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
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 t
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 financia
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 pro
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 sale
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 a
Transactional Adjustments (MADE SEQUENTIALLY)
Real property rights conveyed
Financing terms
Conditions of sale
Expenditures made immediately after purchase
Market Conditions
Property Adjustments
Location
Physical Characteristics
Economic Characteristics
Legal Characteristics
Non-realty components of value
Reconciliation
Narrow multiple transactions into subset of best indications of value
Comparables that require fewest adjustments (total % or total $) generally considered best comparables
Look at gross adjustment % or $
Sales Comparison Approach Procedure
Research competitive market for information on properties that are similar to Subject property
Verify/Confirm Information
Select most relevant unit of comparison
Look for differences between Comparable & Subject that might affect value
Reconcile to a Valu
Reproduction Cost
$$ required to construct exact duplicate of the subject improvements at prices current as of the effective date of the appraisal
Replacement Cost
current cost of improvements having the same utility and general quality as the subject improvements
Index Method
Present Index/Index at Time of Construction X Original Cost = Present Cost
3 Types of Depreciation
Physical Deterioration
Functional Obsolescence
External Obsolescence
External Obsolescence
Environmental obsolescence
Economic obsolescence
Locational obsolescence
It is any loss of value from causes outside the property and is always considered incurable.
Examples:
Change in land use or natural conditions
Change in business environment, such a
Physical Deterioration
Caused by wear-and-tear and action of the elements, and usually the most obvious form of depreciation
Curable when repairs result in equal or greater increase in overall property value
Incurable when repairs are not economical
Functional Obsolescence
Caused by presence of currently undesirable layout, design, or other features, or absence of currently desirable features
Curable if alteration is economical
Incurable if alteration not practical
Age Life Method
Effective Age/Economic Age= Accrued Depreciation
Physical Deterioration - Curable
New Carpet
Physical Deterioration - Incurable
New Ceiling (Costs to repair exceeds increase in value)
Functional Obsolescence - Curable
Covered Parking - Cost to Provide Covered Parking can be Recovered Through Higher Rental Rates
Functional Obsolescence - Incurable
Clear Height is Too Low - Not Cost Effective to Raise Roof Because Cost cannot be Recovered Through Higher Rental Rates
External Obsolescence - Incurable
Change in land use or natural conditions
Change in business environment, such as
Loss of jobs due to layoffs or closures
Rental Rates Not High Enough to Provide an Adequate Return on Cost
Income Approach
Most reliable with income-producing property
Appraiser analyzes property's capacity to generate future benefits (net income) and capitalizes the income into an indication of present value.
Based on Anticipation and Supply & Demand
Potential Gross Income (PGI)
Total income attributable to real property at full (100%) occupancy before vacancy loss & operating expense loss
Effective Gross Income (EGI)
Total income attributable to real property at full (100%) occupancy less vacancy loss
Net Operating Income (NOI)
Effective Gross Income less operating expenses
Operating Expenses
Fixed Expenses - Do not vary with occupancy
-Taxes & Insurance
-Replacement for reserves
Variable Expenses - Change with occupancy
-Management Expense
-Utilities
Reserves for replacement
-heating, air conditioning, roof, carpeting
Direct Capitalization
Used primarily for single-family residences that are not usually purchased as income-producing properties
Occasionally used for small apartment projects
Does not consider expenses
GRM
Sales Price/Gross Rent
Value
Net Operating Income/Capitalization Rate
Income/Rate
Rate
Income/Value
Income
Rate X Value
IRR
the rate at which the present value of future cash flows are exactly equal to the initial cash investment.
b) $304,500
With a present index of 462, an index at time of construction of 220, and an original cost of
$145,000, the present cost of a structure using the index method is:
a) $69,048
b) $304,500
c) $319,000
d) $350,900
c) 33.3%
You are appraising a warehouse using the cost approach to value method. You have estimated
that the effective age of the building is 15 years and the total economic life is 45 years. Using
the age-life method, total depreciation expressed as a percentage
c) $412,500
You are appraising a building and have concluded the replacement cost new is $550,000, the
property has an effective age of 10 years and a remaining economic life of 30 years. What is
the depreciated replacement cost of the building?
a) $495,000
b) $366,6
Cost Approach
Basic value principle is Substitution
Other important principles are Contribution and Supply & Demand
Cost Approach Formula
Reproduction or Replacement Cost of Improvements - Depreciation on Improvements
+ Site Value = Property Value
a) $687,500
You are appraising a building and have concluded the replacement cost new is $750,000, the
depreciation due to incurable physical deterioration is 25%, the depreciation due to external
obsolescence is 10% and the underlying land value is $200,000. What is
b) $19.00
You are appraising a vacant lot for a retail site. Six months ago, a comparable site sold for $20.00 per square
foot. In analyzing the market, you arrive at the following four conclusions:
1. The market trend in prices is downward 10% per year since the c
c) $148,500
You are appraising a vacant lot for a single-family residence. One year ago, a comparable site sold for
$125,000. In analyzing the market, you arrive at the following three conclusions
o The subject site is 10 percent more valuable as a result of price in
C) $90,750
An investor bought a golf course lot today for $75,000. The lot sold for $100,000 five years ago.
If the investor sells the lot 2 years from now at 10% annual compound appreciation rate, what
will it be worth?
a) $82,500
b) $90,000
c) $90,750
d) $120,000
b) $103,000
The following questions are based on the following information. A small office building has the
following characteristics:
- Net Operating Income: $65,000
-Operating Expenses: $33,000
-Vacancy and Bad Debt Losses: $5,000
-Capitalization Rate: 6%
What is t
d) $1,083,333
The following questions are based on the following information. A small office building has the
following characteristics:
- Net Operating Income: $65,000
-Operating Expenses: $33,000
-Vacancy and Bad Debt Losses: $5,000
-Capitalization Rate: 6%
What is t
c) $103,000
A small office building has the following characteristics:
- Net Operating Income: $65,000
-Operating Expenses: $33,000
-Annual Mortgage Interest: $18,000 Vacancy
-Bad Debt Losses: $5,000
What is the Potential Gross Income?
a) $98,000
b) $111,000
c) $103,
a) $98,000
A small office building has the following characteristics:
- Net Operating Income: $65,000
-Operating Expenses: $33,000
-Annual Mortgage Interest: $18,000 Vacancy
-Bad Debt Losses: $5,000
What is the Effective Gross Income?
a) $98,000
b) $111,000
c) $103,
b) 34%
A small office building has the following characteristics:
- Net Operating Income: $65,000
-Operating Expenses: $33,000
-Annual Mortgage Interest: $18,000 Vacancy
-Bad Debt Losses: $5,000
What is the Operating Expense Ratio?
a) 32%
b) 34%
c) 51%
d) 66%
Operating Expense Ratio
Operating expenses/EGI
b) 8.75
If an income property sells for $210,000 and has a gross income of $24,000, what is the gross
income multiplier?
a) 6.5
b) 8.75
c) 10.0
d) 11.4
Reconciliation Checklist
Is comparable property similar in terms of location and physical characteristics?
Does comparable have same highest and best use as Subject?
Is comparable in the same market as the Subject?
Do sale details match definition of market value?
Would buyer of
Comparative Analysis may employ:
Quantitative Techniques, or
Qualitative Techniques
Separately or in Combination
Paired Sales Data Analysis
Most common Quantitative Technique
Sales or Rental data on nearly identical properties except for one characteristic
Forms foundation for Quantitative Adjustment
Best example is a sale and re-sale of the same property because all variables other than size
Trend Analysis
Useful when sales of highly comparable properties are lacking, but a broad database on properties with less similar characteristics is available
Ranking Analysis
Comparable sales are ranked in descending or ascending order of desirability and each is analyzed to determine its position relative to the Subject
Bracketing - process to determine a probable range of values by applying qualitative techniques to group sa
Bracketing
process to determine a probable range of values by applying qualitative techniques to group sales or rents
Market Conditions Adjustment
Ratio between sale prices and listing prices
Exposure time
Listing prices
Days on market
Trends in rents
Number of offers a seller receives
Proportion of accepted offers that actually close
Number of foreclosures
Number of properties on market
Number of b
e) none of the above
If an income property sells for $210,000 and has a gross income of $24,000,What is the overall capitalization rate?
a) 0.092
b) 0.111
c) 0.125
d) 0.153
e) None of the above
a) condemnation of a property
What is not a use of police power?
a. Condemnation of a property
b. State laws
c. Environmental regulations
d. Licensing of real estate agents
c) The property will escheat to the state
What happens to property if a person dies without a will and has no heirs?
a. The property will pass testate.
b. The property will pass intestate though descent.
c. The property will escheat to the state.
d. The property will be distributed by an executor
c) nonconforming use
Residential property in an area rezoned for commercial use is an example of a(n)
a. conditional use.
b. illegal use.
c. nonconforming use.
d. speculative use.
d) subdivision development method
All probable costs of an improvement and construction are calculated to find land value in the
a. sales comparison method.
b. allocation method.
c. abstraction method.
d. subdivision development method.
b)
Which statement is true?
a. The sales comparison approach is the most reliable method of site valuation.
b. There are no basic differences between the data valuation of improved properties and unimproved sites in the sales comparison method.
c. Vacant lan
b) allocation method
Land value is treated as a proportion of the total value of improved property in the
a. sales comparison method.
b. allocation method.
c. subdivision development method.
d. land residual method.
a) sales comparison method
Sales of similar vacant sites are analyzed and compared in the
a. sales comparison method.
b. allocation method.
c. abstraction method.
d. All of these
c)
In the sales comparison approach, how is the appropriate unit of comparison chosen?
a) Price per square foot is always used
b) Price per square foot is used except for hotels, for which the price per room is used
c) The appropriate unit(s) of comparison t
b) added; subtracted
When the sales comparison approach to value, an appraiser may identify differences between
the subject property and the comparables. If so, the value of a negative feature present in the
comparable but not present in the subject property is ____ while the
c) $150,937
You are appraising a vacant lot for a single?family residence. 18 months ago, a comparable site sold
for $125,000. In analyzing the market, you arrive at the following three conclusions:
1. The market trend in prices is upward 10% per year since the compa
b) $227,500
You are appraising a single?family residence with a two stall garage without a pool. Six months ago,
a similar house in the same neighborhood sold $250,000; however, the comparable sale had a pool
and a three car garage. In analyzing the market, you arriv
b) potential gross income
An allowance for vacancy and collection losses is usually estimated as a
percentage of
a. effective gross income.
b. potential gross income.
c. operating expenses.
d. net operating income.
d) Mortgage payments
Which of the following categories of expenses is not included as an operating
expense?
a. Maintenance
b. Utilities
c. Management fees
d. Mortgage payments
c) yearly reserve for replacement
The replacement cost of a heating system, divided by its remaining useful life in
years, yields the amount that an appraiser should consider as a
a. variable expense.
b. fixed expense.
c. yearly reserve for replacement.
d. reversion value.
b) reconstructing the operating statement
The process of eliminating inapplicable expenses and adjusting the expenses that
remain is called
a. developing the capitalization rate.
b. reconstructing the operating statement.
c. finding effective gross income.
d. the market extraction method.
c) 8.33
What is the annual gross rent multiplier for a residential rental property that
produces $2,000 per month rental income and had a sales price of $200,000?
a. 1
b. 10
c. 8.33
d. .012
a) net operating income
Subtracting expenses from effective gross income yields the
a. net operating income.
b. gross income.
c. net effective income.
d. capitalization rate.
b) effective gross income
When a property's vacancy and collection losses are subtracted from the
property's potential gross income, which of the following is derived?
a. Cash flow
b. Effective gross income
c. Net operating income
d. Taxable income
d) effective gross income
The operating expense ratio for income-producing property can be calculated by
dividing operating expenses by
a. net income.
b. debt service.
c. cash flow.
d. effective gross income.
b) property management
Which of the following operating expenses is not normally considered a fixed
expense?
a. Real estate taxes
b. Property management
c. Fire insurance
d. Flood insurance
c) vacancy and collection losses
The difference between potential gross income and effective gross income is
a. operating expenses.
b. market rent.
c. vacancy and collection losses.
d. variable expenses.
c) accrued depreciation
In computing value by the income capitalization approach, which of the
following is not applicable?
a. Capitalization rate
b. Net operating income
c. Accrued depreciation
d. Gross income
c) value
Net operating income divided by the capitalization rate yields
a. effective net operating income.
b. gross income.
c. value.
d. gross sales price.
c) 4%
If a building has an estimated remaining economic life of 25 years, its annual
recapture rate using the straight-line method is
a. 25 percent.
b. 40 percent.
c. 4 percent.
d. 400 percent.
a) they can never be the same
Which of the following statement is FALSE regarding the "going-in" capitalization rate and the terminal capitalization rate:
a. They can never the same.
b. They may be the same.
c. The terminal capitalization rate is likely to be higher than the going-in
d)
The internal rate of return is that discount rate at which:
a. cash flow consists of income from operations plus the sales price or salvage value at the end of the analysis.
b. the future worth of present cash flow is exactly equal to the initial cash inv
a) deducting operating expense
In a cash-flow projection, the net operating income is determined by starting with the gross potential income, calculating the effective gross income, and then:
a. deducting operating expense.
b. deducting depreciation.
c. deducting vacancies and bad debt
d) Anticipation and Supply & Demand
Direct Capitalization and Yield Capitalization are based on which of the following principles?
a. Substitution and Anticipation
b. Anticipation and Balance
c. Balance and Substitution
d. Anticipation and Supply & Demand
b) estimating depreciation
Which of the following is NOT a step in Yield Capitalization?
a. Selecting a projection period
b. Estimating depreciation
c. Forecasting future cash flows
d. Selecting an appropriate yield (discount) rate
a) interest rate
What is i in the formula for calculating the Future Value of $1?
a. The interest rate
b. The income rate
c. The net operating income
d. None of the above
d) the number of periods
What is n in the formula for calculating the Present Value of $1?
a. The net operating income
b. The effective age of the property
c. The interest rate
d. The number of periods
a) balance
What economic principle suggests that the values of the property is created and maintained when there is equilibrium in the supply, demand, location and so forth of real estate?
a. balance
b. equilibrium
c. substitution
d. surplus productivity
b) substitution
Which principle of value suggests that the maximum value of property generally cannot exceed the cost of its replacement?
a. balance
b. substitution
c. anticipation
d. opportunity cost
a) substitution
Which of the following commonly accepted economic principles is used to explain that when several parcels of property with substantially the same utility are available on the market, the one with the lowest asking price will attract the greatest demand?
a
b) balance
In considering developing a subdivision, a builder determines the optimum lot sizes, house sizes and amenity packages. Which of the following economic principles does this illustrate?
a. anticipation
b. balance
c. contribution
d. substitution
d) all of the above
Under the principle of Contribution, an item can have a value that is:
a. below market value
b. above market value
c. approximately equal to market value
d. all of the above
c) fee simple estate
What is an example of a freehold estate?
a. Leasehold
b. Chattel Real
c. Fee Simple Estate
d. Estate in Remainder
a) leasehold
What type of an estate does a tenant have?
a. Leasehold
b. Fee simple
c. Fee tail
d. Reversionary
Liquidation value
What would property sell for after a Severely Limited Exposure on the market given that the Seller is Extremely Compelled to Sell
Consummation of a Sale in a Short Time Period
Seller is under Extreme Compulsion to Sell
A Normal Marketing Period is not Pos
Disposition value
What would property sell for after a Limited Exposure on the market given that the Seller is Compelled to Sell
Consummation of a Sale within a Future Exposure Time Specified by the Client
Seller is under Compulsion to Sell
An Adequate Marketing Period wil
Interim Use
Existing use is not optimal use, but continued use will defray holding costs & demolition costs until redevelopment is economically feasible
EX)parking lot
b) interim use
When a site's highest and best use is forecast to change in the near future, the present use is considered a(n)
a. restricted use.
b. interim use.
c. speculative holding.
d. temporary use.
d) land residual method
Building net income is a consideration in finding land value by the
a. sales comparison method.
b. allocation method.
c. subdivision development method.
d. land residual method.
b) cost approach
In appraising a special-purpose building, such as a post office, the most reliable
approach to value would generally be the
a. sales comparison approach.
b. cost approach.
c. income capitalization approach.
d. gross income multiplier.
a)
Widespread use of appraisal report forms has resulted in frequent use of
a. square-foot method of calculating reproduction cost.
b. unit-in-place method.
c. quantity survey method.
d. index method.
b) unit in place method
One method used to determine reproduction cost is to estimate the costs of the
various components of a structure separately, and then add them together to find the
total cost. This is called the
a. square-foot method.
b. unit-in-place method.
c. cubic-foo
d) index method
A factor representing the percentage increase in construction costs over time is used
in the
a. quantity survey method.
b. square-foot method.
c. unit-in-place method.
d. index method.
c) quantity survey method
The most detailed and time consuming method of estimating the cost of reproducing
a building is the
a. index method.
b. square-foot method.
c. quantity survey method.
d. unit-in-place method.
b) substitution
The valuation principle on which the cost approach to value is based is
a. balance.
b. substitution.
c. supply and demand.
d. anticipation.
a. economic life
Useful life is the same as
a. economic life.
b. physical life.
c. effective age.
d. remaining economic life.
a) reproduction cost
What term refers to the cost of an exact duplication of the structure?
a. Reproduction cost
b. Replacement cost
c. Construction cost
d. Direct cost