Property Valuation

Question 1

What is an appraisal?

Answer 1

An appraisal is an opinion or estimate of the value of a property.

Question 2

What location factors affect the value of a property?

Answer 2

Convenience and accessibility, aesthetic issues and neighborhood factors

Question 3

What three physical factors affect the value of a property?

Answer 3

Arrangement and design
Physical durability
Visual appeal

Question 4

ppraiser John is using the sales comparison approach to appraise Chris and Linda’s home. Their home has 3 bedrooms, 1 bath and a 2-car garage. John has three comparable homes to use. Comp A has 3 bedrooms, 1.5 baths and a 2-car garage. Comp B has 3 bedrooms, 2 baths and a 1-car garage. Comp C has 4 bedrooms, 2 baths and no garage. With all other things being equal, what adjustments will John make?

Answer 4

John will make the following adjustments:
Comp A - Deduct an amount for the better bathroom.
Comp B – Deduct an amount for the better bathroom and add an amount for the inferior garage.
Comp C – Deduct an amount for the better bedroom, deduct for the better bathroom and add an amount for the inferior garage.

Question 5

What’s the difference between reproduction cost and replacement cost?

Answer 5

Reproduction cost is the cost at today’s prices of producing an exact duplicate of the current building, including its improvements and its flaws. Replacement cost is the construction cost at today’s prices of producing a similar or equivalent structure.

Question 6

Jim is using the cost approach to appraise Greg’s property. Jim has the following figures: land value $25,000, building value $137,500, total depreciation, $33,000. Using these figures, what will Jim estimate as the total value of the property?

Answer 6

$129,500 ($137,500 - $33,000 + $25,000)

Question 7

The income approach is based on which two principles of value?

Answer 7

Anticipation and substitution

Question 8

Define the capitalization rate. What is the capitalization rate of a property that sold for $325,000 and is producing an annual net operating income of $29,250?

Answer 8

The rate of return an investor will require on his or her investment of capital in this kind of property.

9% ($29,250 ÷ $325,000 = .09)

Question 9

For what types of property would an appraiser use a gross rent multiplier? If a property had a monthly rental income of $650 and the gross rent multiplier was 180.7, what would the appraiser estimate the property’s value to be?

Answer 9

Properties such as single-family homes and duplexes that could produce income, but are not primarily income-producing properties.

$117,455 ($650 x 180.7 = $117,455)

Question 10

What does an appraiser do after he or she has completed the estimates of value using all three estimating approaches?

Answer 10

The appraiser reconciles the estimates into a final value estimate.

Question 11

What does a mortgage lender need in addition to an appraisal to help evaluate the risk involved in a loan on investment property?

Answer 11

The lender needs information about the market value of a property over the life of the loan, or at least for several years.

Question 12

When developing a meaningful multiple-year operating forecast, what must an analyst forecast?

Answer 12

Gross revenue
Operating expenses
Changes in market value

Question 13

Since the only real way to determine the value of a property is through an actual sale

Answer 13

a lender must rely on an estimate of the property’s value through an appraisal. By definition, an appraisal is an opinion or estimate of the value of a property.

Question 14

The use value of a property is the

Answer 14

value the property holds for the owner

Question 15

The exchange value of a property results from

Answer 15

comparing the property to other similar properties on the open market. This is where appraisals come into play.

Question 16

The process of conducting an appraisal includes seven definite steps.

Answer 16

1. Identify the purpose of the appraisal, such as market value for a purchase or value as loan collateral.
2. Gather the data relevant to the property, such as tax and title records, costs and demographic and economic data.
3. Assess the highest and best use of the property by analyzing market conditions.
4. Estimate the value of the land.
5. Use the three approaches to estimating cost to help reduce errors and establish a “range” of value.
6. Reconcile the estimates from the three approaches into a final value estimate.
7. Compile and present a formal report to the client.

Question 17

People who will be using a particular site are concerned about

Answer 17

convenience and accessibility, aesthetic issues and neighborhood factors.

Question 18

After analyzing the neighborhood, the appraiser will study aspects of the specific property being appraised. The analyst will focus on these three aspects:

Answer 18

Functionality of arrangement and design
Durability of the construction
Visual appeal of the property

Question 19

There are three approaches to estimating cost:

Answer 19

Sales comparison approach
Cost approach
Income capitalization approach

Question 20

The sales comparison approach

Answer 20

is based on the principle of substitution – which says that a buyer will not pay more for the subject property than he or she would pay for a property that is similar in characteristics and amenities. With this approach, the value is determined by comparing the property being appraised with recently sold comparable (equivalent) properties.

Question 21

The cost approach is

Answer 21

most reliable for properties that were built recently, since the appraiser can get access to the actual costs of the development and construction. It’s also a good approach for special purpose buildings when data on income is not available or there are no comparable sales.

Question 22

Appraisers use the income approach

Answer 22

to estimate the value of properties that produce income, usually from rent paid on leases.

Question 23

The gross rent multiplier (GRM) and the gross income multiplier (GIM)

Answer 23

are very similar to the income approach. Appraisers use the GRM or the GIM to estimate the value of properties such as single-family homes and duplexes that could produce income, but are not primarily income-producing properties, like apartment buildings and office space.

Question 24

After using all three appraisal methods, the appraiser reconciles the estimates into a

Answer 24

final value estimate. The best way to do this is to evaluate how appropriate each method is to the particular type of property being appraised and to make decisions about the quality and quantity of the data that was gathered to support each method.

Question 25

A mortgage lender needs to have information about the market value of a property over several years, not just its value at the time of the loan

Answer 25

An analyst can develop a market forecast for every year of the loan amortization.

The forecast contains two important elements:

1. It estimates the expected operating results from the property over the forecast period and indicates to the lender whether the property will generate enough cash flow to cover the loan.
2. It estimates the market value on a year-by-year basis, which indicates the risk of losing principal if there is a foreclosure.

Question 26

To develop a meaningful multiple-year operating forecast, an analyst must forecast

Answer 26

Gross revenue
Operating expenses
Changes in market value