Unit 4 Property Valuation

UNIT 4: BOBRA TAHAN TABITHA MAY HASIN HOWARD HARRIS PROPERTY VALUATION CALIFORNIA INTERACTIVE STUDY GROUP 1 Contact Information Bobra, Tabitha, and Howard have access to this account: releadinstructorca@kaplan.com If you would like to discuss something on the phone, please send your phone number in the email and the best times to reach you. 2 3 3 Setting up the room 4 Setting up the room 5 Setting up the room Unit 4: Property Valuation and Financial Analysis 6 TOPICS TO BE DISCUSSED: Value Methods of Estimating Value Financial Analysis

QUESTION An appraisal is only valid for; A. The date an appraiser inspects a property B. The date the appraisal was ordered C. The date the loan funds D. The date indicated in the appraisal 7 ANSWER D. The date indicated in the appraisal Beware of that word, “ only .” Usually , appraisals are valid as of the date a property is inspected — but not always ! Instead, an appraisal is valid for the date an appraiser cites in the report : Example: A present date to show the current market value of a property. A past date, such as for IRS depreciation allowance disputes, divorce disputes, condemnations, etc. A future date, such as a feasibility study to see what a large project will potentially cost a company. 8 QUESTION The most probable price a property will bring at sale is the: A. Market price B. Assessed value C. Market value D. Ad valorem price 9 ANSWER C. Market Value Market value is the appraised amount: It’s what the property would sell for in the open market (an arm’s length transaction). Market price is the sold or closed price of the property: This is a historical fact. Assessed value and “ad valorem” are terms used by tax assessors, not appraisers. “Ad valorem” might appear on your state exam: It means “according to value.” 10 QUESTION Which is the most detailed and complete appraisal report? A. Self-contained report B. Summary report C. Restricted use report D. Short-Form report 11 ANSWER A. Self-contained report A self-contained report is synonymous with a narrative report — it is the most detailed and complete form of report. Restricted use report = Letter-form report. It states its limitations or restrictions (e.g., the method of valuation used or property interests valued) Summary report = Short-form report (e.g., for loans) 12

ANSWER A. Economic obsolescence Economic obsolescence causes depreciation to improvements due to factors outside the property lines. (e.g., a flight path, a noisy highway, etc.). Note: Economic obsolescence is also called locational obsolescence or external obsolescence. 19 QUESTION An old, four story commercial building has no elevator. The loss in value due to this outdated design is called ____________. A. Economic obsolescence B. Functional obsolescence C. External obsolescence D. ADA compliance 20 ANSWER B. Functional obsolescence Functional obsolescence may be a cause of a building depreciating in value. It is based on factors such as the outdated design. Examples: Single-car garage in the suburbs Four bedroom, one bathroom home Bad floor plan No air conditioning in the Central Valley 21 QUESTION What is the best appraisal method to determine the value of a new construction? A. The sales comparison approach B. The cost approach C. Income approach D. Market data approach 22 ANSWER B. The cost approach The cost approach is the best way to value a building where either there are no comps or that something will be built on vacant land in the near future. Rationale: The cost approach separates the building and land values . Thus, this approach to value is the most important method for new construction. 23 QUESTION In the cost approach: A. Both improvements and land are depreciated B. Neither improvements nor land are depreciated C. Only land is depreciated D. Only improvements are depreciated 24

ANSWER D. Only improvements are depreciated Only improvements are depreciated — land is not depreciated. Rationale: Only improvements have limited, useful lives (meaning that buildings will wear out sometime in the future and need to be replaced). In contrast, land is theoretically considered perpetual and indestructible, and will never need to be replaced. 25 QUESTION The most accurate method to determine the cost of new construction is: A. Quantity survey method B. Unit-cost-in-place method C. Square or cubic foot method D. Index method 26 ANSWER A. Quantity survey method The quantity survey method is a highly involved process of estimating the cost of new construction by detailing raw material and installation costs . It itemizes all construction costs, both direct and indirect: Direct costs = Materials and labor Indirect costs = Permits, taxes, profit, insurance, and other overhead It’s the most accurate — but rarely used 27 QUESTION Under the cost approach, the cost to build an exact replica of a structure new today is called _________________. A. Replacement cost B. Reproduction cost C. Construction cost D. Advancement cost 28 ANSWER B. Reproduction cost Reproduction cost is the expense needed — today — to build an exact replica of an existing structure. It would rebuild with the same functional obsolescence as the original structure. Replacement cost is the expense to build today a new structure with the same function or utility as the existing one. But — it would cure any functional obsolescence 29 INCOME APPROACH Can be used for any property that generates income. R stands for rate . Rate is the capitalization rate or rate of return the investor wants. I stands for Income . Net operating income is the income generated from the property, minus operating expenses. V stands for Value . You should be able to do this formula in all its derivations I=R XV * R= I÷V * V= I÷R 30 I R V

QUESTION In the sales comparison approach which of the following are analyzed by the appraiser? A. Recent listings on the Multiple Listing Service (MLS) B. Recent sales C. Recent off-markets listings D. All of the above 37 ANSWER B. Recent Sales The appraiser only analyzes what has actually happened (i.e., listings that have actually sold). In preparing a Competitive Market Analysis, however, an agent will look at current listings and off-market listings to help suggest a reasonable listing price or offer. 38 QUESTION The Comparative Market Analysis (CMA) is most similar to __________. A. Sales comparison approach B. Income approach C. Cost approach D. None of the above 39 ANSWER A. Sales comparison approach In both the CMA and the sales comparison approach the subject property (the property being valued) is compared to similar properties (the comps). This comparison is used to show the market value of the subject property. 40 QUESTION The principle of substitution underlies which approach to value? A. Market data approach B. Income approach C. Cost approach D. All of the above 41 ANSWER D. All of the above The Principle of Substitution- The value of anything is established by the cost to acquire an equally desirable, available substitute. This principle is used in all approaches to value. 42

QUESTION As the value of real estate increases due to inflation, typically the value of the dollar ______. A. Increases B. Decreases C. Moves neither way D. Moves either way 43 ANSWER B. Decreases This is the underlying concept of inflation — if value or prices go up due to inflation, your dollars buy less . 44 QUESTION An over-improved property declining in value is an example of ________________. A. Regression B. Progression C. Diminishing returns D. Waste 45 ANSWER A. Regression An over-improved property declining in value is the principle of regression . Example: A large house on a property in a neighborhood of small houses. 46 REGRESSION Regression: Example 47 QUESTION An under-improved property increasing in value is an example of ____________. A. Regression B. Progression C. Diminishing returns D. Waste 48