Valuation & Market Analysis

Question 1

Appraisal

Answer 1

An estimate or opinion of market value, done by a license appraiser (regulated at both a state and federal level); required for all federally loaned related programs such as FHA, VA, or conventional loans (NOT required for cash or seller carry loans)

Question 2

Appraiser Licensing

Answer 2

Appraisers must be licensed or certified according to state law and in accordance with federal regulations; can have further designations such as MAI or SRA from the appraisal institute

Question 3

Competitive Market Analysis (CMA)/Broker’s Price Opinion (BPO)/Broker’s Opinion of Value (BVO)

Answer 3

A real estate professional’s job is to perform a CMA; real estate professionals may charge a fee, but they must make sure the CMA is not mistaken for an appraisal & MAY NOT be used to finance property

Question 4

Market Value

Answer 4

The most probable price in terms of cash or its equivalent that a property will bring

Question 5

Market Price

Answer 5

The actual price paid in a transaction

Question 6

Essential Elements or Characteristics of Value

Answer 6

1. Demand;
2. Utility (Usefulness);
3. Scarcity;
4. Transferability

DUST

Question 7

Principals of Value

Answer 7

1. Highest & best use;
2. Substitution;
3. Supply and Demand;
4. Contribution;
5. Conformity

Question 8

Highest & Best Use

Answer 8

MUST be shown in an appraisal but WOULD NOT be shown in a CMA

Question 9

Substitution

Answer 9

If several similar properties are for sale, lowest-priced property has the greatest demand (underlies all approaches to value, especially sales comparison approach)

Question 10

Supply & Demand

Answer 10

Sets rental & listing prices (supply = amount of properties available; demand = amount of properties that will be purchased)

Question 11

Contribution

Answer 11

Value of improvement based on increasing or decreasing return (increasing - improvements add more value than cost, decreasing = improvements add less value than cost)

Question 12

Conformity

Answer 12

Values tend to move towards surroundings (regression = value of over improved property declines, progression = value of under improved property increases)

Question 13

Methods of Estimating Value/Appraisal Process

Answer 13

1. Sales comparison approach;
2. Cost approach/summation approach;
3. Income approach

Question 14

Sales Comparison Approach

Answer 14

Primarily Residential

1. Subject is the property being evaluated (NEVER adjust the subject property);
2. Comparables are recently sold or similar properties;
3. Adjustments are made to comparable;
4. Value of the item being adjusted is determined by comparing properties with and without the item; and
5. Obtaining an appraisal or CMA is the best way to determine the market value of a property

Use the most current comparable in a rapidly, changing market; preferably within 6 months but no longer than 1 year

Adjust for date of sale, location, and square footage, but NOT for capitalization (which is used in the income approach)

Question 15

Cost Approach/Summation Approach

Answer 15

Most effective method for new construction and special-purpose or single-purpose buildings

Cost to build new – Accrued depreciation + Land value = Estimated value

Estimate new construction cost

1. Reproduction cost new - replica with same or highly similar materials;
2. Replacement cost new - same function or utility

Question 16

Income approach

Answer 16

Income-producing properties, such as apartments, office buildings, or shopping centers

1. Capitalization - conversion or future income to present value
2. Calculating Net Operating Income (NOI) - potential gross income minus vacancy and credit loss = effective gross income (EGI); EGI minus operating expenses = Net Operating Income (NOI);
3. Gross Rent Multiplier (GRM) - alternative to capitalization that takes into account gross income but not expenses

Question 17

IRV Circle Formula

Answer 17

Income (NOI) = cap rate * present value

Question 18

GRM Circle Formula

Answer 18

To determine GRM, divide the value by the monthly or annual rents

Annual gross rent multiplier * annual gross rent = value

Monthly gross rent multiplier * monthly gross rent = value

Value/rents = GRM