Describe the 3 basic valuation approaches used by appraisers Flashcards
What are the 3 basic valuation techniques?
1) Sales comparison approach
2) Cost approach
3) Income approach
The 3 basic valuation techniques serve as ___ against each other
checks
Because no 2 parcels of real estate are ___, each comparable property must be analyzed for ___ and ___ between it and the subject property
exactly alike
similarities
differences
The sales comparison approach is a good example of which appraisal principle?
Substitution
2 condos in the same neighborhood are very similar. One of them was already sold and the other is the subject of an appraisal. The comp sold for $145,000 and has a garage valued at $9,000. The subject property has no garage, but it has a fireplace valued at $5,000. What is the indicated value of the subject property?
$141,000
145,000 (comp sale price) - 9,000 (comp is better, subtract CBS). + 5,000 (comp is poorer, add CPA) = 141,000
Which approach is considered to be the most reliable approach in appraising single family homes?
Sales comparison approach
Most appraisals include a minimum of ___ comparable sales reflective of the subject property
3
Comparables should be sales that occurred ___, ___, and ___
less than 6 months
close by
as similar as possible to the subject property
What are the 5 steps of the cost approach?
1) Estimate value of land as if it were vacant and available to be put to its highest and best use
2) Estimate the current cost of constructing buildings and improvements
3) Estimate the amount of accrued depreciation resulting from the property’s physical deterioration, functional obsolescence, and external obsolescence
4) Deduct the accrued depreciation from the current construction cost
5) Add the estimated land value to the depreciated cost of the building and site improvements to arrive at the total property value
Current cost of construction is 185,000. The property has 30,000 in accrued depreciation. The land values at 55,000. Using the cost approach, what is the total property value?
210,000
185,000-30,000+55,000 = 210,000
___ cost is more frequently used in appraising older structures because it eliminates obsolete features and takes advantage of current construction materials and techniques.
Replacement
Reproduction or replacement cost (NEW): 500,000
Age: 5 years
Full economic life: 40 years
Land value: 50,000
Using the cost approach, what is the total property value?
$487,000
Yearly depreciation amount ($500,000 divided by 40 years) = $12,500
Full loss (5 years x 12,500 per year) = 62,500
Depreciated value of the structure (500,000 - 62,500) = 437,500
437,000+ 50,000 (land value) = 487,000
What are the 4 methods of computing the reproduction or replacement cost of a building?
1) Square foot method
2) Unit in place method
3) Quantity survey method
4) Index method
In the cost approach, this is the most common and easiest method of cost estimation
Square-foot method
Appraisal cost approach method that is most detailed and time-consuming
Quantity survey method
The most accurate method of appraising new construction
Cost approach quantity-survey method
Appraisal cost approach method that is only useful as a check of the estimate reached by other methods
Index method
The __ method fails to take into account individual property values
Index
Land does not ___
depreciate
Depreciation is considered ___ or ___ depending on the contribution of the expenditure to the value of the property
Curable or incurable
What are the 3 classes of depreciation?
1) Physical deterioration
2) Functional obsolescence
3) External obsolescence
Outmoded or unacceptable physical or design features that are no longer considered desirable by purchasers are considered ___.
Curable obsolescences
Undesirable physical or design features that cannot be easily remedied because the cost of the cure would be greater than the resulting increase in value would be __.
Incurable obsolescences
An office building that cannot be economically air conditioned suffers from ___ if the cost of adding air conditioning is greater than its contribution to the building’s value.
incurable functional obsolescence
In the case of external obsolescence, depreciation is always ___.
incurable
The easiest but least precise way to determine depreciation
straight-line method
Depreciation is assumed to occur at an even rate over a structure’s ___.
Economic life
A $300,000 property has a land value of $75,000 and an improvement value of $225,000. If the improvement is expected to last 60 years, what is the annual straight-line depreciation?
$3,750
225,000 divided by 60 years = 3750
The ___ approach is most helpful in the appraisal of newer buildings because they are difficult to appraise using other methods
cost approach
The ___ approach is most helpful in the appraisal of special-purpose buildings (schools, churches, public buildings, etc) because there are seldom enough local sales to use as comps and because these properties generally do not generate income
Cost
The ___ approach is used for valuation of revenue producing properties such as apartment buildings, office buildings, and shopping centers
Income approach
What are the 5 steps to estimating value using the income approach?
1) estimate annual potential gross income
2) deduct an appropriate allowance for vacancy & rent loss
3) deduct annual operating expenses
4) estimate the price a typical investor would pay for the income prudced by this particular type and class of property
5) Apply the market derived capitalization rate to the properties annual NOI
Mortgage payments (principle and interest) are NOT considered as ___
operating expenses
A comparable property that is producing an annual net income of 15,000 is sold for 187,500. What is the capitalization rate?
8%
15,000 divided by 187,500 = 0.08 (8%)
income divided by rate = ___
Value
Value = ___ divided by ___
Income divided by rate
Rate = ___ divided by ___
Income divided by value
Income divided by value = ___
Rate
Value times rate = ___
Income
Income = ___ times ___
Value times rate
If a property has a capitalization rate of 9% and generates an income of 72,000, what is the value?
800,000
72,000 divided by 9% = 800,000
If a property has a capitalization rate of 8% and generates an income of 72,000, what is the value?
900,000
72,000 divided by 8% = 900,000
If a buyer is interested in purchasing a 14 unit residential rental property, the ___ would be used for the appraisal value
Gross rent multiplier (GRM)
If a buyer is interested in purchasing 5 or more units, a(n) ___ is often used in the appraisal process
Gross income multiplier (GIM)
Because single family residences usually only produce rental incomes, the ___ is used in the appraisal process
Gross rent multiplier
Commercial and industrial properties generate income from many sources, and are valued using their ___ from all sources
annual income
Gross Income Multiplier= ___ divided by ___
Sales price divided by gross annual income
Sales price divided by gross annual income = ___
Gross income multiplier
Gross rent multiplier = ___ divided by ___
Sales price divided by gross monthly rent
Sales price divided by gross monthly rent = ___
Gross rent multiplier
A home recently sold for 382,000 and its monthly rental income was 2650. What is the GRM for the property?
144.15
382 divided by 2650 = 144.15
To establish an accurate GRM, an appraiser must have recent sales and rental data from at least ___ comps to the subject property
4
estimated market value = ___ times ___
rental income times GRM
rental income times GRM = ___
estimated market value
What is the final step in the appraisal process?
Reconciliation
During the reconciliation process for a single family home, which appraisal approach normally carries the greatest weight in valuing the subject property?
Sales comparison
During the reconciliation process for an investment property, which appraisal approach normally carries the greatest weight in valuing the subject property?
Income approach
During the reconciliation process for special purpose properties (schools, churches, etc) where little to no income is generated, which appraisal approach normally carries the greatest weight in valuing the subject property?
Cost approach
