Real Estate Valuation (S4U1&2)

Question 1

Appraisal

Answer 1

An estimate of value as of a specific date and for a specific use

Question 2

Evaluation

Answer 2

Study of a property, potentially for land use or marketability

Question 3

Valuation

Answer 3

Process of forming an opinion of a property’s value.

Question 4

Assessed Value

Answer 4

what the local taxing authority thinks it’s worth.

Question 5

Market Value

Answer 5

A price at which a willing buyer and willing seller can strike a deal given ordinary market conditions

Question 6

Investment Value

Answer 6

The value to an investor of an investment property

Question 7

DUST

Answer 7

Demand
Utility
Scarcity
Transferability

Question 8

Anticipation:

Answer 8

The value of property today is the current value of the total anticipated future benefits.

Question 9

Competition:

Answer 9

The more similar properties that are on the market, the lower the price will be driven.

Question 10

Conformity:

Answer 10

Value is created and maintained when the characteristics of a property conform to the demands of the market.

Question 11

Contribution

Answer 11

A change in a property impacts the value as a whole.

Question 12

Highest & Best Use:

Answer 12

This is the most profitable use that is both legal (conforms to zoning) and economically feasible (won’t cost more than the increase in value).

Question 13

Plottage:

Answer 13

The joining or assemblage of two neighboring land parcels increases the property value.

Question 14

Regression:

Answer 14

This is the value a higher-quality property loses by being near a lower-quality property.

Question 15

Progression:

Answer 15

This is the value a lower-quality property gains by being near a higher-quality property.

Question 16

Substitution:

Answer 16

A property’s value is determined by what it would cost to purchase a similar substitute property.

Question 17

The Principal of Substitution

Answer 17

the value of a property is equal to the value of an equivalent substitute property.

Question 18

Elements of Comparison

Answer 18

analyze comparables’ locational/physical property characteristics and transaction differences. They explain why different prices are paid for comparables.

Question 19

Units of Comparison

Answer 19

Allow the comparison to be standardized. Units may be price per square foot, per apartment unit, per acre, etc.

Question 20

Financing Terms & Cash Equivalency

Answer 20

This is often offered by builders for new construction or as seller concessions in resale transactions.

Question 21

Conditions of Sale

Answer 21

Was it an arm’s length transaction? Were personal items included, or fixtures excluded?

Question 22

Market Conditions

Answer 22

at time of contract and closing.

Question 23

Location

Answer 23

Underwriters assume appraisers understand the local marketplace, and will accept comparables that exceed distance, time, or other guidelines, if the appraiser supports the decision with written, detailed explanation that demonstrates that local expertise.

Question 24

Physical Characteristics

Answer 24

This includes the site, view, construction quality, amenities, size, etc.

Question 25

Drive By Comparisons

Answer 25

comparisons that are not on record such as a new circular drive, evidence of foundation shifting, a worn-out roof, superior or inferior view, and traffic or other nuisances such as airport noise.

Question 26

Bracketing

Answer 26

a process in which an appraiser determines a probable range of values for a property by comparing a group of comparable sales to the subject that are below and above the property value.

Question 27

The process of comps (substitution) (4 steps)

Answer 27

1) Analyze the subject property to identify its characteristics, particularly those that are in demand in the current market.
2) Identify comparable properties that have been recently sold.
3) Compare the comparables to the subject property and make adjustments to the sales price of the comparables where they are different.
4) Use the data to arrive at an opinion of value for the subject property on the date of appraisal.

Question 28

Two categories of comparison

Answer 28

1) Elements of comparison

2) Units of comparison

Question 29

If the subject property has a superior amenity, the sales price of the comparable property is ___________ by an appropriate amount or factor.

Answer 29

increased

Question 30

If the subject property is inferior in an area (for example, the yard is not well-maintained, while the comparable property is beautifully landscaped), the sales price of the comparable property is ___________.

Answer 30

decreased

Question 31

The amount of the adjustment is based on the value of the item in the market. For example, if the comparable home has a fireplace and the subject property doesn’t, and homes with fireplaces sell on average for $1,000 more, then the comparable property’s sales price is adjusted down by _______.

Answer 31

$1,000

Question 32

To be able to make valid computations of adjustments, the elements of comparison must be applied in this order:(5 steps)

Answer 32

1) Financing terms and cash equivalency:
2) Conditions of sale:
3) Market conditions
4) Location:
5) Physical characteristics

Question 33

The Cost Approach :

Answer 33

The cost approach to finding appraised value measures value as a cost of production, including the acquisition of the land and the construction costs. Its reliability depends on valid reproduction cost estimates (i.e., the cost of rebuilding) and appropriate depreciation estimates.

Question 34

The cost approach most often used with

Answer 34

1) New construction of both residential and commercial property
2) Unique properties, such as highly energy-efficient houses, residential acreage with excess land, historic houses, and high-dollar houses with many amenities
3) Special-purpose commercial uses, such as hospitals, some manufacturing plants, hotels, and other single-purpose properties

Question 35

The _________ approach isn’t used in condominium and cooperative properties and isn’t used as often with older properties, because accurately estimating depreciation is difficult.

Answer 35

cost

Question 36

3 types of depreciation

Answer 36

Physical
Functional
External

Question 37

Physical depreciation

Answer 37

is a loss in value caused by deterioration in physical condition.

Question 38

Functional obsolescence

Answer 38

is a loss in value caused by defects in design, such as a poor floor plan or atypical or inconvenient sizes/types of rooms. Examples include houses where there are bedrooms on a level without a bath(s), or where the only access to a bedroom is through another bedroom.

Question 39

External depreciation

Answer 39

or “economic obsolescence” is a loss in value caused by an undesirable or hazardous influence offsite. Examples are heavily trafficked areas, industrial odors, or airport noise

Question 40

Curable depreciation

Answer 40

refers to an item that can be repaired or replaced, and where the cost to cure the item is less than or the same as the anticipated increase in the property’s value after the item is cured. This includes items of deferred maintenance such a painting or repair of faucets. The cost to cure should be reasonable and economically feasible.

Question 41

Incurable depreciation

Answer 41

includes items not practical to correct. Examples are a furnace or a roof that hasn’t reached the end of its economic life.

Question 42

Replacement Cost

Answer 42

reflects the cost to build a functionally equivalent improvement.

Question 43

Reproduction Cost

Answer 43

the cost to build an exact replica of the subject, with the same materials and deficiencies.

Question 44

3 steps appraisers take to determine real cost

Answer 44

1) Use published indexes and tables to source the data, such as Marshall & Swift Tables™.
2) The cost is then adjusted by its loss in value due to depreciation from all causes.
3) Accurate site value is required as a separate figure. (The sales comparison approach is used most commonly to estimate this value.)

Question 45

The Income Approach

Answer 45

The income approach (also known as the income capitalization approach) estimates the present value of any future benefits of owning a particular property. It’s based on the value principle of anticipation.

Question 46

Gross Rent Multiplier

Answer 46

Use the gross rent multiplier (GRM) by dividing the sale price of a comparable property by that property’s monthly or annual gross rent to arrive at a single number, which is your GRM. That number is then multiplied by the subject property’s anticipated monthly or annual gross rent to arrive at a property value.

Question 47

Gross Income Multiplier

Answer 47

Gross income multiplier (GIM) is essentially the same as GRM, but it uses all sources of income from the property rather than only rent. The multiplier is found from a comparable property by dividing the sales price by the property’s annual gross income from all sources. You can then apply the multiplier to the subject property’s income to determine value.

Question 48

Direct Capitalization

Answer 48

This method calculates a net operating income (NOI) for a property over the next year, then applies a capitalization rate to that income to derive a market value for the property.

Question 49

Capitalization Rate

Answer 49

or Cap Rate; formula used to estimate the potential return an investor will make on a property.

Question 50

Yield Capitalization

Answer 50

This method is similar to direct capitalization, but projects farther into the future than one year. It also considers the potential value of the property upon resale.

Question 51

Reconciliation

Answer 51

analyzing the findings from the approaches used, and then weighing the findings that each provided.

Question 52

True or False: GRM doesn’t take into account any operating costs

Answer 52

True

Question 53

Because it’s a rough estimate, it’s used in conjunction with ______________ in the area to arrive at a property value.

Answer 53

comparable sales

Question 54

Gross Income Multiplier (GIM) is more suitable for _____________ properties

Answer 54

five-unit or larger

Question 55

Cap rate formula

Answer 55

Cap Rate (R) = Net Operating Income (I)/ Property Value (V)

Question 56

Direct capitalization is generally appropriate for ____________________properties and those with stable forecast net income.

Answer 56

small- to medium-sized

Question 57

Yield capitalization is most often used for larger properties where the investor wants a value based on____________, along with the effect of ___________ and potential resale of the property on the ultimate return on investment.

Answer 57

long-term holdings; debt repayment