Section 8: Three Approaches to Valuation

Question 1

CMA - When a subject property has a feature the comparable doesn’t have, what should you do?

Answer 1

Adjust the comparable’s price up.

Question 2

Which approach to finding property value estimates the current value of future income?

Answer 2

Income capitalization approach

Question 3

Which one of these would NOT be an element of comparison an appraiser would use when applying the sales comparison approach to a property valuation?

Answer 3

Income generated

Question 4

On which principle of value is the sales comparison approach based?

Answer 4

Substitution

Question 5

Appraiser’s 4 steps to the sales comparison approach

Answer 5

1. Analyze subject property to identify its characteristics
2. Identify comparable properties
3. Compare the comparables to the subject and make adjustments to the comparable
4. Use data to arrive at a value for the subject property

Question 7

Appraiser’s two categories of comparison

Answer 7

1. Elements of comparison - analyze locations, dates of sale, physical characteristics and terms fo transaction
2. Units of comparison - Allow the comparison to be standardized. Units may be price per square foot, per acre, etc.

Question 8

What are the 3 approaches to appraised value?

Answer 8

1. Sales Comparison - compares the subject to recent sales of similar properties. Best for residential
2. Cost - Cost of property improvements is added to land value. Best for unique properties or replacement value.
3. Income capitalization - Calculates potential future income to determine present value

Question 9

While preparing a CMA, you find out that the seller said the home is 3,000 sq ft and the tax records say 2,700. You should…

Answer 9

Investigate the disparity

Question 10

What is a trio?

Answer 10

Report showing deed, assessor’s map and property profile.

Question 11

Tim, an appraiser, is using the cost approach to determine property value. Which of the following
property types is Tim most likely appraising?

Answer 11

Newly built commercial property

Question 12

To determine property value with the cost approach, the appraiser subtracts the accrued deprecation from the reproduction/replacement cost and then _ the site value.

Answer 12

adds

Question 13

Which one of the four methods used to find the reproduction cost of a structure is the appraiser using if he adds the itemized costs-including direct and indirect expenses-of building or installing all of a new structure’s component parts?

Answer 13

Quantity survey

Question 14

Which one of the four methods used to find the reproduction cost of a structure is the appraiser using if he multiplies the cost per unit of measure of each component part of the property’s structure by the number of units of that component part?

Answer 14

Unit-in-place

Question 15

3 steps to finding value using the cost approach

Answer 15

1. Estimate existing structure’s reproduction or replacement cost
2. Subtract any depreciation loss from the estimated reporduction/replacement cost
3. Add an estimate of the value for the site at highest and best use

Question 16

Cost approach formula

Answer 16

Reproduction/replacement cost - accrued depreciation + site value = property value

Question 17

Reproduction cost

Answer 17

cost to construct a subject property’s exact duplicate at current costs (as of the appraisal date)

Question 18

Replacement cost

Answer 18

the current cost to construct a building with the same usefulness as the subject building.

Question 19

Four Methods to Finding the Reproduction Cost of a Structure

Answer 19

1. Index Method
2. Square foot method
3. Unit-in-place method
4. Quantity survey method

Question 20

Index Method of finding value

Answer 20

Appraiser applies a factor that represents the construction costs, up to teh apprasial date to the subject building’s cost

Question 21

Square-foot method of finding value

Answer 21

Appraiser multiplies the cost per square foot of a recently constructed comparable by the # of sqft in the subject.

Question 22

Unit-in-place method of finding value

Answer 22

Appraiser multiplies the cost per unit of measure of each component of the subject property’s structure by the number of units

Question 24

Quantity Survey Method of finding value

Answer 24

appraiser adds the itemized costs-including direct and indirect expenses-of building or installing all of a new structure’s component parts

Question 25

Three types of depreciation

Answer 25

1. Physical deterioration - loss in value caused by deterioration in physical condition
2. Functional obsolescence - Loss in value because of defects in design or outmoded design
3. External Obsolescence - economic obsolescence is loss in value caused by undesireable or hazardous influence outside of the property itself. Considered incurable.

Question 26

When is the cost approach of valuaton used?

Answer 26

• When sales comparison or income capitalization approach isn’t feasible (valuing a library for example)
• used mostly for
  
  • new construction of residential or commercial
  • Unique properties such as ultra efficient houses, historic properties, etc.
  • Special purpose commercial uses such as hospitals, some manufacturing plants, hotels, other single purpose properties

Question 27

When is the Cost Approach of valuation not used?

Answer 27

Fannie Mae doesn’t require using cost approach for lending purposes

Not used:
* Individual condo units
* Cooperative units
* Older properties

Question 28

Income Approach Terms

Answer 28

• Capitalization - technique of expressing potential income as current value
• Cap rate - a rate of return for an investment expressed as a ratio of net operating income to property value
• Gross income - income before expenses are deducted
• Net operating income - Income remaining after deducting operating expenses and expeted losses from vacancy or collection issues
• Reversion - value of an income property at resale or at the end of a lease
• Yield - amount of money returned from an investment

Question 29

Value principle of _ is the basis of the income approach to appraisal

Answer 29

Anticipation

Question 31

What measure is used to determine a 10-unit apartment building’s ability to produce future income?

Answer 31

Gross income multiplier

Question 32

A 30-unit income-producing property has a sales price of $9 million. Annual gross income is estimated at $750,000. What’s the gross income multiplier?

Answer 32

12x

Question 33

For which of these properties would gross rent multiplier be calculated?

Answer 33

duplex used as a rental property

Question 35

What measure is used to determine a three-unit property’s ability to produce future income?

Answer 35

Gross rent multiplier

Question 36

Why would an appraiser use gross income multiplier, direct capitalization, or yield capitalization-rather than gross rent multiplier-to determine the value of an income property?

Answer 36

The property has income from other sources in addition to rent.

Question 37

Gross Rent Multiplier formula

Answer 37

Sale price / Gross Monthly Rent

Question 38

Gross Income Multiplier formula

Answer 38

Sales price / gross annual income

Question 39

Direct capitalization method

Answer 39

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

Question 40

Yield Capitalization

Answer 40

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.