PSI-Chapter 16 - Real Estate Appraisal Flashcards Preview

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Flashcards in PSI-Chapter 16 - Real Estate Appraisal Deck (28)
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1
Q

An Appraisal is…

A

an opinion of value based on supportable evidence and approved methods.

2
Q

A Federally Related Transaction is…

A

any real estate-related financial transaction in which a federal financial institution or regulator agency is engaged.

3
Q

Appraisals of residential property valued at…._____ or less are ____and need not be performed by licensed or certified appraisers.

A

$250,000 or less are Exempt

4
Q

________ properties valued at more than $250,000 ______ a certified appraiser.

A

Nonresidential properties…. Require a certified appraiser.

5
Q

In conducting an appraisal, an appraiser must follow the…

A

Uniform Standards of Professional Appraisal Practice (USPAP) established by the Appraisal Standards Board (ASB) of the Appraisal Foundation.

6
Q

The Master Appraisal Institute (MAI) is

A

An organization to become certified as an Appraiser

7
Q

Comparative Market Analysis (CMA) focuses on properties similar to the subject property in…

A

size, location and amenities for the purpose of deriving a LIKELY LISTING PRICE or offering price.

8
Q

A Comparative Market Analysis (CMA) analysis is based on…

A
  • Recently closed properties (solds)
  • Properties currently on the market and
  • Properties that did not sell (expired listings in the area)
9
Q

A Broker’s Price Opinion (BPO) is a…

A

less expensive alternative of evaluating property that is often used by lenders working with home equity lines, refinancing, portfolio management, loss mitigation, and collections.
BPO’s should not be confused with an appraisal, which consists of more in-depth information performed by a licensed appraiser.

10
Q

Market Value is…

A

An opinion of a property’s worth. Generally considered the ‘most probable price’.
Determination requires…
-buyer and seller are unrelated
-buyer and seller are well informed of the property’s use and potential, including both its defects and advantages
-reasonable time is allowed for exposure of the property in the open market
-payment is made in cash or its equivalent
-the price paid for the property is a normal market price, unaffected by special financing amounts or terms, services, fees, costs, or credits incurred in the market transaction.

Note: Market Value is not the average price

11
Q

Market Price is…

A

A property’s asking, offer, or sales price.

12
Q

The Basic Principles of Value are…

A
  • ANTICIPATION - value is created by the expectation that certain events will occur.
  • CHANGE - no physical or economic condition remains constant
  • COMPETITION - the interaction of supply and demand
  • CONFORMITY - maximum value is created when a property is in harmony with its surroundings.
  • CONTRIBUTION - the value of any part of a property is measured by its effect on the value of the whole parcel.
  • HIGHEST AND BEST USE - this must be - physically possible, legally permitted, economically or financially feasible, and the most profitable or maximally productive.
13
Q

The worth of a better-quality property is adversely affected by the presence of a lesser-quality property. This is known as…

A

Regression

14
Q

The value of a modest home would be higher if it were located among larger, fancier properties. This principle is known as…

A

Progression

15
Q

How is value obtained in the Sales Comparison Approach?
(the sales comparison approach is usually considered the most reliable of the 3 approaches in appraising single-family homes)

A
In the sales comparison approach (also known as the Market Data Approach) the value is obtained by comparing the property being appraised (subject property) with recently sold & similar comparable properties.  The elements of comparison for which adjustments must be made include:
Property Rights
Financing Concessions
Market Conditions
Conditions of Sale
Market Conditions Since the Date of Sale
Location or Area Preference
Physical Features and Amenities
16
Q

What are the three approaches to value?

A

The Sales Comparison Approach

The Cost Approach

The Income Approach

17
Q

How is value obtained in The Cost Approach?

page 304

A

The cost approach to value also is based on the principle of substitution. It consists of 5 steps:

  1. Estimate the value of land as though it were vacant and available to be put to it’s best use.
  2. Estimate the CURRENT cost of constructing buildings and improvements.
  3. Estimate the amount of ACCRUED DEPRECIATION (loss in value) resulting from the property’s PHYSICAL DETERIORATION, EXTERNAL DEPRECIATION, AND FUNCTIONAL OBSOLESCENCE.
  4. Deduct the accrued depreciation estimated in Step 3 from the construction cost estimated in Step 2.
  5. Add the estimated land value from Step 1 to the depreciated cost of the building and site improvements derived in Step 4 to arrive at the total property value.
18
Q

How is the value obtained in the Income Approach?

A

The income approach to value is based on ANTICIPATION. It’s the present value of the right to future income. It assumes that the income generated by a property will determine the property’s value. It’s used for valuation of INCOME-PRODUCING properties (apartments, office, retail, shopping centers)

19
Q

What are the 5 Steps to estimating value using the Income Approach?
(page 307)

A
  1. Estimate the property’s ANNUAL potential GROSS income.
  2. Deduct an appropriate allowance for vacancy and rent loss to arrive at the effective gross income.
  3. Deduct the annual operating expenses from the effective gross income to arrive at the annual Net Operating Income (NOI). (management costs are always included - Mortgage pymts are debt service and are no considered operating expenses.
  4. Estimate the price a typical investor would pay for the income produced by this property. This rate of return is called the CAPITALIZATION RATE (cap rate)
  5. Apply the cap rate to the property’s annual net operating income to arrive at the estimate of the property’s value.
20
Q

What is Depreciation?

A

Depreciation is a loss in value for any reason. (land is not considered a depreciating asset).

21
Q

Depreciation is considered…

A

Curable or incurable, depending on whether it can be corrected economically.

22
Q

For appraisal purposes, depreciation is divided into 3 classes, according to cause. What are they?

A
  1. PHYSICAL DETERIORATION (curable if repair is economically feasible. incurable if repair is not economically feasible)
  2. FUNCTIONAL OBSOLESCENCE (functional but no longer desirable)
  3. EXTERNAL OBSOLESCENCE (caused by negative factors NOT on the subject property such as environmental, social or economic forces) (like a dump site down the road)
23
Q

What is the Gross Rent Multiplier (GRM)?

A

If the buyer is interested in purchasing a ONE-TO-FOUR-UNIT residential rental property, the GRM based on MONTHLY rental income could be used for a rough estimate of value.
**Sales price divided by MONTHLY gross rent = GRM

24
Q

What is the Gross Income Multiplier (GIM)?

A

If a buyer is interested in purchasing FIVE OR MORE UNITS, a GIM based on ANNUAL income could be used to determine an estimate of value.
**Sales price divided by ANNUAL gross income = GIM

25
Q

What is Reconciliation?

A

Reconciliation is the act of analyzing and effectively weighing the findings from the three approaches. ( The Sales Comparison Approach, The Cost Approach, The Income Approach)

26
Q

Value is created by DUST. What does DUST stand for?

A

Demand
Utility
Scarcity
Transferability

27
Q

Capitalization is the process by which annual net operating income is used to…

A

Estimate Value

28
Q

From the reproduction or replacement cost of a building, the appraiser deducts depreciation which represents…

A

Loss of value due to any reason