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Real Estate > Session 13: Appraisal & Investment Terminology > Flashcards

Session 13: Appraisal & Investment Terminology Flashcards

1
Q

Appraisal

A

Determining the estimated value of a property based on evidence

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2
Q

Appraiser

A

Independent/unbiased and bound by fair housing

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3
Q

Do appraisers in AZ need to be licensed?

A

Yes

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4
Q

Who are AZ appraisers licensed by?

A

AZ Department of Financial Institutions

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5
Q

What are the training requirements for residential appraisers?

A

200 hours education, 1500 hours of training (no fewer than 12 months)

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6
Q

What are the training requirements for certified general appraisers?

A

300 hours education, 3000 hours of training (no fewer than 18 months) and a bachelors degree

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7
Q

How does one order an appraisal?

A

Contact AMC

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8
Q

What does the ECOA require?

A

A free copy is sent to the buyer after it’s completed whether or not credit has been extended.

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9
Q

Value

A

The present worth of property

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10
Q

What are the characteristics of value? ie DUST

A

Demand
Utility
Scarcity
Transferability

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11
Q

Demand

A

Desire for possession

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12
Q

Utility

A

Properties usefulness for the intended purpose

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13
Q

Scarcity

A

Finite supply

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14
Q

Transferability

A

The ease of transferring the ownership rights

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15
Q

Market value

A

Most probable price under all conditions

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16
Q

Anticipation

A

Value is created by the expectation that certain events will occur

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17
Q

Conformity

A

How does that property conform to the rest of the neighborhood

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18
Q

Increase and diminishing returns

A

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

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19
Q

Substitution

A

the cost of the property is set by what it would cost to purchase similar properties

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20
Q

Plottage

A

the assemblage of two properties where the value of them together is greater than when they stood apart

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21
Q

Assemblage

A

taking two parcels and putting them together

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22
Q

Regression and progression

A

Value of property will decrease if surrounded by properties of lesser value, or increase if surrounded by properties of greater value

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23
Q

Reconciliation

A

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

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24
Q

Do apprisers ever use average to come up with the final value?

A

NO

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25
Q

What are the three methods of estimating value?

A 
Sales comparison approach (Market data approach)
Cost approach (Principle of substitution)
Income approach (capitalization approach)
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26
Q

Sales comparison approach (market data)

A

Compares the analysis of similar properties that have recently sold by adjusting the differences between the comparable properties and subject property

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27
Q

What is the best approach for appraising properties in a residential subdivision?

A

Market data

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28
Q

What are the four areas of adjustment in the market data approach?

A

Date of sale
Location
Physical characteristics
Terms of the sale

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29
Q

Comparable better

A

subtract from comparable the difference between the comparable and subject property

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30
Q

Subject better

A

add to the comparable the difference between the comparable and subject property

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31
Q

CIA/CBS

A

if the comp is better you subtract from the subject

if the comp is worse you add to the subject

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32
Q

Cost approach (principle of substitution)

A

This approach is used when you cannot compare the property to any other properties

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33
Q

When would you use a cost approach?

A

Custom homes, special purpose properties like churches, hospitals, historic buildings

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34
Q

How to use the cost approach

A
  1. estimate land value (land never depreciates)
  2. estimate the reproduction/replacement cost of improvements
  3. estimate depreciation
  4. deduct depreciation from the improvements
  5. add the land value back into the estimate
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35
Q

Reproduction method

A

determining what would it cost to build the improvement again using the same materials and methods originally used

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36
Q

Replacement method

A

determining what it would cost to build the improvement using today’s methods and materials

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37
Q

Depreciation

A

loss of value for any reason

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38
Q

Does land ever depreciate?

A

NO

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39
Q

Physical deterioration

A

poor maintenance (normal wear and tear) may be curable or incurable

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40
Q

Functional obsolescence

A

Outdated floor plans or old plumbing fixtures (bathtubs, sinks) may be curable or incurable

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41
Q

External depreciation

A

something outside of your home is making is loose value - always incurable

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42
Q

What is an example of external depreciation?

A

landfills, fire departments, phone towers

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43
Q

Salvage value

A

the estimated resale value of an asset at the end of its useful life

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44
Q

Income approach (capitalization approach)

A

based on the present value of the rights to future income. When you have value to a property plus income coming in

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45
Q

Capitalization rate

A

the rate of return a property will produce on the owner’s investment.
the higher the cap rate, the lower the value

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46
Q

Square footage: living area criteria

A

living area (heated living area or heated square footage) is space that is intended for human occupancy

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47
Q

Square footage: under roof criteria

A

below-grade spaces (basements, dens) do not usually count towards a home’s sqft.

48
Q

When would an attic count towards sqft?

A

If it has at least 7 minimum feet of clearance, is finished, and is attached to the home HVAC system

49
Q

Can enclosed porches be included in sqft?

A

Only if they are heated using the same HVAC as the rest of the house

50
Q

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?

A 
$38,000 depreciation to date
(475000/50=9500)
(9500x4=38000)
$437,000 current value
(475000-38000=437000)
51
Q

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?

A

8.4%
125000-68000=57000
57000/678000=0.084

52
Q

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?

A 
$1,742,250.00
120x295x25=885000cuft
885000x1.85=1637250
1637250-60000=1577250
1577250+165000=1742250
53
Q

Depreciation generally applies to:

a. the building
b. the land
c. both the land and building
d. none of the above

A

The building

54
Q

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

A

Competitive market analysis

55
Q

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

A

Value / rate = income

56
Q

When an appraiser is using the cost approach, physical deterioration would mean

A

Normal wear and tear

57
Q

The term capitalization means

A

to convert income to value

58
Q

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?

A

8.6%

28000/325000=0.086

59
Q

A real estate appraisal accomplishes which of the following?

a. ensures value
b. guarantees value
c. estimates value
d. determines value

A

Estimates value

60
Q

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

A

External obsolescence

61
Q

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

A

lower the value of the comparable

62
Q

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?

A 
$312,500
275000/40=6875
6875x4=27500
275000-27500=247500
247500+65000=312500
63
Q

Which method is used to appraise vacant land?

A

Market data approach

64
Q

When an appraiser uses all three methods of appraisal and then gives more weight to one of the approaches is called

A

Reconciliation

65
Q

In preparing an appraisal for a residential duplex that was converted into an office building would use which approach?

A

Income approach

66
Q

Loss of value fur to any reason is called

A

depreciation

67
Q

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

A

Highest and best use

68
Q

An investor purchased a commercial real estate property for $750,000 and wants a 10% cap rate. What would the annual NOI be?

A

$75,000

750000x0.1=75000

69
Q

When assembling two parcels of real estate together and the value of them together is greater than when they stood apart is called?

A

Plottage

70
Q

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

A

depreciation

71
Q

Which of the following is not a characteristic of value?

a. profit
b. demand
c. utility
d. scarcity

A

profit

72
Q

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?

A

$303,750
75x135=10125
10125x30=303750

73
Q

When it comes time for ordering the appraisal, it’s typically ordered through a

A

Appraisal Management Company

74
Q

In AZ, appraisers must be licensed by

A

AZ Department of financial institutions

75
Q

The space in a home that is intended for human occupancy is referred as

A

Living area criteria

76
Q

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

A

Market data approach

77
Q

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

A

characteristic of value

78
Q

If the capitalization rate in the income approach to appraising is lowered the value of the property will?

A

Go up

79
Q

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

A

Cost approach

80
Q

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

A

capitalization rate

81
Q

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

A

Replacement method

82
Q

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?

A

7%

65000/925000=0.070

83
Q

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?

A

$2,498,667

187400/0.075=2498666.667

84
Q

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?

A

$173,600
248000x0.03=7440
7440x10=74400
248000-74400=173600

85
Q

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?

A 
$6,296,429
875x50=43750
43750x12=525000
525000x0.05=26250
525000-26250=498750
498750-58000=440750
440750/0.07=6296428.57
86
Q

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?

A 
$166,250
150000/40=3750
3750x5=18750
150000-18750=131250
131250+35000=166250
87
Q

Adjusted basis

A

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

88
Q

Appreciation

A

Increase value of a property

89
Q

Beginning basis

A

Cost of the property plus the value of capital improvements such as putting on an addition, replacing a roof

90
Q

Boot

A

Money or something else of value to make up the difference in an exchange of properties

91
Q

Capital Gain

A

Taxable profit realized from the sale of a capital asset.

92
Q

When is a capital gain considered a long-term gain?

A

If the asset is owned for more than 12 mo

93
Q

When is a capital gain considered a short-term gain?

A

When an asset is owned for exactly 12 months or less

94
Q

Cash flow

A

spendable income from an investment after deducting expenses

95
Q

Exchanges

A

used to defer capital gains on investment properties

96
Q

Inflation

A

The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling

97
Q

Intrinsic value

A

A person’s individual preference for a given geographical area based on amenities the area has to offer

98
Q

joint venture

A

group of investors coming together for a specific project only

99
Q

leverage

A

the borrowed funds for an investment

100
Q

liquidity

A

ability to sell an asset and turn it into cash

101
Q

Real estate investment trust (REIT)

A

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

102
Q

Syndicate

A

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

103
Q

Ordinary income

A

characterized as income other than long-term capital gains

104
Q

What is classified as ordinary income?

A

Wages, salaries, tips, commissions, bonuses and other types of compensation from employment, interest, dividends, or net income from a sole proprietorship, partnership or LLC

105
Q

Tax on ordinary income

A

Ordinary income is taxed at marginal tax rates

106
Q

When are capital gains realized?

A

When the asset is sold

107
Q

Are capital gains considered taxable income?

A

Yes

108
Q

What rates are capital gains taxed?

A

Short term: up to 37%

Long term: up to 20%

109
Q

1031 Exchange

A

property owner sells or exchanges one property for another. Allows the seller to leverage deferred tax dollars to acquire another property.

110
Q

Does a 1031 exchange defer capital gains?

A

Yes

111
Q

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

A

Boot

112
Q

Delayed exchange

A

deed of the relinquished property is recorded going to the seller (exchangor) to the buyer

113
Q

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?

A

$108,000

135000/0.125=108000

114
Q

Where are the exchange funds given in a delayed exchange?

A

Directly to the qualified intermediary

115
Q

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?

A

$750,000
5000x12=60000
60000/0.08=750000

Real Estate (20 decks)

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