section 16 appraising and estimating market value Flashcards
The benefits a buyer expects to derive from a property over a holding period.
Anticipation
An appraisal principle that holds that a buyer will pay no more for a property than the buyer would pay for an equally desirable and available substitute property. Forms the foundation for the sales comparison approach to value.
Substitution
The increment of market value added to a property through the addition of a component or improvement to the property. Not to be confused with the cost of the component.
Contribution
A theoretical use of a property that is legally permissible, physically possible, financially feasible, and maximally productive, usually in terms of net income generation.
Highest and Best Use:
This principle holds that a property’s maximal value is attained when its form and use are in tune with surrounding properties and uses.
Conformity
If a property is surrounded by properties with higher values, its value will tend to rise.
Progression
If a property is surrounded by properties with lower values, its value will tend to fall.
Regression
A combining of contiguous parcels of real estate into a single tract, performed with the expectation that increased value will result.
Assemblage
The division of a single property into smaller properties can also result in a higher total value. For instance, a one-acre suburban site appraised at $50,000 may be subdivided into four quarter-acre lots worth $30,000 each. This principle contributes significantly to the financial feasibility of subdivision development.
Subdivision
The value based on the cost of constructing a precise duplicate of the subject property’s improvements, assuming current construction costs.
Reproduction Value:
The value based on the cost of constructing a functional equivalent of the subject property’s improvements, assuming current construction costs.
Replacement Value:
An opinion of the price at which a willing seller and buyer would trade a property at a given time, assuming a cash sale, reasonable exposure to the market, informed parties, marketable title, and no abnormal pressure to transact.
Market Value:
An opinion of value of a property developed by a professional and disinterested third party and supported by data and evidence.
Appraisal
An estimate of a property’s value rendered by a party who is not necessarily licensed, objective, or qualified. The estimate may not be a complete appraisal.
Broker’s Opinion of Value:
An appraiser’s weighted blending of the results of different approaches to value into a final value estimate.
Reconciliation
A method of appraising property that relies on the principle that a property is generally worth what other, similar properties are worth.
Sales Comparison Approach:
A property having similar characteristics to a subject property in an appraisal. The value or sale price of the comparable is used to estimate the value of the subject.
Comparable:
(CMA) A method used by brokers and salespeople for estimating the current value of a property using sale price data from similar properties. Not to be confused with a bona fide appraisal performed by a licensed appraiser.
Comparative Market Analysis:
A method for determining value that takes into account the cost of the land and the replacement or reproduction cost of the improvements net of estimated depreciation.
Cost Approach:
- A non-cash expense taken against the income of investment property that allows the owner to recover the cost of the investment through tax savings.
- A loss of value to improved property.
Depreciation
A method of appraising the value of a property by applying a rate of return to the property’s net income.
Income Capitalization Approach:
The amount of pre-tax revenue generated from an income property after accounting for operating expenses and before accounting for any debt service.
Net Operating Income:
The rate of return on capital an investor will demand from the investment property, or the rate of return that the property will actually produce.
Capitalization Rate:
A shortcut method for estimating the value of an income property. The procedure involves multiplying the property’s gross monthly rent times a multiplier that reflects the ratio between gross monthly rent and sale price that is typical for similar properties in the area.
Gross Rent Multiplier:
In 1989, Congress passed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) in response to the savings and loan crisis. This act included provisions to regulate appraisal.
Financial Institutions Reform, Recovery and Enforcement Act:
The Uniform Standards of Professional Appraisal Practice (USPAP) is a set of standards, guidelines and provisions for the appraisal industry. It resulted from the cooperation of nine national appraisal organizations in 1985.
Uniform Standards of Professional Appraisal Practice:
A person paid $150,000 for a house with the intention of renting it out for $1,000 per month. The economic principle that led the person to pay this price based on the property’s ability to generate this future income is known as
anticipation
Which of the following situations illustrates the principle of contribution?
A homebuyer makes a down payment of 20% instead of the 10% the lender requires.
A homeowner adds a third bathroom to a house and thereby increases the appraised value by $10,000.
The appraised value of a house goes up by $20,000 over a two-year period because of the prices recently paid for other houses in the neighborhood.
Because of a decline in mortgage interest rates, a homeowner in a certain market is able to list her house at a higher price.
A homeowner adds a third bathroom to a house and thereby increases the appraised value by $10,000.
A property owner buys an adjacent parcel and combines it with the original parcel to create a property with a higher value than the total of the two separate property values. The operative principle of value in this situation is called
assemblage.
What is the difference between the appraised value of a property and its mortgage value, if any?
They are the same.
The appraised value is an appraiser’s estimate; mortgage value is the amount a lender will lend for the purchase of the property.
The appraised value is an appraiser’s estimate; mortgage value is the value a lender imputes to the property as collateral.
Appraised value is mortgage value multiplied by a lender’s loan-to-value ratio.
The appraised value is an appraiser’s estimate; mortgage value is the value a lender imputes to the property as collateral.
What is the difference between market value and market price, if any?
They are the same.
Market value is an estimate; market price is the price at which a property is offered.
Market value is an average price derived from comparable sales; market price is a price based on the cost of creating the property.
Market value is an estimate; market price is the price at which a property sold.
Market value is an estimate; market price is the price at which a property sold.
An appraisal is
a professional appraiser’s opinion of value, supported by data and following approved methods.
The first step in the appraisal process, regardless of the appraisal method, is to
identify the highest and best use of the property to be appraised.
collect and analyze property data.
estimate the value of the land as if it were vacant.
define the appraisal problem and the purpose of the appraisal.
define the appraisal problem and the purpose of the appraisal.
In the final step of an appraisal, the appraiser reconciles the value estimates derived by the various appraisal approaches by
disregarding the high and low extreme results.
averaging the results of all three approaches.
weighing the applicability of the approaches and considering the quality of data supporting each approach.
choosing the result that is closest to the average for properties in the immediate neighborhood.
weighing the applicability of the approaches and considering the quality of data supporting each approach.
Which of the following statements properly describes the central concept of the sales comparison approach?
Find the median price of recently sold comparable properties and add or subtract dollar amounts in the subject property to account for competitive differences.
Make dollar adjustments to the sale prices of comparable properties to account for competitive differences with the subject.
Find at least three comparable properties that are currently for sale and make dollar adjustments to the listing prices to account for competitive differences with the subject.
Apply an appreciation factor to the price at which the subject property most recently sold and make dollar adjustments to account for competitive differences with comparable properties currently for sale.
Make dollar adjustments to the sale prices of comparable properties to account for competitive differences with the subject.
One of the strengths of the sales comparison approach is that it
takes into account the subject property’s investment value.
reveals the profit margin of the builder or developer of the subject property.
discovers the underlying value of the subject property apart from the influence of competing properties.
takes into account the competitive value of specific amenities of the subject property.
takes into account the competitive value of specific amenities of the subject property.
In making dollar adjustments in the sales comparison approach, the appraiser
adds value to a comparable that is inferior to the subject property.
adds value to the subject property if it is inferior to a comparable.
subtracts value from a comparable that is inferior to the subject property.
subtracts value from the subject property if it is inferior to a comparable.
adds value to a comparable that is inferior to the subject property.
The best comparable property for use in the sales comparison approach is the one that
is located closest to the subject property.
requires the fewest and smallest adjustments.
sold most recently.
was built according to the same plan as the subject and at about the same time.
requires the fewest and smallest adjustments.
A house is being appraised using the sales comparison approach. The house has three bedrooms, two bathrooms, and a patio. The appraiser selects a comparable house that has three bedrooms, 2.5 bathrooms, and no patio. The comparable house just sold for $100,000. A half-bath is valued at $5,000, and a patio at $1,000. Assuming all else is equal, what is the adjusted value of the comparable?
$100,000.
$104,000.
$96,000.
$106,000.
96,000
Which of the following statements properly describes the methodology of the cost approach to appraisal?
Apply a depreciation factor to the reported actual cost of acquiring and improving the subject property.
Estimate the cost of building the improvements on the subject property.
Estimate the land value and add to this the actual cost of the improvements adjusted for competitive differences with similar properties.
Add the estimated land value and cost of improvements and subtract the accrued depreciation of the improvements.
Add the estimated land value and cost of improvements and subtract the accrued depreciation of the improvements.
One of the strengths of the cost approach is that it
takes into account the amount of money required to develop a similar property.
is very accurate for a property with new improvements that represent the highest and best use.
results in an actual price in dollars instead of an estimated value.
reveals the owner’s return on money invested in the cost of development.
is very accurate for a property with new improvements that represent the highest and best use.
The principle underlying depreciation from physical deterioration is that
eventually, a property loses all of its value.
a property loses a portion of its value each year because of economic obsolescence.
a property loses the same increment of value each
year over the economic life of the property.
the value lost to depreciation is incurable.
a property loses the same increment of value each year over the economic life of the property.
A property is being appraised by the cost approach. The appraiser estimates that the land is worth $10,000 and the replacement cost of the improvements is $75,000. Total depreciation from all causes is $7,000. What is the indicated value of the property?
$68,000.
$92,000.
$82,000.
$78,000.
$78,000.
Which of the following statements properly describes how to apply the income capitalization approach to appraisal?
Apply a desired rate of return to the price paid for an income property.
Divide the income a property generates by a desired rate of return.
Estimate the amount of income a property must generate to return the capital amount invested in it.
Estimate the rate of return a property owner receives from income generated by the property.
Divide the income a property generates by a desired rate of return.
A strength of the income capitalization approach is that it
uses a rate of return that is required for all potential purchasers in a market.
yields an accurate projection of investment income.
uses a method that is also used by investors to determine how much they should pay for an investment property.
can be used with any type of property in any market.
uses a method that is also used by investors to determine how much they should pay for an investment property.
A property is being appraised using the income capitalization approach. Annually, it has an estimated gross income of $30,000, vacancy and credit losses of $1,500, and operating expenses of $10,000. Using a capitalization rate of nine percent, what is the indicated value (to the nearest $1,000)?
$206,000.
$167,000.
$222,000.
$180,000.
$206,000.
An apartment building that sold for $450,000 had monthly gross rent receipts of $3,000. What is its monthly gross rent multiplier?
12.5
.01
.08
150
150
A rental house has monthly gross income of $1,200. A suitable gross income multiplier derived from market data is 14.1. What estimated sale price (to the nearest $1,000) is indicated?
$169,000.
$102,000.
$203,000.
$173,000.
$203,000.
A certified appraiser is one who has received certification by
a licensed real estate school.
the Appraisal Institute.
the state in which the appraiser operates.
the Appraisal Review Board.
the state in which the appraiser operates.
The act that required federally-related appraisals to be conducted by a certified appraiser is known as
the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).
the Uniform Standards of Professional Appraisal Practice Act (USPAPA).
the Appraisal Foundation Authorization and Reform Act (AFAR).
the Federal Institution for Regulation and Enforcement of Appraisal Act (FIREAA).
the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).
If the monthly rent of a property is $3,000, and the gross rent multiplier (GRM) is 80, what is the value of the property?
$45,000
$267,000
$240,000
$288,000
$240,000
The principal shortcoming of the gross rent multiplier approach to estimating value is that
numerous expenses are not taken into account.
the multiplier does not relate to the market.
the method is too complex and cumbersome.
the method only applies to residential properties.
numerous expenses are not taken into account.
If net income on a property is $20,000 and the cap rate is 5%, the value of the property using the income capitalization method is
$100,000.
$400,000.
$1,000,000.
$4,000,000.
$400,000.
Net operating income is equal to
gross income minus potential income minus expenses.
effective gross income minus debt service.
potential gross income minus vacancy and credit loss minus expenses.
effective gross income minus vacancy and credit loss.
potential gross income minus vacancy and credit loss minus expenses.
The steps in the income capitalization approach are:
estimate gross income, multiply times the gross income multiplier.
estimate effective income, subtract tax, apply a capitalization rate.
estimate net income, and apply a capitalization rate to it.
estimate potential income, apply a capitalization rate to it.
estimate net income, and apply a capitalization rate to it.
The income capitalization approach to appraising value is most applicable for which of the following property types?
Single family homes
Apartment buildings
Undeveloped land
Churches
Apartment buildings
