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Appraisal
assessment of value at a specific point in time
Inherent Assumptions of Market Value
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what they consider their best
interests;
(3) A reasonable time is allowed for exposure in the open market;
 (4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements
comparable thereto; and
(5) . The price represents the normal consideration for the property sold unaffected by special or
creative financing or sales concessions granted by anyone associated with the sale.

1/118

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celeste_warren
Tags related to this set
Highest And Best Use
Net Operating Income
Effective Gross Income
Terms in this set (118)
Appraisal

assessment of value at a specific point in time

Inherent Assumptions of Market Value

(1) Buyer and seller are typically motivated;

(2) Both parties are well informed or well advised, and acting in what they consider their best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable
thereto; and
(5) . The price represents the normal consideration for the property sold unaffected by special or
creative financing or sales concessions granted by anyone associated with the sale.

Approaches to value

Cost Approach
Income Approach
Sales Comparsion Approach

4 Powers of Government

1) taxation
2) eminent domain (Ex. build highways)
3) police power (Ex. zoning)
4)escheat (Ex. Die without a will property goes to state)

Consistent Use
Land cannot be valued on the basis of one use while the improvements are valued on the basis of
another use

Highest and Best Use

The reasonably probable and legal use of vacant land or an improved property that is physically possible,
appropriately supported, financially feasible, and that results in the highest value

The reasonably probable use the produces the most benefits and the highest land value at any given
time

4 tests of highest and best use

1) Physically Possible

Limited by site's size, shape, topography

2) Legally Permitted

Consideration of zoning, building codes, hazardous

areas, CC&Rs

3) Financially Feasible

Present or anticipated market conditions

4) Maximally Productive

Highest financial return and property price

Financially feasible

Potential Use is Feasible if:

Land Value > 0
Market Rent > Feasibility Rent

Potential Use is not Feasible if:

Land Value <0
Market Rent < Feasibility Rent

Maximally Productive Use = Highest of the Financially Feasible Uses

Financially Feasible - 3 Measures

Land Residual Analysis

Feasibility Rent

Profitability Index
Sales Comparison Approach

Information is gathered on Subject property and Comparable properties that have sold or been listed for
sale recently

Most common technique & preferred method when sales are available

Make appropriate adjustments for differences between the Comparable property and the Subject
property - we adjust the sale to the subject

Market Extraction

An estimate of the depreciated cost of the improvements is deducted from the total sale price to arrive
at the land value
Most applicable when a site has few improvements
Frequently used in rural areas

Allocation method

Ratio of site value is extracted from comparable sales in competitive locations and applied to the value
of the improved subject property or comparable properties to develop the site value

Applicable when valuing one-unit residential lots where ample sales of both lots and improved homes
are available comparison purposes

Less accurate for commercial properties

For commercial properties can provide a check on reasonableness rather than a formal opinion of site
value

Other than in valuing residential subdivision lots rarely used as the primary land valuation technique

Direct Capitalization - Land Residual Method

Net income attributable to the land is capitalized at a market-derived land capitalization rate to provide
an estimate of value

Most applicable in testing feasibility of alternative uses of a site in highest and best use analysis

Direct Capitalization - Ground Rent Capitalization

Annual income from ground lease is divided by capitalization rate to indicate market value of site

Most applicable when comparable rents, rates and factors can be developed from an analysis of sales of
leased land

Yield Capitalization - Subdivision Development (DCF)

Costs of developing and subdividing parcel of land are subtracted from total expected sales prices of the
separate sites to determine the value of the undivided raw land
Most applicable when subdivision development is the highest and bet use of the land and there is
market support for immediate absorption

Requires many variables, including: sale price projections, absorption rate projections, construction cost
projections and profit margin projections

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AGRARIAN REFORM (CARL/PD27)

AGRARIAN REFORM (CARL/PD27)
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E
1. Classification and use of lands exempted from CARP law but not included:
A. Lands actually, directly and exclusively use for prawn farm and fishpond; lands devoted to raising
of livestock' poultry or swine.
B. Agricultural lands with slope of 18% or more; lands actually, directly and exclusively used and
found necessary for parks, wildlife, forest reserves, reforestration, fish sanctuaries, breeding
grounds, water shed and mangroves
C. Lands actually, directly and exclusively used and found necessary for national defense, school
sites, church sites, mosque sites, communal burial grounds and penal colonies.
D. Lands actually, directly and exclusively used and found necessary for national defense, school
 sites, cultural movement sites, mosque sites, communal burial grounds and penal colonies.
E. All of the above

D
2. Refers to Patent issued only by the President of the Philippines for a
particular purpose (reclaimed land along Roxas Blvd. and in Cebu,
untitled patrimonial property in the vast area of Fort Bonifacio)
A. Free Patent
B. Homestead Patent
C. Sales Patent
D. Special Patent
1/27

Created by
dianne_yanna
Terms in this set (27)
E
1. Classification and use of lands exempted from CARP law but not included:
A. Lands actually, directly and exclusively use for prawn farm and fishpond; lands devoted to
raising of livestock' poultry or swine.
B. Agricultural lands with slope of 18% or more; lands actually, directly and exclusively used and
found necessary for parks, wildlife, forest reserves, reforestration, fish sanctuaries, breeding
grounds, water shed and mangroves
C. Lands actually, directly and exclusively used and found necessary for national defense,
school sites, church sites, mosque sites, communal burial grounds and penal colonies.
D. Lands actually, directly and exclusively used and found necessary for national defense,
school sites, cultural movement sites, mosque sites, communal burial grounds and penal
colonies.
E. All of the above
D
2. Refers to Patent issued only by the President of the Philippines for a particular purpose
(reclaimed land along Roxas Blvd. and in Cebu, untitled patrimonial property in the vast area of
Fort Bonifacio)
A. Free Patent
B. Homestead Patent
C. Sales Patent
D. Special Patent
C
3. Refers to the release for agricultural purpose the Insular Government Property Sales
Application under RA 3038
A. Free Patent
B. Homestead Patent
C. Sales Patent
D. Special Patent
C
4. As provided for by the Agrarian Reform Law, lands awarded to a tenant beneficiary cannot be
subject of a conversion permit within:
A. Within 1 year from grant of emancipation patent
B. Within 2 year from grant of emancipation patent
C. Within 5 year from grant of emancipation patent
D. Within 10 year from grant of emancipation patent
D
5. Cases where conversion of agricultural land cannot be allowed except:
A. Agricultural land within restricted areas designated under the national Integrated Protected
Areas System ( NIPAS ), including water shed and recharged areas of acquifier; irrigated lands
where water is available for rice and other crops production and all irrigated lands where water
is not available but are within areas programmed for irrigation facility rehabilitation
B. Irrigable lands already covered by irrigation projects with firm funding commitment;
C. Agricultural lands within irrigation facilities operated by private organizations.
D. Agricultural lands with destroyed iirigation facilities and scarce availability of water.
A
6. Refers to patents for residential, commercial, industrial, educational, charitable and other
similar purposes as governed by Chapter IX of the Public Land Act (Com. Act 141 as amended.
A. Miscellaneous Sales Patent
B. Free Patent
C. Sales Patent
D. Special Patent
A
7. An enactment that gives municipalities the power to reclassify up to 15% of agricultural land
not covered by CARL to non-agricultural uses if it is deemed by the local council ( sanggunian )
to be either no longer sound for agriculture or substantially greater value if used for residential
,commercial, or industrial purposes.
A. RA 7160
B. RA 7150
C. 1988 LGU
D. RA 7155
C
8. Refer to land devoted to or suitable to agriculture as defined in RA 6657 and owned by
private natural or juridical persons.
A. Farm land
B. Cultivated farm land
C. Private land
D. Irrigated farm land
D
9. Documentary requirement for DAR clearance in sale of 5-hectare agricultural land except:
A. Application for DAR clearance; copy of title, lot and vicinity plan
B. Seller's affidavit of non-tenancy or tenant's affidavit of voluntary surrender; seller's affidavit
that the hectarage he is selling is his retention area; buyer's affidavit that the hectarage he is
buying, together with his present agricultural landholdings, if any, does not exceed 5 has.
C. Municipal assessor's certification of seller's and buyer's extent of landholdings in the
municipality; provincial assessor' certification of seller's and buyer's extent of landholding in the
province; clearance from National Irrigation Authority
D. Seller's affidavit of non-tenancy or tenant's affidavit of voluntary surrender; buyer's affidavit
that the hectarage he is selling is his retention area; buyer's affidavit that the hectarage he is
buying, together with his present agricultural landholdings, if any, does not exceed 5 has
D
10. The retention unit of landowner under CARP is:
A. 5 has. for the landowners and 3 has. Per child irrespective of age.
B. 5 has for the landowner and 3 has per child who must be at least 15 years old
C. 5 has for landowner and 5 has per child whether or not they till or manage the land.
D. 5 has for the landowner and 3 has per child who must be at least 15 years old and actually
tilling or managing the land.
D
11. Tenants may be awarded 5 hectares of unirrigated land and _____if irrigated land.
A. 5 hectares
B. 6 hectares
C. 4 hectares
D. 3 hectares
C
12. Beneficiary of land may not sell, transfer, convey through hereditary succession said land for
a period of:
A. 5 years
B. 7 years
C. 10 years
D. 12 years
D
13. Has ruled that all agricultural lands that are already classified as commercial, industrial or
residential before June 15, 1988 no longer need any conversion clearance even if it is still
devoted to agricultural activity.
A. Republic Act 6657
B. Republic Act 7279
C. Ministry Order No. 39 series of 1985
D. DOJ Opinion No. 44 SERIES of 1990
C
14. Registration of sale of five (5) hectare agricultural land must be accompanied by
A. DAR conversion permit
B. HLURB license to Sell
C. DAR clearance
D. LGU Development Permit
B
15. The 2 criteria for carp coverage is suitability of the land for agriculture and
A. Its need for carp purpose
B. Its size and location
C. Its possibility of acquisition
D. Abusive landowners
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What term is used where all parties to the transaction
are dealing from equal bargaining positions and
disinterested as to the affairs of others?
Arm's-length
Which statement is true about the relationship
between the market value of a property and its
sales price at the time the property is sold
The price could be more or less than the market
value depending on the motivations of the buyers
and seller and details of the transaction
1/21

Created by
miroslava_s__rivera
Terms in this set (21)
What term is used where all parties to the transaction are dealing from equal bargaining positions and
disinterested as to the affairs of others?

Arm's-length

Which statement is true about the relationship between the market value of a property and its sales
price at the time the property is sold

The price could be more or less than the market value depending on the motivations of the buyers and
seller and details of the transaction

An appraisal for the price that a property would sell for based on a quick sale would be estimating what
type of value.

Liquidation value
What term BEST identifies the most probable price as of a given date for which specified property rights
should sell to a knowledgeable buyer in a competitive open market.

Market price

The interest or value that the owner has in real estate above the liens against it is referred to as

Equity

An appraisal term meaning the legally and physically possible use that, at the time of appraisal, is MOST
likely to produce the greatest land value is known as

Highest and best use

The term market value is MOST closely associated with which of the following terms

Value in exchange

What is the distinction between the terms market price and market value.

Market price is what the property sells for while market value is what the sales price should be to a
typical buyer

The term market value is sometimes explained as a theoretical economic concept. Part of the definition
of market value addresses how payment is made. In the common definition of market value, the method
of payment is assumed to be in what form.

Cash to the seller

Which of the following conditions is assumed in the normal definition of market value?

Payment will be made in cash or equivalent

The fundamental economic (valuation) principle underlying the direct sales comparison (market)
approach to value is known as:

Substitution

The highest and best use of a parcel of land will result in which of the following.

Greatest present value of the land

What economic principle would explain that when several houses with essentially the same utility are
available, the one with the lowest price will attract the greatest demand?

Substitution

Included in the definition of the highest and best use are certain tests or criteria that must be met.
Which of the following conditions is not a criterion in determining the highest and best use of land?

Socially acceptable
The direct sales comparison approach involves a step undertaken by the appraiser to adjust for such
items as square footage, age, quality of construction, etc. What economic principle is the foundation on
which this adjustment process is undertaken?

Contribution

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REE 4103 EXAM 3
REE 4103 EXAM 3
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An allowance for vacancy and collection loss is

estimated as a percentage of:
potential gross income
The anticipated income that remains after
deducting all operating expenses from effective
gross income but before mortgage debt service is:
net operating income (NOI)
1/86
Created by
onebilliontothesun
Tags related to this set
Effective Gross Income Multiplier
Effective Gross Income
Net Operating Income
Terms in this set (86)
OriginalAlphabetical
An allowance for vacancy and collection loss is estimated as a percentage of:
potential gross income
The anticipated income that remains after deducting all operating expenses from effective gross
income but before mortgage debt service is:
net operating income (NOI)
A _______________ would have the lowest ratio of operating expenses to gross income
incurred by the landlord.
retail and industrial properties
The operating expense ratio for income property is typically:
complement of the net income ratio
In determining income and expenses the first step is:
a lease and rental analysis
Effective gross income is income after an allowance for:
vacancy rates
In a high rise 100-unit apartment building there is a basement laundry area that brings in $500
monthly from the concessionaire. The laundry income is:
Would commonly be included as a miscellaneous income and added to the potential gross
income.
In an appraisal of income property, which of the following items should be excluded from the
expense statement?
depreciation
Overage rent is the:
percentage rent over the guaranteed
In an operating statement the painting and redecorating of an apartment unit is included in what
line item:
operating expenses
A reconstructed operating statement for an owner operated property should include:
management expense (ex: Have to reconstruct it because there's no way a manager should be
paid, say $5,000 / yr at market)
Rental data would not include:
...
Which of the following is an example of a specific expense item rather than a category?
property taxes
A rent survey reveals that apartment buildings offering one-bedroom units have a considerably
higher occupancy factor than those with two-bedroom units. If the subject property includes only
units with two bedrooms, the appraisal should probably project:
a higher vacancy factor (lower occupancy factor) than was found for one bedroom units
The subject property has 95% occupancy. What conclusion would you most likely draw if the
typical occupancy rate in the area were only 85%?
The rent might be lower in the 100% property (and too low for the market). So the value would
end up being the same because even though the occupancy is higher, the rent is lower. Or
another answer could be it's nicer than the others (but then if it's that nice, the rent is probably
still too low)
The total income anticipated from income property operations after vacancy and collection
losses are deducted is:
expected gross income (EGI)
Which approach would involve an investigation of the rent schedules of the subject property and
the comparables?
income approach
All of the following relate to the rent level or payment schedule of a lease except:
financing of the property
In direct capitalization which of the following cannot be converted into value estimates
(direct capitalization: widely used to value non residential properties with stabilized income &
predictable expenses; value estimate based on single years noi divided by cap rate) (can
convert: Single tenant industrial building)
If your capitalization rate is 12%, what is the value difference between a Net operating Income
of $48,000 and $70,000?
V = I/R = 48,000 / .12 = 400,000
V = I/R = 70,000 / .12 = 583,333.333
583,333.333 - 400,000 = 183,333.333
Lease renewals or extensions negotiated with existing tenants:
revaluation lease
When does an appraiser need to describe the source of information and verification of lease
terms?
scope of work- section of the appraisal report
Free rent for a specified period of time that does not appear in a lease agreement is called?
rent concessions
Any required adjustments in the division of expenses in comparable properties should:
be the same lease terms and divisions of expenses as the subject property.
If a renewable lease option were found to be favorable to a tenant an appraiser:
should note that in the appraisal report, and appraiser may be justified, concluding that the
tenant would exercise the option to renew.
A lease clause that limits the expenses of the landlord is termed a: (select all the answers that
are correct)
expense cap (expense stop)
If a tenants sales do not reach a certain level, they may cancel their lease if they have what type
of clause?
kick out or escape clause
Stabilized Net Operating Income should recognize the tenant improvements made to a property
that are appropriate for the market.
True
A tenant who has an Exclusive Use Clause with a landlord, where the landlord later allows a
competing tenant in the same shopping center may: (select all answers that are correct)
exercise the clause in a lawsuit
General payroll expenses:
operating expenses (variable expenses)
The definition of market value assumes financing terms:
compatible with those found in the market
All the following are excluded from the reconstructed operating statement except:
Excluded: mortgage loan interest payments, book depreciation, business tax, capital
costs/improvementsIncluded:management chargesFixed- taxes& insuranceVariable-
management/utilities/maintenanceReplacement allowance- exterior paint and kitchen/bathroom
equipment & carpeting/roofadvertising expenses
All of the following lease provisions are advantageous to the lessee except
escalation clause
Consider a property with potential gross income of $[x], effective gross income of $[y], and
operating expenses of $[z]. What is the net operating income?
NOI = EGI - OP EXPENSES
EX: Y = 22,500, Z = 10,000
NOI = 22,500-10,000 = 12,500
Potential gross income includes
scheduled rent
What is the value of a property with a net operating income of $[x], and a capitalization rate of
[y]?
V = NOI/CAP RATE
X/.Y
A small office building sold for $[x]. The monthly net operating income is $[y]per MONTH. What
was the overall capitalization rate? (enter answer as a decimal not a percentage - for example .
08 not 8%)
CAP RATE = NOI X 12 / SALE PRICE
EX: A small office building sold for $120,000. The monthly net operating income is $1,300 per
MONTH. What was the overall capitalization rate?
13% 1300x12 /120000
The gross rent multiplier is often used as the:
approach for single family properties
Gross income multipliers are generally considered part of:
The Sales Comparison Approach
If the overall capitalization rate for income property were to increase while estimated net
operating income remained the same, the resulting value estimate would:
Decrease
Income capitalization is the term used to describe the process of estimating the value of income
property by studying expected future income. This process: (select all answers that are correct).
Converts the noi of a property into its equivalent capital value;
Reflects the time value of money by reducing or discounting future income to its present value;
Focuses on the present worth of future benefits;
Uses market interest rates
In selecting an overall capitalization rate for an income-producing property, the appraiser will
consider all the following except:
interest rate on the existing loan which was arranged last year
The most commonly used capitalization rate is:
overall rate
An ordinary annuity is: (select all the correct answers)
-Level in amount and timing-Different from a variable annuity-Received at the end of each
period
A rent multiplier:
the ratio of the price of a real estate investment to its monthly rental income before expenses
The principle of anticipation:
is future oriented
In applying gross rent multiplier analysis to the subject property, the appraiser would use:
market rent
If a property would sell based on an equity dividend rate of 7% and qualifies for a 25-year, 85%
loan-to-value mortgage with monthly payments at 9%, what is the indicated overall capitalization
rate? Use the band-of-investment technique and round your answer to the nearest 0.1%.
- R=(RmM)+(ReE)
- Rm = Annual Debt Service / Initial Amount of Mortgage
-300 N; 9/12 I/Y; 1 PV; 0 FV; CPT PMT = -0.0084<--Monthly payment
- ADS = .0084 * 12 = .1007 <-Needed to annualize .0084 monthly payment
- Rm = 0.1007 / 1 = 0.1007
- M = .85
- Re = .07
- E = .15
- So...
- R = (0.1007 .75) + (.07 .15)
- = .0755 + .0105 = .0860 or 8.60%
The equity dividend rate is measured against
Equity investment (Ve=Ie/Re)
Comparable Sale A was recently sold for $700,000. Assume the PGI of the property is $112,000
and its effective gross income is $100,000. The operating expense ratio of the property is
45.4%. What is the effective gross income multiplier of Sale A?
EGIM = SALES PRICE / EGI
700,000/100,000 = 7
A property with a variable income and unknown resale price. Its holding period is estimated at 7
years. The reversion at the end of the holding period is estimated to increase by a total of 11%
over the entire holding period. The estimated discount rate for the property is 9%. If the net
present value of just the income over the holding period is $300,000, what is the present value
of the property when taking into consideration the reversion?
...
Comparable Sale A was recently sold for $[x]. Assume the PGI of the property is $[y] and its
equity dividend is $[z]. The operating expense ratio of the property is [a]. What is the Net
Income Ratio?
NIR = 1 - OER =
EX: 1 - .78 = 0.22 = 22%
OR 220,000/1,000,000
If the Net Operating Income for the subject property is determined to be $[x]/year. The Net
Operating Income and the Value of the property are expected to grow at [y] each year. The
Discount rate is determined to be [z] what is the indicated value of the property.
R=Y-A(change) ........................................................ R=.12 - .05 . ----> .
7% .................................... V=I/R ................................ V=45,000/.07 ................................
V=642,857 .....................................
If level income is forecast and the Discount rate is greater than the overall rate (R0),
_____________ is expected:
property appreciation
Comparable Sale A was recently sold for $[x]. Assume the PGI of the property is $450,000 and
its effective gross income is $[y]. The operating expense ratio of the property is [z]. What is the
overall capitalization rate extracted from the effective gross income multiplier of Sale A? (enter
answer as a decimal - for example .08 not 8%)
Step 1: Formula for Extracting Cap rate from EGI multiplier
R=NIR/EGIM or Cap Rate = Net income ratio divided by effective gross income multiplier
Step 2: Solve for EGIM
Value = EGI * EGIM
$700,000 = $220,000 * EGIM
EGIM = 3.18
Step 3: Solve for NIR (Net Income Ratio)
Net Income Ratio = 1 - OER (operating expense ratio)
NIR = 1-.75
NIR = .25 or 25%
Step 4: Solve for Cap Rate
R = .25/3.18
R = .0786 or 7.86%
Deriving the overall cap rate from the band of investment - Land and building: Assume the land
represents 30% of the property value and the building represents the other 70%. The land cap
rate derived from comparable sales data is 8.4%; the building cap rate is 12%. What is the
overall cap rate?
R = (LRatio RL) + (BRatio RB)
= (.30 .084) + (.70 .12)
= .0252 + .0840
= .11 or 11%
A property with NOI of $220,000 and annual debt service of $83,000. The Rm (mortgage
constant) equals .1090, and the M (loan to value ratio) is .65. What is the overall cap rate
indicated when using the debt coverage formula?
R = M(mortgage ratio) x RM (mortgage constant) x DCR
DCR = NOI/DEBT SERVICE
An appraiser determines that a comparable property would have a holding period of 5 years,
terminal cap rate (based on Yr 6 NOI) of 13%, and estimates 5% selling expenses. The
property's purchase price was $475,000. The appraiser projects the following cash flows for
NOI:
Year 1: $47,000; Year 2: $48,000; Year 3: $55,000; Year 4: $60,000; Year 5: $45,000; Year 6:
$40,000. What is the IRR (internal rate of return) for this comparable.
on calc:
VT = IT / RT = 40,000 / .13 = 307,692.308
Cf0 = -475,000; Cf1 = 47,000 ; Cf2 = 48,000 ; Cf3 = 55,000 ; Cf4 = 60,000
Cf5 = 45,000 + 307,692.308 - .05(307,692.308) = 337,307.6926
**Note: don't use CF6 since Holding P = 5
IRR = 3.56%
Using a discounted cash flow analysis, what is the value of a property with the following
characteristics: 6-year holding period; Resale is $3,000,000; Discount rate for this type of
property is 16%; Yearly income is $200,000 every year.
N = 6; I = 16; PMT = 200,000; FV = 3,000,000; CPT PV= 1,968273.95
Using a discounted cash flow analysis, what is the value of a property with the following
characteristics: 5-year holding period; Discount rate for the net operating income and for the
reversion for the property is determined by the appraiser to be 8%; Resale is $2,300,000; Fist
year's net operating income is $200,000; net operating income increases every year by 6% over
previous year's net operating income. Vacancy rate is 10% of gross income. Operating
expenses also increase at 4% per year.
...
If the Net Operating Income for the subject property is determined to be $55,000/year. The Net
Operating Income and the Value of the property are expected to grow at 8% each year. The
Discount rate is determined to be 16% what is the indicated value of the property.
Y = R + CR R = Y - CR = .16 - .08 = .08 RV = I / R = 55,000 / .08 = $687,500
The appraiser's final value estimate should be based on:
A weighing of the reliability of the information analyzed in each of the three approaches to value
Before reconciliation the appraiser should:
review the overall appraisal process and check for technical accuracy
In preparing an appraisal report, your analysis concludes that one of the approaches to value is
not applicable to this particular case. You should:
State that the approach is not applicable, explain the reasons for this contention, and provide
supporting data
In reconciliation and conclusion of value, the appraiser should:
-describe the relevance of each value approach explored-discuss the reliability of the data used-
provide arguments to justify his/her final conclusion of value-explain his/her judgments and
reasoning
Value indications are reconciled into a final value estimate:
after all 3 approaches have been completed
During the reconciliation process, an appraiser should ask:
How appropriate is each approach; how adequate are the date; what range of value do the
approaches suggest
Reconciliation in appraisal is:
The process of reevaluation that leads to the final value estimate
Since each value approach has its own strengths and weaknesses an appraiser should:
Weigh the strengths and weaknesses of each approach and decide which is the most reliable
for the subject property
Final value estimates should be rounded to reflect the:
so the appraiser does not give a false impression of precision associated with an opinion.
Reconciliation involves:
placing primary emphasis on the estimate deemed most reliable
Which is the last step in reconciliation?
select a final estimate of value
A value range is never:
wide or narrow
An "as of" date is specified in appraisals to:
Is often the date of the last inspection
Clarity and accuracy contribute to the:
quality of an appraisal
The form of an appraisal report:
does not drive the appraisal report
The form in which a formal appraisal is presented is called:
Narrative
A formal appraisal report must include the:
-date of the value estimate-signature of the appraiser-identification of the property appraised-
certification
If an appraiser uses the services of another appraiser who helps in reaching the value
conclusion:
This should be stated in the appraisal report and both should sign it
Which of the following is important for good appraisal communication? (select all the answers
that are correct)
All of the above: (Word choice; Reading level; Grammatical correctness; Clarity)
The most comprehensive type of appraisal report is:
Narrative Appraisal Report
Narrative appraisal reports may omit:
Addenda
An oral appraisal report:
Is acceptable when the client requests it
CAP RATE
R= NIR / EGIM
NOI = PGI - V&C = EGI - OE = NOI
...
Resale or reversion - selling expenses = net sale proceeds
cf5 = income + net sale proceeds
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Chapter 5 Flashcards Preview

Basic Appraisal Procedures > Chapter 5 > Flashcards

Study These Flashcards

FLASHCARDS IN CHAPTER 5 DECK (99)

1
The appraisal principle that states that when several similar or
commensurate commodities, goods, or services are available, the one with
the lowest price will attract the greatest demand and widest distribution.
This is the primary principle upon which the cost and sales comparison
approaches are based.

Principle of Substitution
2
 Reproduction or Replacement Cost New
- Accrued Depreciation
+ Site Value
= Property Value

Cost Approach Formula

3
Cost Approach Formula Example
A very simplistic example would be as follows. A house cost $200,000 to build
new. It is 10 years old and has sustained a total of 15% depreciation. It sits on
a lot worth $40,000. What is its value by the cost approach?

Cost New $200,000 minus Accrued Depreciation ($200,000x.15) - $30,000 =

$170,000
+ Site Value ($ 40,000)
= 210,000
4
A set of procedures through which a value indication is derived for the fee
simple estate by estimating the current cost to construct a reproduction of
(or replacement for) the existing structure, including an entrepreneurial
incentive or profit, deducting depreciation from the total cost, and adding the
estimated land value. Adjustments may then be made to the indicated value
of the fee simple estate in the subject property to reflect the value of the
property interest being appraised.

Cost Approach
5
Absolute ownership unencumbered by any other interest or estate, subject
only to the limitations imposed by the governmental powers of taxation,
eminent domain, police power, and escheat.

Fee Simple Interest

6
 The estimated cost to construct, at current prices as of the effective date of
the appraisal, an exact duplicate or replica of the building being appraised,
using the same materials, construction standards, design, layout, and quality
of workmanship and embodying all the deficiencies, superadequacies, and
obsolescence of the subject building

Reproduction Cost
7
The cost to create a virtual replica of the existing structure, employing the
same design and similar building materials. The current cost of an identical
new item.

Reproduction Cost
8
The estimated cost to construct, at current prices as of the effective appraisal
date, a building with utility equivalent to the building being appraised, using
modern materials and current standards, design and layout

Replacement Cost
9
The estimated cost to construct, at current prices as of a specific date, a
substitute for a building or other improvements, using modern materials and
current standards, design, and layout.

Replacement Cost
10
The amount an entrepreneur expects to receive for his or her contribution to
a project. Entrepreneurial incentive may be distinguished from
entrepreneurial profit (often called developer’s profit) in that it is the
expectation of future profit as opposed to the profit actually earned on a
development or improvement. 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

Entrepreneurial Incentive
11
In appraising, a loss in property value from any cause; the difference between
the cost of an improvement on the effective date of the appraisal and the
market value of the improvement on the same date.

Depreciation
12
In accounting, an allocation of the original cost of an asset, amortizing the
cost of the asset's life; calculated using a variety of standard techniques.

Depreciation
13
oldest, first approach to value

Cost Approach
14
Second approach to value after 1940's

Sales Comparison appraoch

15
The most common type of approach to value today

Sales comparison approach

16
 What approach or approaches to value are required by USPAP?

appraisers are required to develop whatever approaches are necessary to

produce credible assignment results.
17
Fannie Mae may say the cost approach is not required - by them, BUT if the
property is new....

the cost approach might be necessary for credible results.

18
A lack of market activity _________ the use of the sales comparison approach.
You can't use the sales comparison approach without a _______ amount of
reliable sales _______

Precludes (prevents from happening); reasonable; data

19
The _________approach is best applied when the typical purchaser would be an
investor who is buying the property for investment purposes.

income
20
You can virtually always do a ______ approach! I don't care how old it is, what
type of property it is, or what the market activity is. I can research a property,
estimate its cost new, subtract apparent depreciation, and add site value.

cost
21
this approach is the one universal approach that can be applied to any kind of
improved real property.

cost approach
22
 This approach has good applicability when the improvements we are
appraising are new or relatively new.

cost approach
23
The first step in this approach is to estimate the cost new of the building
improvements. If it was recently built, it most likely was constructed of
modern materials, utilizing modern construction techniques.

cost approach
24
The second step in this approach is the value of the land or site. If it's a
standard lot and there are adequate sales in the marketplace, it becomes a
relatively easy and straightforward task to arrive at that value.

cost approach
25
The ideal situation for developing a cost approach is where the current
building improvements truly do represent the _______ ___ ______ _____ of the land
as though vacant. Any time we stray away from that ideal, there is potential
for errors.

highest and best use

26
Special-purpose properties are sometimes called __-_______t properties. They
represent things that are not normally bought and sold in the marketplace.

no-market
27
Let's suppose you are asked to appraise a 30-year-old ranch house with a
proposed addition that will include 800 square feet, three rooms, a full bath,
and a fireplace. You may not be able to find sales of comparable properties
that include an older house with a large, new addition. Assume the house will
still be of single-family orientation and there would not be a market for such
property as an investment. Which approach would you use?
 Cost approach
28
The appraisal requires that land and improvements be valued ___________; such
as for insurance or accounting purposes

seperately
29
The value of the land and the improvements also needs to be separated when
considering _____________ for income tax purposes.

depreciation
30
Land value is a significant portion of the overall _______; such as with
agricultural properties

value
31
When the cost approach is least applicable:

The depreciation is a type that is difficult to estimate

Data is scarce or lacking to estimate the amount of entrepreneurial profit
Data is scarce or lacking to estimate the land value
The interest valued is anything other than fee simple - adjustments must be
made
32
True or false: Use the cost approach even if the depreciation is a type that's
difficult to estimate

false
33
True or false: You should void the cost approach if data is scarce or lacking to
estimate the amount of entrepreneurial profit or the land value

true
34
 The three legs supporting the value estimate by the cost approach:

cost, depreciation and land value

35
Tue or false: Avoid the interest valued is anything other than fee simple

True
36
The amount an entrepreneur expects to receive for his/her contribution to a
project is

depreciation
entrepreneurial profit
entrepreneurial incentive
reproduction cost

entrepreneurial incentive
37
True or False: The cost approach is most applicable in situations where the
site value is not well-supported.

False
38
The cost approach is primarily based on which valuation principle?

contribution
change
reconciliation
substitution

substitution
39
 True or False: If appraising something other than fee simple interest, an
appraiser can make an adjustment to the indicated value by cost approach in
order to reflect the value of the property interest being appraised.

True
40
The estimated cost to construct, at current prices as of the effective date of
the appraisal, an exact duplicate or replica of the building being appraised,
using the same materials, construction standards, design, layout, and quality
of workmanship and embodying all the deficiencies, superadequacies, and
obsolescences of the subject building.

Reproduction Cost
41
The estimated cost to construct, at current prices as of a specific date, a
substitute for a building or other improvements, using modern materials and
current standards, design, and layout

Replacement Cost
42
Two basic ways to estimate what it would cost to build a subject's building
improvements brand new today

Reproduction costs
Replacement Costs
43
Most fire and casualty insurance is written to pay an amount equal to the
_______ cost of the structure. That is an eye-opener to many people.

replacement
44
Certainly the majority of the appraisals performed today reflect the use of
________ cost if the cost approach is developed.

replacement
45
 Where does this cost data come from? Cost data may be obtained from:

Construction contracts for similar properties

Appraiser's files
Local building contractors
Professional cost estimators
Cost estimating services
46
A prime source of cost data if you can get your hands on such contracts.

Construction contracts for similar properties

47
You may be able to obtain construction contracts for similar properties from

real estate agents, lenders, or other appraisers.

48
Every time you do an appraisal for a proposed construction, try to get a hold
of and keep a _____ of the construction contract

copy
49
Who's the first person you should ask about building costs?

the builder
50
These people are sources you must pay in order to obtain cost data

professional cost estimators

51
These services are not always 100% reliable, but they are probably the most
commonly-utilized source of cost data for appraisers. There are several
national ones.

Cost estimating services

52
 The major cost estimating services are:

Marshall & Swift www.marshallswift.com

RS Means Company, Inc. www.rsmeans.com

53
The most popular cost service among residential appraisers.

Marshall and Swift

54
Whatever the source of the cost data, all cost estimates to be used in the cost
approach need to include three basic ingredients:

Direct costs
Indirect costs
Entrepreneurial incentive
55
Expenditures for the labor and materials used in the construction of
improvements; also called hard costs

Direct costs
56
Expenditures or allowances for items other than labor and materials that are
necessary for construction, but are not typically part of the construction
contract. Indirect costs may include administrative costs; professional fees;
financing costs and the interest paid on construction loans; taxes and the
builder's or developer's all-risk insurance during construction; and marketing,
sales, and lease-up costs incurred to achieve occupancy or sale. Also called
soft costs.

Indirect costs
57
The amount an entrepreneur expects to receive for his or her contribution to
a project. Entrepreneurial incentive may be distinguished from
entrepreneurial profit (often called developer’s profit) in that it is the
expectation of future profit as opposed to the profit actually earned on a
development or improvement. 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.

Entrepreneurial Incentive
58
Examples of tangible, hard direct costs:

Building permits
Materials used to construct buildings
Labor used to construct buildings
59
Examples of intangible, indirect costs

Architectural and engineering fees

Appraisal, accounting and legal fees
Cost of carrying the investment (e.g., construction loans)
Property insurance and taxes during construction
60
Entrepreneurial incentive is what a contractor or developer ______ to get;
entrepreneurial profit is what they ________ get.

hopes; actually
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