Real Estate Appraising

Question 1

Is the most probable price a property would bring in an arm’s-lengths transaction under normal conditions on the open market. The appraiser’s opinion of what a typical buyer would pay.

Answer 1

Market Value

Question 2

What four basic elements must be present before any product has a market value?

Answer 2

A market exists only when demand has been created by a product’s utility, or usefulness, coupled with its relative scarcity. The product must also have the quality of transferability; that is, there must be no impediment to its sale, such a lien or other encumbrance. (DUST)

Question 3

Life cycle - both buildings and neighborhoods go through life cycles. As they are developed, they achieve growth, attain a period of equilibrium (or stability) in which little change is evident, they decline as properties deteriorate.

Question 4

the combination of land uses that results in the highest property values overall. For example, housing should benefit from its proximity to places of employment and shopping areas.

Answer 4

Balance, principle of

Question 5

Takes into account the effect on market value of the relationship between the number of properties on the market at a given time and the number of potential buyers.

Answer 5

Supply and demand, principle of

Question 6

Holds that property values are maximized when buildings are similar in design, construction, and age, particularly in residential neighborhoods.

Answer 6

conformity, principle of

Question 7

The worth of a less valuable building tens to be enhanced by proximity to buildings of greater value.

Answer 7

progression, principle of

Question 8

A building’s value will decline if the buildings around it have a lower value.

Answer 8

Regression, principle of

Question 9

A component part of a property is valued in proportion to its contributions to the value of the entire property, regardless of its separate actual cost.

Answer 9

Contribution, principle of

Question 10

Business profits encourage competition, which ultimately may reduce profits for any one business.

Answer 10

Competition, principle of

Question 11

Effect on property value of constantly varying physical, economic, social, and political forces.

Answer 11

Change, principle of

Question 12

Expectation that property will offer future benefits, which tends to increase present value.

Answer 12

Anticipation, principle of

Question 13

Principle of Market value tends to be set by the present or recent cost of acquiring an equally desirable and valuable property, comparable in construction, utility, or both.

Answer 13

Substitution, principle of

Question 14

Market comparison approach; market date approach; appraisal method in which the sale prices of properties that are comparable in construction and location to the subject property are analyzed and adjusted to reflect differences between the comparables and the subject.

Answer 14

Sales comparison approach.

Question 15

A transaction in which neither party acts under duress and both have full knowledge of the property’s assets and defects, the property involved has been on the market a reasonable length of time, there are no unusual circumstances and the price represents the normal consideration for the property sold, without unusual financing terms.

Answer 15

Arm’s-length transaction.

Question 16

Appraisal method in which site value is added to the present reproduction or replacement cost of all property improvements, less depreciation, to determine market value.

Is ideal for special purpose properties-those that have no comparables in the area or which produce no income. Example are Museums, schools, and churches.

Answer 16

Cost approach.

The formula for the cost approach is as follow:

Reproduction or replacement - Accrued + Site value
cost of improvement(s) depreciation

Question 17

The cost of a new building of exactly the same design and materials as the subject property.

Answer 17

Reproduction cost

Question 18

The cost of a new building using modern construction techniques, design, and materials but having the same utility as the subject property.

Answer 18

Replacement cost.

Question 19

Determination of land value exclusive of improvements.

Answer 19

Site Value

Question 20

The subjective value of property to its present owner, as opposed to market value, which should be objective

Answer 20

Value in use

Question 21

The most probable price property would bring in an arm’s-length transaction under normal conditions on the open market.

Answer 21

Market Value

Question 22

Way of finding reproduction cos by multiplying the current cost per square foot of a comparable building by the number of square feet in the subject building.

Answer 22

Square-foot method

Question 23

Way of estimating building reproduction cost by adding the construction cost per unit of measure of each of the components parts of the subject property: each unit cost includes material, labor, overhead, and builder’s profit.

Answer 23

unit-in-place method

Question 24

Way of estimating building reproduction cost by making a thorough itemization of all construction costs, both direct (materials and labor) and indirect (permits, overhead, profit), then totaling those cost.

Answer 24

quantity survey method

Question 25

Way of estimating building reproduction cost by multiplying the original cost of the subject building by a factor that represents the percentage change in construction cost generally from the time of construction to the time of valuation.

It is a very imprecise method, however, and for that reason it should be used only as a check on the value arrived at by one of the other methods.

Answer 25

Index method

Question 26

Decrease in value of an asset that is allowed in computing property value for tax purposes; in appraising, a loss in the value of a property improvement from any cause; depreciation is curable when it can be remedied by a repaid or an addition to the property, and it is incurable when there is no easy or economic way to cure the loss.

Answer 26

Depreciation

Question 27

Loss in value brought about by wear and tear, disintegration, use, and action of the elements.

Answer 27

Physical deterioration

Question 28

Loss in value due to adverse factors within a structure that affects its marketability, such as its design, layout, or utility.

Answer 28

functional obsolescence

Question 29

Economic or environmental obsolescence; loss in value due to outside causes, such as changes in nearby land use. Ironically, rezoning may increase the value of the rezoned property while decreasing the value of a adjacent property.

Answer 29

external obsolescence

Question 30

Depreciation computed at a constant rate over the estimated useful life of the improvement.

Answer 30

Straight-line method

Question 31

Breakdown method: depreciation computed by estimating the loss in value caused by evert item of depreciation, whether curable or incurable.

it requires the appraiser to estimate the loss in value caused by every individual item of depreciation, whether curable or incurable.

Answer 31

Observed condition method

Question 32

Appraisal method in which the actual or likely net operating income of property is divided by its expected rate of return(capitalization rate) to arrive at an estimate of market value.

Answer 32

Income capitalization approach

Question 33

The maximum income that property is capable of producing.

Answer 33

Potential gross income

Question 34

The rent that could be charged for property at the present time, based on demand and the number of available properties.

Answer 34

Market rent

Question 35

The rent agreed to by lessor and lessee.

Answer 35

Contract rent

Question 36

Property income from all sources, less allowance for vacancy and collection losses.

Answer 36

Effective gross income

Question 37

Profit; the money remaining after expenses are deducted from income.

Answer 37

Net operating income

Capitalization x Value = Net Operating income

Question 38

The rate of interest that is considered a reasonable return on an investment, used in the process of determining value based on net operating income; the yield necessary to attract investment.

Answer 38

Capitalization rate

Net operating income / Value = Capitalization rate

Question 39

In appraising, the final step, in which the estimates of value reached by each of the three appraisal approaches ( sales comparison, cost, and income capitalization) are weighed in light of the type of property being appraised, the purpose of the appraisal, and other factors, to arrive at a final conclusion of value.

Answer 39

Reconciliation

Question 40

Narrative report; most comprehensive type of appraisal report, including a thorough statement of the background date supporting the opinion of value.

Answer 40

Self-contained report

Question 41

Appraisal report using a standardized form, such as the Uniform Residential Appraisal Report (URAR) developed by Fannie Mae and Freddie Mac.

Answer 41

Summary Form Report

Question 42

Property appraisal that will be limited in either the method of valuation used or the property interests valued.

Answer 42

Restricted use report.

Question 43

In appraising real estate, the most profitable, physically possible, and legally permissible use for the property under consideration.

Answer 43

Highest and best use

Question 44

The appraiser can use any one or more of the following four methods to find the reproduction or replacement cost of property improvements:

Answer 44

Square-foot method
Unit-in-place method
Quantity survey method
Index method

Question 45

The three forms of depreciation are as followed:

Answer 45

Physical deterioration
Functional obsolescence
External obsolescence=

Question 46

An annual GIM (gross income multiplier) is more likely to be used for industrial or commercial property.

Question 47

A monthly GIM (gross income multiplier) generally is used for residential property. Because its income is generally limited to rent, the multiplier for a single-family residence is usually termed a gross rent multiplier (GRM).

Question 48

The sales comparison approach usually is the best indicator of value for residential property. The cost approach is the most reliable indicator for newly constructed or special purpose property. The income capitalization approach is the best indicator of value for commercial/industrial property and apartment buildings of five units or more.