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Real Estate Principles > Unit 14 > Flashcards

Unit 14 Flashcards

1
Q

Learning Objective: Explain the steps in the appraisal process.

A

Answer:
The steps include:

  • Defining the problem: Identify the purpose of the appraisal and property characteristics.
  • Collecting and analyzing data: Gather information on market trends, property features, and comparable properties.
  • Determining the highest and best use: Analyze the property’s most profitable and legally permissible use.
  • Applying the approaches to value: Use sales comparison, cost, and income approaches to estimate value.
  • Reconciling the values: Analyze results to form a final opinion of value.
  • Reporting the findings: Present the appraised value in a detailed report.
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2
Q

Learning Objective: Identify the different types, the four characteristics, and the basic principles of value.

A

Answer:

  • Types of value: Market value, assessed value, investment value, insurable value.
  • Four characteristics of value (DUST):
  • Demand: Desire for ownership.
  • Utility: Usefulness to satisfy needs.
  • Scarcity: Limited availability.
  • Transferability: Ability to transfer ownership.
  • Basic principles of value:
  • Substitution, conformity, contribution, highest and best use, plottage, and anticipation.
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2
Q

Learning Objective: List and illustrate the steps taken in the sales comparison approach, cost approach, and income approach to value and the process for reconciling those values.

A

Answer:

Sales Comparison Approach:

  • Compare the subject property to similar properties.
  • Adjust for differences in features, location, or time of sale.

Cost Approach:

  • Estimate the cost to reproduce or replace the property.
  • Subtract depreciation.
  • Add the land value.

Income Approach:

  • Estimate annual net operating income.
  • Apply the capitalization rate to compute property value.

Reconciliation:

  • Evaluate all approaches.
  • Assign weight to the most relevant method.
  • Form a final opinion of value.
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2
Q

Learning Objective: Distinguish a comparative market analysis (CMA) from an appraisal in pricing a property to be listed.

A

Answer:
A CMA is an informal estimate of value based on recently sold and currently listed properties, prepared by a real estate agent. An appraisal is a formal, detailed opinion of value conducted by a licensed appraiser following specific methodologies.

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3
Q

Learning Objective: Describe the requirements for becoming a licensed or certified appraiser in Texas.

A

Answer:
Requirements include:

  • Completion of education requirements (varies by license level).
  • Passing the state exam.
  • Meeting experience thresholds (e.g., supervised appraisal hours).
  • Maintaining compliance with TREC and the Appraisal Qualifications Board standards.
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4
Q

Key Term: Appraisal

A

Definition: A professional opinion or estimate of a property’s value, supported by market data and analysis.

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5
Q

Key Term: Capitalization Rate

A

Definition: The rate of return on an investment property, calculated as net operating income divided by property value.

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6
Q

Key Term: Cost Approach

A

Definition: A valuation method that estimates the value of a property by calculating the cost of reproducing or replacing the building, subtracting depreciation, and adding land value.

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7
Q

Key Term: Comparative Market Analysis (CMA)

A

Definition: A report prepared by a real estate agent that estimates a property’s value based on similar recently sold properties.

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8
Q

Key Term: Depreciation

A

Definition: Loss in property value due to physical deterioration, functional obsolescence, or external factors.

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9
Q

Key Term: Economic Life

A

Definition: The period during which a property can generate income or serve its intended purpose.

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10
Q

Key Term: External Obsolescence

A

Definition: A decrease in property value caused by external factors, such as changes in the surrounding area.

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11
Q

Key Term: Functional Obsolescence

A

Definition: Loss in property value due to outdated or impractical design or features.

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12
Q

Key Term: Gross Income Multiplier

A

Definition: A factor used to estimate property value by multiplying gross annual income by the multiplier.

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13
Q

Key Term: Gross Rent Multiplier

A

Definition: A simplified method for estimating property value, calculated as property price divided by gross rental income.

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14
Q

A comparative market analysis
A. cannot help the seller set a price for the real estate.
B. is a comparison of recently sold properties that are similar to a seller’s parcel of real estate.
C. is the same as an appraisal.
D. should not be retained in the property’s listing file because of its confidentiality.

A

Answer: B. is a comparison of recently sold properties that are similar to a seller’s parcel of real estate.
Reasoning for the answer: A CMA compares similar properties to help sellers determine a reasonable asking price but is not as detailed or formal as an appraisal.

15
Q

The elements of value include which of the following?
A. Anticipation
B. Scarcity
C. Competition
D. Balance

A

Answer: B. Scarcity
Reasoning for the answer: The four elements of value (DUST) are Demand, Utility, Scarcity, and Transferability. Scarcity reflects the limited availability of a property.

16
Q

Two locations, 457 and 459 Tarpepper Street, are adjacent vacant lots, each worth approximately $50,000. If the owner sells them as a combined parcel, however, they will be worth $120,000. What principle does this illustrate?
A. Substitution
B. Plottage
C. Externalities
D. Contribution

A

Answer: B. Plottage
Reasoning for the answer: Plottage is the increase in value when two or more adjacent parcels are combined under single ownership to maximize utility.

17
Q

The amount of money a property brings in the marketplace is its
A. market price.
B. market value.
C. intrinsic value.
D. book value.

A

Answer: A. market price
Reasoning for the answer: Market price is the actual amount paid for a property, which may differ from its appraised market value.

18
Q

An appraisal may NOT be conducted by
A. a Texas-licensed appraiser.
B. an out-of-state appraiser, registered only temporarily in Texas.
C. an appraiser trainee.
D. a real estate broker.

A

Answer: D. a real estate broker
Reasoning for the answer: Only licensed or certified appraisers are legally authorized to conduct appraisals. Brokers may provide opinions of value but not formal appraisals.

19
Q

Howard constructs an eight-bedroom brick house with a tennis court, a greenhouse, and an indoor pool in a neighborhood of modest two-bedroom and three-bedroom frame houses on narrow lots. The value of Howard’s house is likely to be affected by what principle?
A. Conformity
B. Assemblage
C. Externalities
D. Contribution

A

Answer: A. Conformity
Reasoning for the answer: The principle of conformity states that maximum value is achieved when properties conform to the standards of the surrounding area.

20
Q

Reconciliation refers to which of the following?
A. Separating the value of the land from the total value of the property to compute depreciation
B. Analyzing the results obtained by the three approaches to value to determine a final opinion of value
C. The process by which an appraiser determines the highest and best use for a parcel of land
D. Averaging the results of the three approaches to determine a final opinion of value

A

Answer: B. Analyzing the results obtained by the three approaches to value to determine a final opinion of value
Reasoning for the answer: Reconciliation involves weighing the results of the sales comparison, cost, and income approaches to arrive at the most accurate property value.

21
Q

If a property’s annual net income is $37,500 and it is valued at $300,000, what is its capitalization rate?
A. 12.5%
B. 10.5%
C. 15%
D. 18%

A

Answer: A. 12.5%
Reasoning for the answer: The capitalization rate is calculated as net income ÷ value. $37,500 ÷ $300,000 = 12.5%.

22
Q

An appraiser must determine certain data before value can be computed by the income approach. Which one of the following is NOT required for this process?
A. Annual net operating income
B. Capitalization rate
C. Accrued depreciation
D. Annual gross income

A

Answer: C. Accrued depreciation
Reasoning for the answer: Depreciation is not a factor in the income approach, which focuses on income and capitalization rate.

23
Q

Under the cost approach to value, the ceiling, or top limit, of value of an improved parcel of real estate usually is
A. the sales price paid for a similar property.
B. the cost of buying a lot and erecting a similar building on it.
C. the capitalized value of present net rents.
D. the depreciated value of the building plus the cost of land.

A

Answer: B. the cost of buying a lot and erecting a similar building on it.
Reasoning for the answer: The cost approach sets the value based on what it would cost to acquire land and construct a similar property.

24
Q

An appraiser is asked to determine the value of an existing strip shopping center. Which approach to value will be given the MOST weight?
A. Cost approach
B. Sales comparison approach
C. Income approach
D. Reproduction approach

A

Answer: C. Income approach
Reasoning for the answer: The income approach is most appropriate for income-generating properties like shopping centers, as it focuses on their profitability.

25
Q

The market value of a parcel of real estate is
A. an estimate of the most probable price it should bring.
B. the amount of money paid for the property.
C. its value without improvements.
D. its cost.

A

Answer: A. an estimate of the most probable price it should bring.
Reasoning for the answer: Market value is an estimate of what a property would bring under typical market conditions.

26
Q

Capitalization is the process by which annual net operating income is used to
A. determine cost.
B. estimate value.
C. establish depreciation.
D. determine potential tax value.

A

Answer: B. estimate value.
Reasoning for the answer: Capitalization converts annual net operating income into an estimate of property value using the capitalization rate.

27
Q

In the cost approach to value, it is necessary to
A. determine a dollar value for depreciation.
B. estimate future expenses and operating costs.
C. check sales prices of recently sold houses in the area.
D. reconcile differing value indications.

A

Answer: A. determine a dollar value for depreciation.
Reasoning for the answer: Depreciation is subtracted from the cost of reproducing or replacing a property to determine its current value in the cost approach.

28
Q

In the sales comparison approach to value, the probable sales price of a building may be estimated by
A. considering sales of similar properties.
B. deducting accrued depreciation.
C. determining construction cost.
D. computing replacement cost of the structure.

A

Answer: A. considering sales of similar properties.
Reasoning for the answer: The sales comparison approach relies on analyzing recently sold comparable properties to estimate the value of the subject property.

29
Q

Which factor is NOT important in comparing properties under the sales comparison approach to value?
A. Difference in dates of sale
B. Difference in financing terms
C. Difference in appearance and condition
D. Difference in original cost

A

Answer: D. Difference in original cost
Reasoning for the answer: Original cost is irrelevant in the sales comparison approach, which focuses on current market factors.

30
Q

In the income approach to value,
A. the reproduction or replacement cost of the building must be computed.
B. the capitalization rate, or rate of return, must be estimated.
C. depreciation must be determined.
D. sales of similar properties must be considered.

A

Answer: B. the capitalization rate, or rate of return, must be estimated.
Reasoning for the answer: The income approach requires the capitalization rate to convert net operating income into property value.

31
Q

From the reproduction or replacement cost of the building, an appraiser deducts depreciation, which represents
A. the future value of the building.
B. remodeling costs to increase rentals.
C. loss of value due to any cause.
D. costs to modernize the building.

A

Answer: C. loss of value due to any cause.
Reasoning for the answer: Depreciation accounts for the decrease in property value resulting from physical, functional, or external factors.

32
Q

Which formula is used to determine the capitalization rate of an office building?
A. Income = rate × value
B. Value = income ÷ rate
C. Rate = income ÷ value
D. Rate = value × income

A

Answer: C. Rate = income ÷ value
Reasoning for the answer: The capitalization rate is calculated by dividing the net operating income by the property value.

33
Q

The appraised value of a residence with four bedrooms and one bathroom would probably be reduced because of
A. external obsolescence.
B. functional obsolescence.
C. curable physical deterioration.
D. incurable physical deterioration.

A

Answer: B. functional obsolescence
Reasoning for the answer: Functional obsolescence refers to a property feature that is less desirable or outdated, such as insufficient bathrooms relative to bedrooms.

Real Estate Principles (18 decks)

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