Valuation & Appraisal

A competitive market analysis is prepared by a real estate agent to estimate the likely sales price of a property. The sales comparison method is used in this analysis. This method involves comparing the property being analyzed to similar properties that have recently sold in the same area. By comparing factors such as size, location, condition, and amenities, the real estate agent can determine an estimated sales price for the property. This method is commonly used in real estate because it provides a direct comparison to recent sales, giving a more accurate estimate of the property's value.

The capitalization rate is calculated by dividing the net income by the sale price and multiplying by 100. In this case, the net income is $21,000 and the sale price is $300,000. Therefore, the capitalization rate is (21,000 / 300,000) * 100 = 7%.

The principle of conformity suggests that the highest value is maintained by having a residence in a center of a residential development. This is because living in a center of a residential development implies that the property is located in a well-planned and well-maintained community, which often includes amenities such as parks, recreational facilities, and a sense of community. This can increase the desirability and value of the property, making it a preferred choice for many buyers.

An appraisal of property refers to the process of determining the value of a property. It involves analyzing various factors such as market conditions, location, size, condition, and comparable sales. A supported estimate of value is an appropriate description for an appraisal because it implies that the value assigned to the property is backed by relevant data, research, and analysis. This ensures that the estimate is credible and reliable.

External obsolescence refers to factors outside of a property that negatively impact its value. In this case, vacant and abandoned structures in the area contribute to external obsolescence. These structures can be seen as a blight on the neighborhood, reducing the desirability and attractiveness of the area. Potential buyers or tenants may be deterred from investing in or renting a property in an area with vacant and abandoned structures due to concerns about safety, security, and overall quality of life. This can lead to a decrease in property values and difficulty in finding occupants, ultimately affecting the property's marketability and profitability.

The formula for assessing value is calculated by subtracting the depreciation from the replacement cost and adding the value of the land. This formula takes into account the cost of replacing the asset, the decrease in value due to depreciation, and the value of the land on which the asset is located.

The principle of contribution suggests that the value of a property is determined by the contribution that a particular feature or improvement makes to the overall value of the property. In the context of including a tennis court with a planned apartment building, the advisability of such a decision would depend on whether the tennis court would contribute significantly to the value of the property. If the presence of a tennis court is likely to increase the overall value and desirability of the apartment building, then it would be advisable to include it.

The appraiser would need to determine accrued depreciation when using the cost approach because this method estimates the value of a property based on the cost to replace it, taking into account any depreciation that has occurred since the property was originally built. Accrued depreciation refers to the loss in value of a property over time due to factors such as wear and tear, functional obsolescence, or external factors. By considering accrued depreciation, the appraiser can arrive at a more accurate estimate of the property's value.

The income approach is a method used to determine the value of a property based on its potential income. In this case, the annual net income of $40,000 is divided by the capitalization rate of 8 percent (0.08) to calculate the value. Using the formula Value = Net Income / Capitalization Rate, we get $40,000 / 0.08 = $500,000. Therefore, the value of the property using the income approach would be $500,000.

This scenario demonstrates the principle of supply and demand. The fact that the last lot in the subdivision sold for almost twice the price paid for the first lot indicates that there was a higher demand for the last lot. As the supply of lots decreased, the demand increased, causing the price to rise. This principle highlights how the interplay between supply and demand influences prices in a market.

The income approach would be used to determine the present value of future income. This method considers the potential income that a property can generate and calculates its present value based on the expected future cash flows. It takes into account factors such as rental income, operating expenses, and market conditions to estimate the property's value. This approach is commonly used in real estate and business valuation to determine the worth of an asset based on its income potential.

The cost approach requires a separate value for the land because it focuses on determining the cost to replace the property, including the cost of the land and the cost of constructing a similar property. By separating the value of the land, the cost approach ensures that the value of the property is determined based on its physical characteristics and the cost of construction, rather than the value of the land itself. This approach is commonly used for new or unique properties where comparable sales data may not be readily available.

"The whole is worth more than the sum of its parts" refers to the concept of assemblage. This means that when individual components or elements are combined or assembled together, the resulting whole has a greater value or significance than the individual parts on their own. It suggests that the synergy or combination of these parts creates a greater impact or value.

The correct answer is regression. Regression in real estate refers to the tendency for the value of higher-priced homes to decrease when lower-priced homes are introduced into the same area. In this situation, the construction of several $150,000 homes caused the existing homes, which were valued at $400,000 to $500,000, to decline in value. This is a classic example of regression in the real estate market.

The formula for the cost approach is to calculate the replacement cost of the property and subtract the depreciation value, then add the value of the land. This approach is commonly used in real estate appraisal to estimate the value of a property based on the cost to replace it with a similar property, accounting for any depreciation and the value of the land.

The appraiser should adjust the sale price of the comparable upward because of the size difference. This is because the property being appraised has a larger square footage compared to the comparable. Since the size of a property is an important factor in determining its value, the appraiser needs to make an adjustment to account for the difference in size. By adjusting the sale price of the comparable upward, the appraiser can reflect the higher value associated with the larger size of the property being appraised.

Reconciliation refers to the process of combining and analyzing multiple appraisal methods, with different weights assigned to each method. This approach helps to reach a consensus and find a middle ground when there are conflicting outcomes or discrepancies between the different appraisal methods. By considering the strengths and weaknesses of each method and assigning appropriate weights, reconciliation ensures a more comprehensive and balanced evaluation.

In appraising property, an appraiser would depreciate fences because they are subject to wear and tear over time. Fences can deteriorate due to weather conditions, age, and lack of maintenance. As a result, their value decreases over time. Depreciation is a method used to estimate the decrease in value of an asset, such as fences, over its useful life. By depreciating fences, the appraiser takes into account their condition and adjusts the property's overall value accordingly.

Demand alone is not enough to determine the value of real property because it does not take into account the ability of buyers to actually purchase the property. Purchasing power refers to the financial capacity of individuals or entities to buy goods or services, including real estate. Therefore, combining demand with purchasing power provides a more accurate assessment of the value of real property, as it considers both the desire for the property and the ability to pay for it.

The cost approach is used by an appraiser to determine the value of a structure by estimating the cost to replace it with a similar one. In this case, the appraiser is counting the number of electrical outlets in the structure, which is a component of the overall cost of construction. By using the cost approach, the appraiser can calculate the value of the structure based on the cost of its individual components, including electrical outlets.

A narrative report would be the most comprehensive appraisal report because it provides a detailed and thorough analysis of the subject property. This type of report includes a comprehensive description of the property, an evaluation of the market conditions, a detailed analysis of comparable properties, and an explanation of the appraiser's conclusions and opinions. It is a comprehensive document that provides a complete picture of the property and the factors considered in the appraisal process.

The seller's agreement to sell the home with no down payment and below market rate seller financing would likely affect the price of the property. This means that the buyer would be able to purchase the property at a lower price due to the favorable financing terms. However, it would not necessarily affect the value of the property itself, as the value of a property is typically determined by factors such as location, condition, and market demand, rather than the financing terms.

The buyer's decision to make an offer on the home with the lowest list price suggests that they were utilizing the principle of substitution. This principle states that buyers will choose a similar product that offers the same benefits at a lower price. In this case, the buyer considered the seven similar homes and chose the one with the lowest list price, indicating that they were looking for a comparable home at a more affordable price.

The appraiser is referencing market value when using the expression a "willing, informed buyer and a willing informed seller." Market value is the highest price that a property can be sold for in a competitive and open market, where both the buyer and seller are knowledgeable about the property's characteristics and potential uses. This concept takes into account factors such as supply and demand, as well as the principle of highest and best use, to determine the fair market value of a property.

The highest and best use refers to the use of a property that maximizes its value and benefits the community the most. This means that the property should be utilized in a way that generates the highest possible value, whether it be through increased revenue, improved functionality, or enhanced community services. By identifying and implementing the highest and best use, the property can reach its full potential and contribute positively to the community.

Forces outside the property boundaries refer to external factors that can cause depreciation to a property. These forces are beyond the control of the property owner, making it difficult for them to correct or prevent the depreciation. Examples of such forces can include natural disasters like floods or earthquakes, changes in the neighborhood or surrounding area that negatively impact property value, or economic factors like inflation or recession. Unlike chronological age, the built-in nature of the structure, or wear and tear due to use, which can be managed or repaired by the property owner, forces outside the property boundaries are more challenging to address.

The cost approach is the appraisal method that would tend to set the upper limit of value on a new structure. This method involves estimating the cost to replace the structure with a similar one, taking into account factors such as materials, labor, and depreciation. By determining the maximum cost to replace the structure, the cost approach provides an upper limit on its value.

The economic life of a structure refers to the time period in which the structure generates income that can be attributed to the structure itself. This means that during this period, the structure is able to generate enough income to cover its expenses and contribute to its overall profitability. It is an important concept in determining the financial viability and value of a structure, as it helps in estimating the length of time the structure will be economically useful before it becomes obsolete or requires significant repairs or renovations.

In appraisals, depreciation is a measure of the decrease in value of an asset over time. The correct answer is 2% because it indicates that 2% of the asset's value is factored in for depreciation per year. This means that the value of the asset is expected to decrease by 2% annually.

External obsolescence refers to factors outside of the property itself that negatively impact its value. In the given scenario, the presence of commercial property and older, less expensive homes in the area can contribute to external obsolescence for the new, expensive home. The mixed nature of the area may not be as desirable for potential buyers, leading to a lower market value for the new home compared to its cost.

An investor making extraordinary profits from the first mini warehouse in the area would be concerned with the principle of competition. This is because with the success of the first mini warehouse, it is likely that other investors will enter the market and open their own mini warehouses in the area. This increased competition can potentially reduce the investor's profits as customers have more options to choose from. Therefore, the investor needs to be mindful of the competitive landscape and find ways to differentiate their mini warehouse from others to maintain their profitability.

The appraiser would lower the value of the comparable because the comparable has a higher value due to its three car garage compared to the property being appraised, which only has a two car garage. In order to make a fair comparison and adjustment, the appraiser would decrease the value of the comparable to account for the difference in the number of garage spaces.

Market value refers to the estimated worth of an asset or property in the current market. It is determined by considering the present value of the future benefits that can be derived from owning the asset. This includes factors such as potential income, appreciation, and other financial gains that the owner can expect to receive over time. Therefore, the present worth of future benefits is the most suitable definition of market value as it encompasses the potential value that an asset holds for its owner.

The gross rent multiplier is calculated by dividing the total purchase price of a property by the gross annual rental income it generates. In this case, the correct answer is "rent x # units divided by income per month x 12." This formula takes into account the monthly rent multiplied by the number of units, and then divides it by the monthly income per unit, which is then multiplied by 12 to get the annual income.

The appraiser used a combination of different approaches (market comparison, cost, and income) to determine the value of the property. The process of combining these different values and arriving at a final estimated value is known as reconciliation. In this case, the appraiser used 80 percent of the value from the market comparison approach, 20 percent from the cost approach, and did not consider the value from the income approach. This demonstrates the process of reconciliation to determine the overall value of the property.

The higher capitalization rate of 12 percent used by the first appraiser results in a lower appraised value compared to the second appraiser who uses a 10 percent rate. This is because the capitalization rate is used to determine the value of an income-producing property by dividing the net income by the capitalization rate. A higher capitalization rate means that the property's value is being discounted more, resulting in a lower appraised value. Therefore, the correct answer is a $50,000 decrease in appraised value.

The appraiser sets the replacement cost of the structure at $120,000 and appraises the land value separately at $80,000. The economic life of the structure is determined to be 50 years, with an effective age of 10 years. In the cost approach, the appraiser considers the replacement cost of the structure and subtracts depreciation based on the effective age. The depreciation is calculated by dividing the effective age by the economic life, which in this case is 10/50 = 0.2. The depreciation amount is then multiplied by the replacement cost, resulting in $120,000 * 0.2 = $24,000. Finally, the appraiser adds the depreciated value of the structure to the land value, resulting in $24,000 + $80,000 = $104,000. Therefore, the property is appraised at $104,000 for the structure and $80,000 for the land, giving a total appraisal value of $104,000 + $80,000 = $184,000. Since none of the options match this value, the correct answer must be the closest option, which is $176,000.

In using the sales comparison approach to value to appraise a single family residence, the appraiser might have to make adjustments for the date of sale. This is because the real estate market is constantly changing, and the value of properties can fluctuate over time. The date of sale adjustment takes into account any market trends or conditions that may have affected the sale price of the property. By adjusting for the date of sale, the appraiser can ensure that the property is valued accurately based on current market conditions.

An increase in taxes of $4,000 would result in a decrease in the value of a property by $50,000. This is because the increase in taxes directly affects the net income from the property. With fixed rents and a capitalization rate of 8 percent, the increase in taxes reduces the net income by $4,000 / 0.08 = $50,000. As the value of a property is closely tied to its income potential, the decrease in net income leads to a decrease in property value.

Reproduction cost refers to the present cost to produce a duplicate of a structure. This means that if a structure needs to be rebuilt or replicated exactly as it is, the reproduction cost would be the current cost to do so. It takes into account the materials, labor, and other expenses required to create an identical structure. This cost may differ from the original cost or the depreciated value of the structure, as it focuses on the current cost of producing a duplicate.

In the market comparison method, amenities are balanced out because no two properties are identical. This means that even if two properties have similar amenities, there may still be differences in other factors such as location, size, condition, and so on. These differences can significantly affect the value and appreciation of the properties. Therefore, in order to accurately determine the market value and potential appreciation of a property, it is important to consider the unique characteristics and attributes of each individual property.

The principle of contribution in property appraisal refers to the economic effect that a specific improvement has on the overall value of the property. It recognizes that the value of an improvement is determined by how much it contributes to the property's worth. In other words, the principle of contribution states that the value of an improvement is not based solely on its cost, but rather on the impact it has on the property's value as a whole.

Accepting an appraisal where the fee will be a percentage of the value derived would be unethical because it creates a conflict of interest. This payment structure incentivizes the appraiser to provide a higher value for the property in order to receive a larger fee. It undermines the objectivity and impartiality that is expected from an appraiser, as their primary responsibility is to provide an accurate and unbiased assessment of the property's value.

The gross rent multiplier is an inaccurate measurement of value because it fails to consider unusual expenses. These expenses can significantly impact the profitability and value of a property. For example, if a property requires extensive repairs or has high maintenance costs, the gross rent multiplier would not account for these expenses, leading to an inaccurate valuation. Therefore, it is important to consider unusual expenses when determining the value of a property.

According to the principle of supply and demand, when the price of a product decreases, it becomes more affordable for consumers. As a result, the demand for the product tends to increase because more people are willing and able to purchase it at a lower price. Therefore, the correct answer is that the principle of supply and demand predicts increasing demand when the price decreases.

The annual gross rent multiplier is calculated by dividing the sales price of the property by the annual rental income. In this case, each unit in the fourplex rents for $225 per month, so the annual rental income would be $225 * 12 months * 4 units = $10,800. Dividing the sales price of $81,000 by the annual rental income of $10,800 gives us a gross rent multiplier of approximately 7.5.

The appraiser would be concerned with economic changes in the arena because these changes can have a significant impact on the value of the property. Economic changes such as fluctuations in the housing market, interest rates, and local economic conditions can affect the property's market value and its ability to serve as collateral for the loan. Therefore, the appraiser needs to consider these factors to ensure that the lender is making a sound investment decision.

Use value refers to the subjective value that an individual or entity places on a particular item or property based on its usefulness or utility to them. It is often determined by factors such as personal preferences, needs, and the specific purpose for which the item or property is being used. Unlike market value, assessed value, or book value, which may be more objective and based on external factors, use value is more subjective and varies from person to person. Therefore, use value is the most appropriate option for a value regarded as subjective.

According to the principle of integration and disintegration, the value of a property will eventually decline. This principle suggests that over time, the value of a property will decrease due to factors such as wear and tear, obsolescence, and changing market conditions. As properties age and become less desirable or outdated, their value tends to decrease. Additionally, economic factors such as inflation and changes in demand can also contribute to the decline in property value. Therefore, it is important for property owners to consider these factors and plan for the eventual decline in value.

The correct answer is dividing the price paid by the annual gross income. This calculation gives the annual gross rent multiplier, which is a measure of how many times the price paid for a property is equivalent to the annual gross income it generates. By dividing the price paid by the annual gross income, the appraiser can determine this multiplier and use it as a benchmark for comparing the value of similar properties.