USPAP Flashcards

Question

Allocation Method

Answer 1

"A method of estimating land value in which sales of improved properties are analyzed to establish a typical ratio of land value to total property value and this ratio is applied to the property being appraised or the comparable sale being analyzed."

Answer 2

real property value is created and sustained when the characteristics of a property conform to the demands of its market."

Answer 3

real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium."

Answer 4

A method of estimating land value in which the net operating income attributable to the land is isolated and capitalized to produce an indication of the land's contribution to the total property." This method deals with income as the basis for value and only should be used in the appraisal of income producing properties.

Answer 5

Remember the basic income capitalization formula that Value = Income/Rate. Value = Market value Income = Net operating income Rate = Capitalization rate

Answer 6

"A method of estimating land value; applied by capitalizing ground rent at a market-derived rate. This method is useful when comparable rents, rates, and factors can be developed from an analysis of sales of leased land or other market sources." value equals income divided by a rate.

Answer 7

Ranking analysis is a variant of relative comparison analysis, in which the comparable sales are ranked in ascending or descending order. Then the relative position of the subject is determined within the array.

Answer 8

However, the manufactured home is constructed on a permanent steel chassis and has wheels and axles. It is meant to be hauled down the highway and arrives 100% finished. The sections are joined together at the site and it is complete. Most significantly, it is built to meet the HUD Code. A modular home is built in sections, called boxes, which are lifted onto a truck and transported to the site. The boxes are lifted off with a crane, or rolled off, onto the foundation. Then the boxes have to be joined and finishing work performed at the site. A modular home is built to meet state and local codes, not the HUD Code.

Answer 9

"Total area of finished, above-grade residential space; calculated by measuring the outside perimeter of the structure and includes only finished, habitable, above-grade living space. (Finished basements and attic areas are not generally included in total gross living area. Local practices, however, may differ)."

Answer 10

A level is considered below-grade if any portion of it is below-grade - regardless of the quality of its finish or the window area of any room. A walk-out basement with finished rooms would not be included in the above-grade room count. The Fannie Mae Selling Guide goes on to state: "Rooms that are not included in the above-grade room count may add substantially to the value of a property-particularly when the quality of the finish is high. The appraiser must report the basement or other partially below-grade areas separately and make appropriate adjustments for them on the 'basement and finished areas below-grade' line in the 'sales comparison analysis' grid." End of Page

Answer 11

When appraising 2-4 family residential properties, Fannie Mae, Freddie Mac, HUD/FHA and VA require an appraiser to use gross building area. Fannie Mae says in its Selling Guide, Section B-4-1.4-14, "Gross building area: is the total finished area including any interior common areas, such as stairways and hallways of the improvements based on exterior measurements. is the most common comparison for two- to four-unit properties. must be consistently developed for the subject property and all comparables used in the appraisal. must include all finished above-grade and below-grade living areas, counting all interior common areas such as stairways, hallways, storage rooms, etc. cannot count exterior common areas such as open stairways.

Answer 12

``` Obtain a building permit Check applicable codes Building codes Fire codes Check environmental regulations Wetlands Protected areas Hazard areas Check flood plain Curb cut permit or driveway permit (if needed) ```

Answer 13

Split entry

Answer 14

The amount of entrepreneurial incentive required for a project represents the economic reward sufficient to motivate an entrepreneur to accept the risk of the project and to invest the time and money necessary in seeing the project through to completion."

Answer 15

2,826 SF X $54.18 = $153,113 286.3 / 193.4 = 1.480 $153,113 x 1.480 = $226,607 Therefore, costs have gone up 48% since 1995, and it would cost $226,607 to build the same house today. End of Page

Answer 16

Here's a quick example. You find a comparable sale of a new house similar to the one you are appraising. It just sold for $320,000. You estimate the value of the site at $75,000 and the cost of the site improvements at $15,000. $320,000 - $75,000 -$15,000 = $230,000. The house has 2,550 square feet (SF) of gross living area (GLA). What is the unit cost of the structure? All you have to do is divide $230,000 by 2,550 and the answer is $90.20. That is a market-derived comparative unit cost.

Answer 17

Effective age ————————— X total cost = depreciation Total economic life The cost new of the improvements is $245,200, the site value is $60,000, and the effective age is 17. The total economic life expectancy judged by comparable sales is 55 years. 17 / 55 = .309 or 30.9% $245,200 x .309 = $ 75,767 Total cost of the improvements $245,200 Less total depreciation - 75,767 Depreciated cost $169,433 Plus site value + 60,000 Indicated value by the cost approach $229,433

Answer 18

Many appraisers feel this is a preferable method when there are substantial items of deferred maintenance in a property. The cost of the deferred items is subtracted first. The cost new of the subject property is $235,000, the site value is $70,000 and the effective age is 25. The total economic life is estimated to be 60 years. The subject has deferred maintenance items that total $4,500. After these repairs, the effective age will be reduced to 20 years. $235,000 - $4,500 = $230,500 Remaining Improvement Cost 20 (effective age) / 60 (total economic life) = .333 (percent of depreciation) Cost Approach ``` Remaining Improvement Cost $230,500 Minus Depreciation ($230,500 x .33) - 76,065 ``` Depreciated Cost of Improvements $154,435 Plus Site Value $ 70,000 Value by Cost Approach $224,435 Rounded to $225,000

Answer 19

So the roof covering would be a short-lived item. Now suppose we were appraising that house when it was 15 years old. We might estimate the cost to replace the roof at $4,000. That roof has lost a lot of its life, but there might be 5 years left in it. There is no need to replace it now, because we would just be throwing away money. However, in the cost approach, we will have to measure its loss of utility and subtract that amount. Fifteen out of 20 years means it has lost .75 or 75% of its value. However, it still retains 25% of its original value. $4,000 x .75 = $3,000 depreciation. The roof still has a remaining value of $1,000, but the short-lived depreciation charged to the roof is $3,000.

Answer 20

Long-lived items are defined this way: "A building component or site improvement expected to have the same useful life as the entire structure." For example, let's assume a total replacement cost of $200,000. A portion of that is accounted for by the cost of the short-lived items (the roof, furnace, water heater, etc.) and any deferred maintenance. The rest, by default, must be the cost of the long-lived items. It's process of elimination, like the old saying goes, "If it isn't one thing‚ it's got to be the other!" If we identify the total cost new of the short-lived items to be $50,000 (assume no deferred maintenance), then the cost of the long-lived items has to be $150,000 ($200,000 - $50,000). Then, remember that the cost of the long-lived items will be depreciated over the remaining economic life of the whole structure. If we estimate the remaining economic life to be 45 years out of a total of 60 years, then the long-lived items have incurred a total depreciation, at this point in their lives, of 15/60 or 25%. In this example, long-lived depreciation is therefore equal to 0.25 X $150,000, or $37,500.

Answer 21

For example, a property may be found to sustain $10,000 in external obsolescence because of nearby environmental pollution. However, let's assume that 75% of the value is in the improvements and 25% is in the land. Therefore, 25% or $2,500 is attributable to the land. This means that 75%, or $7,500 is attributable to the improvements. The total loss in value ($10,000) should be properly allocated between the two components.

Answer 22

A neighborhood is defined as "A group of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises." A district is defined as "A neighborhood characterized by homogeneous land use, e.g., apartment, commercial, industrial, agricultural." A market area is defined as "The geographic region from which a majority of demand comes and in which the majority of competition is located. Depending on the market, a market area may be further subdivided into components such as primary, secondary, and tertiary market areas, or the competitive market area may be distinguished from the general market area."

Answer 23

"A quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties are analyzed to isolate a single characteristic's effect on value or rent. Often referred to as paired sales analysis."

Answer 24

$198,000 / $180,000 = 1.10 That is an increase of 10.0% over 10 months, or an average of 1.0% (one percent) per month. Therefore, if a comparable property sold 12 months ago, we could adjust it on the basis of 1.0% per month or a total of 12%. That is the way most residential appraisers make adjustments for changes in market conditions; using straight-line adjustments, on a monthly basis. An alternative method is to use compound interest, instead of straight-line, for the monthly adjustments. Let's look at an example using the Hewlett Packard 12C calculator.

Answer 25

Real property can be owned in different ways. A property can be owned by a single individual. Oddly enough, this is called Tenancy in Severalty. The definition is simply: "An estate in property held by one owner." Tenancy, by the way, is defined as "1. The holding of property by any form of title. 2. The right to use and occupy property as conveyed in a lease."

Answer 26

Any time a property has a mortgage or is encumbered by a lien, for example, the owner no longer has a fee simple interest! Actual fee simple ownership may be the exception rather than the rule. As stated previously, we typically appraise real property as if unencumbered by mortgages and liens, so stating "fee simple" in the report may be appropriate. If we are asked to appraise a partial interest, that assignment becomes more complicated. It may prove to be that the impact of some factor that creates a partial interest is negligible. But we never know until we investigate the circumstances. It is possible that an easement can add to value, reduce value, or have no impact. Generally, however, when valuing partial interests, we discover that the value of a partial interest is less than the pro rata share of a fee simple interest. For example, the value of a 1/3 interest may be considerably less than 1/3 of the market value of the property. "When analyzing the assemblage of the various estates or component parts of a property, an appraiser must analyze the effect on value, if any, of the assemblage. An appraiser must refrain from valuing the whole solely by adding together the individual values of the various estates or component parts. Comment: Although the value of the whole may be equal to the sum of the separate estates or parts, it also may be greater than or less than the sum of such estates or parts. Therefore, the value of the whole must be tested by reference to appropriate data and supported by an appropriate analysis of such data. A similar procedure must be followed when the value of the whole has been established and the appraiser seeks to value a part. The value of any such part must be tested by reference to appropriate data and supported by an appropriate analysis of such data."1

Answer 27

You must record the type of property rights for the subject and all comparables on the Uniform Residential Appraisal Report (URAR). There is a box for this information in the Value Adjustments section, just below the box for location information. For residences, the entry in this box may be "Fee Simple". But if it is not, note the variance and assign an appropriate value to it, based on data obtained from the market. For example, if Comparable 1 sold for $220,000 but did not include timber rights, you would search for other comparables with timber rights and compare prices. Comparable 2 was nearly identical to 1, and included timber rights. It sold for $250,000. It would be reasonable to conclude that timber rights were worth $30,000. Note this information as follows:

Answer 28

"A lump-sum payment (or series of payments) to the lender that reduces the interest payments of the borrower. The cost of the buydown is usually reflected in the price paid and can be expressed as a percentage of principal

Answer 29

Specific appraisal techniques applied to develop a value indication for a property based on its earning capability and calculated by the capitalization of property income." Value = Income / Rate Value = Income X Multiplier

Answer 30

"The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted. Note: This definition mirrors the convention used in corporate finance and business valuation for EBITDA (earnings before interest, taxes, depreciation, and amortization)."

Answer 31

"A method used to convert an estimate of a single year's income expectancy into an indication of value in one direct step, either by dividing the net income estimate by an appropriate capitalization rate or by multiplying the income estimate by an appropriate factor. Direct capitalization employs capitalization rates and multipliers extracted or developed from market data. Only one year's income is used. Yield and value changes are implied but not explicitly identified." So, with direct capitalization we get a "snapshot" of value at one particular point in time. It is somewhat simplistic, but can produce credible results if you have sufficient data. If we had an estimated income (NOI) of $10,000 per year and the appropriate rate at which to capitalize it was 10%, then we would simply divide $10,000 by .10, and the resulting value estimate would be $100,000. That's too easy - you can do it in your head!

Answer 32

Excess rent is defined as "The amount by which contract rent exceeds market rent at the time of the appraisal; created by a lease favorable to the landlord (lessor) and may reflect unusual management, unknowledgeable or unusually motivated parties, a lease execution in an earlier, stronger rental market, or an agreement of the parties."

Answer 33

“The periodic expenditures necessary to maintain the real estate and continue production of the effective gross income, assuming prudent and competent management. See also total operating expenses.” Expenses are divided into two categories: fixed expenses and variable expenses.

Answer 34

“Operating expenses that generally do not vary with occupancy and which prudent management will pay whether the property is occupied or vacant.”

Answer 35

The sum of all fixed and variable operating expenses and the replacement allowance cited in the appraiser's operating expense estimate."

Answer 36

Gross Annual Rental (Potential Gross Income, or PGI) ``` + Other Income - Vacancy/Credit Loss (V&C) = Effective Gross Income (EGI) - Operating Expenses (TOE) = Net Operating Income (NOI) ```

Answer 37

The total income attributable to property at full occupancy before vacancy and operating expenses are deducted."

Answer 38

The sum of all fixed and variable operating expenses and the replacement allowance cited in the appraiser's operating expense estimate."

Answer 39

"A method used to convert future benefits into present value by 1) discounting each future benefit at an appropriate yield rate, or 2) developing an overall rate that explicitly reflects the investment's income pattern, holding period, value change, and yield rate."

Answer 40

The procedure in which a discount rate is applied to a set of projected income streams and a reversion. The analyst specifies the quantity, variability, timing, and duration of the income streams as well as the quantity and timing of the reversion and discounts each to its present value at a specified yield rate."

Answer 41

The relationship or ratio between the sale price or value of a property and its periodic gross rental income."

Answer 42

The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses and an addition is made for any other income."

Answer 43

``` Site value Replacement costs Depreciation Vacancy rates Market rents GRM Operating expenses Taxes Insurance ```

Answer 44

A = P (1 + r/n) (nt)

Answer 45

Work out the Mean (the simple average of the numbers) Then for each number: subtract the Mean and square the result. Then work out the mean of those squared differences. Take the square root of that and we are done!

Answer 46

An increase in value (over the cost of acquiring the parcels)by successful assemblage, usually due to a change in use.

Answer 47

If the appraiser can determine the total property income and the income attributed to the building by subtracting the building income from the total income, the appraiser may calculate the income attributed to the land. Once the income to the land is calculated, the appraiser will then capitalize the income at the appropriate land cap rate to indicate the value of the land. This process in known as the land residual technique. The following formula is for which method of site valuation? Total Net Property Income - Building Income = Income To the Land / Land Cap Rate = Site Value.

Answer 48

A way to convert a property's income figure into an estimated value.

Answer 49

An income capitalization method that takes a property's single year income figure (net operating income or NOI) divided by the sale price to derive a capitalization rate: NOI ÃÆÃÂ· Sale Price = Cap. Rate (Property value can also be derived using NOI divided by cap. rate: NOI ÃÆÃÂ· Rate = Value).

Answer 50

An amount of money set aside for future repairs that may be needed for major items, such as the roof or heating.

Answer 51

Costs of running a building, such as repairs and maintenance, but not including debt service nor depreciation. No it does not

Answer 52

Ongoing operating expenses that do not vary based on occupancy levels of the property (e.g., taxes and insurance).

Answer 53

Operating expenses that are necessary to the property, but are dependent on the property's occupancy level.

Answer 54

Analyzes all of the anticipated cash flows over the life of an investment

Answer 55

The total income that a property is capable of generating at 100% occupancy prior to a vacancy and collection loss allowance and operating expenses is commonly referred to as

Answer 56

The total rent received above the guaranteed base rent, which is calculated as a percentage of the volume of sales that a particular business experiences, is commonly known as

Answer 57

Effective gross income is: Potential Gross Income - Vacancy and Collection Losses.

Answer 58

A sinking fund is a means of repaying funds through periodic payments. HP 12C method: 64,000 [FV], 6 [n], 8 [i], PMT. A client's building will need a new roof in 20 years. The estimated cost at that time will be $64,000. If the client can invest at 8% annually, how much should the client deposit each month to have the required funds at the end of 20 years? (Rounded your answer to the nearest dollar.) HP 12C method: 64,000 [FV], 8 [g] [i], 20 [g] [n], [PMT]. (Note: The blue key [g] is used when monthly payments, or compounding, is noted in the question. When you key the blue key [g] it is "times 12," indicating that the payments are paid monthly or the compounding is monthly.) A client's building will need a new roof in 20 years. The cost today is $8,000. If inflation is estimated to be 8% annually, what will be the cost of the new roof in 20 years? (Round your answer to the nearest penny.) HP 12C method: 8,000 [PV], 8 [i], 20 [n], [FV].

Answer 59

% of effective gross income

Answer 60

Age-life depreciation is calculated by taking effective age and dividing it by total economic life

Answer 61

effective age is total economic life (aka useful life) - remaining economic life.

Answer 62

$249,000 (Improved value) - $35,000 (Site value) = $214,000 (Depreciated improvement value); $239,000 (replacement cost) - $214,000 = $25,000 (total depreciation)/10 (actual age) = $2,500 (depreciation per year); $239,000/$2,500 = 95.6 - 5 (effective age) = 90.6 or rounded, 91 years.

Answer 63

The modified age-life method considers the known cost to cure of curable items and an effective age as if the items were cured.

Answer 64

Soft costs include items that are not labor and materials directly related to the project. Items such as building permits, real estate taxes (during construction), and professional fees would be examples.

Answer 65

The unit in place method is best defined as the method that is widely used by contractors; it entails the cost addition of all the major building components.

Answer 66

The modified age-life method considers the known cost to cure of curable items and an effective age as if the items were cured. First, depreciation is calculated: 20 (Effective Age) / 60 (Total Economic Life: 40 + 20) = 33.33%. Next, curable depreciation is subtracted from cost: $226,000 - $2,800 = $223,200. Total depreciation is calculated as follows: $223,200 x 33.33% = $74,392.56 (incurable) + 2,800.00 (curable) = $77,192.56.

Answer 67

A tax levied only against properties that benefit from a public improvement (e.g. a sewer or street light), to cover the cost of the improvement; creates a special assessment lien, (an involuntary lien).