Real Estate Course Chapter 15 Flashcards
A comparative market analysis (CMA) must conform to the Uniform Standards of Professional Appraisal Practice (USPAP). True or False?
False
Replacement cost is the amount of money required to build an exact duplicate of the structure. True or False?
False. That would be Reproduction Cost
Name the four characteristics of Value.
DUST
Demand (this also implies ability to obtain)
Utility (the ability to provide useful benefits)
Scarcity (supply and demand)
Transferability (legal ability to transfer title)
What is the formula for obtaining Present Value?
Net Operating Income (NOI) ÷ Overall Capitalization Rate (OAR)
What is the value for obtaining Net Operating Income?
Overall Capitalization Rate (OAR) x Present Value
What is the value for obtaining Overall Capitalization Rate (OAR)?
Net Operating Income (NOI) ÷ Present Value
If a comparable property is superior to the subject property with regard to size, a downward adjustment is made to the sale price of the comparable.
True. Remember: Comp better = subtract
Comp better = ?
Comp inferior = ?
Comp better = subtract (CBS)
Comp inferior = add (CIA)
In the cost-depreciation approach, the maximum value of a property can be measured by determining the cost to acquire an equivalent site and to reproduce a structure as if new, and then subtracting accrued depreciation?
True
The cost-depreciation approach is based on….
the theory that a knowledgeable purchaser will pay no more for a property than the cost of acquiring a similar site and constructing an acceptable substitute structure
Chronological age is used in the lump-sum age-life method of calculating accrued depreciation.
FALSE. The lump-sum age-life method is based on a ratio of a property’s effective age to its economic life. Effective age is the age indicated by a structure’s condition and utility.
If an appraisal report involves a federally related transaction, it must be prepared by a state-certified or licensed appraiser?
True
Define Cost
Cost is the total expenditure required to bring a new improvement into existence plus the cost of the land.
Define Price
Price refers to the amount of money (or its equivalent) for which a good is actually sold.
Which method of estimating building costs relies on the use of cost-calculation publications?
COMPARATIVE SQUARE-FOOT
A limited partnership plans to purchase an apartment building that has a monthly net income of $5,200 and monthly expenses of $1,400. If the partnership is to get a 12 percent return on its investment, what should it pay for the property?
A)$43,333
B)$350,500
C)$520,000
D)$62,400
C) $520,000.
The solution is: Income ÷ Rate = Value;
$5,200 monthly net income × 12 months = $62,400 annual NOI; $62,400 ÷ .12 rate of return = $520,000 target price.
A comparable property has one more bathroom than does the subject property. The appraiser estimates the value of an extra bath at $30,000. How should the adjustment be entered on the reconciliation?
A)Decrease the value of the subject property by $30,000
B)Increase the value of the comparable by $30,000
C)Decrease the value of the comparable by $30,000
D)Increase the value of the subject property by $30,000
C) DECREASE THE VALUE OF THE COMPARABLE BY $30,000.
Remember: Comp better = subtract (CBS)
What is Assemblage?
Assemblage is the combining of two or more adjoining properties into one tract: the process of consolidating properties
Which type of depreciation is associated with inefficient architectural design?
A)External obsolescence
B)Age-life deterioration
C)Functional obsolescence
D)Physical deterioration
C) FUNCTIONAL OBSOLESCENCE. Functional obsolescence is depreciation associated with operational inadequacies, poor design, or changing tastes and preferences.
How do you figure the GRM (gross rent modifier) for a property?
Sale price ÷ gross monthly rent = GRM
Which type of value is associated with an income-producing property that has been operating successfully for some time?
Going Concern. Going concern value is the value of an income-producing property characterized by a significant operating history.
The price per square foot for three comparable lots is as follows: Lot 1: $5.25; Lot 2: $6.00; and Lot 3: $6.30. Based on inspection of the properties and considerations such as shape and location, the appraiser decides to use a weighted averaging technique of 20 percent weight for Lot 1 and 40 percent weight each for Lots 2 and 3. What is the average price per square foot?
The answer is $5.97. The solution is: $5.25 × .20 = $1.05; $6.00 × .40 = $2.40; $6.30 × .40 = $2.52; $1.05 + $2.40 + $2.52 = $5.97 per square foot.
For which feature does an appraiser make an adjustment if it is determined that there was a business relationship between the buyer and seller that may have influenced the sale price?
CONDITIONS OF SALE. Appraisers research the conditions of sale to determine if the buyer or seller was under abnormal pressure to buy or sell or if there was a special relationship between the parties to the transaction.
The four characteristics of value do NOT include which characteristic? A)Demand B)Transferability C)Utility D)Surplus
D) SURPLUS. The four characteristics of value are: demand, utility, scarcity, and transferability
A new car has a sticker amount of $31,000. This figure is the car’s
Price
Which type of age is MOST relevant in the cost-depreciation approach?
Effective.Effective age is the age indicated by a structure’s condition and utility.
Using income capitalization, what is the result of holding the capitalization rate constant and increasing the net operating income?
PRESENT VALUE INCREASES. If the net income goes up and the capitalization rate remains constant, the present value will increase
Which type of value is personal to a particular investor based on the investor’s investment objectives, risk tolerance, and so forth?
INVESTMENT. Investment value is the price an investor would pay, given the investor’s own financing requirements and income tax situation.
Which principle states that an informed purchaser will NOT pay more for real estate than the cost of acquiring an equally desirable alternative property?
SUBSTITUTION. The principle of substitution means that a prudent buyer or investor will pay no more for a property than the cost of acquiring, through purchase or construction, an equally desirable alternative property.
A developer combines two adjacent parcels into a single parcel, making the property more suitable for development. Which appraisal term describes this process?
ASSEMBLAGE. Assemblage is the combining of two or more adjoining properties into one tract: the process of consolidating properties. This is usually done to increase the usability and value of the resulting consolidation.
Which method of estimating building costs relies on the use of cost-calculation publications?
COMPARATIVE SQUARE-FOOT. In this method, the cost on a square-foot basis is compared for a similar structure, sometimes using cost-calculation publications.
Which type of cost is calculated using similar, but NOT identical, building materials, resulting in equal utility as compared with the subject property?
REPLACEMENT. Replacement cost is the amount of money required to replace a structure having the same use and functional utility as the subject property, but using modern, available, or updated materials.
Define Reproduction Cost.
the amount of money required to build an exact duplicate.
Replacement Cost =
Define Replacement Cost
the amount of money required to replace a structure having the same use and functional utility as the subject property, but using modern, available, or updated materials.
Name three methods of estimating building replacement costs.
1) Quantity survey method
2) Unit-in-place method
3) Comparative square-foot or cubic-foot method.
In relation to estimating building replacement costs, describe the Quantity Survey Method.
This method involves a detailed inventory of all labor, materials, products, and indirect costs, plus the builder’s profit, required to reproduce a building. The number of items in then multiplied by the cost per item.
In relation to estimating building replacement costs, describe the Unit-in-place Method.
The cost of materials plus the cost of labor to install them is calculated for each component of a structure (driveways, walls, floors,etc). The base cost is then multiplied based on the total square feet.
In relation to estimating building replacement costs, describe the Comparative square-foot or cubic-foot method
The cost of reproducing a recently built property similiar in size and function to the subject property is often used as a basis. (What we use as insurance agents). Square foot or cubic-foot costs are obtained for standard benchmark-software is used.
What is the Comparative square-foot or cubic-foot method sometimes called?
Comparative unit method or the Unit Comparison method.
Define Depreciation
the loss in value caused by things such as wear and tear, poor design, or the structure’s surroundings.
What is Accrued depreciation?
the total depreciation that has accumulated over the years.
Define Curable and Incurable depreciation?
Curable depreciation occurs when a building component has been added or repaired and the owners are able to get their money back in added value.. Incurable depreciation means one can not get their money back
Depreciation in a structure can be attributed to three major causes
1) Physical deterioration
2) Functional obsolescence
3) Extranal obsolescence
Related to depreciation, describe physical deterioration
Ordinary wear and tear.
Related to depreciation, describe Functional Obsolescence
Anything that is inferior due to to operational inadequacies, poor design, or changing tastes and preferences
Related to depreciation, describe External Obsolescence
Any loss in value due due to influences originating outside the boundaries of the property.
Define Economic Life with respect to appraisal value
The total estimated number of years that the structure is expected to contribute to the property’s value
With respect the Accrued Depreciation Formula what is the formula
Effective age ÷ Total economic life x Reproduction cost new = Estimated total accrued depreciation.
Example: 4 years ÷ 60 years x $225,000 = $15,000
Define the Potential Gross Income (PGI)
The total annual income a property would produce if it were fully rented and no collection losses were incurred
What is the the Effective Gross Income (EGI)?
When vacancy and collection losses are deducted from the annual PGI and any income from other sources (parking,vending machines) is added.
What is the Net Operating Income (NOI)?
NOI is the income remaining after subtracting all relevant operating expenses from Effective Gross Income (EGI). You would deduct fixed expenses, variable expenses and reserve for replacements from EGI. NOTE: DO NOT deduct mortgage or income tax payments.
What is the difference between GRM (gross rent modifier) and GIM (gross income modifier)?
the GIM refers to all income a property may make, while the GRM refers to only rent. They are calculated the same way, except GIM uses annual income versus monthly rent.
Sale price ÷ gross ANNUAL income = GIM
Sale price ÷ gross MONTHLY rent = GRM
CMAs usually present information concerning three major categories of properties. They are:
1) properties sold with the last 12 months
2) properties currently on the market
3) properties that have expired within the last 12 months
What is plottage?
The ADDED VALUE as a result of assembling (combining) two or more properties into one large parcel
What is Progression?
The principle that the value of an inferior property is enhanced by its association with superior properties of the same type.
What is Regression?
The principle that the value of an superior property is adversely effected by its association with an inferior property of the same type
What is Situs?
Refers to people’s preferences, both physical and economic, for a certain area owing to factors such as weather, job opportunities, and transportation facilities.
