1. What is an appraisal?

: An appraisal is an opinion
or estimate of the value of a property.
2. What location factors affect the value of a
property?: Convenience and ac- cessibility, aesthetic
issues and neighborhood factors

3. What three physical factors affect the value of a

property?: Arrangement and design
Physical durability
Visual appeal

4. Appraiser John is using the sales comparison

approach to appraise Chris and Linda's home. Their
home has 3 bedrooms, 1 bath and a 2-car garage.
John has three comparable homes to use. Comp A
has 3 bedrooms, 1.5 baths and a 2-car garage. Comp
B has 3 bedrooms, 2 baths and a 1-car garage. Comp
C has 4 bedrooms, 2 baths and no garage. With all
other things being equal, what adjustments will John
make?: John will make the following adjustments:

Comp A - Deduct an amount for the better bathroom.

Comp B - Deduct an amount for the better bathroom
and add an amount for the inferior garage.
Comp C - Deduct an amount for the better bedroom,
deduct for the better bathroom and add an amount
for the inferior garage.
5. What's the difference between reproduction cost
and replacement cost?: - Reproduction cost is the
cost at today's prices of producing an exact
duplicate of the current building, including its
improvements and its flaws. Replacement cost is the
construction cost at today's prices of producing a
similar or equivalent structure. 6. Jim is using the
cost approach to appraise Greg's property. Jim has
the fol- lowing figures: land value $25,000, building
value $137,500, total depreciation, $33,000. Using
these figures, what will Jim estimate as the total
value of the property?: $129,500 ($137,500 - $33,000
+ $25,000)
7. The income approach is based on which two
principles of value?: Anticipa- tion and substitution
8. Define the capitalization rate. What is the
capitalization rate of a property that sold for
$325,000 and is producing an annual net operating
income of $29,250?: The rate of return an investor
will require on his or her investment of capital in this
kind of property.
9% ($29,250 ÷ $325,000 = .09)
9. For what types of property would an appraiser use
a gross rent multiplier? If a property had a monthly
rental income of $650 and the gross rent multiplier
was 180.7, what would the appraiser estimate the
property's value to be?: - Properties such as single-
family homes and duplexes that could produce
income,

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Ch. 13 - Valuation of Income Properties
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but are not primarily income-producing properties.

$117,455 ($650 x 180.7 = $117,455)
10. What does an appraiser do after he or she has
completed the estimates of value using all three
estimating approaches?: The appraiser reconciles
the estimates into a final value estimate.
11. What does a mortgage lender need in addition to
an appraisal to help evaluate the risk involved in a
loan on investment property?: The lender needs
information about the market value of a property
over the life of the loan, or at least for several years.
12. When developing a meaningful multiple-year
operating forecast, what must an analyst forecast?:
Gross revenue
Operating expenses
Changes in market value
13. Since the only real way to determine the value of
a property is through an actual sale, a lender must
rely on an estimate of the property's value through
an appraisal. By definition, an appraisal is an opinion
or estimate of the value of a property.

The use value of a property is the value the property

holds for the owner. The exchange value of a
property results from comparing the property to
other similar properties on the open market. This is
where appraisals come into play.: The process of
conducting an appraisal includes seven definite
steps.

Identify the purpose of the appraisal, such as market

value for a purchase or value as loan collateral.
Gather the data relevant to the property, such as tax
and title records, costs and demographic and
economic data.

Assess the highest and best use of the property by

analyzing market conditions. Estimate the value of
the land.
Use the three approaches to estimating cost to help
reduce errors and establish a "range" of value.

Reconcile the estimates from the three approaches

into a final value estimate. Compile and present a
formal report to the client.
People who will be using a particular site are
concerned about convenience and accessibility,
aesthetic issues and neighborhood factors.

After analyzing the neighborhood, the appraiser will

study aspects of the specific property being
appraised. The analyst will focus on these three
aspects:

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Ch. 13 - Valuation of Income Properties
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Functionality of arrangement and design

Durability of the construction
Visual appeal of the property
14. There are three approaches to estimating cost:

Sales comparison approach

Cost approach
Income capitalization approach
The sales comparison approach is based on the
principle of substitution - which says that a buyer
will not pay more for the subject property than he or
she would pay for a property that is similar in
characteristics and amenities. With this approach,
the value is determined by comparing the property
being appraised with recently sold comparable
(equivalent) properties.: The cost approach is most
reliable for properties that were built recently, since
the appraiser can get access to the actual costs of
the development and construction. It's also a good
approach for special purpose buildings when data on
income is not available or there are no comparable
sales.

Appraisers use the income approach to estimate the

value of properties that produce income, usually
from rent paid on leases.
The gross rent multiplier (GRM) and the gross
income multiplier (GIM) are very similar to the
income approach. Appraisers use the GRM or the
GIM to estimate the value of properties such as
single-family homes and duplexes that could produce
income, but are not primarily income-producing
properties, like apartment buildings and office
space.

After using all three appraisal methods, the

appraiser reconciles the estimates into a final value
estimate. The best way to do this is to evaluate how
appropriate each method is to the particular type of
property being appraised and to make decisions
about the quality and quantity of the data that was
gathered to support each method. 15. A mortgage
lender needs to have information about the market
value of a property over several years, not just its
value at the time of the loan. An analyst can develop
a market forecast for every year of the loan
amortization.

The forecast contains two important elements:

It estimates the expected operating results from the

property over the forecast period and indicates to
the lender whether the property will generate
enough

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Ch. 13 - Valuation of Income Properties
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cash flow to cover the loan.

It estimates the market value on a year-by-year
basis, which indicates the risk of losing principal if
there is a foreclosure.: To develop a meaningful
multi- ple-year operating forecast, an analyst must
forecast
Gross revenue
Operating expenses
Changes in market value
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16. The cost approach would be most reliable for
which of these properties?- : The cost approach
would be most reliable for which of these properties?
17. Which of the following problems would be an
example of incurable depre- ciation?: Non-air
conditioned office complex
18. The highest price a buyer is willing to pay and
the lowest price the seller will accept for a property
is known as:: Market value
19. Which of these methods of cost estimation is the
easiest to do?: Unit comparison
20. Which of the following is not important when
developing a multiple-year operating forecast?:
Vacancy rates
21. If a building has a monthly rent of $750 and the
GRM is 140, what is the estimated value of the
building?: $105,000
22. After analyzing the neighborhood, an appraiser
will study all of the phys- ical aspects of the specific
property being appraised except for which of the
following?: Highway accessibility
23. If a building is producing an annual net operating
income of $34,500 and the capitalization rate is 12%,
what is the value of the building?: $287,500
24. A property sold for $185,000 and is producing an
annual net operating income of $16,650. What is the
capitalization rate?: 9%
25. The sales comparison approach is based on what
principle of value?: Sub- stitution