Session 13: Appraisal & Investment Terminology Flashcards
Appraisal
Determining the estimated value of a property based on evidence
Appraiser
Independent/unbiased and bound by fair housing
Do appraisers in AZ need to be licensed?
Yes
Who are AZ appraisers licensed by?
AZ Department of Financial Institutions
What are the training requirements for residential appraisers?
200 hours education, 1500 hours of training (no fewer than 12 months)
What are the training requirements for certified general appraisers?
300 hours education, 3000 hours of training (no fewer than 18 months) and a bachelors degree
How does one order an appraisal?
Contact AMC
What does the ECOA require?
A free copy is sent to the buyer after it’s completed whether or not credit has been extended.
Value
The present worth of property
What are the characteristics of value? ie DUST
Demand
Utility
Scarcity
Transferability
Demand
Desire for possession
Utility
Properties usefulness for the intended purpose
Scarcity
Finite supply
Transferability
The ease of transferring the ownership rights
Market value
Most probable price under all conditions
Anticipation
Value is created by the expectation that certain events will occur
Conformity
How does that property conform to the rest of the neighborhood
Increase and diminishing returns
improvements increase the value until a certain time when the improvements tend to decrease the value no matter how much money you spend to improve the property
Substitution
the cost of the property is set by what it would cost to purchase similar properties
Plottage
the assemblage of two properties where the value of them together is greater than when they stood apart
Assemblage
taking two parcels and putting them together
Regression and progression
Value of property will decrease if surrounded by properties of lesser value, or increase if surrounded by properties of greater value
Reconciliation
The final step in appraisal where they reconcile the different approaches (giving more weight to possibly one of the approaches) and coming up with an estimate of value
Do apprisers ever use average to come up with the final value?
NO
What are the three methods of estimating value?
Sales comparison approach (Market data approach) Cost approach (Principle of substitution) Income approach (capitalization approach)
Sales comparison approach (market data)
Compares the analysis of similar properties that have recently sold by adjusting the differences between the comparable properties and subject property
What is the best approach for appraising properties in a residential subdivision?
Market data
What are the four areas of adjustment in the market data approach?
Date of sale
Location
Physical characteristics
Terms of the sale
Comparable better
subtract from comparable the difference between the comparable and subject property
Subject better
add to the comparable the difference between the comparable and subject property
CIA/CBS
if the comp is better you subtract from the subject
if the comp is worse you add to the subject
Cost approach (principle of substitution)
This approach is used when you cannot compare the property to any other properties
When would you use a cost approach?
Custom homes, special purpose properties like churches, hospitals, historic buildings
How to use the cost approach
- estimate land value (land never depreciates)
- estimate the reproduction/replacement cost of improvements
- estimate depreciation
- deduct depreciation from the improvements
- add the land value back into the estimate
Reproduction method
determining what would it cost to build the improvement again using the same materials and methods originally used
Replacement method
determining what it would cost to build the improvement using today’s methods and materials
Depreciation
loss of value for any reason
Does land ever depreciate?
NO
Physical deterioration
poor maintenance (normal wear and tear) may be curable or incurable
Functional obsolescence
Outdated floor plans or old plumbing fixtures (bathtubs, sinks) may be curable or incurable
External depreciation
something outside of your home is making is loose value - always incurable
What is an example of external depreciation?
landfills, fire departments, phone towers
Salvage value
the estimated resale value of an asset at the end of its useful life
Income approach (capitalization approach)
based on the present value of the rights to future income. When you have value to a property plus income coming in
Capitalization rate
the rate of return a property will produce on the owner’s investment.
the higher the cap rate, the lower the value
Square footage: living area criteria
living area (heated living area or heated square footage) is space that is intended for human occupancy
Square footage: under roof criteria
below-grade spaces (basements, dens) do not usually count towards a home’s sqft.
When would an attic count towards sqft?
If it has at least 7 minimum feet of clearance, is finished, and is attached to the home HVAC system
Can enclosed porches be included in sqft?
Only if they are heated using the same HVAC as the rest of the house
Makati Terrace was purchased four years ago for $475,000. The building currently has an estimated remaining useful life of 46 years. What is the property’s total depreciation to date? What is the current value of Makati Terrace?
$38,000 depreciation to date (475000/50=9500) (9500x4=38000) $437,000 current value (475000-38000=437000)
The effective gross annual income from a property is $125,000. Total expenses for the year are $68,000. What capitalization rate was used to obtain a valuation of $678,000?
8.4%
125000-68000=57000
57000/678000=0.084
A building, 120ft by 295ft by 25ft, has a replacement cost of $1.85/ftcu. The land is valued at $165,000 and the building’s depreciation has been estimated at $60,000. What is the value of the property via the cost approach?
$1,742,250.00 120x295x25=885000cuft 885000x1.85=1637250 1637250-60000=1577250 1577250+165000=1742250
Depreciation generally applies to:
a. the building
b. the land
c. both the land and building
d. none of the above
The building
A broker is preparing comps for a listing presentation. He will most likely is a
a. cost analysis
b. income analysis
c. competitive market analysis
d. reassessment analysis
Competitive market analysis
All of the following formulas are correct for the income approach except:
a. value / rate = income
b. value x rate = income
c. income / rate = income
d. income / value = rate
Value / rate = income
When an appraiser is using the cost approach, physical deterioration would mean
Normal wear and tear
The term capitalization means
to convert income to value
A property is valued at $325,000 and a net operating income of $28,000 per year. What is the capitalization rate for this property?
8.6%
28000/325000=0.086
A real estate appraisal accomplishes which of the following?
a. ensures value
b. guarantees value
c. estimates value
d. determines value
Estimates value
Beautiful custom home was built behind a large shopping mall and was also surrounded by commercial buildings. This is an example of
a. progression
b. external obsolescence
c. physical deterioration
d. reconciliation
External obsolescence
The subject property has a two-car garage while three of the comparable have 3 car garages. In making the adjustments, the appraiser would
a. lower the value of the comparable
b. lower the value of the subject property
c. raise the value of the comparable
d. raise the value of the subject property
lower the value of the comparable
The replacement cost of a building is estimated to be $275,000. The building has an estimated useful life of 40 years; it is now 4 years old. The land is valued at $65,000. What is the current estimated value of the real estate?
$312,500 275000/40=6875 6875x4=27500 275000-27500=247500 247500+65000=312500
Which method is used to appraise vacant land?
Market data approach
When an appraiser uses all three methods of appraisal and then gives more weight to one of the approaches is called
Reconciliation
In preparing an appraisal for a residential duplex that was converted into an office building would use which approach?
Income approach
Loss of value fur to any reason is called
depreciation
The most important factor and usually the first step an appraiser will consider is
a. loan to value
b. net operating income
c. physical deterioration
d. highest and best use
Highest and best use
An investor purchased a commercial real estate property for $750,000 and wants a 10% cap rate. What would the annual NOI be?
$75,000
750000x0.1=75000
When assembling two parcels of real estate together and the value of them together is greater than when they stood apart is called?
Plottage
When an appraiser is using the income approach, which of the following is not a factor in determining value?
a. depreciation
b. capitalization rate
c. gross income
d. NOP
depreciation
Which of the following is not a characteristic of value?
a. profit
b. demand
c. utility
d. scarcity
profit
An appraiser is appraising a commercial building and has estimated the replacement cost at $30/sqft. The building is 75ft wide x 135ft deep. What is the replacement cost of the building?
$303,750
75x135=10125
10125x30=303750
When it comes time for ordering the appraisal, it’s typically ordered through a
Appraisal Management Company
In AZ, appraisers must be licensed by
AZ Department of financial institutions
The space in a home that is intended for human occupancy is referred as
Living area criteria
Which of the following would be the best method for appraising vacant land?
a. Market data approach
b. income approach
c. cost approach
d. substitution approach
Market data approach
What does the acronym DUST stand for?
a. characteristic of land
b. characteristic of government powers
c. characteristic of joint tenancy
d. characteristic of value
characteristic of value
If the capitalization rate in the income approach to appraising is lowered the value of the property will?
Go up
Using which of the following would require the value of the land to be calculated separately from the value of the improvements?
a. the income approach
b. the gross rent multiplier
c. the cost approach
d. the sales comparison approach
Cost approach
An investor wishes to measure the return from a real estate investment. To accomplish this the investor would most likely use the properties:
a. cash flow
b. capitalization rate
c. depreciation schedule
d. debt expense
capitalization rate
When an appraiser is using the cost approach and determining what it would cost to build the building again with current methods and material would be
Replacement method
An apartment complex was purchased two years ago for $850,000 and now appraises for $925,000. The net operating income for the year is $65,000. What would the capitalization rate be?
7%
65000/925000=0.070
An appraiser has estimated the annual net operating income for a commercial building to be $187,400. With a capitalization rate of 7.5%, the estimated property value is?
$2,498,667
187400/0.075=2498666.667
If the value of your home, not including the lot was $248,000 when you purchased it 10 years ago, what is the current value if it has depreciated at 3% per year?
$173,600
248000x0.03=7440
7440x10=74400
248000-74400=173600
If the cap rate on a property is 7% and the income property has 50 units renting for $875/mo, what would the value be if operating expenses are $58,000/yr and the vacancy rate is 5% of the gross income?
$6,296,429 875x50=43750 43750x12=525000 525000x0.05=26250 525000-26250=498750 498750-58000=440750 440750/0.07=6296428.57
You have been asked to estimate the market value of a building that has an effective age of 5 years. It would currently cost $150,000 to reproduce the structure new. The economic life is estimated to be 40 years and the land value is estimated to be $35,000. The building’s original cost when new was $95,000. What is the estimated market value of the property using the cost apporach to appraising?
$166,250 150000/40=3750 3750x5=18750 150000-18750=131250 131250+35000=166250
Adjusted basis
Original cost of property reduced by deductions and increased by improvement costs. Deductions can be broker commissions, advertising, legal fees, closing costs, title company fees, inspectors
Appreciation
Increase value of a property
Beginning basis
Cost of the property plus the value of capital improvements such as putting on an addition, replacing a roof
Boot
Money or something else of value to make up the difference in an exchange of properties
Capital Gain
Taxable profit realized from the sale of a capital asset.
When is a capital gain considered a long-term gain?
If the asset is owned for more than 12 mo
When is a capital gain considered a short-term gain?
When an asset is owned for exactly 12 months or less
Cash flow
spendable income from an investment after deducting expenses
Exchanges
used to defer capital gains on investment properties
Inflation
The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling
Intrinsic value
A person’s individual preference for a given geographical area based on amenities the area has to offer
joint venture
group of investors coming together for a specific project only
leverage
the borrowed funds for an investment
liquidity
ability to sell an asset and turn it into cash
Real estate investment trust (REIT)
group of at least 100 investors who transfer title to real estate to a trustee, who manages the property for the benefit of the investors
Syndicate
a business venture in which two or more individuals invest their monies in a real estate project. once the project is over they can stay together and invest in more projects
Ordinary income
characterized as income other than long-term capital gains
What is classified as ordinary income?
Wages, salaries, tips, commissions, bonuses and other types of compensation from employment, interest, dividends, or net income from a sole proprietorship, partnership or LLC
Tax on ordinary income
Ordinary income is taxed at marginal tax rates
When are capital gains realized?
When the asset is sold
Are capital gains considered taxable income?
Yes
What rates are capital gains taxed?
Short term: up to 37%
Long term: up to 20%
1031 Exchange
property owner sells or exchanges one property for another. Allows the seller to leverage deferred tax dollars to acquire another property.
Does a 1031 exchange defer capital gains?
Yes
As part of a 1031 exchange, Investor Smith had to give the other party $10,950 and a 1953 Chevy. The cash and car are:
a. Equity
b. Collateral
c. Boot
d. Like kind
Boot
Delayed exchange
deed of the relinquished property is recorded going to the seller (exchangor) to the buyer
An owner’s house was recently appraised at $135,000. Based on the appraisal, it has appreciated 25% in the 5 years since it was purchased. The original purchase price of the property was?
$108,000
135000/0.125=108000
Where are the exchange funds given in a delayed exchange?
Directly to the qualified intermediary
Bobby owns an apartment building that contains 14 units. The total monthly rent generated is $5,000 and it represents a 8% return on Bobby’s investment. What was the original cost of the property?
$750,000
5000x12=60000
60000/0.08=750000
