Chapter 15 - Estimating Real Property Value

Question 1

Active real estate licensees are allowed to perform a _______________ for the purpose of obtaining a listing or a prospective sale.

Answer 1

Comparative market analysis (CMA)

Question 2

What is a federally related transaction?

Answer 2

Any real estate-related financial transaction that a federal financial institutions regulatory agency has either contracted for, or regulates, and requires the services of an appraiser

Question 3

What are the types of values that an appraiser may be hired to estimate?

Answer 3

Assessed value
Insurance value
Investment value
Liquidation value
Going-concern value
Salvage value

Question 4

What is assessed value?

Answer 4

The value used as a basis for property taxation

Question 5

What is insurance value?

Answer 5

An estimate of the amount of money required to replace a structure in the event of some catastrophic event such as fire

Question 6

What is investment value?

Answer 6

The price an investor would pay, given his or her own financing requirements and income tax situation

Question 7

What is liquidation value?

Answer 7

The value associated with a rapid sale; the amount of dollars a property should bring in a foreclosure sale, for example

Question 8

What is going-concern value?

Answer 8

The value of an income-producing property characterized by a significant operating history

Question 9

What is salvage value?

Answer 9

The estimated amount for which improvements can be sold at the end of a structure’s useful life

Question 10

How is value determined?

Answer 10

By a good or service’s ability to command other goods or services in exchange

Question 11

What is price?

Answer 11

The amount of money (or its equivalent) for which a good is actually sold

Question 12

What is cost?

Answer 12

The total expenditure required to bring a new improvement into existence plus the cost of land

Question 13

What is an overimprovement?

Answer 13

Occurs when an owner invests more money in a structure that he may reasonably expect to recapture

Question 14

What are the for traits of value?

Answer 14

Demand
Utility (useful)
Scarcity
Transferability (without ability to sell it, it has no value)

Question 15

The most profitable use to which a property may be put is the property’s:

Answer 15

Highest and best use

Question 16

A property’s highest and best use must be:

Answer 16

Legally permissible (zoning)
Physically possible (soil type, site's shape, size, and slope)
Financially feasible (income generated considering cost of improvements)

Question 17

What are the three approaches to estimating real property value?

Answer 17

1. Sales comparison approach (comparable sales method)
2. Cost-depreciation approach (cost method)
3. Income capitalization approach (income method)

Question 18

What is the principle of substitution?

Answer 18

The basis for all three approaches to market value
Means that a prudent buyer or investor will pay no more for a property than the cost of acquiring, through purchase or construction, an equally desirable alternative property

Question 19

What is the sales comparison approach?

Answer 19

Based on the theory that a knowledgeable purchaser will pay no more for a property than the cost of acquiring an equally acceptable substitute property

Question 20

Because time can affect property values, the sales used for comparison purposes must meet two qualifications:

Answer 20

1. They must have occurred recently in the same market area where the subject property is located
2. The comparable properties selected must be similar to the subject property

Question 21

What is the cost-depreciation approach?

Answer 21

Based on the theory that a knowledgeable purchaser will pay not more for a property than the cost of acquiring a similar site and constructing an acceptable substitute structure

Question 22

What are the four steps in the cost-depreciation approach?

Answer 22

1. Estimate the current reproduction (or replacement) cost of the improvements as of the appraisal date
2. Estimate the amount of depreciation from all causes (physical deterioration, functional obsolescence, and external obsolescence) and deduct it from the reproduction (or replacement) cost
3. Estimate the value of the site and nonstructural site improvements, assuming the site is vacant and will be put to its highest and best use
4. Add the estimated value of the site, including site improvements, to the depreciated structure value

Question 23

What is the income capitalization approach?

Answer 23

The object is to measure the flow of income projected into the future
Develops an estimated market value based on the present worth of future income from the subject property

Question 24

What is potential gross income?

Answer 24

Total annual income a property would produce if it were fully rented and no collection losses were incurred

Question 25

What is effective gross income?

Answer 25

The potential gross income minus vacancy and collection losses

Question 26

What is net operating income?

Answer 26

Income remaining after subtracting all relevant operating expenses from effective gross income

Question 27

What is the formula to find the net operating income?

Answer 27

Potential gross income (PGI)) - Vacancy and collection losses + Other income (laundry room, vending machine) = Effective gross income (EGI) EGI - Operating expenses (fixed, variable) = NOI

Question 28

Income =

Answer 28

Rate of return x value

Question 29

What is assemblage?

Answer 29

The combining of two or more adjoining properties into one tract; the process of consolidating properties

Question 30

What is plottage?

Answer 30

The added value as a result of assembling two or more properties into one large parcel

Question 31

What is situs?

Answer 31

Refers to people's preferences, both physical and economic, for a certain area owing to factors such as weather, job opportunities, and transportation facilities Site you chose to live and work and why you chose it

Question 32

The total expenditure required to bring a new improvement into existence is referred to as:

Answer 32

Cost

Question 33

The approach to estimating value that is referred to as "the real estate market speaking through past sales" because it utilizes actual sales transactions is the:

Answer 33

Sales comparison method

Question 34

When more money is invested in a building than can reasonably be expected to be recaptured, it is referred to as:

Answer 34

Overimprovement

Question 35

The approach to value most likely to be relevant for appraising a community college is the:

Answer 35

Cost-depreciation approach

Question 36

In the income capitalization approach, value equals:

Answer 36

Net operating income / an appropriate capitalization rate

Question 37

In the comparable sales approach:

Answer 37

Adjustments are made to the comparable properties

Question 38

When applying the cost-depreciation approach, what is not subject to depreciation?

Answer 38

Land

Question 39

When applying the cost-depreciation approach, what is subject to depreciation?

Answer 39

A poor traffic pattern in a home New solid oak wood cabinets and marble tile floors in a neighborhood of $80,000 homes Older site improvements

Question 40

A small income-producing property has a projected effective gross income of $48,000. Expenses are estimated at 20% of effective gross income. An appraiser has determined that an appropriate capitalization rate, based on property type and competing properties, is 9%. The estimated market value of this property (rounded up to the nearest dollar) is:

Answer 40

``` $426,667 PGI 48,000 - V&C - 0 + Add. Inc. + 0 = EGI = 48,000 - Exp. - (48,000 x .2) = NOI = 38,400 ``` I 38,400 / R / .09 = V 426,666.667

Question 41

Analyzing the sale price and income of comparable investment properties (NOI / sale price) is a common way of determining the:

Answer 41

Overall capitalization rate

Question 42

Real estate investment can be considered to be:

Answer 42

A relatively long term investment

Question 43

Karen has always wanted a home near the ocean. She recently received an inheritance that would help her purchase the house she's always wanted down the street. This is an example of:

Answer 43

Demand

Question 44

A builder is looking to develop an area of several acres. Concrete in the area is hard to get due to a large complex being built down the street. He is being affected by:

Answer 44

Supply

Question 45

Demand may be influenced by:

Answer 45

The ability of a buyer to get a loan

Question 46

Key indicators of a change in the market could be:

Answer 46

A change in the sales volume

Question 47

A seller's market occurs when:

Answer 47

Not enough inventory is available for buyers

Question 48

The most important understanding of the vacancy rate is:

Answer 48

To indicate how much movement there is in the market

Question 49

What is not a demand factor?

Answer 49

Availability of skilled workers

Question 50

The principle of property being nonhomogeneous means:

Answer 50

No two properties are the same

Question 51

A large factory closed in the area. Many workers lost their jobs as a result. This will probably result in:

Answer 51

A buyer's market

Question 52

Government interference influences the real estate market. What is included in government interference?

Answer 52

``` PETE Police power Escheat Taxation Eminent domain ```

Question 53

What is a seller's market?

Answer 53

When there are too many buyers are too little property

Question 54

What is a buyer's market?

Answer 54

When there are too many homes and not as many buyers