Valuation and Market Analysis Flashcards
What is the purpose of an appraisal?
A » This is a scientific inexact way of determining value
B » To give an average value derived from various sources
C » To give a determination of value
D » To give an estimate of value
D » To give an estimate of value
Note: Buyers determine value - appraisers estimate value.
Define Appraisal
A document that gives an estimate of fair market value; for lenders, owners, etc.
The best way to estimate value for a residential property is with:
A » the owner’s opinion
B » an appraisal
C » what the owner originally paid factoring in a multiplier
D » an estoppel certificate
B » an appraisal
Define Estoppel Certificate
States the current loan balance on a note; used especially when notes are sold to others
The purpose of an appraisal is to estimate: A » market price B » market value C » book value D » assessed value
B » market value
What does an appraisal actually do? A » Assure value B » Guarantee value C » Determine value D » Estimate value
D » Estimate value
In appraising a property, which of the following items would have the greatest impact on value?
A » Method of determining square footage
B » Method of compensation for the appraiser
C » Local economic conditions
D » The assessed valuation
C » Local economic conditions
A house with outdated plumbing fixtures would be an example of:
A » physical deterioration
B » economic obsolescence
C » curable functional obsolescence
D » incurable functional obsolescence
C » curable functional obsolescence
Define Physical Deterioration
A form of depreciation due to peeling paint, sagging floors, etc.
Define Economic Obsolesence
A form of depreciation due to problems outside the property lines; e.g., owning a house next to a factory or sewage treatment plant; also referred to as external obsolescence
Define Functional Obsolescence
A form of depreciation due to problems inside the property lines; does not function the way modern properties do; e.g., outhouses, pumps for water, etc.
In using the cost approach to value on an older building, which type of cost would be best? A » Reproduction cost B » Reasonable cost C » Replacement cost D » Reserve cost
C » Replacement cost
Note: Replacement cost is using the cost of similar materials and would be used on older properties. Reproduction cost is normally used on historical properties.
In the cost approach to value, which of the following would LEAST affect depreciation?
A » Land value going down
B » Physical deterioration to a building
C » Functional obsolescence on a property
D » Exterior obsolescence where a property is next to a toxic dump site
A » Land value going down
Note: Land never depreciates
Which of the following would be considered functional obsolescence? A » A poor lay-out design B » Termite damage C » Wear and tear D » Adverse economic conditions
A » A poor lay-out design
Which is usually closest to market value? A » Replacement cost B » Reproduction cost C » Purchase price D » Assessed value
C » Purchase price
Note: The purchase price is usually close to market value because buyers are who determine both the price and market value.
An appraiser considers the conditions of a neighborhood to determine: A » economic obsolescence B » functional obsolescence C » curable obsolescence D » physical obsolescence
A » economic obsolescence
A property was in an area with a lot of smoke and soot from nearby factories. It suffers from:
A » physical depreciation
B » functional obsolescence
C » locational depreciation
D » economic (external) obsolescence
D » economic (external) obsolescence
Which approach to value would an appraiser be using when one adds the land value to the depreciated replacement cost of a property? A » Market Data B » Cost C » Income D » Gross Rent Multiplier
B » Cost
Note: The cost approach formula consists of three steps: take current replacement cost minus depreciation plus land value to determine current fair market value.
Define Gross Rent Multiplier
This is a form of the income approach used to estimate the value of a rental property. The gross rent multiplier is computed by taking a rental properties sale price and dividing by the rent charged.
Define Replacement Cost
Using the cost of similar materials
Which of the following indicates functional obsolescence?
A » Deterioration of the foundation walls
B » Inherent inadequacies of the property
C » Exterior surroundings lowering the value
D » It is caused by deferred maintenance
B » Inherent inadequacies of the property
Which of the following would one normally depreciate?
A » A building only
B » Land only
C » Land and a building
D » The difference between land and a building
A » A building only
Note: Land Never Depreciates
A person may depreciate property for tax purposes when the property is:
A » a rental property held for investment
B » sold
C » a second home
D » exchanged for a smaller property
A » a rental property held for investment
What is it called when a person takes the cost of purchase and then recaptures this amount? A » A sinking fund B » Escrow C » Profit D » Depreciation
D » Depreciation
Define Depreciation
Another word for tax depreciation is to recapture the cost of purchase over a certain time period allowed by IRS regulations.
Define Sinking Fund
A sinking fund is created to save money to satisfy a debt.
Define Profit
Profit is the difference between what a property is sold for less the costs incurred in acquisition.
Which of the following properties would an appraiser NOT depreciate?
A » Improvements on real property over 50 years old
B » Improvements on real property less than 10 years old
C » Rental property of less than 5 rental units
D » Vacant land to be used for commercial property
D » Vacant land to be used for commercial property
When an owner takes the original cost of real property and takes tax deductions over the life of the property, this is referred to as: A » appreciation B » depreciation C » physical life D » economic life
B » depreciation
Define Physical Life
Number of years item is physically sound
Define Economic Life
Number of years item is profitable; economic life is shorter than the physical life
Which approach to value would be best for an apartment complex? A » Market data approach B » Income approach C » Cost approach D » Sales comparison approach
B » Income approach
Note: The income approach is best used on income producing properties such as apartments. The market data approach or sales comparison is best used on residential property and vacant land. The cost approach is best used on special purpose properties like churches.
Capitalization refers to which valuation approach? A » Income B » Market data C » Cost D » Gross rent multiplier
A » Income
Note: Capitalization is taking the net income divided by the capitalization rate (rate of return) to get the value of an income property. Market data is used in residential property and vacant land by analyzing the comparables. Cost figures rebuilding minus depreciation. GRM is residential rental.
Some out-of-towners had inherited some property. They contacted a local broker to sell the property. The out of town owners wanted to list the property for $50,000. The broker knew that similar properties in that area were selling for $80,000. What should the broker do?
A » Buy the property personally because of the profit potential
B » List the property for $50,000 as a broker must be obedient to a client
C » Suggest a market analysis for the seller to estimate the current value of the property
D » Require a professional appraisal be done before listing the broker
C » Suggest a market analysis for the seller to estimate the current value of the property
Note: Although the duty of obedience is valid, a broker agent owes care, fiduciary and full disclosure as well to a client. This would include supplying the seller with a market analysis.
What is the best way to determine a list price for a residential property?
A » Mortgage value
B » Assessed value
C » Competitive market analysis (CMA)
D » Appraised value
C » Competitive market analysis (CMA)
Which approach to value is best to use in estimating the value of vacant land? A » Income approach B » Cost approach C » Sales comparison approach D » Rent approach
C » Sales comparison approach
When a real estate agent is preparing a competitive market analysis (CMA) for a client, how many comparable properties would make for a good evaluation of value? A » 1 other B » 2 C » 3-5 D » A minimum of 5
C » 3-5
A salesperson, in doing a competitive market analysis (CMA) for a seller, should NOT tell the seller:
A » what the property might sell for in price
B » the probable list price for the area
C » the maximum selling price
D » that this is a professional appraisal
D » that this is a professional appraisal
The direct sales or market data approach is based upon the principle of: A » competition B » anticipation C » substitution D » conformity
C » substitution
Note: The market data approach looks at comparables which is using substitution.
Define Market Data Approach
An approach to value best used on residential property and vacant land; uses comparable properties to estimate values
Define Competition Principle
High profits attract competition
Define Anticipation Principle
Looks to the future for value
Define Substitution Principle
A property is only worth what one can get another one for just like it
Define Conformity Principle
Properties should conform to the neighborhood to maintain the greatest value
An appraiser should lend most validity to the market data approach on which of the following properties? A » Oil refinery B » Vacant land C » Gas station D » Hotel
B » Vacant land
Note: Oil refineries, gas stations and hotels would probably use the income approach.
A buyer purchases three properties. After the buyer combines all three properties, the entire parcel is now more valuable than before. This is called:
A » being in the right place at the right time
B » increasing returns
C » plottage
D » anticipation
C » plottage
Define Plottage
Plottage or assemblage is where combining properties together results in more value for all the properties than if being left separated.
Define Increasing Returns
Increasing returns says the cost of an improvement will add that much or more to the total value.
The principle of progression in the selling of a property would be best illustrated when the other homes in the neighborhood:
A » had adequate maintenance and repairs
B » are not as nice as the sold property
C » were nicer than the sold property
D » were mostly rental properties
C » were nicer than the sold property
Note: (B) Having a property that is better than the others in the neighborhood is actually called regression, the opposite of progression.
Define Principle of Progression
A property would increase in value being around better properties
Three properties all built side by side and identical to each other were for sale. Assuming constant demand, which one would sell for the lowest price?
A » The one sold first
B » The one sold second
C » The one sold last
D » There is not enough information to determine the answer
A » The one sold first
Define Demand
An element of value; must be wanted
The right of a defaulting borrower to retain title to a property by satisfying the debt prior to the foreclosure sale is referred to as: A » equitable redemption B » statutory redemption C » trustee's sale D » remainder rights
A » equitable redemption
What is it called when a life tenant dies and the property passes to a 3rd party (remainderman)?
Remainder rights
