the principle of substituion

When an appraiser determines market value, he would be least concerned with: (A) prudent value in exchange for a prudent price; (B) original cost; (C) objective value; (D) an open market.

(B) original cost

Each of the following is one of the special forces influencing value, EXCEPT: (A) social ideals and standards; (B) economic influences; (C) private restrictions; (D) political or governmental regulations.

When a developer purchases two or more contiguous lots, thus placing them under common ownership for the purpose of increasing hte value per lot, it is known as: (A) co-ownership; (B) cooperative ownership; (C) plottage; (D) disassemblage.

When using hte market data approach to appraise a single-family residence, the unit of comparison is: (A) square foot; (B) cubic foot; (C) capitalization rate; (D) the entire property.

(D) the entire property

The method which is most commonly used by appraisers to value land or sites is: (A) the residual method; (B) the developmental method; (C) the unit-in-place survey method; (D) the comparative method.

(D) the comparative method

When an appraiser compares "reproduction cost" and "replacement cost," "replacement cost" it would best be described as: (A) the cost to replace a building with some other building which would then be able to use the land to its highest and best use; (B) the original cost to build the building; (C) the present cost to build an exact replica of the building; (D) the present cost to build a comparable building having the same utility as the building it would replace.

(D) the present cost to build a comparable building having the same utility as the building it would replace

All of the following would be considered economic obsolescence, EXCEPT: (A) community businesses closing; (B) an old kitchen; (C) Incompatible zoning laws; (D) a new sewage treatment plant next to the property.

(B) an old kitchen

An appraiser would use which of the following approaches in appraising a shopping center? (A) comparison approach; (B) capitalization (income) approach; (C) replacement cost approach; (D) market data approach.

(B) capitalization (income) approach

Which of the following would be considered an expense item when arriving at a net operating income for a 50-unit apartment building: (A) income tax; (B) depreciation; (C) salary for a part-time gardener; (D) addition of a clubhouse.

When appraising income property with the capitalization approach, which of the following items is NOT a component of net operating income? (A) personal income taxes; (B) potential gross rental income; (C) vacancies; (D) operating expenses.

(A) personal income taxes

When a real estate appraiser is using a gross multiplier to determine property value, the appraiser calculates the appropriate gross multiplier by: (A) dividing the sale price by the net monthly income; (B) multiplying the annual gross income by the appropriate capitalization rate; (C) dividing the sales price by the gross monthly income; (D) dividing the sale price of comparable properties by the appropriate capitalizatoin rate.

How long is each side of a square which contains one acre? (A) 209 ft.; (B) 100 sq. yds.; (C) 4,840 sq. ft.; (D) 43,560 sq. ft.

(A) 209 ft.

During the site inspection of a home, an appraiser finds that the inside of an exterior all of a building is about the same temperature as the other interior walls. What does this tell the appraiser? (A) the heater is doing a great job; (B) the wall insulation is adequate; (C) heat is leaking out through the exterior walls; (D) the heating duct system is inadequate.

(B) the wall insulation is adequate

Parallel wooden members used to support ceilings and floors are called: (A) sole plates; (B) joists; (C) headers; (D) studs.

(B) joists

When real estate is sold, if requested, a copy of the structural pest control report must be given to: (A) the buyer, as soon as practical; (B) the title insurance company; (C) the broker; (D) the escrow company.

(A) the buyer, as soon as practical

Who must receive a copy of the structural pest control report? (A) buyer; (B) seller; (C) agent; (D) both buyer and seller.

(D) both buyer and seller