Appraisals, Valuation/Pricing, & Investment Properties

Question 1

accrued depreciation

Answer 1

the total loss in value of a building from all causes; part of the cost approach to value.

Question 2

adjustment process

Answer 2

the process used in the sales comparison approach where values are added to or subtracted from comparables to account for the differences from the property being appraised

Question 3

anticipation

Answer 3

the economic influence on value that indicates that present value is created by the valuation of future benefits

Question 4

appraisal

Answer 4

an estimate or opinion of value or as being completed by an expert for a particular purpose. The term refers to both the activity and the report.

Question 5

appraiser

Answer 5

a person who through study and experience is licensed or certified to perform appraisals

Question 6

appreciation

Answer 6

a rise in the value of a piece of property

Question 7

balance

Answer 7

the economic influence on value that states that a relationship exists between the value of land and the value of the buildings on the land

Question 8

basis

Answer 8

the initial price paid for a property. Once capital improvements are added and depreciation (cost recovery) is subtracted, it becomes the adjusted basis.

Question 9

break-even point

Answer 9

the point (dollar amount) in a percentage lease where the override percentage begins to be calculated.

When evaluating a commercial real estate investment property, breakeven occupancy is the point at which the property’s operating expenses plus loan payments are equal to the amount of potential rental income it produces.

Question 10

capital gain

Answer 10

the profit realized from the sale of a property for more than was paid for it

Question 11

capital improvement

Answer 11

a permanent improvement that usually adds value to the property, such as a new roof

Question 12

capitalization rate

Answer 12

similar to a rate of return, the amount of income an investor hopes to receive from an investment as a percentage of the value of the investment. In the income capitalization approach to value, it’s used to convert a stated amount of income into the value of the investment.

Question 13

cash flow after taxes

Answer 13

the amount of money left for the year from a property investment after all expenses including the mortgage and income taxes are paid

Question 14

cash flow before taxes

Answer 14

the amount of money left for the year from a property investment after all expenses including the mortgage are paid but before income taxes are paid

Question 15

change

Answer 15

the economic influence on value that states that nothing remains the same due to physical, governmental, economic, and social changes that affect property value

Question 16

combination trust

Answer 16

a real estate investment trust (REIT) that invests shareholders’ money in property equities and mortgage loans

Question 17

comparable

Answer 17

a property that has recently been sold that is very similar to the property being appraised (subject property). Based on the principle of substitution, the comparable is a good indicator of the value of the subject property.

Question 18

conformity

Answer 18

the economic influence on value that states that value is created and sustained when real estate characteristics are similar

Question 19

contribution

Answer 19

the economic influence on value that states that an improvement to a property is worth what the real estate market will pay, not what it cost

Question 20

cost approach

Answer 20

one of the three approaches to value used to appraise properties, based on the cost of the various components of the building and property. This is used for unique properties for which there aren’t many comparable sales.

Question 21

cost recovery period

Answer 21

the period of time, set by the government, over which an asset may be depreciated

Question 22

curable deterioration

Answer 22

damage or wear and tear to the property that is economically feasible to repair — that is, the increase in value of the property as a result of the repair exceeds the cost of the repair.

Question 23

decreasing returns

Answer 23

the economic influence on value that exists when an improvement to a property adds less value to the overall value of the property than the cost of the improvement

Question 24

depreciation

Answer 24

in the cost approach to value, the loss in value to any structure due to various factors such as wear and tear

Question 25

depreciation (cost recovery)

Answer 25

the recovery of the cost of an asset that wears out; this is used for tax purposes.

Question 26

direct costs

Answer 26

those expenses directly associated with the actual construction of a building, such as labor and materials

Question 27

economic life

Answer 27

when speaking of a building, the length of time the structure contributes value to the land

Question 28

effective age

Answer 28

when speaking of a building, an estimate of the age the structure appears to be, given wear and tear, maintenance, and upgrades

Question 29

effective gross income

Answer 29

the income available for property expenses after deducting a vacancy and collection loss from potential gross income and adding in other income

Question 30

equity trust

Answer 30

a real estate investment trust (REIT) that invests in a number of different types of real estate and sells shares to investors