Real Estate Appraisal

Question 1

What are the elements of value?

Answer 1

STUD -
- Scarcity
- Transferability
- Utility
- Demand

Value is the present worth of future benefits.

Question 2

Market Value vs. Market Price

Answer 2

Market Value - what should be paid for the property under normal conditions

Market Price - what was actually paid for the property

Question 3

What is the principle of highest and best use?

Answer 3

The most profitable use for the property. It must be:
1) physically possible
2) economically feasible and
3) legally permissible

Question 4

What is the principle of change?

Answer 4

Real estate values are constantly in flux. Every property has a physical life and an economic life – the economic life is shorter.

The property/neighborhood goes through a four-step lifecycle: Integration (growth), equilibrium (stability). disintegration (decline) and rejuvenation.

Question 5

What is the principle of anticipation?

Answer 5

Anticipated future benefits of a property since these are what arise the desire to own.

Question 6

What is the principle of supply and demand?

Answer 6

Values tend to rise as demand increases - eg, a new employer would increase demand for homes and thus property prices.

Question 7

What is the principle of substitution?

Answer 7

Nobody will pay more for a property than they would for an equally desirable substitute property.

Question 8

What is the principle of conformity?

Answer 8

The maximum value of land is achieved when there is an acceptable degree of social conformity. When a home is surrounded by higher quality homes, the value increases (and vice versa).

Question 9

What is the Principle of contribution?

Answer 9

The value that an improvement adds to the over-all value of the property.

Question 10

What is the principle of competition?

Answer 10

Profits tend to encourage competition, and excess profits tend to result in ruinous competition. An income generating property may find profits reduced by similar properties opening nearby.

Question 11

What is “Excess land” in appraisals?

Answer 11

The portion of land that does not contribute to the value of the property.

Question 12

What is “plottage” in appraisals?

Answer 12

Two parcels of land when combined may be worth more than their individual value (this is especially true when it changes the highest and best use)

Question 13

What is the sales comparison approach?

Answer 13

Based on the principle of substitution that no buyer would pay more for a property than she would for an equally desirable property, this is the best method for residential appraisals.

Uses sales within the last six months, if possible, in the same neighborhood with similar characteristics terms and conditions.

Question 14

What is the cost approach to value?

Answer 14

Only method for public buildings and churches, and a reliable method for new construction. This estimates the cost of replacing the improvements rather than reproducing them. Depreciation is then deducted and the value of land is added.

Square footage is estimated by the outside dimensions of each floor of the structure, excluding garage. Square footage below grade is usually not included.

Question 15

What is functional obsolecense?

Answer 15

Functional obsolescence: loss
in value due to inadequate or
outmoded equipment, or as a
result of a poor or outmoded
design

Question 16

What is external obsolescence?

Answer 16

External (economic)
obsolescence: a loss in value
resulting from factors outside
the property itself, such as
close proximity to an airport

Question 17

What is the income approach to value?

Answer 17

This is the capitalization method, based on the idea that there is a relationship between the net income and market value to an investor.

Economic rent: market rent
Contract rent or Historical rent: actual earnings

Question 18

What is effective gross income?

Answer 18

Gross income after deducting vacancy factor.

Question 19

What expenses are not deducted from gross income?

Answer 19

P&I (debt service), depreciation, and the property owner’s income taxes.

Question 20

When is the gross income multiplier method used?

Answer 20

This is used when evaluating single-family residential properties, which are not thought of as income producing properties. This is the figure which is multiplied by the properties gross income to get an estimate of the property value.

Question 21

What are formats of appraisal reports?

Answer 21

Narrative report, which is more detailed, and form report, which is the standard use by lending institutions and government agencies.

Question 22

What does the reconciliation process in an appraisal involve?

Answer 22

This is the final step in an appraisal when they assemble and interpret the data. The appraiser does not simply rely on an average.