Unit 6: Methods of Valuation

Question 1

What are the 3 methods of appraisals?

Answer 1

1. Market Data Approach
2. Cost Approach
3. Income Approach

Question 2

What value method is used for residential properties and vacant land?

Answer 2

Market Data Approach

Question 3

What is the market data approach?

Answer 3

Using the sales prices of comparable properties to estimate the value of the subject property.

Question 4

T/F When doing a sales comparison approach, always adjust the subject, the property that is being appraised.

Answer 4

False. NEVER adjust the subject property.

Question 5

In a rapidly changing market, the comparables should have sold between what time periods?

Answer 5

Within 6 months and no longer than 12 months.

Question 6

When doing a sales comparison approach, what are the primary elements that are being compared and adjusted?

Answer 6

• Lot size
• Date of sale
• Days on market
• Amenities
• Square footage

Question 7

T/F Adjustments are made to the comps.

Answer 7

True

Question 8

T/F If the comp is better than subject, subtract.

Answer 8

True

Question 9

T/F If the comp is worse than subject, add.

Answer 9

True

Question 10

What is a paired sales anaylsis?

Answer 10

The appraiser finds two properties that are nearly identical, with the exception of the item being adjusted.

Question 11

T/F The value is based on what the improvement cost to purchase and/or install.

Answer 11

False. The value is NOT based on what the improvement cost to purchase and/or install but on what the market will pay for it.

Question 12

What is another name for the market data approach?

Answer 12

Sales Comparison Approach

Question 13

Which appraisal approach is used for new construction and unique or special purpose properties?

Answer 13

Cost Approach

Question 14

What is the cost approach?

Answer 14

The subject property’s value is figured out by estimating the cost of replacing (reproducing) the improvements, then subtracting the accrued depreciation and adding the land value.

cost to build new - accrued depreciation + land value = estimated value

Question 15

When appraising a property using the cost approach, why do you need to add the value of the land?

Answer 15

Land does not depreciate.

Question 16

What are the 2 methods used to figure out the cost to build new value?

Answer 16

1. Reproduction

2. Replacement

Question 17

How do you figure out the reproduction cost?

Answer 17

Cost to build a replica with the same or highly similar materials.

Question 18

When is the reproduction cost used in a cost approach?

Answer 18

For historic properties.

Question 19

How do you figure out the replacement cost?

Answer 19

Cost to replace improvements with the same functionality/utility.

Question 20

What is depreciation?

Answer 20

The loss of value for any reason.

Question 21

T/F Depreciation affects land.

Answer 21

False. Depreciation affects IMPROVEMENTS. It NEVER affects land.

Question 22

What are the 3 types of depreciation?

Answer 22

1. Physical
2. Functional
3. Economic

Question 23

What is another name for depreciation?

Answer 23

Obsolescense

Question 24

What is physical depreciation?

Answer 24

The wear and tear of a property.

Question 25

What is functional depreciation?

Answer 25

The design or other inadequacies of the property.

Question 26

What is economic depreciation?

Answer 26

The external factors (location or surroundings) of a property. These factors are typically outside of the property boundaries.

Question 27

Which appraisal approach is used for properties that generate income?

Answer 27

Income Approach

Question 28

What is the income approach?

Answer 28

The subject property’s value is based on the net income it produces.

Question 29

What are the 2 other names for the income approach?

Answer 29

1. Capitalization Method

2. Investor’s Method of Appraisal

Question 30

Using the income approach, how do investors determine what they will pay for a property?

Answer 30

Investors use the capitalization rate also known as the rate of return.

Question 31

What do appraisers use when doing an income approach appraisal?

Answer 31

Appraisers use past sales to estimate the present value of a property.

Question 32

What is capitalization?

Answer 32

The process of converting estimated future income into a present value.

Question 33

What is the alternative to capitalization?

Answer 33

Gross Rent Multiplier

Question 34

What is the gross rent multiplier?

Answer 34

Takes into account gross income but not vacancies, bad debts, or expenses.

Question 35

What kind of property would an appraiser use the gross rent multiplier instead of the capitalization rate when doing an income approach appraisal?

Answer 35

Single-family rental homes.

Question 36

What is the final step in an appraisal?

Answer 36

Reconciliation

Question 37

What is reconciliation?

Answer 37

The appraiser assembles and interprets the data in order to arrive at a final value estimate.

Question 38

What is another name for reconciliation?

Answer 38

Correlation

Question 39

T/F The appraisal value for a property is the average of all the 3 appraisal methods.

Answer 39

False. The estimated value of a property is NOT the average of all 3 appraisal methods.