Unit 19: Real Estate Appraisal

Question 1

Anticipation

Answer 1

The appraisal principle holding that value can increase or decrease based on the expectation of some future benefit or detriment produced by the property.

Question 2

Appraisal

Answer 2

An estimate of the quantity, quality, or value of something. The process through which conclusions of property value are obtained; also refers to the report that sets forth the process of estimation and conclusion of value.

Question 3

Appraiser

Answer 3

An independent person trained to provide an unbiased opinion of value in an impartial and objective manner according to the appraisal process.

Question 4

Assemblage

Answer 4

The combining of two or more adjoining lots into one larger tract to increase their total value.

Question 5

Broker’s Price Opinion (BPO)

Answer 5

A less-expensive alternative of valuating properties often used by lenders working with home equity lines, refinancing, portfolio management, loss mitigation, and collections. Many BPOs simply consist of a “drive by” that verifies the existence of the property, along with a listing of comparable sales.

Question 6

Capitalization Rate

Answer 6

The rate of return a property will produce on the owner’s investment.

Question 7

Change

Answer 7

The appraisal principle that holds that no physical or economic condition remains constant.

Question 8

Comparative Market Analysis (CMA)

Answer 8

A comparison of the prices of recently sold homes that are similar to a listing seller’s home in terms of location, style, and amenities.

Question 9

Competition

Answer 9

The appraisal principle stating that excess profits generate competition.

Question 10

Conformity

Answer 10

The appraisal principle holding that the greater the similarity among properties in an area, the better they will hold their value.

Question 11

Contribution

Answer 11

The appraisal principle that states that the value of any component of a property is what it gives to the value of the whole or what its absence detracts from that value.

Question 12

Cost Approach

Answer 12

Cost approach is the process of estimating the value of a property by adding to the estimated land value the appraiser’s estimate of the replacement cost of the building, less depreciation.

The Replacement Cost of Improvements is the cost to replace an improvement with another improvement having the same utility.

This is most commonly used to appraise special purpose properties such as Libraries, Schools and police stations.

Cost approach sets the upper limits of value because essentially you are looking at what it cost to replace a building brand new.

Question 13

Depreciation

Answer 13

(1) In appraisal, a loss of value in property due to any cause, including physical deterioration, functional obsolescence, and external obsolescence. (2) In real estate investment, an expense deduction for tax purposes taken over the period of ownership of income property.

Question 14

Economic Life

Answer 14

The number of years during which an improvement will add value to the land.

Question 15

External Obsolescence

Answer 15

Reduction in a property’s value caused by outside factors (those that are off the property).

Question 16

Functional Obsolescence

Answer 16

A loss of value to an improvement to real estate arising from functional problems, often caused by age or poor design.

Question 17

Gross Income Multiplier (GIM)

Answer 17

A figure used as a multiplier of the gross annual income of a property to produce an estimate of the property’s value.

Question 18

Gross Rent Multiplier (GRM)

Answer 18

The figure used as a multiplier of the gross monthly income of a property to produce an estimate of the property’s value.

Question 19

Highest And Best Use

Answer 19

The possible use of a property that would produce the greatest net income and thereby develop the highest value.

Question 20

Income Approach

Answer 20

The process of estimating the value of an income-producing property through capitalization of the annual net income expected to be produced by the property during its remaining useful life.

Question 21

Index Method

Answer 21

The appraisal method of estimating building costs by multiplying the original cost of the property by a percentage factor to adjust for current construction costs.

Question 22

Law Of Diminishing Returns

Answer 22

Law that applies when at the point where additional improvements do not increase income or value.

Question 23

Law Of Increasing Returns

Answer 23

Law that applies as long as money being spent on improvements produces an increase in income or value.

Question 24

Market Value

Answer 24

The most probable price that property would bring in an arm’s-length transaction under normal conditions on the open market.

Question 25

Net Operating Income (NOI)

Answer 25

The income projected for an income-producing property after deducting losses for vacancy, collection, and operating expenses.

Question 26

Physical Deterioration

Answer 26

A reduction in a property’s value resulting from a decline in physical condition; can be caused by action of the elements or by ordinary wear and tear.

Question 27

Plottage

Answer 27

The increase in value or utility resulting from the consolidation (assemblage) of two or more adjacent lots into one larger lot.

Question 28

Progression

Answer 28

An appraisal principle that states that, between dissimilar properties, the value of the lesser-quality property is favorably affected by the presence of the better-quality property.

Question 29

Quantity-survey Method

Answer 29

The appraisal method of estimating building costs by calculating the cost of all of the physical components in the improvements, adding the cost to assemble them and then including the indirect costs associated with such construction.

Question 30

Reconciliation

Answer 30

The final step in the appraisal process, in which the appraiser combines the estimates of value received from the sales comparison, cost, and income approaches to arrive at a final estimate of market value for the subject property.

Question 31

Regression

Answer 31

An appraisal principle stating that, between dissimilar properties, the value of the better-quality property is affected adversely by the presence of the lesser-quality property.

Question 32

Replacement Cost

Answer 32

The construction cost at current prices of a property that is not necessarily an exact duplicate of the subject property but serves the same purpose or function as the original.

Question 33

Reproduction Cost

Answer 33

The construction cost at current prices of an exact duplicate of the subject property.

Question 34

Sales Comparison Approach / Market Data Approach

Answer 34

The process of estimating the value of a property by examining and comparing actual sales of comparable properties.

Question 35

Square-foot Method

Answer 35

The appraisal method of estimating building costs by multiplying the number of square feet in the improvements being appraised by the cost per square foot for recently constructed similar improvements. (also called the comparison method).

Question 36

Straight-line Method

Answer 36

A method of calculating depreciation for tax purposes, computed by dividing the adjusted basis of a property by the estimated number of years of remaining useful life.

Question 37

Substitution

Answer 37

An appraisal principle stating that the maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property, assuming that no costly delay is encountered in making the substitution.

Question 38

Supply And Demand

Answer 38

The appraisal principle that follows the interrelationship of the supply of and demand for real estate. Because appraising is based on economic concepts, this principle recognizes that real property is subject to the influences of the marketplace, as is any other commodity.

Question 39

Uniform Standards Of Professional Appraisal Practice (USPAP)

Answer 39

A set of standards that details information required of an appraisal of residential property. The Uniform Residential Appraisal Report is required by many government agencies.

Question 40

Unit-in-place Method

Answer 40

The appraisal method of estimating building costs by calculating the costs of all the physical components in the structure, with the cost of each item including its proper installation, connection, and so forth. Also called the segregated cost method.

Question 41

Value

Answer 41

The power of a good or service to command other goods in exchange for the present worth of future rights to its income or amenities.

Must meet the following characteristics:
Demand. The need or desire for possession or ownership backed by the financial means to satisfy that need

Utility. The property’s usefulness for its intended purposes

Scarcity. A finite supply

Transferability. The relative ease with which ownership rights are transferred from one person to another

Question 42

Market price

Answer 42

is what a property actually sells for—its sales price. Market price is a historical fact.

Question 43

homogeneity

Answer 43

In single-family residential neighborhoods, for example, buildings should be similar in design, construction, size, and age

Question 44

The characteristics of value include…

Answer 44

DUST
Demand
Utility
Scarcity
Transferability

Question 45

depreciation is divided into what three classes?

Answer 45

physical deterioration
functional obsolescence
external obsolescence.