Describe the 3 basic valuation approaches used by appraisers

Question 1

What are the 3 basic valuation techniques?

Answer 1

1) Sales comparison approach
2) Cost approach
3) Income approach

Question 2

The 3 basic valuation techniques serve as ___ against each other

Answer 2

checks

Question 3

Because no 2 parcels of real estate are ___, each comparable property must be analyzed for ___ and ___ between it and the subject property

Answer 3

exactly alike
similarities
differences

Question 4

The sales comparison approach is a good example of which appraisal principle?

Answer 4

Substitution

Question 5

2 condos in the same neighborhood are very similar. One of them was already sold and the other is the subject of an appraisal. The comp sold for $145,000 and has a garage valued at $9,000. The subject property has no garage, but it has a fireplace valued at $5,000. What is the indicated value of the subject property?

Answer 5

$141,000

145,000 (comp sale price) - 9,000 (comp is better, subtract CBS). + 5,000 (comp is poorer, add CPA) = 141,000

Question 6

Which approach is considered to be the most reliable approach in appraising single family homes?

Answer 6

Sales comparison approach

Question 7

Most appraisals include a minimum of ___ comparable sales reflective of the subject property

Answer 7

3

Question 8

Comparables should be sales that occurred ___, ___, and ___

Answer 8

less than 6 months
close by
as similar as possible to the subject property

Question 9

What are the 5 steps of the cost approach?

Answer 9

1) Estimate value of land as if it were vacant and available to be put to its highest and best use
2) Estimate the current cost of constructing buildings and improvements
3) Estimate the amount of accrued depreciation resulting from the property’s physical deterioration, functional obsolescence, and external obsolescence
4) Deduct the accrued depreciation from the current construction cost
5) Add the estimated land value to the depreciated cost of the building and site improvements to arrive at the total property value

Question 10

Current cost of construction is 185,000. The property has 30,000 in accrued depreciation. The land values at 55,000. Using the cost approach, what is the total property value?

Answer 10

210,000
185,000-30,000+55,000 = 210,000

Question 11

___ cost is more frequently used in appraising older structures because it eliminates obsolete features and takes advantage of current construction materials and techniques.

Answer 11

Replacement

Question 12

Reproduction or replacement cost (NEW): 500,000
Age: 5 years
Full economic life: 40 years
Land value: 50,000
Using the cost approach, what is the total property value?

Answer 12

$487,000

Yearly depreciation amount ($500,000 divided by 40 years) = $12,500
Full loss (5 years x 12,500 per year) = 62,500
Depreciated value of the structure (500,000 - 62,500) = 437,500
437,000+ 50,000 (land value) = 487,000

Question 13

What are the 4 methods of computing the reproduction or replacement cost of a building?

Answer 13

1) Square foot method
2) Unit in place method
3) Quantity survey method
4) Index method

Question 14

In the cost approach, this is the most common and easiest method of cost estimation

Answer 14

Square-foot method

Question 15

Appraisal cost approach method that is most detailed and time-consuming

Answer 15

Quantity survey method

Question 16

The most accurate method of appraising new construction

Answer 16

Cost approach quantity-survey method

Question 17

Appraisal cost approach method that is only useful as a check of the estimate reached by other methods

Answer 17

Index method

Question 18

The __ method fails to take into account individual property values

Answer 18

Index

Question 19

Land does not ___

Answer 19

depreciate

Question 20

Depreciation is considered ___ or ___ depending on the contribution of the expenditure to the value of the property

Answer 20

Curable or incurable

Question 21

What are the 3 classes of depreciation?

Answer 21

1) Physical deterioration
2) Functional obsolescence
3) External obsolescence

Question 22

Outmoded or unacceptable physical or design features that are no longer considered desirable by purchasers are considered ___.

Answer 22

Curable obsolescences

Question 23

Undesirable physical or design features that cannot be easily remedied because the cost of the cure would be greater than the resulting increase in value would be __.

Answer 23

Incurable obsolescences

Question 24

An office building that cannot be economically air conditioned suffers from ___ if the cost of adding air conditioning is greater than its contribution to the building’s value.

Answer 24

incurable functional obsolescence

Question 25

In the case of external obsolescence, depreciation is always ___.

Answer 25

incurable

Question 26

The easiest but least precise way to determine depreciation

Answer 26

straight-line method

Question 27

Depreciation is assumed to occur at an even rate over a structure's ___.

Answer 27

Economic life

Question 28

A $300,000 property has a land value of $75,000 and an improvement value of $225,000. If the improvement is expected to last 60 years, what is the annual straight-line depreciation?

Answer 28

$3,750 225,000 divided by 60 years = 3750

Question 29

The ___ approach is most helpful in the appraisal of newer buildings because they are difficult to appraise using other methods

Answer 29

cost approach

Question 30

The ___ approach is most helpful in the appraisal of special-purpose buildings (schools, churches, public buildings, etc) because there are seldom enough local sales to use as comps and because these properties generally do not generate income

Answer 30

Cost

Question 31

The ___ approach is used for valuation of revenue producing properties such as apartment buildings, office buildings, and shopping centers

Answer 31

Income approach

Question 32

What are the 5 steps to estimating value using the income approach?

Answer 32

1) estimate annual potential gross income 2) deduct an appropriate allowance for vacancy & rent loss 3) deduct annual operating expenses 4) estimate the price a typical investor would pay for the income prudced by this particular type and class of property 5) Apply the market derived capitalization rate to the properties annual NOI

Question 33

Mortgage payments (principle and interest) are NOT considered as ___

Answer 33

operating expenses

Question 34

A comparable property that is producing an annual net income of 15,000 is sold for 187,500. What is the capitalization rate?

Answer 34

8% 15,000 divided by 187,500 = 0.08 (8%)

Question 35

income divided by rate = ___

Answer 35

Value

Question 36

Value = ___ divided by ___

Answer 36

Income divided by rate

Question 37

Rate = ___ divided by ___

Answer 37

Income divided by value

Question 38

Income divided by value = ___

Answer 38

Rate

Question 39

Value times rate = ___

Answer 39

Income

Question 40

Income = ___ times ___

Answer 40

Value times rate

Question 41

If a property has a capitalization rate of 9% and generates an income of 72,000, what is the value?

Answer 41

800,000 72,000 divided by 9% = 800,000

Question 42

If a property has a capitalization rate of 8% and generates an income of 72,000, what is the value?

Answer 42

900,000 72,000 divided by 8% = 900,000

Question 43

If a buyer is interested in purchasing a 14 unit residential rental property, the ___ would be used for the appraisal value

Answer 43

Gross rent multiplier (GRM)

Question 44

If a buyer is interested in purchasing 5 or more units, a(n) ___ is often used in the appraisal process

Answer 44

Gross income multiplier (GIM)

Question 45

Because single family residences usually only produce rental incomes, the ___ is used in the appraisal process

Answer 45

Gross rent multiplier

Question 46

Commercial and industrial properties generate income from many sources, and are valued using their ___ from all sources

Answer 46

annual income

Question 47

Gross Income Multiplier= ___ divided by ___

Answer 47

Sales price divided by gross annual income

Question 48

Sales price divided by gross annual income = ___

Answer 48

Gross income multiplier

Question 49

Gross rent multiplier = ___ divided by ___

Answer 49

Sales price divided by gross monthly rent

Question 50

Sales price divided by gross monthly rent = ___

Answer 50

Gross rent multiplier

Question 51

A home recently sold for 382,000 and its monthly rental income was 2650. What is the GRM for the property?

Answer 51

144.15 382 divided by 2650 = 144.15

Question 52

To establish an accurate GRM, an appraiser must have recent sales and rental data from at least ___ comps to the subject property

Answer 52

4

Question 53

estimated market value = ___ times ___

Answer 53

rental income times GRM

Question 54

rental income times GRM = ___

Answer 54

estimated market value

Question 55

What is the final step in the appraisal process?

Answer 55

Reconciliation

Question 56

During the reconciliation process for a single family home, which appraisal approach normally carries the greatest weight in valuing the subject property?

Answer 56

Sales comparison

Question 57

During the reconciliation process for an investment property, which appraisal approach normally carries the greatest weight in valuing the subject property?

Answer 57

Income approach

Question 58

During the reconciliation process for special purpose properties (schools, churches, etc) where little to no income is generated, which appraisal approach normally carries the greatest weight in valuing the subject property?

Answer 58

Cost approach