Highest and Best Use Flashcards
Agents of production:
land
labor
capital
entrepreneurial profit (entrepreneurial coordination)
These are the factors that combine to create value of developed real property
Central Business District (CBD)
The center of an urban area, typically zoned for various uses such as retail, office, and residential. Further, in some areas, transportation starts and ends in the CBD since it is the central location for employment.
Consumption:
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt.
Consumer credit:
Consumer debt that has been paid.
Consumer debt:
Consumer credit which is outstanding. In macroeconomic terms, it is debt which is used to fund consumption rather than investment.
Demand segmentation:
Demand analysis that includes the investigation and identification of the most probable user, including their preferences based on behavioral, motivational, and psychological factors.
Demographics:
The study of a population and its characteristics such as age, sex, familial status, occupation, etc.
Economics:
The social science that studies the production, distribution, and consumption of goods and services.
Efficient market:
Characterized by goods or services that are easily produced and readily transferable, with a large volume of knowledgeable buyers and sellers.
General data:
Relates to information appropriate for many properties; includes all of the four forces (social, economic, environmental, and governmental).
Growth or expansion
The preliminary stage in a life cycle that refers to increased development of an area.
Inefficient market:
A market characterized by an uneven flow of information, with goods and services that are not easily produced or transferable.
Information asymmetry:
During the negotiation process, only one party is privy to important information that may affect the outcome of the transaction. Information asymmetry causes inefficient markets, since all the market participants do not have access to the information needed for their decision making processes.
Investment and Consumer Goods:
Real estate is purchased with the expectation of attaining a return on investment, with the intention of using it as an investment vehicle and/or a consumer good.
Market area delineation concepts:
Define the primary and secondary market areas and include the type of tenants or clientele buildings might attract and their location, as well as time-distance relationship to nearby complementary services such as restaurants, schools, voting districts, etc. as compared to the competition.
Market delineation:
Defines the geographic demand for a specific property.
Market participant:
Someone involved in a real estate transaction who receives and possibly acts upon all relevant information.
Market segmentation:
Defines and subdivides a large homogenous market into segments based on location, demographics, and consumer behavior.
Real estate market:
A succession of submarkets with various desires and needs for each market participant that change autonomously of one another based on a group of complementary land uses that may be divided by natural barriers, political boundaries, districts, income levels of inhabitants, or streets.
Recession:
The general contraction of the business cycle in economics during a sustained period of time. This occurrence is typically over two consecutive quarters of negative GDP growth.
Revitalization, upturn, or recovery:
Occurs in a life cycle after a decline and before the growth cycle occurs again. Revitalization may occur due to rehabilitation and/or renovation as an area undergoes gentrification.
Stabilization:
Stability, slowdown, or downturn that follows the growth stage within a life cycle, especially when an area grows at a slower rate.
Transaction Costs:
Buying and selling real estate is much more expensive than most types of transactions. These costs include financing, commissions, closing costs, title insurance, moving costs, legal fees, land transfer taxes, deed registration fees, etc.
Typically, real estate is divided into six property classifications :
residential
office
industrial
retail
special-purpose
agricultural
Real estate cycles typically have four life cycle stages:
expansion
contraction
recession
recovery.
The “four great forces” that affect real property value are:
governmental
environmental
economic
social forces
governmental forces
Building, housing, and sanitary codes
Code enforcement
Environmental regulations
Fire protection
Land use
Local development levies (impact fees)
Police power
School districts
Special assessments
Taxation
Traffic patterns
Zoning
Environmental forces
Attractiveness of area
Climate (temperatures, dust, wind, etc.)
Features important to wildlife
Hazards of surrounding properties (odor, noise, trash, etc.)
Land use patterns (currently and in the possible future)
Liabilities (landslides, flooding, etc.)
Maintenance of subject and surrounding properties
Open space
Property size
Public utilities (electric, water, gas, sewer, cable, etc.)
Subsurface terrain (marsh, rock, clay, sand, etc.)
Topography (terrain and vegetation)
Transportation (railway, commuter buses, etc.)
Type of property
Waterways
Economic forces
Development trends
Employment
Income levels for households
Occupancy versus rental levels
Trends of property values
Vacancy rates
Social forces:
Age levels
Community associations
Crime statistics
Cultural groups
Educational characteristics
Employment levels and categories
Family / household configuration
Neighborhood organizations
Population density
Skill levels
Anticipation:
An economic theory where value is created by expectations of future benefits such as income, appreciation, tax benefits, etc.
Balance:
An economic principle; the condition caused when values are proportional by various factors.
Change:
An economic principle that demonstrates new social patterns, technology, employment, transportation, and other factors create new demands for real estate.
Competition:
An economic principle stating that individuals and firms strive for a greater share of a market to sell or buy goods and services, each acting independently by offering the most favorable terms.
Conformity:
An economic principle which states that property value is maximized when the characteristics of a property are in conformance with market expectations and demands.
Contribution:
Contribution holds that the value of a component of a property is based on its contribution to the value of the whole property. This principle is also known as marginal productivity.
Externalities:
An economic principle pertaining to an item or event which is external to the boundaries of the property. It can have a positive or negative effect on the property. Many of the forces that affect or influence real estate values pertain to governmental, environmental, economic, and social factors.
General data:
Relates to information appropriate for many properties which includes all of the four forces (social, economic, environmental, and governmental).
Increasing / Decreasing Returns:
An economic principle that states a feature, repair, addition, etc. might increase or decrease real estate value. As such, the laws of increasing or decreasing returns states that beyond a certain point in time, the feature, repair, addition, etc. will either add or decrease value.
Market analysis:
The classification and study of current supply and demand conditions in a particular area for a specific type of property. Further, the market analysis develops the supportable basis for determining highest and best use, vacant or improved.
Opportunity Cost:
An economic principle; the income lost by not choosing an alternative.
Example: A commercial real estate company invests $2 million to acquire another commercial real estate firm and their office building instead of re-investing the money in an interest-bearing Certificate of Deposit. The opportunity cost of this decision would be the interest income that they did not receive because the $2 million was not reinvested in a CD. If the correct decision was made, the actual income received should exceed the opportunity cost.
Primary Data:
Data that has been compiled for a specific purpose and has not been collated or merged with others. Primary data relates to specific markets in which the property is located and may include specific sales information, surveys of buyers’ preferences, absorption statistics for the assignment, and competitive inventory surveys.
Residual income:
The amount of money an investor retains after debt is paid. Examples include before-tax cash flow or an equity dividend.
Secondary data:
Encompasses publications and other sources of information that were prepared by someone other than the appraiser. Sources of secondary data may include government reports, Chamber of Commerce publications, census reports, rent studies, published sales data services, etc.
Specific data:
Relates to information used directly in the analysis of the subject property and while encompassing the comparables used in the valuation process.
Substitution:
An economic principle that is the replacement of one thing with another.
*In other words, an informed buyer will not pay more for a property than for a similar property or the cost of producing a substitute property with the same utility. As such, the property value is determined by the price for which another equally desirable property can be acquired or produced. If several similar properties are simultaneously available in the market, the one with the lowest price will attract the most interest. This principle applies to each of the three traditional approaches to value utilized within the appraisal process:
Sales Comparison Approach
Income Approach
Cost Approach*
Supply analysis:
Entails examining and analyzing the current competitive properties and their characteristics based on economic, financial, location factors as well as site and building size, if appropriate.
Supply and Demand:
An economic principle describing how values or prices are related to the number of goods made available [supply] and the number of goods people want [demand].
Surplus Productivity:
An economic principle; the net income that remains after the costs of labor, capital, and entrepreneur profit have been paid and which is attributable to the value of the land.
Equilibrium Price:
The equilibrium price is where the supply of goods matches demand
Absorption:
The total demand for a type of real estate offered on the open market by all economic agents resident in an economy that may be leased or sold during a certain period of time.
Asset manager:
Professional management of real estate to meet specified asset goals for the advantage of the investors. Investors may be insurance companies, lenders, pension funds, corporations, or private investors.
Capture rate:
A capture rate is defined as the estimated percentage of the total potential market for a specific type of property.
Developer:
A person or company who typically purchases a tract of vacant land and develops the real estate with improvements to yield a profit.
Development process:
A part of real estate development wherein vacant land is purchased after a design conception, financed, and sold.
Economic base analysis:
A survey of the industries and businesses that generate employment and income in a community as well as the rate of population growth and levels of income, both of which are functions of employment. Economic base analysis is used to forecast the level and composition of future economic activity. Specifically, the relationship between basic employment (which brings income into a community) and nonbasic employment (which provides services to workers in the basic employment sector) is studied to predict population, income, or other variables that affect real estate values or land utilization.1
Feasibility study:
An analysis or study involving examination of geographic locations for a real estate development project as well as a cost-versus-value analysis.
FIRE:
(finance, insurance, real estate):
The study of capital and income that characterizes the financial services industries as part of the SIC/NAIS breakdown of types of industry: finance, Insurance, and real estate. The SIC was replaced by the North American (Canada, USA, Mexico) Industry Classification System (NAICS) in 1997.
Fundamental capture method:
A method that compares the subject share of the market, adjusts the subject to the competition using quantifiable rating techniques, calculates the subject historical capture rate, and other factors.
General merchandise, apparel, furniture, and other (GAFO):
In retailing, general merchandise such as apparel, furniture, etc.
Investment analysis:
The study of economic and market trends, earnings calculations, and various other market indicators to determine investment strategies.
Marketability analysis:
A marketability analysis or study consists of interviews, comprehensive data, maps, tables, etc. and demonstrates the marketability of a specific property or the possible future of an existing property.
Mean:
A calculation derived by adding the sum of data and dividing by the number of items.
Measure of dispersion:
Describes the differences within a population in a statistical calculation.
Median:
The middle number within a series of numbers arranged by sequence in statistical analysis.
Mode:
The number that occurs most frequently within statistical analysis.
Normal distribution:
A smooth symmetrical bell-shaped curve. The normal distribution can describe many populations.
North American Industry Classification System (NAICS):
The standard used by Federal statistical agencies to classify businesses for collecting, analyzing, and publishing statistical data related to the U.S. business economy.
Net absorption:
The square feet leased in a specific geographic area over a fixed time period after calculating the deduction of space vacated in the same area during the same time period.
Population growth:
Growth of the population due to new employment in the area, new schools, shopping, or other characteristics consumers find desirable.
Population trends:
The number of people in the primary and secondary trade areas from the most recent census information as well as projections from state, regional, and local government agencies.
Range:
The difference between the smallest and the largest numbers within the list within statistical analysis.
Sample:
In statistics, a sample is a subset of data from a population or universe, as in a representative sample of the population.
Standard deviation:
The difference of the observations from the mean in a statistical analysis. According to the principles of statistics, 66% of observations are within one standard deviation from the mean, while 95% are within two standard deviations.
Submarket:
A submarket is a specialized sub-section of a market based on the geographic or economic conditions. For example, a submarket is a secondary market compared to the primary market.
Market delineation vs Market segmentation
Market delineation defines the geographic demand for a specific property.
2 Market segmentation defines and subdivides a large homogenous market into segments based on location, demographics, and consumer behavior.
Analysis:
Experimental tests of the theories by several independent parties are conducted to ensure validity of the first three steps of the scientific method (observation, formulation, prediction).
Attitudinal surveys:
Consumers are interviewed based on their opinion or attitudes for a certain characteristic of a property to determine demand.
Desire:
The motivation of an individual, group of persons, or business entity involving real estate.
Econometrics:
The application of mathematical and statistical techniques to economic data and problems.
Formulation:
A theory that explains phenomena in the scientific method.
Fundamental analysis:
A fundamental analysis forecasts demand based on specific information within the subject market. For instance, the appraiser utilizes capitalization rates for specific types of properties within the subject market area to forecast the estimated value of the subject. This analysis relies on the appraiser’s problem-specific data searches, interviews, and surveys; also known as primary data.
Gravity models:
A model within market delineation that predicts and describes behaviors that imitate gravitational interaction such as public transportation or real estate demand.
Inferred Analysis:
The inferred analysis, often referred to as a trend analysis, is a technical analysis utilized to forecast changes in future value by analyzing historical information. An inferred analysis is not specific to a particular property or subject. It compares the subject to general market indicators such as comparable property data, secondary data surveys and forecasts, the subject’s historical performance, local economic analysis, and other factors.
Levels of a market analysis:
During the research phase of the market analysis, an appraiser determines the level of analysis appropriate for the appraisal. These levels are the inferred analysis and the fundamental analysis.
Macroeconomics:
A branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole. Macroeconomics is one of the two most general fields in economics (microeconomics is the other).
Microeconomics:
A principle of economics that studies individuals, households, businesses, and states to understand their decisions regarding use of their resources.
Nelson technique:
A technique within market delineation that estimates a retail trade area based on location or trade area after an investigation of population, income, and socioeconomic status.
Observation:
A description of a group of phenomena in the scientific method.
Phenomena:
A fact or occurrence that can be observed.
Prediction:
The use of the theory that predicts the existence of other phenomena, or that predicts quantitatively the results of new observations.
Psychographics:
The study of consumer behaviors within a market, segmenting by factors such as level of education, income, occupation, familial status, age, sex, race, and others.
Scientific method:
A method that attempts to diminish the influence of bias by the appraiser when testing a theory
4 steps: observation, formulation, prediction, and analysis.
Six-Step Process:
A process used within most market/marketability analyses; steps include:
productivity analysis
market definition
demand analysis
supply analysis
comparison of supply and demand
development of subject capture estimate
Spotting Technique:
A market analysis based on drive times, customer segments, and household incomes. This widely used technique for market delineation is used for many purposes including residential, retail, hotel/motel, and industrial analysis for customer loyalty programs, transportation models, proposed development, etc.
The four criteria that the highest and best use must meet are
- legal permissibility
- physical possibility
- financial feasibility
- maximum productivity
Standards Rule 1-3 (a & b) states, “when necessary for credible assignment results in developing a market value opinion, an appraiser must
identify and analyze the effect on use and value of existing land use regulations, reasonably probable modifications of such land use regulations, economic supply and demand, and the physical adaptability of the real estate, and market area trends.” The Comment to SR 1-3 (a) states, “An appraiser must avoid making an unsupported assumption or premise about market area trends, effective age, and remaining life.”
Six-step process for market analysis
- Define the product
- Market delineation
- Demand analysis
- Supply analysis
- Analyze interaction of supply and demand
- Forecast subject capture rate
PGI
Potential Gross Income
(with hypothetical 100% occupancy)
V&C
Vacancy & Collection Loss
(% deducted from Potential Gross Income to get Effective Gross Income)
EGI
Effective Gross Income
NOI
Net Operating Income
(Effective Operating Income - Expenses = NOI)
GRM
Gross Rent Multiplier
GRM*Annual Income = Market Value
If a knowledgeable buyer purchased a property from a seller who is significantly less knowledgeable, this is an example of:
- Market delineation
- Information asymmetry
- Conflict of interest
- Illegal conduct
Information asymmetry
What type of analysis defines the geographic demand for a specific property?
- Information asymmetry
- Market segmentation
- Market delineation
- Consumption
Market delineation
What is the term for the process that defines and subdivides a large homogenous market based on location, demographics, and consumer behavior?
- Stabilization
- Market participants
- Market segmentation
- Information asymmetry
Market segmentation
Barry owes $8,000 on his credit card, and he carries this balance from month to month. This is considered to be:
- Demand
- Consumer credit
- Consumer debt
- Economics
Consumer debt
How does the real estate cycle affect the income of real property?
- When the economy is in recession, property owners raise rents to compensate
- During a recovery, rental rates decline
- When vacancy rates increase, rental rates decrease
- When vacancy rates increase, rental rates also increase
When vacancy rates increase, rental rates decrease
Buyers and sellers of real estate always make rational decisions.
- TRUE
- FALSE
-
-
FALSE
Because of the high price of real estate:
- Property values always go up
- Recessions usually last five years or more
- Real property is a better investment than personal property
- Most purchasers must use debt financing
Most purchasers must use debt financing
A buyer and a seller are engaging in a real estate transaction. The seller is more knowledgeable about the property and the market than the buyer. This is an example of:
- Market delineation
- Effective demand
- Information asymmetry
- Revitalization, upturn, or recovery
Information asymmetry
What entity is considered the authority on determining when the U.S. economy is in a recession?
- National Bureau of Economic Research
- Department of Housing and Urban Development
- Department of Health and Human Services
- National Association of REALTORS®
National Bureau of Economic Research
At which stage in the real estate cycle does competition among sellers increase, resulting in a decrease in profits?
- Contraction
- Recovery
- Recession
- Expansion
Contraction
What is a major cause of inefficient markets, especially relating to real estate?
- Consumption
- Market area delineation concepts
- Consumer debt
- Information asymmetry
Information asymmetry
The study of a population and its characteristics such as age, sex, familial status, occupation, etc. is known as:
- Demand segmentation
- Demographics
- Consumption
- Market delineation
Demographics
How many consecutive quarters must the U.S. economy contract for it to be considered a recession?
- One
- Two
- Three
- Four
Two
What could be an early indicator of a declining market?
- Three consecutive quarters of economic contraction
- Rising vacancy rates
- A forecast from the NBER
- A review of one year’s worth of property value declines
Rising vacancy rates
What type of corporation invests in real estate, pays no corporate taxes, and distributes 90% of the income to investors?
- Limited Partnership
- Real Estate Investment Trust
- Market Area Delineation Corporation
- Agents of Production
Real Estate Investment Trust
At which stage of the real estate cycle does the federal government often lower interest rates to maintain construction levels?
- Expansion
- Contraction
- Recession
- Recovery
Recession
The four stages of the real estate cycle are typically:
- Expansion, recession, recovery, renewal
- Growth, decline, revitalization, gentrification
- Growth, stability, expansion, decline
- Expansion, contraction, recession, recovery
Expansion, contraction, recession, recovery
Which of these is NOT a stage in the real estate cycle?
- Contraction
- Gentrification
- Recession
- Expansion
Gentrification
The real estate transfer process is complicated by:
- There is a limited pool of buyers for the property at any given time
- Time-consuming negotiations
- The necessity and availability of financing
- All of these
All of these
Data that relates directly to the subject property is identified as:
- Specific data
- Demographic data
- Primary data
- All of these
Specific data
Which of these would NOT be considered specific data?
- County tax assessment
- Zoning classification
- Market area boundaries
- Comparable sales and listings
Market area boundaries
How might developers differentiate their properties in order to make them more readily marketable?
- Make them as homogenous as possible
- Offer various features and amenities
- Hire a full-time marketing professional
- Build one model type repeatedly until it is perfected
Offer various features and amenities
Before researching the market, an appraiser must
- Inspect the property
- Prepare a preliminary market analysis report
- Interview market participants
- Identify the subject’s market area
Identify the subject’s market area
An appraiser is asked to appraise a large regional mall. How might the appraiser delineate the market for the property?
- Stay within state lines
- Focus on regions with similar economic characteristics
- Use the limits of the township or county in which the subject is located
- It is not possible to delineate the market for a property of this type
Focus on regions with similar economic characteristics
Which statement is TRUE regarding the process of developing a parcel of real property?
- Financing is usually a secondary consideration
- Because of the large dollar amounts involved, these are not simple transactions
- It takes a relatively short time to improve a parcel of real estate
- The development process includes construction only; it does not include the additional time spent on feasibility studies and obtaining permits from government agencies
Because of the large dollar amounts involved, these are not simple transactions
Market segmentation defines and subdivides a large homogenous market into segments based on
- Location
- Demographics
- Consumer behavior
- All of these
All of these
The four great forces that affect property values include:
- Political
- External
- Governmental
- All of these
Governmental
A true market segment meets all of the following criteria EXCEPT:
- Reached by a market intervention
- Can be combined with other related segments
- Homogenous or consistent within the segment
- Responds similarly to market stimulus
Can be combined with other related segments
What model can be used to explain growth patterns around major employment centers?
- Central Business District
- Concentric Ring Growth Pattern
- Transition Zone
- Five-Year Urban Planning
Concentric Ring Growth Pattern
A vacant property is zoned for apartments. Because it is situated adjacent to an operating sanitary landfill, the property has remained undeveloped for many years. This is an example of a/an _____________ force affecting real estate.
- Environmental
- Economic
- Governmental
- Social
Environmental
When segmenting markets for office space, what does the designation “CBD” mean?
- Commercial business designation
- Commercial building delineation
- Cannot be determined
- Central business district
Central business district
A local municipality issues a moratorium on building permits because of concerns that local sewage systems are draining into a local waterway. This is an example of a/an _____________ force affecting real estate.
- Environmental
- Economic
- Governmental
- Social
Governmental
A developer is constructing a high-end luxury apartment building. While the building is under construction, the major employer in the area consolidates its operations and moves most of its executives out of state. When the building opens, occupancy reaches 40% and remains at that level. This would be an example of _____________ forces that affect real estate.
- Environmental
- Social
- Governmental
- Economic
Economic
Which of these is an efficient market?
- Real estate market
- Stock market
- They are both efficient markets
- None of the above
Stock market
Which statement is FALSE regarding the process of developing a parcel of real property?
- Because of the large dollar amounts involved, these are not simple transactions
- The development process may include feasibility studies and obtaining permits from government agencies
- Financing is usually a secondary consideration
- It takes a relatively long time to improve a parcel of real estate
Financing is usually a secondary consideration
Buyers and sellers of real property are usually equally knowledgeable about the subject property and local market conditions.
- TRUE
- FALSE
-
-
FALSE
In a market analysis, an appraiser examines trends and:
- Television infomercials
- Motivations of market participants
- Capitalization rates for similar properties in other cities
- Sales within the previous 10-year period
Motivations of market participants
Which of these is NOT one of the four agents of production?
- Entrepreneurial coordination
- Materials
- Capital
- Labor
Materials
The four agents of production DO NOT include:
- Labor
- Value
- Land
- Capital
Value
What is the term for the process that defines and subdivides a large homogenous market based on location, demographics, and consumer behavior?
- Stabilization
- Information asymmetry
- Market segmentation
- Market participants
Market segmentation
What is the loss of income by not choosing an alternative called?
- Externality
- Contribution to value
- Law of Diminishing Return
- Opportunity Cost
Opportunity Cost
A _________ includes supply and demand analysis along with the collection of market data, analyses, and recommendations.
- Economic principles analysis
- Consumer survey
- Market analysis
- None of these
Market analysis
A building owner installs a new “green” roof on the structure at a cost of $300,000. The value of the building increases by only $200,000 as a result of the new roof. This demonstrates:
- Opportunity cost
- Externalities
- Substitution
- Contribution
Contribution
A developer constructs a new home in the middle of a manufacturing area, surrounded by industrial buildings. The sale price of the new home is 20% less than the developer’s cost to construct. What economic principle is best demonstrated in this example?
- Conformity
- Anticipation
- Substitution
- Opportunity cost
Conformity
Which phrase best describes equilibrium price?
- The market price that is set by interaction of supply and demand
- The dollar value that is representative of the highest and best use of the property
- The price that is set temporarily by government intervention in a market
- Property values have peaked and have now begun to decline
The market price that is set by interaction of supply and demand
The principle which holds that the net income attributable to the land after the costs of labor, capital, and entrepreneurial profit have been paid is:
- Supply and demand
- Surplus productivity
- Contribution
- Externalities
Surplus productivity
The neighborhood life cycle and the business cycle are examples of which valuation principle?
- Anticipation
- Balance
- Contribution
- Change
Change
When do improvements add the most value to a property?
- When the property is used for its highest and best use
- When the property sells for the highest price in the neighborhood
- When the most expensive materials are used in construction
- All of these
When the property is used for its highest and best use
What is achieved when numerous factors exert proportional influence on value?
- Contribution
- Change
- Balance
- Externalities
Balance
Appraisal theory holds that after the costs of labor, capital, and entrepreneurial coordination are paid, any excess income is attributable to ______________.
- The government
- The land
- The developer
- The buyer
The land
The present worth of revenue or other benefits expected in the future is referred to as:
- Balance
- Change
- Competition
- Anticipation
Anticipation
Which valuation principle requires appraisers to analyze trends?
- Externalities
- Change
- Balance
- Contribution
Change
Which principle applies equally to residential and commercial properties?
- Exchange
- Replacement
- Substitution
- Swap
Substitution
The principle of anticipation applies only in the appraisal of income-producing properties.
- TRUE
- FALSE
-
-
FALSE
In a competitive market, ________ will function to equalize the quantity demanded by consumers and the quantity supplied by producers.
- Supply
- Price
- Value
- Economies of scale
Price
The principle of ___________ states that a prudent purchaser will pay no more for a property than he or she would pay for a similar or comparable property.
- Substitution
- Externalities
- Change
- Conformity
Substitution
Which economic principle states that factors located outside the boundaries of a property can have a positive or negative effect on value?
- Law of diminishing returns
- Contribution
- Externalities
- Supply and demand
Externalities
An apartment building owner wishes to construct a new garage building for his tenants, at a cost of $80,000. The principle of contribution holds that the value of this new garage is:
- Based on its contributing value to the total property
- Based on its actual cost to construct
- Based on what its cost should have been, as documented in a nationally-published cost manual
- Something less than its cost
Based on its contributing value to the total property
In Mapletown, there are only three homebuilders who control the entire market for new home construction. This is an example of:
- Monopoly
- Oligopoly
- Supply and demand imbalance
- Communism
Oligopoly
Which of these is NOT an important indicator of supply?
- New and proposed construction
- Recent population trends
- Vacancy rates and available inventory
- Availability of land and materials
Recent population trends
If an appraiser takes information on a sale from the MLS, and personally verifies it with a party to the transaction, it becomes:
- Primary data
- Secondary data
- Comparable data
- Demographic data
Primary data
What does GIS software do?
- Creates or manages geographic data
- Tracks population and demographic trends
- Helps an appraiser estimate vacancy rates
- Verifies sales data for use in the sales comparison approach
Creates or manages geographic data
How can secondary data become primary data?
- When it is obtained from a government Website
- When the appraiser performs additional research or verification
- When the appraiser subscribes to a data service
- It is not possible to produce primary data from a secondary source
When the appraiser performs additional research or verification
Data that was prepared by someone other than the appraiser would be considered _______________ data.
- General
- Primary
- Secondary
- Unreliable
Secondary
What type of GIS application is classified into three functionality categories: GIS Viewer, GIS Editor, and GIS Analyst?
- WebMap servers
- Spatial Database Management Systems
- Server GIS
- Desktop GIS
Desktop GIS
Demographic information from a local chamber of commerce publication would be considered _____________ data.
- Physical
- Primary
- Secondary
- Unreliable
Secondary
Where is the best place to obtain information regarding current building permits for apartment buildings in a market area?
- Local government officials
- U.S. Census Bureau
- Driving around the neighborhood, looking for building permits
- GIS mapping
Local government officials
What type of data relates to many properties within a market area?
- General data
- Specific data
- Property data
- None of these
General data
A particular GIS program has a representation of buildings as rectangles, with two attached fields that detail the building owner and the year built. This would be considered a ____________ representation.
- Layered
- Raster
- Vector
- Three-dimensional
Vector
____________ are typically used to represent variables that are continuous over space, such as terrain elevations or land cover.
- Layers
- Rasters
- Vectors
- Polygons
Rasters
An appraiser’s field notes that were taken during the physical inspection of the subject property would be considered ___________ data.
- Physical
- Secondary
- General
- Specific
Specific
What type of GIS application is often used for field data collection?
- Mobile GIS
- Spatial Database Management Systems
- Server GIS
- Desktop GIS
Mobile GIS
In analyzing local household trends, an appraiser notes that 60% of households are persons living alone, and per capita income is below the local and state averages. What would be the most appropriate residential development project for this area?
- Detached single-family homes with three bedrooms
- Luxury condominiums
- Apartment complex with predominantly one-bedroom units
- Loft apartments of 2,000 square feet or larger
Apartment complex with predominantly one-bedroom units
In developing opinions and conclusions about the marketability of a property, an appraiser typically uses:
- Primary data only
- Secondary data only
- Both primary and secondary data
- None of the above
Both primary and secondary data
Field notes and building measurements that the appraiser took during the physical inspection of the subject property would be considered ___________ data.
- Physical
- Primary
- Secondary
- General
Primary
In analyzing local household trends, an appraiser notes that 60% of households are persons living alone, and per capita income is significantly higher than state and local averages. What would be the most appropriate residential development project for this area?
- Detached single-family homes with four bedrooms
- Smaller, high-quality condominiums
- Apartment complex with mostly efficiency units
- Three-story townhouses of 3,000 square feet or larger
Smaller, high-quality condominiums
The principle of substitution does not apply to non-owner occupied commercial properties.
- TRUE
- FALSE
-
-
FALSE
Applications for GIS software include:
- Evaluation of places for location of new stores
- Verification of comparable sales
- Forecasting economic recessions
- Ensuring that real estate sale transactions are processed more smoothly
Evaluation of places for location of new stores
What is achieved when numerous factors exert proportional influence on value? (exert = apply or bring to bear (a force, influence, or quality)
- Contribution
- Change
- Balance
- Externalities
Balance
What type of data directly relates to the subject property?
- Income data
- General data
- Specific data
- Secondary data
Specific data
Demand-wise, which is generally a better investment?
- A good quality property in a poor location
- A poor quality property in a good location
- Neither – the lack of quality will cancel out the location difference
- None of the above
A poor quality property in a good location
An appraiser’s analysis indicates that 125,000 square feet of office space will be leased in a market in the next year; however during that same period, 50,000 square feet of currently occupied office space will become vacant. What would this analysis indicate?
- a net absorption of 175,000 square feet
- a net absorption of 75,000 square feet
- a net absorption of 125,000 square feet
- a real estate market in recession
a net absorption of 75,000 square feet
In reference to categorizing business and office space, the acronym FIRE stands for:
- Finance, Insurance, and Real Estate
- Financial Incentives for Real Estate
- A destructive natural force that can quickly decimate a building
- Financial Institution Risk Equity
Finance, Insurance, and Real Estate
In the valuation of a local convenience store near a residential subdivision, the _________ would be the most significant factor in the valuation.
- Local economy
- National economy
- Price of gasoline
- Local and national economies would be of equal importance
Local economy
In the valuation of a regional electrical power co-generation plant, the _________ would be the most significant factor in the valuation.
- Local economy
- National economy
- Cost of labor
- Local and national economies would be of equal importance
National economy
What method compares the subject share of the market, adjusts the subject to the competition using quantifiable rating techniques, calculates the subject historical capture rate, and other factors?
- Quantitative inventory analysis
- Fundamental capture method
- Quantity survey method
- Contingent valuation method
Fundamental capture method
What is the federal government source for employment data?
- Bureau of Labor and Industry
- Department of Health and Human Services
- Bureau of Labor Statistics
- Bureau of Employment and Jobs
Bureau of Labor Statistics
When considering a property for sale, investors will compare the property to other available properties, while owner/occupants will not consider other available competing properties.
- TRUE
- FALSE
-
-
FALSE
A demand analysis might include all of these activities, EXCEPT:
- Understanding alternative uses
- Identifying market participants
- Identifying seller motivations
- Forecasting future occupancy and rental rates
Identifying seller motivations
An appraiser’s analysis indicates that 550,000 square feet of retail space will be leased in a market in the next year. However, during that same period 75,000 square feet of currently occupied retail space will become vacant. What would this analysis indicate?
- A net absorption of 550,000 square feet
- A net absorption of 625,000 square feet
- A net absorption of 475,000 square feet
- A distressed market
A net absorption of 475,000 square feet
Measures of demand that are often used in the appraisal process include:
- Cost source references
- Availability study
- Capital appreciation rate
- Absorption rate
Absorption rate
One measure of demand that is often used in the appraisal process is:
- Availability study
- Capital appreciation rate
- Capture rate
- Zoning analysis
Capture rate
If a property lacks market acceptance, how can the demand for the property be increased?
- Nothing can be done to increase demand
- Wait until the market accepts the property
- Decrease the price
- Market the property only to the purchasers who will accept it
Decrease the price
The ability to determine household income, affordability of housing, and purchasing power is very important when considering the development or redevelopment of an area with:
- Commercial properties
- Residential properties
- Both of these
- Neither of these
Both of these
When using the U.S. Bureau of Labor Statistics as a source for employment and wage estimates, an appraiser should be aware that ____________ are not included in the estimates.
- Self-employed persons
- Minimum-wage workers
- Finance, Insurance, and Real Estate workers
- Underemployed persons
Self-employed persons
A demand analysis might typically include all of these activities, EXCEPT:
- Forecasting revisions to building codes
- Forecasting future occupancy and rental rates
- Identifying market participants
- Determining the financial return for a property
Forecasting revisions to building codes
An analysis to determine the best possible location for a condominium development, which includes a cost versus value analysis, would be called a:
- Feasibility study
- Market survey
- Property inspection
- Consultant report
Feasibility study
An appraiser’s analysis indicates that 250,000 square feet of retail space will be leased in a market in the next year, but during that same period 25,000 square feet of currently occupied retail space will become vacant. What concept does this analysis demonstrate?
- Police power
- Recession
- Net absorption
- Zero net growth
Net absorption
In the town of Woodlake, 60,000 square feet of Class A office space is leased per year. The Cedars, a Class A office building, just opened with 48,000 square feet of space to lease. It is projecting a 20% capture rate. How long will it take this building to reach 100% occupancy?
- 1.25 years
- 5 years
- 4 years
- 4 months
4 years
Why is the absorption rate useful in an appraisal?
- It demonstrates the principle of anticipation
- It helps determine supply and demand trends
- None of these
- It supports the appraiser’s estimate of accrued depreciation
It helps determine supply and demand trends
The _______________ is the rate at which properties for sale have been sold or rented within a specific market area.
- Capture rate
- Absorption rate
- Capitalization rate
- List-to-sale ratio
Absorption rate
Market analysis should relate and focus the ___________ to the value of the subject property.
- Current use
- Definition of value
- National, regional, and local information
- Comparable sales
National, regional, and local information
Over the last year in Highland Falls, there have been 84 sales of single-family homes. Currently, there are 168 homes on the market. How long will it take the market to absorb this inventory?
- 2 months
- 12 months
- 24 months
- 48 months
24 months
What is the term used to describe the estimated percentage of the total potential market that is sold or leased by one entity or development?
- Absorption rate
- Expected growth rate
- Future demand
- Capture rate
Capture rate
Market delineation defines the _____________ demand for a specific property.
- Geographic
- Economic
- Optimum
- Expected
Geographic
The appraiser must not only assess the level of demand at the time of the appraisal, but also:
- Forecast future demand
- Forecast the value of the property for a five-year holding period
- Consider the possibility that the property will be foreclosed
- Assess historic demand for at least the previous three years
Forecast future demand
In the Oakdale market area, there were 80 new condominium units sold last year. Treetop Gardens development, with 40 units available, sold 22 units. What is the capture rate for Treetop Gardens?
- 0.55
- 0.5
- 0.275
- 0.22
.275
Market segmentation defines and subdivides a large homogenous market into segments, such as:
- Office
- Residential
- Lodging
- All of these
All of these
Within the market delineation process, the appraiser identifies:
- The type and definition of value to be used in the appraisal
- The approaches to value to be used in the appraisal
- Competing and complementary properties
- All of these
Competing and complementary properties
An appraiser is studying absorption rates for retail space in a market. She notes that over the last several years, more space is becoming vacant than is being leased. What is this phenomenon called?
- Negative capture
- Negative net absorption
- Upside-down absorption
- Zero sum absorption
Negative net absorption
In the town of Woodlake, 60,000 square feet of Class A office space is leased per year. The Pines, an older Class A office building, has 36,000 square feet of space for lease. It is projecting a 10% capture rate. How long will it take this building to reach 100% occupancy?
- 6 years
- 3 years
- 5 years
- 10 years
6 years
In market analysis, what should the economic and demographic trends ideally support?
- The appraiser’s highest and best use conclusion
- The property’s current use
- The cost source
- The definition of value used in the assignment
The appraiser’s highest and best use conclusion
Market segmentation defines and subdivides a large homogenous market into segments, such as:
- All of these
- Lodging
- Residential
- Office
All of these
Berry Developers leased 25,000 square feet in their new 80,000 square foot retail complex last year. In the local market area, 200,000 square feet of retail space was leased. What is the capture rate for Berry Developers?
- 0.125
- 0.4
- 0.3125
- 0.08
.125
The results of the market analysis may cause a developer to:
- Lower the asking price
- Redesign the project
- Ensure the subject property offers standard features and amenities that are accepted in the market
- Any of these
Any of these
If there are 50 condominium units for sale in a market area, and units are selling at a rate of five per month:
- There is a 10-month supply of inventory currently on the market
- There is a 10-year supply of inventory currently on the market
- All of the current listings are overpriced
- A quick sale value should be provided in the appraisal
There is a 10-month supply of inventory currently on the market
There are several ways in which an appraiser can estimate demand.
- TRUE
- FALSE
-
-
TRUE
If 200 new homes are sold in Newtown in a single year, and XYZ Homes sold 50 of them, what is XYZ’s capture rate?
- 0.5
- 0.25
- 0.04
- Cannot determine from the information provided
.25
In calculating a capture rate, what must an appraiser consider if the subject property is superior to its competition?
- It should have a lower asking price to attract more buyers
- It should be redesigned to be more like its competition
- The calculation should be based on the assumption that the subject property offers only standard features and amenities
- It will “steal” occupants from existing facilities
It will “steal” occupants from existing facilities
NCREIF is the:
- Nationwide Council for Reform, Enforcement, Independence, and Freedom
- National Committee for Real Estate Information Funding
- National Council of Real Estate Investment Fiduciaries
- National Committee on Real Estate Investment Fraud
National Council of Real Estate Investment Fiduciaries
Census information can help an appraiser formulate a highest and best use analysis.
- TRUE
- FALSE
-
-
TRUE
According to NCREIF, which of these is NOT required to be considered in developing demand analysis for multi-family residential properties?
- Demographics by income, age, family size
- Employment and labor force trends
- Consumer purchasing habits and debt
- Population growth/decline
Consumer purchasing habits and debt
Census data should be analyzed according to standard methodology.
- TRUE
- FALSE
-
-
FALSE
Appraisers of what types of properties can use census information in their analyses?
- Restaurants
- Multi-family properties
- Self-storage facilities
- All of these
All of these
How often is a complete U.S. Census conducted?
- Every year
- Every four years
- Every ten years
- At odd intervals, as mandated by Congress
Every ten years
According to NCREIF, development of demand analysis for industrial properties:
- Is not required if the property is owner occupied
- Is not necessary unless the appraiser’s client demands it
- Is the same as office demand analysis
- Is the same as residential demand analysis
Is the same as office demand analysis
To make accurate predictions based on census data, real estate professionals should:
- Use the data as raw and unfiltered
- Take local and economic impacts into consideration
- Make sure the predictions agree with the client’s projections
- Go back at least 20 years when developing trends
Take local and economic impacts into consideration
According to NCREIF, what is the purpose of demand analysis?
- Develop historical relationships as a basis for forecasting future demand
- Use current demand to determine what the supply should have been at a given retrospective point in time
- Develop current trends that correlate to historical relationships between price and value
- All of these
Develop historical relationships as a basis for forecasting future demand
How can census data be used in appraising restaurant properties?
- Determine whether sales will support the rent
- Determine which nights of the week will be busiest
- Determine capitalization rates for properties in large metropolitan areas
- None of these
Determine whether sales will support the rent
According to NCREIF, additional knowledge leads to a better appraisal product, and also to:
- Increased income
- A greater market share
- Less liability
- All of these
Less liability
Members of NCREIF include:
- Investment managers
- CPAs
- Consultants
- All of these
All of these
According to NCREIF, which is NOT a step in demand analysis?
- Determine major market demand factors
- Define the unit of demand for the property type
- Base local demand projections solely on U.S. macroeconomic factors
- Present historic and projected demand data
Base local demand projections solely on U.S. macroeconomic factors
When analyzing an apartment building, an appraiser notes that it is located in a busy urban location, near a bus line. This is an example of _______ data.
- Meaningless
- Quantitative
- Qualitative
- Confirmed
Qualitative
What two measures are typically used in descriptive statistics?
- Pie charts and doughnut charts
- Standard deviation and variance
- Mean and median
- Central tendency and dispersion
Central tendency and dispersion
What is the study of methods and tools for collecting data and mathematical models to describe and interpret data?
- Descriptive Statistics
- Inferential Statistics
- Measures of dispersion
- Stacked column charts
Descriptive Statistics
A ____________ is a subset of the population.
- Sample
- Conclusion
- Anomaly
- Standard deviation
Sample
