Real Estate National Test Ch 16 Flashcards Preview

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Flashcards in Real Estate National Test Ch 16 Deck (79)
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1
Q

D: Appraisal

A

Is an opinion of value based on supportable evidence and approved methods.

2
Q

D: Appraisal Report

A

Is an opinion of market value on a property given to a lender or client with detailed market information.

3
Q

D: Appraiser

A

Is an independent professional trained to provide an unbiased opinion of value in an impartial and objective manner, following an identified appraisal process.

4
Q

D: Appraising

A

Is a professional service performed for a fee; it is a breach of accepted practice and ethics to collect a commission for an appraisal based on the value of the property appraised.

5
Q

D: Appraiser Independence Requirements (AIR)

A

Regulations issued by Fannie Mae that must be followed by appraisers to ensure accurate and objective appraisals.

6
Q

D: FIRREA ( Financial Institutions Reform, Recovery, and Enforcement Act of 1989)

A

Requires that any appraisal used in connection with a federally related transaction be performed by a competent individual who is licensed or certified by the state in which the appraiser practices.

Every state now has an appraiser licensing agency, which is required by FIRREA to be separate from the agency that licenses real estate professionals.

7
Q

what is a federally related transaction

A

is any real estate-related financial transaction in which a federal financial institution or regulatory agency is engaged.

8
Q

What transactions are the examples of federally related transactions?

A

involve the sale, lease, purchase, investment, or exchange of real property. They also include the use of real property as security for a loan or an investment, including mortgage-backed securities.

9
Q

Summary of Appraisal requirements

A
  1. Appraisals of residential property valued at $250,000 or less are exempt and need not be performed by licensed or certified appraisers.
  2. Nonresidential properties valued at more than $250,000 (raised to $500,000 in 2018) require a certified appraiser.
  3. Fannie Mae will not require a new appraisal for a limited cash-out refinancing when borrower and lender are the same, the original appraisal was performed no more than 12 months earlier (if performed more than four months earlier, an appraisal update is required), and the property should be in substantially the same condition (no significant updates or deterioration) that would affect market value.
10
Q

D: Property Inspection Waiver (PIW)

A

An offer by Fannie Mae to waive the appraisal for eligible transactions with the borrower’s permission.

Given the many properties that have had appraisals entered in Fannie Mae’s Collateral Underwriter (CU) database, some loans purchased by Fannie Mae are eligible for a property inspection waiver (PIW). Fannie Mae’s Desktop Underwriter (DU) system will search the property address for an appraisal; if the first and last names of the borrowers on the earlier and present loan match, Fannie Mae will consider a PIW.

If the earlier appraisal was flagged for any reason (perhaps an over valuation), the PIW will not be issued.

11
Q

D: Uniform Standards Of professional Appraisal Practice (USPAP)

A

A set of standards developed by the Appraisal Foundation that details information required for a property appraisal.

12
Q

State licensing and certification criteria for appraisers must conform to what?

A

The requirements of the Appraisal Subcommittee of the Federal Financial Institutions Examination Council, as recommended by the Appraiser Qualification Board (AQB).

13
Q

D: Appraiser Qualifications Board (AQB)

A

Members of the AQB meet regularly to review and make recommendations for changes to the level of education and experience required of appraisers.

14
Q

D: Appraisal Standard Board (ASB)

A

Members of the ASB also meet often to discuss revisions and updates to USPAP.

15
Q

List of the largest Appraising orginzations.

A
  1. American Society of Appraisers
  2. American Society of farm managers and Rural Appraisers,INC
  3. Appraisal Institute
  4. International Association Of Assessing Officers
  5. International Right of Way Association
  6. National Association of Independent Fee Appraisers
16
Q

A Comparative Market Analysis (CMA) is based on what factors?

A
  1. Recently closed (sold) properties.
  2. Properties currently on the market ( competition for the subject property)
  3. Properties that did not sell ( expired listings in the area)
17
Q

D: Broker’s Price opinion (BPO)

A

Is a less-expensive alternative for evaluating property that is often used by lenders working with home equity lines, refinancing, portfolio management, loss mitigation, and collections.

Although some BPOs are more extensive, including information about the neighborhood and an interior analysis, many are simply “drive bys” that verify the existence of the property, along with a listing of comparable sales.

A BPO should not be confused with an appraisal, which consists of more in-depth analysis of gathered information and which may be performed only by a licensed or certified appraiser.

A BPO cannot be used if the matter involves a federally related transaction that requires an appraisal and/or the transaction occurs in a state that requires one.

18
Q

The data needed by the appraiser can be divided into what two basic classes?

A
  1. General data, which covers the nation, region, city, and neighborhood. The appraiser researches the physical, economic, social, and political influences that affect the value and potential of the subject property.
  2. Specific data, which covers the type and features of improvements to the subject property as well as comparable properties that are similar to and competitive with the subject property.
19
Q

What should be in the appriasal report?

A
  1. identify the real estate and real property interest being appraised
  2. state the purpose and intended use of the appraisal
  3. define the value sought
  4. state the effective date of the value and the date of the report
  5. state the extent of the process of collecting, confirming, and reporting the data
  6. list all assumptions and limiting conditions that affect the analysis, opinion, and conclusions of value
  7. describe the information considered, the appraisal approaches used, and the reasoning that supports the report’s conclusions (if an approach was excluded, the report should explain why)
  8. describe the appraiser’s opinion of the highest and best use of the real estate
  9. describe any additional information that may be appropriate to show compliance with the specific guidelines established in USPAP or to clearly identify and explain any departures from those guidelines
  10. include a signed certification, as required by USPAP
20
Q

List the steps of the Apprisal Process

A
  1. Define the problem
  2. Determine the scope of work
3. Gather, record, verify, and analyze the necessary data.
          General Date
           i. Nation
           ii. Region
           iii. city
           iv. Neighborhood
      Specific Data

      i. Subject Site
      ii. Improvements

        Data for Each Approach

          i. Sales Data
          ii. Cost Data
          iii. Income & Expense Data
  1. Form opinion of value by each of the three approaches.
  2. Reconcile values for the final opinion of value.
  3. Report final opinion of value.
21
Q

True or False

The information used to perform an appraisal is divided into two basic classes: general data and specific data.

A

True

22
Q

D: Value

A

The power of a good or service to command other goods in exchange for the present worth of future rights to its income or amenities. 

23
Q

What does DUST stand for & define?

A
  1. Demand - The need or desire for possession or ownership backed by the financial means to satisfy that need.
  2. Utility - The property’s usefulness for its intended purposes.
  3. Scarcity - a finite supply
  4. Transferability - The relative ease with which ownership rights are transferred from one person to another.
24
Q

To have value what must a property have?

A

(DUST)

  1. Demand
  2. Utility
  3. Scarcity
  4. Transferability
25
Q

D: Market price

A

The most probable price that a property would bring in an arm’s-length transaction under normal conditions on the open market.

Is a property’s asking, offer, or sales price.

26
Q

What is required to determine the market price?

A
  1. The buyer and the seller are unrelated and acting without undue pressure.
  2. Both the buyer and the seller are well informed of the property’s use and potential, including both its defects and its advantages
  3. A reasonable time is allowed for exposure of the property in the open market
  4. Payment is made in cash or its equivalent
  5. The price paid for the property is a normal market price, unaffected by special financing amounts or terms, services, fees, costs, or credits incurred in the market transaction.
27
Q

D: Market Value

A

Is an opinion of value based on an analysis of data. The data may include not only an analysis of comparable sales but also an analysis of potential income, expenses, and replacement costs.

28
Q

D: Anticipation

A

The appraisal principle holding that value can increase or decrease based on the expectation of some future benefit or detriment produced by the property.

29
Q

D: Change

A

The appraisal principle that holds that no physical or economic condition remains constant.

30
Q

D: Competition

A

The interaction of supply and demand creates competition.

Profitable businesses tend to attract competition. For example, the success of a retail store may cause investors to open similar stores in the area.

This tends to mean less profit for all stores concerned unless the purchasing power in the area substantially increases.

31
Q

D: Conformity

A

The principle of conformity means that maximum value is created when a property is in harmony with its surroundings.

Maximum value is realized if the use of land conforms to existing neighborhood standards.

In a single-family residential neighborhood, for instance, buildings should be similar in design, construction, size, and age.

Many parts of the country have experienced the “tear-down” phenomenon in which a large, expensive new home replaces a smaller, mid-century home that is more typical of others in the neighborhood.

The new home will not realize its maximum value because it has violated the principle of conformity—at least, until a significant number of such conversions has taken place.

32
Q

D: Contribution

A

Under the principle of contribution, the value of any part of a property is measured by its effect on the value of the whole parcel. Installing a swimming pool, greenhouse, or private bowling alley may not add value to the property equal to its cost, but remodeling an outdated kitchen or bathroom might.

33
Q

D: Highest and Best Use

A

The most profitable single use of a property is its highest and best use. The use must be

  1. physically possible,
  2. legally permitted,
  3. economically or financially feasible, and
  4. The most profitable or maximally productive.

The highest and best use of a site can change with social, political, and economic forces.

34
Q

D: Law of Increasing Returns

A

Applies as long as money being spent on property improvements produces an increase in the property’s income or value.

35
Q

D; Law of Diminishing Returns

A

Point at which additional property improvements do not increase the property’s income or value.

36
Q

D: Plottage

A

Is in evidence when the consolidation of adjacent lots into a single larger one produces a greater total land value than the sum of the two sites valued separately.

Plottage is the amount that the value of the combined properties is increased by successful assemblage.

37
Q

D: Assemblage

A

The combining of two or more adjoining lots into one larger tract to increase their total value.

38
Q

What are the three Approaches to Value used by appraiser.

A
  1. The Sales Comparison
  2. The Cost Approach
  3. Income Approach
39
Q

D: Sales Comparison Approach

A

AKA: Market Data Approach

Value is obtained by comparing the property being appraised—the subject property—with recently sold comparable properties—properties similar to the subject in location and features.

The sales comparison approach is usually considered the most reliable of the three approaches in appraising single-family homes, where the intangible benefits of home ownership may be difficult to measure otherwise.

40
Q

What are the elements of comparison for which adjustments must be made & explain.

A
  1. Property Rights - An adjustment must be made when less than fee simple—the full legal bundle of rights—is involved. An adjustment could be made because of the presence of a land lease, ground lease, life estate, easement, deed restriction, and/or encroachment.
  2. Financing Concessions - The financing terms under which a property was sold must be considered, including mortgage loan terms and owner financing or an interest rate buydown by a builder-developer.
  3. Market Conditions - Interest rates, supply and demand, and other economic indicators must be analyzed.
  4. Conditions of Sale - Adjustments must be made for motivational factors that would affect the sale, such as foreclosure, a sale between family members, or some nonmonetary incentive.
  5. Market Conditions Since the Date of Sale - An adjustment must be made if economic changes occur between the date of sale of the comparable property and the date of the appraisal.
  6. Location or Area Preference - Similar properties might differ in price from neighborhood to neighborhood or even between locations within the same neighborhood.
  7. Physical Features and Amenities - Physical features, such as the structure’s age, size, and condition when compared to the subject property, may require adjustments.
41
Q

D: Cost Approach

A

The process of estimating the value of a property by adding to the estimated land value the appraiser’s estimate of the reproduction or replacement cost of the building, less depreciation.

To value also is based on the principle of substitution.

42
Q

What are the five steps in the Cost Approach?

A
  1. Estimate the value of the land as though 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 (loss in value) resulting from the property’s physical deterioration, external depreciation, and functional obsolescence.
  4. Deduct the accrued depreciation estimated in Step 3 from the construction cost estimated in Step 2.
  5. Add the estimated land value from Step 1 to the depreciated cost of the building and site improvements derived in Step 4 to arrive at the total property value.
43
Q

D: Accrued Depreciation

A

Loss in a property’s value resulting from physical deterioration, external depreciation, and functional obsolescence.

44
Q

D: Depreciation

A

In appraisal, a loss of value in property due to any cause, including physical deterioration, functional obsolescence, and external obsolesc

45
Q

For appraisal purposes, depreciation is divided into what three classes?

A
  1. Physical Deterioration
  2. Functional Obsolescence
  3. External Obsolescence
46
Q

D: Straight Line Depreciation

A

AKA: Economic age-life

Depreciation is assumed to occur at an even rate over a structure’s economic life, the period during which it is expected to remain useful for its original intended purpose.

The property’s cost is divided by the number of years of its expected economic life to derive the amount of annual depreciation.

47
Q

When is the cost approach of depreciation most useful?

A

The cost approach is most useful in the appraisal of newer or special-purpose buildings such as schools, churches, and public buildings.

Such properties are difficult to appraise using other methods because there are seldom enough local sales to use as comparables and because the properties do not ordinarily generate income.

48
Q

D: Economic Life

A

The number of years during which an improvement will add value to land.

49
Q

D: Income Approach

A

To value is based on the present value of the right to future income.

It assumes that the income generated by a property will determine the property’s value.

The income approach is used for valuation of income-producing properties such as apartment buildings, office buildings, retail stores, and shopping centers and is based on anticipation.

A simplified version of the computations used in applying to income approach is shown in Income Capitalization Approach to Value.

50
Q

What are the five steps in the Income Approach?

A
  1. Estimate the property’s annual potential gross income. An estimate of economic rental income must be made based on market studies. Current rental income may not reflect the current market rental rates, especially in the case of short-term leases or leases about to terminate. Potential income also includes income to the property from such sources as vending machines, parking fees, and laundry machines.
  2. Deduct an appropriate allowance for vacancy and rent loss, based on the appraiser’s experience, and arrive at the effective gross income.
  3. Deduct the annual operating expenses from the effective gross income to arrive at the annual net operating income (NOI). Management costs are always included, even if the current owner manages the property. Mortgage payments (principal and interest) are debt service and are not considered operating expenses. Capital expenditures are not considered expenses; however, an allowance can be calculated representing the annual usage of each major capital item.
  4. Estimate the price a typical investor would pay for the income produced by this particular type and class of property. This is done by estimating the rate of return (or yield) that an investor will demand for the investment of capital in this type of building. This rate of return is called the capitalization rate (or “cap” rate) and is determined by comparing the relationship of net operating income with the sales prices of similar properties that have sold in the current market. For example, a comparable property that is producing an annual net income of $15,000 is sold for $187,500. The capitalization rate is $15,000 divided by $187,500, or 8%. If other comparable properties sold at prices that yielded substantially the same rate, it may be concluded that 8% is the rate that the appraiser should apply to the subject property.
  5. Apply the capitalization rate to the property’s annual net operating income to arrive at the estimate of the property’s value.
51
Q

D: Gross Rent or Gross Income Multiplers

A

If a buyer is interested in purchasing a one- to four-unit residential rental property, the gross rent multiplier (GRM) based on monthly rental income could be used for a rough approximation of value.

If the buyer is interested in purchasing five or more units, a gross income multiplier (GIM) based on annual income could be used.

To establish an accurate GRM, an appraiser must have recent sales and rental data from at least four properties that are similar to the subject property.

The resulting GRM can then be applied to the estimated fair market rental of the subject property to arrive at its market value.

52
Q

What is the formula for Gross Rent Multipler for 1-4 units that has no income from other sources.

A

Sales price ÷ monthly gross rent = gross rent multiplier (GRM)

53
Q

What is the formula for Gross Rent Multipler for 5 or more units with income from a variety of sources..

A

Sales price ÷ annual gross income = gross income multiplier (GIM)

54
Q

D: Reconciliation

A

Is the act of analyzing and effectively weighing the findings from the three approaches.

In reconciliation, an appraiser explains not only the appropriateness of each approach but also the relative reliability of the data within each approach in line with the type of value sought.

The appraiser should also explain how the data reflect the current market.

Certain approaches are more valid and reliable with some kinds of properties than with others.

55
Q

True or False & Why

External obsolescence is always incurable.

A

True

If caused by negative factors, not on the subject property, such as environmental, social, or economic forces, the depreciation is always considered incurable because the cure is beyond the efforts of the owner.

56
Q

True or False & Why

The income approach to value is based on the future value of the rights to present income.

A

False

The income approach to value is based on the present value of the rights to future income.

57
Q

True or False & Why

An estimate of the rate of return (yield) that an investor would expect for investing in a piece of property is called the anticipation rate.

A

False

An estimate of the rate of return (yield) that an investor would expect for investing in a piece of property is called the capitalization rate or cap rate.

58
Q

An appraiser’s role is to

A) determine value.

B) average value.

C) provide an opinion of value.

D) set the market price.

A

C) provide an opinion of value.

An appraiser is an independent professional trained to provide an unbiased opinion of value using approved methods.

59
Q

A homeowner constructs an eight-bedroom brick house with a tennis court, a greenhouse, and an indoor pool in a neighborhood of modest two-bedroom and three-bedroom frame houses on narrow lots. The value of this house is MOST likely to be affected by what principle?

A) Change

B) Assemblage

C) Regression

D) Progression

A

C) Regression

The value of larger lavish homes in a modest neighborhood will be drawn down by the presence of modest, less-lavish homes. Regression is the opposite of progression.

60
Q

Which appraisal method uses a rate of investment return?

A) Income approach

B) Gross income multiplier method

C) Cost approach

D) Sales comparison approach

A

A) Income approach

The income approach uses the rate of investment return, which is the relationship between the appraised value and the net annual income.

61
Q

Another name for the market data approach to appraising is

A) the cost approach.

B) the income capitalization approach.

C) the sales comparison approach.

D) the competitive market analysis.

A

C) the sales comparison approach.

Value is obtained by comparing the property being appraised with recently sold comparable properties.

A competitive market analysis is the informal method of valuation performed by a real estate analysis to assist buyers and sellers.

62
Q

Which of the following is TRUE about a comparative market analysis?

A) It is made by a professional appraiser.

B) It is the same as an appraisal.

C) It is based on a detailed market analysis of market conditions, property features, recent sales and listings, land value, and construction costs.

D) None of these.

A

D) None of these.

A comparative market analysis is based on recently closed properties, those currently on the market, and expired listings. It is prepared by a real estate professional and is not as detailed as an appraisal performed by a licensed or certified appraiser.

63
Q

The sellers are not sure whether to renovate the kitchen before selling their home. The principle of value that will determine whether the renovation is financially feasible is

A) consideration.

B) cost.

C) conformity.

D) contribution.

A

D) contribution.

The principle of contribution states that if the increase in the value of the real estate is more than the cost to renovate, the sellers would financially benefit by doing the renovation.

64
Q

The appraised value of a residence with four bedrooms and one bathroom would probably be reduced because of

A) incurable physical deterioration.

B) external obsolescence.

C) functional obsolescence.

D) curable physical deterioration.

A

C) functional obsolescence.

Depending on the other homes in the marketplace, a home with four bedrooms and only one bathroom may be undesirable.

65
Q

If a property’s annual net income is $24,000 and it is valued at $300,000, what is its capitalization rate?

A

8%

Net annual income ÷ market value = capitalization rate ($24,000 ÷ $300,000 = 0.08, or 8%). Given any two elements, the third can be calculated.

66
Q

Change, contribution, plottage, and substitution are some of the basic principles that affect what aspect of real estate?

A) Demand

B) Supply

C) Depreciation

D) Value

A

D. Value

They all affect value—the most probable price a property will bring.

67
Q

A developer buys the last five vacant lots in a subdivision and constructs a large, expensive home on each lot. The homes sell for what are record-setting high prices for the area. The owners of the older, lesser-valued houses in the neighborhood may find that the values of their homes are affected by what principle?

A) Competition

B) Progression

C) Regression

D) Increasing returns

A

B) Progression

The value of modest homes in an area may increase with the presence of more expensive homes. This is an example of the principle of progression.

68
Q

The cost approach to value is based on the principle of

A) change.

B) conformity.

C) substitution.

D) highest and best use.

A

C) substitution.

What would a reasonable person pay for a similar property with the same improvements and degree of depreciation?

69
Q

It would cost approximately $350,000 to build a house and its various improvements on a parcel of property. If the property was vacant, undeveloped land, it would be worth about $100,000. At present, the property’s physical deterioration equals about $60,000. If an appraiser were to apply the cost approach, what would be an estimate of the value of this property?

A) $450,000

B) $390,000

C) $480,000

D) $250,000

A

B) $390,000

In the cost approach, the appraiser subtracts depreciation from the current cost of the improvements and then adds on the value of the land as if it were vacant: $350,000 – $60,000 + $100,000 = $390,000.

70
Q

From the reproduction or replacement cost of a building, the appraiser deducts depreciation, which represents

A) remodeling costs to increase rentals.

B) the remaining economic life of the building.

C) loss of value due to any reason.

D) costs to modernize the building.

A

C) loss of value due to any reason.

Depreciation is loss of value from any reason.

Some examples of such causes are physical deterioration (wearing out and/or deferred maintenance), external (economic) obsolescence, and functional obsolescence (lack of modernity or good design).

71
Q

Which of the following is NOT used by an appraiser applying the income approach to value?

A) Annual net operating income

B) Annual gross income

C) Accrued depreciation

D) Capitalization rate

A

C) Accrued depreciation

Depreciation is one of the calculations used in the replacement (cost) approach and not in the income approach.

72
Q

A loss in value as the result of the market’s response to an item, rather than a deterioration of the item’s physical condition, is

A) environmental destruction.

B) deferred maintenance.

C) external obsolescence.

D) functional obsolescence.

A

D) functional obsolescence.

The design features that were most desirable in the 1970s may make a home seem outmoded, and undesirable features may not be economical to correct.

73
Q

A two-unit apartment building is being appraised. In this neighborhood, the accepted gross rent multiplier is 144. The annual income generated by the building is $16,800 (both units rented). The monthly expenses are $300. Based on the income approach, what is the estimated market value of the apartment building?

A) $224,800

B) $232,500

C) $258,600

D) $201,600

A

D) $201,600

The monthly rental income is $1,400 ($16,800 ÷ 12 = $1,400). Rental income × GRM = estimated market value: $1,400 × 144 = $201,600. The monthly expenses are not included in the calculation.

74
Q

A homeowner constructs an eight-bedroom brick house with a tennis court, a greenhouse, and an indoor pool in a neighborhood of modest two-bedroom and three-bedroom frame houses on narrow lots. The value of this house is MOST likely to be affected by what principle?

A) Change

B) Assemblage

C) Regression

D) Progression

A

C) Regression

The value of larger lavish homes in a modest neighborhood will be drawn down by the presence of modest, less-lavish homes. Regression is the opposite of progression.

75
Q

What is the GRM for a residential duplex (two-unit building) with a selling price of $234,000 if the monthly rent for each unit is $925?

A) 126.5

B) l.054

C) 252.9

D) 10.54

A

A) 126.5

Because gross rent multiplier (GRM) for one-unit and two-unit residential properties is based on gross monthly rent, GRM = sales price ÷ gross rent: $234,000 ÷ (2 × $925) = 126.5 GRM.

76
Q

W buys a small house in a highly desirable neighborhood consisting of large homes and pays $390,000. X buys a nearly identical house in a neighborhood of similarly sized homes and pays $290,000. What economic principle BEST describes the reason why W paid more than X?

A) Regression

B) Substitution

C) Plottage

D) Progression

A

D) Progression

The answer is progression. W’s house benefits from being a smaller one alongside larger, more prestigious ones (i.e., progression). X’s house is appropriately valued for its neighborhood.

77
Q

Which of these formulas is incorrect for the income approach?

A) Income ÷ value = rate

B) Value × rate = income

C) Value ÷ rate = income

D) Income ÷ rate = value

A

C) Value ÷ rate = income

The answer is value ÷ rate = income. As the capitalization rate goes down, the value increases.

78
Q

The appraised value of a residence with four bedrooms and one bathroom would probably be reduced because of

A) functional obsolescence.

B) curable physical deterioration.

C) external obsolescence.

D) incurable physical deterioration.

A

A) functional obsolescence.

Depending on the other homes in the marketplace, a home with four bedrooms and only one bathroom may be undesirable.

79
Q

The essential elements of value are

A) title, demand, supply, and utility.

B) desire, supply, usefulness, and title.

C) demand, supply, utility, and transferability.

D) transferability, demand, scarcity, and utility.

A

D)
transferability, demand, scarcity, and utility.

The answer is transferability, demand, scarcity, and utility. Remember the memory aid DUST: demand, utility, scarcity, and transferability.