Chapter 10 - Appraisal

Question 1

What is an appraisal

Answer 1

An estimate (opinion) of value
Based on info from marketplace
Cost or price is not a value

Question 2

Appraisers base fee on

Answer 2

Time, effort, and expertise to finish an assignment

Question 3

T/F - Lenders only loan on appraised value

Answer 3

True

Question 4

What is market value

Answer 4

The true value of real estate- the most probable price it could sell for under normal conditiosn

Question 5

What is required for market value to be legit?

Answer 5

Both buyer and seller must be knowledgeable
Neither buyer or seller can have abnormal pressure to act (like a divorce)
Property must be reasonable exposed to market place
Price agreed upon must be for terms of cash

Question 6

Four Economic Characteristics of Value

**********

Answer 6

DUST*******
Demand - is it desirable and in demand by people
Utility - is it useful
Scarcity - amount of land is fixed
Transferability - Can you transfer it for sale

Question 7

Principles of VALUE

abbreviated PV

Answer 7

Substitution
Highest & Best Use 
Conformity 
Supply & Demand 
Anticipation 
Competition
Plottage Increment (assemblage plottage)

Question 8

Cap Rate =

Answer 8

annual net income (ANI)

Question 9

PV - Substitution

Answer 9

Buyer will pay no more than what they would for equal property of the like

Question 10

PV - Highest & Best Use

Answer 10

Property’s greatest use for return
Can change over time
(bungalow home on busy road is now store front)

Question 11

PV - Conformity

Answer 11

Property has best value if it fits into neighborhood.
Progression = smallest house in subdivision (will gain value)
Regression = largest house in subdivision (will lose value)

Question 12

PV - supply and demand

Answer 12

Supply goes down, demand goes up (price goes up)

Supply goes up, demand goes down (price goes down)

Question 13

PV - Anticipation

Answer 13

Expectation of what the future value of a property would be (can cause value to go up or down)

Question 14

PV - Competition

Answer 14

If there is too much or too little competition, it will have an effect on value

Question 15

PV - Plottage Increment (assemblage plottage)

Answer 15

Putting several properties together increasing overall value.
Monopoly

Question 16

Can property depreciate

Whats another word for depreciation

Answer 16

Yes - it can by two ways

Obsolecense

Question 17

Depreciate for tax purposes

Answer 17

Allows investors to deduct % of investment property’s value each year to reduce taxes.
Only the improvements depreciate - never the land

Question 18

Actual Depreciation (loss in value) from 3 sources or categories

Answer 18

Physical Obsolescence:
Functional Obsolescence:
External (Economic) Obsolesence:

Question 19

Physical Obsolescence

Answer 19

wear and tear on the physical

lack of maitenance

Question 20

Functional Obsolescence

Answer 20

a use problem that can’t be fixed
Outdated
(small stair case in old two story house)

Question 21

External (economic) Obsolescence

Answer 21

Loss in value from outside the property’s boundaries

-busy road now cuts through your property

Question 22

Age & Life of Property

2 types of age

Answer 22

Chronological Age 
Effective Age (the age assigned because of it's functionality)

Question 23

Age & Life of Property

2 types of life

Answer 23

Economic Life: how long will it be useful

Physical Life: How long will it exist

Question 24

Square footage of property

Answer 24

width x length

Exterior measurements only (doesn’t include garage etc.)

Question 25

Site analysis

Answer 25

Analysis of the lot itself (slope, View, sun, trees etc)

Question 26

What are the 3 approaches to value used by appraisers

Answer 26

``` Sales Comparison Approach (market data approach) Cost Approach (summation approach) Income Approach (capitalization approach) ```

Question 27

Sales Comparison Approach -

Answer 27

Market Data Approach PV - SUBSTITUTION Compare property sold within six months & 1 mile If comp is superior - subtract from yours

Question 28

Cost Approach

Answer 28

Summation Approach - Estimate current replacement cost - Subtract for depreciation - Add current land value

Question 29

2 types of cost approches

Answer 29

Replacement Cost | Reproduction cost

Question 30

Income Approach

Answer 30

Capitalization Approach Used in commercial properties that are income producing (based on rate of return) 1) add up all the rents 2) deduct vacancy or rent loss = effective gross income 3) subtract operating expenses = net income 4) determine Cap Rate (rate of return a property produces as investment) 5) Determine value, net income divided by cap rate

Question 31

Relationship between cap rate & value

Answer 31

inverse

Question 32

What are the first and last steps to the appraisal process being done?

Answer 32

1) state the problem | 2) Reconciliation - find the final value estimate