Appraisal Procedures Flashcards
A systematic set of procedures an appraiser follows to provide answers to a client’s questions about real property value.
Valuation Process (appraisal process)
“The party or parties (i.e., individual, group, or entity) who engage an appraiser by employment or contract in a specific assignment, whether
directly or through an agent.”
Client
“The client and any other party as identified, by name or type,
as users of the appraisal or appraisal review report by the appraiser, based on communication with the client at the time of the assignment.”
Intended user
“The use(s) of an appraiser’s reported appraisal or
appraisal review assignment results, as identified by the appraiser based
on communication with the client at the time of the assignment.”
Intended use
The objective of an assignment—e.g., in an
appraisal assignment, to develop an opinion of the defined value of a specified
interest in real estate.
Purpose of an assignment
An assignment-specific assumption as of the effective date regarding uncertain information used in an analysis which, if found to be false, could alter the appraiser’s opinions or conclusions.
Extraordinary assumption
An assumption, directly applicable to a specific service, which, if found to be false, could alter the opinions or conclusions in an appraisal or review
Special assumption
This is a condition that is contrary to what exists but is supposed for the purpose of analysis
Hypothetical condition
L____ and r_______ are also considered as assignment conditions.
Laws and regulations
“type and extent of research and analyses in an appraisal or appraisal review assignment”
Scope of work
M_____ a____ d___ is g_____ d___ about the four forces that influence value - economic, environmental, social, and governmental.
Market area data, general data
Details about the property being appraised, comparable sale
and rental properties, and relevant local market characteristics.
specific data
A series of related changes brought about by a chain of causes and
effects.
trend
A shortened term for similar property sales, rentals, or operating expenses used for comparison in the valuation process. In best usage, the thing being compared should be specified, e.g., comparable sales, comparable properties, comparable rentals.
Comparables
C______ p______ d___ can be general or specific data
Comparable property data
the study of the supply and demand in a specific area for a specific type of property
Market analysis
The reasonably probable use of property that results
in the highest value.
Highest and best use
The four criteria that the h_____ and b___ u___ must meet are l____ p________, p_____ p_______, f_______ f________, and m_______
p________.
The four criteria that the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum
productivity.
A tax appeal assignment will commonly involve a r________ effective date.
retrospective
Intended use affects both appraisal d________ and reporting.
development
A systematic procedure appraisers can employ to provide the answer to a client’s
question about the value of a property is called the v______ p_____
valuation process
In h_____ a__ b___ u___ analysis, the appraiser analyzes the ideal
improvement for the property.
highest and best use
The relevant characteristics of a property are part of i______ the problem.
identifying
T or F Scope of work is the type and extent of research and
analyses in an appraisal or appraisal review assignment.
True
T or F Identifying relevant characteristics of the subject property
is specific data rather than general data.
True
T or F The client and intended user are never the same.
False
T or F A prospective appraisal has an effective date
contemporaneous with the date of the report.
False
T or F Developing an opinion of insurable value can be identified as the purpose of an appraisal assignment.
True
6 different procedures for analyzing land: G\_\_\_\_ r\_\_\_ c\_\_\_\_\_\_\_ L\_\_\_ r\_\_\_\_\_\_ A\_\_\_\_\_\_ D\_\_\_\_\_\_\_ (subdivision) E\_\_\_\_\_\_\_ S\_\_\_\_\_ c\_\_\_\_\_\_
Ground rent capitalization Land residual Allocation Development (subdivision) Extraction Sales comparison
involves searching for similar vacant parcels, analyzing them in comparison to the subject parcel, and adjusting the sales for salient differences.
Sales comparison
E______ is based on improved sales, and the depreciated cost (contributory value) of the improvements is subtracted from the sales price.
Sale price of comparable sale ‒ Depreciated cost of improvements = Land value of comparable sale.
Extraction
A_____ also uses sales of improved properties. Rather than deducting the improvements as in extraction, allocation is based on a ratio of land value to improved property value. The ratio is derived from what is typical in the market.
Sale price × Typical ratio of land value to improvement value = Land value
Allocation
L____ r______ t______ is an income approach based on the economic principle of surplus productivity. As the other three agents of production have been paid, land as the residual receives income, which is capitalized into land value.
In this procedure, the appraiser separates the rent between the improved land and building improvements. As will be discussed in greater detail later in this course, there is a basic formula for income capitalization called IRV, Income ÷ Rate = Value.
Land Residual Technique
G_____ r___ c_______ is also an income approach to land value. This procedure can be used when the improved land rent is a known amount, as in an improved land lease.
In this procedure, the appraiser divides the net amount estimated for the right to use and occupy the improved land by a land capitalization rate (derived from the market) to form an opinion of improved land value.
Ground rent capitalization
S______ d________ is also an income approach to the valuation of tracts of unimproved land with subdivision potential.
Subdivision development
If the comparable sale is S_____ S_____.
If the comparable sale is I_____, I_____.
Superior, Subtract
Inferior, Increase
R________ is the process of resolving the differences among the various value indications and arriving at a final opinion of value. The value opinion can be a single dollar figure or a range into which the value will most likely fall.
Reconcilliation
T or F A hypothetical condition is contrary to what exists but is
supposed for the purpose of analysis.
True
T or F The valuation process provides a framework for deriving an
opinion of market value as well as other types of value.
True
T or F The first two assignment elements of problem identification
are identifying the real estate and the real property rights to
be appraised.
False
T or F Comparable sales having a different highest and best use
than the subject should be used if similar in other relevant
characteristics.
False
T or F Non-realty components of value are an element of comparison
considered within the sales comparison approach.
True
T or F Extraction is an improved land valuation procedure that
can be used when a property sells and includes building
improvements on the site.
True
T or F The final step in the valuation process is the reconciliation of
the value indications.
False
T or F An appraiser must use all three approaches in every assignment.
False
T or F The first step in the cost approach is to value the land as vacant
and ready for development to its highest and best use.
True
T or F Purpose defines the intended use of the appraisal.
False
C________: The conversion of income into value.
Capitalization
The ratio of income or yield to the original investment; the ratio of the current annual net income generated from the operation of an enterprise to the capital investment, the net yield over the duration of the investment.
Rate of return
C\_\_\_\_\_\_\_ r\_\_\_ (R). A ratio of one year’s net operating income provided by an asset to the value of the asset; used to convert income into value in the application of the income capitalization approach.
Capitalization rate
O____ c________ r____ (RO). The relationship between a single year’s
net operating income expectancy and the total property price or value.
Overall capitalization rate
E____ c_________ r___ (RE). An income rate that reflects the relationship between one year’s equity cash flow and the equity investment;
also called the cash-on-cash rate, cash flow rate, or equity dividend rate.
Equity capitalization rate
M______ c______ r____ (RM). The capitalization rate for debt; the
ratio of the annual debt service to the principal amount of the mortgage
loan.
Mortgage capitalization rate
The rate of return, or yield, on debt capital.
Interest rate
A rate of return on capital used to convert future payments
or receipts into present value.
Discount rate
No separate mathematical distinction is made
between return on and return of capital—it’s all in the rate.
Direct capitalization
The distinction between the return of and return
on capital is always definite and precise for each year’s cash flow and
reversion.
Yield capitalization
A stated or contract rate; an interest rate, usually
annual, that does not necessarily correspond to the effective or compound
interest rate.
Nominal interest rate
A method used to convert an estimate of a single year’s
income expectancy into an indication of value in one direct step, either by
dividing the net income estimate by an appropriate capitalization rate or by
multiplying the income estimate by an appropriate factor.
Direct capitalization
A method used to convert future benefits into present
value by 1) discounting each future benefit at an appropriate yield rate, or
2) developing an overall rate that explicitly reflects the investment’s income
pattern, holding period, value change, and yield rate. AKA D_____ c___ f___ a_____
Yield capitalization; discounted cash flow analysis
The portion of net operating
income that remains after total mortgage debt service is paid but before income tax on operations is deducted; also called before-tax cash flow or
equity dividend.
Pre-tax cash flow (PTCF)
The total potential income
attributable to property at full occupancy before vacancy and operating
expenses are deducted. (The word potential was added to the definition.)
Potential gross income (PGI)
The anticipated income from all operations of the real estate after an allowance is made for vacancy and
collection losses and an addition is made for any other income.
Effective gross income (EGI)
The actual or anticipated net
income that remains after all operating expenses are deducted from
effective gross income, but before mortgage debt service and book
depreciation are deducted.
Net operating income (NOI)
The portion of pre-tax cash flow that remains after all income tax liabilities have been deducted
After-tax cash flow (ACTF)
A lump-sum benefit that an investor receives or expects to receive upon the termination or sale of an investment
Reversion
What does the purpose of an appraisal assignment define?
A. a summary of the scope of work decision
B. the definition of the client’s problem
C. the intended use of the assignment
D. the type and definition of value used in the assignment
D
A value opinion of a proposed office building based on a current effective date would generally require what kind of assignment condition?
A. a hypothetical condition
B. an extended limiting condition
C. an extraordinary assumption/special assumption
D. a standard assumption
A
The ratio of annual debt service to the principal amount of the mortgage loan is called the A. discount rate. B. equity capitalization rate. C. interest rate. D. mortgage capitalization rate.
D
If the net operating income of a property is $187,500 and the market indicates
an overall capitalization rate of 7.5%, what is the indicated value using direct
capitalization?
A. $201,563
B. $328,125
C. $2,500,000
D. $2,678,571
C $187,500 / 0.075 = $2,500,000
What are the three traditional approaches to value?
A. cost, sales comparison, and income capitalization
B. income capitalization, sales comparison, and extraction
C. market analysis, highest and best use analysis, and cost analysis
D. sales comparison, extraction, and allocation
A
What is the indicated overall capitalization rate of a property that sold for
$825,000 and has a net operating income of $53,625?
A. 0.063%
B. 0.15%
C. 6.5%
D. 15.38%
C $53,625 / $825,000 = 0.065 (or 6.5%)
What is the gross rent multiplier of a property that sold for $174,000 and has a gross monthly rent of $1,500? A. 8.6% B. 98 C. 113 D. 116
D $174,000 / $1,500 = 116 GRM
The amount left after debt service has been deducted from net operating income is called A. after-tax cash flow. B. discounted cash flow. C. pre-tax cash flow. D. reversion.
C
What method is used to convert an estimate of a single year’s income expectancy into an indication of value? A. direct capitalization B. discounted cash fl ow analysis C. reversion D. yield capitalization
A
Jackson is appraising a large tract of land that is being farmed for agricultural use.
The land use surrounding the farm is currently in transition from agricultural to
one-unit residential developments. For this assignment, what two procedures should Jackson consider in analyzing the land value of the property?
A. extraction and allocation
B. ground rent capitalization and allocation
C. residual land technique and extraction
D. sales comparison and subdivision development analysis
D
T\_\_\_ = Part ÷ Rate P\_\_\_ = Rate × Total R\_\_\_ = Part ÷ Total
Total, Part, Rate
A r______ is an element of a mathematical set that when
multiplied by a given element yields the identity element (Merriam-Webster). It is also referred to as a multiplicative inverse.
Reciprocal
O_____ e_____ r____ (OER). The ratio of total operating expenses to effective gross income (TOE / EGI); the complement of the net income ratio, i.e., OER = 1 – NIR.
Operating expense ratio
This is the ratio between the sale price (or value) of
a property and its effective gross income (EGI) or its potential gross income (PGI).
Gross income multiplier (GIM)
This is a similar ratio to GIM, but it applies to
rental income only. This multiplier is applied in less complex properties such as
rented one-unit residential homes and two-to-four unit small residential income
properties.
Gross rent multiplier (GRM)
A contract in which the rights to use and occupy land, space, or structures
are transferred by the owner to another for a specified period of time in return for
a specified rent.
Lease
G____ l____. The landlord (i.e., lessor) pays all of the operating expenses.
N___ l____. The tenant (i.e., lessee) pays all of the operating expenses.
Gross lease
Net lease
F___ r_____: A lease with a specified level of rent that continues throughout the
lease term; also called level payment lease.
Flat rental
G______ r____: A lease that provides for specified changes in rent at one or
more points during the lease term.
a. S___-__ l____. The payments increase at specified intervals.
b. S___-____ l___. The payments decrease at specified intervals.
Graduated rental
step-up lease
step-down lease
R_______ l____ A lease that provides for periodic rent adjustments based
on the market rental rate of the space. This is sometimes accomplished
through appraisal or arbitration.
Revaluation lease
I_____ l____ A lease, usually for a long term, that provides for periodic rent
adjustments based on the change in an economic index, e.g., a cost-of-living
index.
Index lease
P_______ l____. A lease in which the rent or some portion of the rent
represents a specified percentage of the volume of business, productivity, or use
achieved by the tenant. This type of lease is frequently used for retail. Most
leases specify a guaranteed minimum rent with overages possible.
Percentage lease
An amount paid for the use of land, improvements, or a capital good.
Rent
Types of rent
a. C______ r___. The actual rental income specified in a lease.
b. S________ r___. Income due under existing leases.
Contract rent
Scheduled rent
M____ r___: The most probable rent that a property should bring in a
competitive and open market reflecting the conditions and restrictions of a
specified lease agreement, including the rental adjustment and revaluation,
permitted uses, use restrictions, expense obligations, term concessions,
renewal and purchase options, and tenant improvements
Market rent
E______ r___. Total base rent, or minimum rent stipulated in a lease, over
the specified lease term minus rent concessions; the rent that is effectively
paid by a tenant net of financial concessions provided by a landlord.
Effective rent
D____ r___. The amount by which market rent exceeds contract rent at the
time of the appraisal; created by a lease favorable to the tenant, resulting
in a positive leasehold, and may reflect uninformed or unusually motivated
parties, special relationships, inferior management, a lease executed in a
weaker rental market, or concessions agreed to by the parties.
Deficit rent
E_____ r___. The amount by which contract rent exceeds market rent
at the time of the appraisal; created by a lease favorable to the landlord
(lessor) and may reflect unusual management, unknowledgeable or unusually motivated parties, a lease execution in an earlier, stronger rental
market, or an agreement of the parties.
Excess rent
P________ r___. Rental income received in accordance with the terms of a percentage lease; typically derived from retail store and restaurant tenants
and based on a certain percentage of their gross sales.
Percentage rent
O____ r___. The percentage rent paid over and above the guaranteed minimum rent or base rent; calculated as a percentage of sales in excess of a specified breakpoint sales volume. This is not excess rent, but is a contract rent.
Overage rent
P_____ g____ i____ (PGI). This is the total rent possible if the property is 100% occupied.
Potential gross income
E______ g____ i____ (EGI). Derive by subtracting an allowance for vacancy and
collection loss from (PGI).
Effective gross income
O______ e____. The periodic expenditures necessary to maintain the
real estate and continue production of the effective gross income, assuming
prudent and competent management.
Operating expenses
F_____ e_____. Operating expenses such as property taxes and insurance
that generally do not vary with occupancy and that prudent management will
pay for whether the property is occupied or vacant.
Fixed expenses
V_______ e_____. Operating expenses that generally vary with the level of
occupancy or the extent of services provided.
Variable expenses
R________ a________. An allowance that provides for the periodic
replacement of short-lived building components that wear out more rapidly
than the building itself and must be replaced periodically during the building’s
life.
Replacement allowance
T____ o______ e____ (TOE) The sum of all fixed and variable operating expenses
and the replacement allowance cited in the appraiser’s operating expense estimate.
Total operating expenses
N__ o______ i____ (NOI or IO). The actual or anticipated net income that
remains after all operating expenses are deducted from effective gross income,
but before mortgage debt service and book depreciation are deducted; may be
calculated before or after deducting the replacement allowance.
Net operating income
M_____ d___ s_____ (IM). The periodic payment for interest on and retirement of
the principal of a mortgage loan.
Mortgage debt service
P__-___ c___ f___ (PTCF). The portion of net operating income that remains after
total mortgage debt service is paid but before income tax on operations is deducted.
Pre-tax cash flow
O______ e_____ r___ (OER). The ratio of total operating expenses to
effective gross income (TOE/EGI); the complement of the net income ratio, i.e.,
OER = 1 − NIR.
Operating expense ratio
N__ i____ r____ (NIR). The ratio of net operating income to effective gross
income (NOI/EGI); the complement of the operating expense ratio, i.e.,
NIR = 1 − OER.
Net income ratio
D____ c_____ r___ (DCR). The ratio of net operating income to annual debt
service; … measures the relative ability of a property to meet its debt service
out of net operating income; DCR = IO / IM
Debt coverage ratio
E____ g___ i___: PGI minus allowance for vacancy and collection losses
Effective gross income
N___ o_______ i___: EGI minus operating expenses
Net operating income
P___ c___ f___: IO minus debt service
Pretax cash flow
G______ r____ l___: A contract calling for changes in the amount of rent at one or more points during
the lease term
Graduated rental lease
