Real Estate Express Unit 4

Question 1

What is the Principle of Substitution?

Answer 1

if a buyer will pay a certain price for a property, he will pay a similar price for a ‘substitute’ property of similar characteristics.

Question 2

Describe the Sales Comparison Approach

Answer 2

1. Identify comparable sales.
2. Compare comparables to the subject and make adjustments to comparables. One always adjusts the values of the comparables – never the subject.
3. Reconcile values indicated by adjusted comparables for the final value estimate of the subject - a judgmental evaluation based on all value indicators.

Question 3

What is a Cost Approach?

Answer 3

relies on the original cost of the property’s land and improvements, the cost to reproduce or replace the property’s improvements, and the degree to which the improvements have depreciated.

Question 4

Reproduction Cost

Answer 4

The cost of replacing with the same materials as the original construction

Question 5

Replacement Cost

Answer 5

The cost of replacing with current materials and methods with similar utility and function to the original improvement

Question 6

What are the types of depreciation?

Answer 6

physical deterioration
functional obsolescence
external obsolescence

Question 7

Physical deterioration

Answer 7

form of depreciation caused by the action of the physical elements, such as wind or snow, or just ordinary wear and tear.

Question 8

Functional Obsolescence

Answer 8

A loss in value due to conditions within the structure which make the building outdated when
compared with a new building. (4 bedrooms and 1 bath, insulation, narrow stairway, etc.)

Question 9

Economic Obsolescence

Answer 9

A loss in value due to factors outside the subject property, such as changes in competition or
surrounding land use. Also referred to as external obsolescence.

Question 10

Effective Age

Answer 10

The difference between the theoretical economic life of a structure and its actual remaining
economic life. Differs from the actual age (chronological age) by such variable factors as depreciation, quality of maintenance, and the like

Question 11

Chronological Age

Answer 11

Actual age in years of the building, based on building date. The “Chronological Age” of a building cannot be changed. If the building is 20 years old the “Chronological Age” is 20 years.

Question 12

Physical Life

Answer 12

the actual age or life of a structure that is considered habitable. Example: A building sitting vacant without a tenant has a “Physical Life” but there is no economic life because there is no income.

Question 13

Economic Life

Answer 13

The time period over which an improvement to land earns more income than the cost incurred in
generating the income. Economic life ends when the improvement no longer represents the “highest and best use” of the property.

Question 14

Incurable vs Curable Deterioration

Answer 14

Incurable - Elements of a structure which are neither physically possible nor economically feasible to correct
Curable - When the cost of the repair is less than what the repair adds to the value of property

Question 15

Income Approach to Value

Answer 15

Calculating the value of an income generating property based on the present value of the rights to future income

Question 16

Capitalization (Cap) Rate

Answer 16

The rate of return on an investment

Question 17

What are the Income approach formulas?

Answer 17

To solve for Value:
I / R = V (Income divided by Cap Rate = Value)

To solve for Cap Rate (rate of return, or R):
I / V = R (Net Income divided by Value = Cap Rate)

To solve for Income (Net Operating Income):
V x R = I (Value x Cap Rate = Net Income)