N. Property Value and Appraisal Flashcards
John’s home is up for sale. He originally bought it five years ago for $300,000, and its current value is $350,000. His real estate agent notifies him that a buyer just made an offer on his home for $365,000, which is the price other similar homes in the neighborhood are selling for, and John accepts. What does the price of $365,000 represent?
A. The assessed value
B. The appraised value
C. The market value
D. The investment value
C. The market value
Market value is the price at which a willing buyer and a willing seller would strike a deal, given normal market conditions.
The Richards’ farm is located on a 10-acre parcel of land, which is very rare to come by in their area. However, the house is rundown and in need of many repairs. Buyers in the area looking for a move-in ready home would need to either look elsewhere or wait several months for the home to be renovated. Which factors are negatively impacting the value of the Richards’ property?
A. Utility, scarcity, and transferability
B. Utility and transferability
C. Demand and utility
D. Demand, scarcity, and transferability
C. Demand and utility
Although large parcels in the area are scarce, the low demand of buyers willing to buy and then wait to live in a property that needs significant repairs is affecting the value.
Most of the homes in Betty’s new neighborhood are valued between $400,000 and $450,000. All of the homes in the neighborhood are very beautiful, the lots are large, and everyone’s yard has impeccable landscaping. If Betty’s home were in another neighborhood only a few miles away, it might only be valued at $300,000 due to its smaller size. But her home is valued at $400,000 in her neighborhood due to the desirability of the area. Why is her home in this neighborhood worth significantly more?
A. Progression
B. Price bump
C. Regression
D. Conditional value
A. Progression
A home in an incredibly nice neighborhood full of luxury housing, for example, would make the home’s worth significantly more. The price of Betty’s home certainly got bumped up, but “price bump” isn’t a recognized term in real estate, so option B isn’t correct. “Conditional value” isn’t a real estate term either, so option D is out. Regression is a real estate term, but it describes the exact opposite of what’s occurring here. If Betty lived next to a property that was in complete disarray and wasn’t maintained, it would likely detract from her home’s value, or cause it to “regress.” So this takes care of option C. The desirability of the homes in Betty’s neighborhood increases the value of her home, which is due to A, progression. Think about progression this way: Having a higher-valued home is definitely a “pro”!
Ashton, an appraiser, is estimating a home’s value using the sales comparison approach. He applies more weight to two comparables over several others he used. What process is he utilizing?
A. Bracketing
B. Correlation
C. Conformity
D. Averaging
B. Correlation
Option A, bracketing, is when an appraiser uses units that are both superior and inferior to the subject property as far as age, condition, conditions of sale, etc., to determine a probable range of values. This makes option A incorrect. Conformity is a principle of value related to how well a property conforms to the surrounding area, so option C is incorrect. Averaging is a mathematical tool, and appraisers typically wouldn’t average the values computed for comparable properties, so that eliminates option D. Correlation, also called reconciliation, means that at the end of the appraisal process the appraiser reviews all work performed and, usually by giving the most weight to one or two of the most similar comparables or to one of the specific valuation approaches used, determines a single value or a range of values for the subject property.
Your client is purchasing a single-family home using a VA-guaranteed loan. The sales price is $150,000. Is a certified appraiser required to perform an appraisal?
A. No, since the property is less than $250,000.
B. No, since it’s a VA loan.
C. Yes, and since the purchase is being financed with a VA-guaranteed loan, the appraiser must be VA certified.
D. It’s at the discretion of the buyer to have the property appraised.
C. Yes, and since the purchase is being financed with a VA-guaranteed loan, the appraiser must be VA certified.
Certain rules apply as to when appraisals are or are not required for federally related transactions. They’re definitely not at the buyer’s discretion, unless the buyer is paying cash, and that’s not the case here, so option D is out. Option A is misleading, because normally transactions of less than $250,000 would be exempt from the appraisal requirement, but this is where the VA loan factor comes into play. VA loans required to have a state-licensed, VA-certified appraisal, so options A and B out. This leaves us with option C.
Robin, the appraiser of the Birkenstocks’ property, wants to make sure her computations of adjustments on their home are valid. She’s using the sales comparison approach, so she’ll prioritize the ______ first.
A. Location
B. Market conditions
C. Conditions of sale
D. Physical characteristics
C. Conditions of sale
The sales comparison approach compares a property to other properties with similar characteristics that have recently sold. The elements considered in the sales comparison approach are applied in a specific order: financing terms and cash equivalency, conditions of sale, market conditions at the time of contract and closing, location, and physical characteristics. (This is one of those things you’ll want to memorize for your exam.) So the first element listed here would be option C. The other three elements are on the list but are considered after the conditions of sale. Option B (market condition) is factored in after conditions of sale, option A (location) is factored in next, and option D (physical characteristics), would be the very last element Robin would look at.
What’s the estimated value by cost approach for a property if the site value is $25,000, the cost of improvements is $100,000, and the total depreciation estimate is $15,000?
A. $115,000
B. $90,000
C. $140,000
D. $110,000
D. $110,000
To estimate value using the cost approach, an appraiser adds the site value to the cost to replace improvements, then subtracts the amount of depreciation. Here, that gives us $100,000 + $25,000 – $15,000 = $110,000.
When the Browns first purchased their home, the area was primarily agricultural. But over the years, as more homes were built, the area has undergone some major changes. What was once a quiet neighborhood is now on the corner of a major busy intersection with lots of traffic, noise, and light pollution throughout the night. What type of depreciation has the Browns’ home undergone?
A. Physical depreciation
B. Functional obsolescence
C. Incurable depreciation
D. External depreciation
D. External depreciation
External depreciation (or economic obsolescence) is a loss in value caused by an undesirable or hazardous influence offsite.
Which of these situations represents reproduction cost in the cost approach to value?
A. Jenning’s historic property was mostly destroyed by fire. He rebuilds it with similar materials, square footage, and design.
B. Kristina’s antebellum mansion in New Orleans was severely damaged by a hurricane. She spends several years repurposing materials from other similar homes to rebuild it exactly as it was before the hurricane.
C. Martin sold his beloved family home, then built one just like it, only with newer materials that were more environmentally friendly, in a warmer, drier part of the country.
D. Ginger’s parents built a new home when Ginger was just leaving for college. When she graduated, Ginger went back to her home town and hired a builder to build a similar but smaller house for her and her new husband.
B. Kristina’s antebellum mansion in New Orleans was severely damaged by a hurricane. She spends several years repurposing materials from other similar homes to rebuild it exactly as it was before the hurricane.
The cost to build a functionally equivalent property like the property Jenning built is replacement cost, making option A incorrect. Martin and Ginger build similar homes, but with different materials in a different area or in a different size; this more likely represents replacement cost as well, which eliminates options C and D. Reproduction cost, which is usually used to determine the value of historic or one-of-a-kind properties that, in order to achieve the same utility and function, would use the same materials and have the same deficiencies, is reproduction cost.
Kevin’s lender just ordered an appraisal on the five-unit apartment building he’s contracted to purchase. He’s especially interested in hearing about the estimated rate of return the property could pull. What type of value is he interested in?
A. Assessed value
B. Insured value
C. Value in use
D. Investment value
D. Investment value
While Kevin may be interested in all of these values, there’s one in particular that has to do with a property’s rate of return. Kevin wants to determine the property’s highest and best, or most valuable, use, so he’s not concerned with the assessed value at this point, which has to do with taxes—option A is out. The insured value is the total cost it would take to completely replace the property. This is something insurance companies would be most interested in, so option B isn’t what Kevin’s looking for. Option C, value in use, won’t help him determine the property’s highest and best value. “Rate of return” lets us know this is an investment property; option D is correct.
The gross income multiplier for an area is 12X. If the estimated annual rent is $10,000, what’s the property’s estimated value?
A. $100,000
B. $10,000
C. $12,000
D. $120,000
D. $120,000
If the subject property’s gross market rent is $10,000 and the multiplier extracted from the local market is 12X, the estimated value of the subject is $120,000.
One month after Max passed his real estate licensing exam, a couple contacts him via referral, asking him to represent them in the sale of their home. Max meets with his clients at their home, does a walk-through, takes a drive through the neighborhood, and then heads back into the office to conduct a comparative market analysis on the property. They’ve communicated to him that they’d obviously like to make as much off the sale as possible, but they need to complete the sale in the next three months, in time for the wife to start a new job in another state. To accurately calculate a suggested price range for their property, Max will have to ______.
A. Adjust prices from all properties listed or sold within a one-mile radius to the subject property
B. Use the prices of sold comparables and active listings, adjusted for the amount of time listed
C. Use adjusted prices from sold comparables, refining the price range with data from active listings, expired listings, and possibly pending sales
D. Calculate based on data from expired listings and pending sales
C. Use adjusted prices from sold comparables, refining the price range with data from active listings, expired listings, and possibly pending sales
CMAs produce a range of possible list prices. First off, Max needs to identify comparables—properties that are similar to the property he’ll be listing. Homes can differ significantly, even in a one-mile radius, so option A isn’t a viable approach. Option D won’t help him, since this choice doesn’t factor in recently sold properties at all. Option B doesn’t work because simply using the prices of sold properties doesn’t account for the differences between the comparables and the subject property. Max will want to closely review sold property records, looking at recently sold properties that are similar to his client’s property and in the same geographical area. Recent sales of comparables should be used to calculate that price range for the CMA
In this form of price determination, the real estate professional will often just drive by the property and take photos, then complete paperwork for the lender.
A. Comparative market analysis
B. Competitive market analysis
C. Broker’s price opinion
D. Appraisal
C. Broker’s price opinion
Licensees prepare a comparative market analysis, sometimes also referred to as a competitive market analysis, for sellers to assist in setting a listing price for a home. It may also be used to help buyers determine an appropriate offer amount. It’s not prepared for a lender, so that makes options A and B incorrect. An appraisal is a formal, detailed estimate of value prepared for a buyer and the buyer’s lender. The appraisal includes a detailed analysis of the property’s interior and exterior, so option D is incorrect. A broker’s price opinion is prepared by a real estate professional, usually for a lender, insurance company, or investor, and may be either a drive-by or an interior BPO
You’re working with Gretchen, a buyer who wants to make an offer on a house that’s much lower than the list price. That’s because she’s seen the tax assessor’s value, which is far lower than the list price. What should you tell her?
A. “Assessed value is determined as a percentage of market value. It’s used to calculate taxes and is just one factor in determining an offer price.”
B. “Assessed value is assigned by county taxing authorities and is required by state law to be lower than actual market value.”
C. “Assessed value has no relationship to current market value, since it’s only used to calculate property tax rates.”
D. “Assessed value is always based on market value, so it’s a great way to determine a fair price to offer on this property.”
A. “Assessed value is determined as a percentage of market value. It’s used to calculate taxes and is just one factor in determining an offer price.”
Assessed value is the value placed on a property by taxing authorities (often the county assessor’s office), but this value isn’t dictated by state law, so option B is incorrect. Assessed value is related to market value, and in some states assessed value may equal the sales price of recent sales, though the two values will rarely be identical. Option C is out. Many jurisdictions don’t update assessed values frequently, and it’s rare that these values mimic actual immediate market conditions, so option D is incorrect. Assessed value is generally a percentage of market value and tends to follow the market’s ups and downs, though often in a time-delayed fashion. Assessed value is used to calculate taxes, but it’s just one factor in determining an offer price along with comparable sales and other conditions, so option A is correct.
