Course III Final

Term
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What is commonly known as a set of rights to an item enjoyed by the owner?
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Terms in this set (750)
What is commonly known as a set of rights to an item enjoyed by the owner?
A bundle of rights
Where can the book value of a property be found?
The owner's accounts
The property being appraised must be what?
Adequately and accurately described
What is described as air, water, land and everything affixed to the land?
Real estate
Which of the following is NOT a unique physical characteristic of land?

Immobility
Indestructibility
Mobility
Heterogeneity
Mobility
What are man-made structures attached to the land called?
Improvements
The two types of cost used in appraising are
Replacement cost
Reproduction cost
What value type is most commonly utilized in foreclosures and bankruptcies?
Liquidation value
To an early appraiser during the depression era, market price was the equivalent of
Market value
How is capitalized value determined?
Capitalized value is the result of applying capitalization rates to property income in the income capitalization approach to value.
An item is not considered property if it is notOwnedThe fundamental purpose of an appraisal is to:Estimate some kind of valueCost is not reflective of market value for the primary reason thatCost is an expense associated with improvementsWhat is an appraisal?An estimated opinion of valueWhat does an appraisal take into account?A variety of factors, including the property's historic, current, and future values, the interests and equity in the property and any other considerations that can influence the property's current or future valueWhat is the primary purpose of an appraisal?To estimate a type of market valueWhy do banks and mortgage lenders order and review a real estate appraisal?To determine whether a property meets certain underwriting standardsWhat does the legal concept of land encompass?The surface area of the earth Everything beneath the surface of the earth extending downward to its center All natural things permanently attached to the earth The air above the surface of the earth extending outward to infinityWhat are the three physical characteristics of land?Immobility, indestructibility, and heterogeneityWhat does the legal concept of real estate encompass?Land All man-made structures that are "permanently" attached to the landWhat are the two classifications of property?Real property and personal propertyDescribe market value.The highest price that a buyer would pay and the lowest price that the seller would accept for the property.What is the difference between sales price and market value?Sales price is a fact; market value is an opinionWhat is the most common type of value sought in an appraisal?Market ValueWhat is mortgage value?The value of the property as collateral for a loanWhat is it called when an owner takes out a mortgage on a property?To assignThe commonly accepted definition of market value derives fromthe law of substitution.Items of personal property are also calledchattel.Who are known as experts in evaluating the strengths and weaknesses of property, neighborhoods, or other related real estate assets?AppraisersA value opinion must be appropriately supported withgeneral and specific data.Which of the following statements best defines the concept of depreciated value?Depreciated value is a value established by subtracting accumulated depreciation from the purchase price or cost of a property.Assemblage is the process ofputting together parcels from multiple owners in order to create a larger parcel of land.Because values change over time, appraisals must refer toa specific date.For an appraiser, the exact definition of market value depends onthe intended useA parcel, or tract, of land is a portion of landdelineated by boundaries.What does an "arm's length" transaction mean?The buyer and seller are not related.What is the most important condition to be met in a purchase agreement?The appraisalWhat is the general definition of real estate value?The current worth of the benefits and rights associated with real property ownership and useList the four basic sources of influence on all aspects of human activity.Governmental controls and regulations Economic conditions and circumstances Physical and environmental conditions Social trendsHow does the government require citizens to contribute to the cost of government services?By way of taxationWhy is government influence at the state level less extensive than at the federal and local levels?Because state governments delegate many of their constitutionally-granted powers to the county and municipal levels of governmentExplain what happens to a property that does not conform to zoning and/or building codes.Property that does not conform to these requirements loses value in that a new owner will have to expend funds to bring it into compliance.List the economic characteristics of land.Area preference (situs)—market appeal of location and environment Availability—relative scarcity or abundance Improvements—quality and suitability for use Permanence of investment—stability of value over timeWhat are the four phases of standard market cycles?Growth, Peak, Decline, RecoveryWhat are three investment vehicles that real estate competes with?Stocks, Bonds, CommoditiesWhat type of inflation is caused by a seller's market (too many purchasers wanting too few available goods)?Demand InflationWhat geographical and environmental issues affect value?Climate, soil, water, air quality, wind patterns, and environmental hazardsList three ways environmental hazards can affect property value.The presence of such hazards can: Modify or destroy land use Make a buyer change his mind about purchasing real estate or moving to the area at all (decrease demand) Cause physical damage to property or medical damage to owners and occupants Leave a stigma on the real estate and community even after the hazard has been removedThe study of population trends and statistics is defined as what?DemographyCultural norms, by influencing the personal values of individuals, influence what?Choices made in the marketplace End of PageGovernments establish land use laws and regulations in response to social attitudes, political pressures, economic conditions andenvironmental conditions.The Equal Credit Opportunity Act and the Real Estate Settlement Procedures Act are examples of what type of laws?Consumer protection lawsWhat term describes a condition which disturbs a party's legal right to quiet enjoyment?NuisanceProperty that does NOT conform to code requirementsloses value.What type of program enables qualified buyers to undertake larger mortgage loans than would otherwise be possible?Federal loan assistance programsA swimming pool located on a residential property would be classified as a(n)amenityWhat type of policy concerns how the government collects revenue and makes expenditures on various services?Fiscal policyWhat factor causes some buyers to pay too much for a property because of "falling in love" with a home?Emotional attachmentWhen accessibility to major travel corridors influences the demand for a particular house, office or corporate headquarters, it is known aslinkageWhat is the purpose of the Federal monetary policy?To control the supply of money for the purpose of assisting stability and growth in the economyWhat ultimately grants individuals the benefits of property ownership that we translate into real property value?The ConstitutionWhat describes the ability of people in the market to exchange cash or its equivalent for goods and services?Purchasing powerWhat is described as a measure of the strength of a currency or monetary system?Purchasing powerWhat is dependent on the changes in the primary industries that financially sustain an area?Employment ratesWhat describes the ease with which title to a property can be moved from one person or entity to another?TransferabilityWhat type of inflation is caused by an increased cost to produce or offer commodities?Cost inflationWhat term describes a rise in the cost of commodities?InflationWhat type of programs affect development in coastal and wetland areas?Federal flood insurance programsWhat are the two types of inflation?Demand and cost inflationWhich social force is most influential on a person's values and the choices they make in the marketplace?Cultural normsPermits for septic systems requirepercolation tests.What is an example of an unstable economic base?Seasonal tourismWhat creates interest in a demand for new mechanical systems, recycled materials, insulation and construction methods and special water consumption devices?Environmental consciousnessWhat type of laws affect the activities of employers, workers and labor unions?Labor lawsWhat is the term given to periods of growth that are followed by periods of stagnation or decline?National business circlesUnder the principle of supply and demand, what describes a time of financial prosperity and high demand?GrowthDependence on a single industrymakes an entire economy vulnerable.What is the first step in the appraisal process?Define the problem and the scope of workWhat does the appraiser do after he or she decides which value approaches to use?Determine the type of data needed and the sources to be consulted, and then collect the dataDescribe the difference between specific and general data.Specific data is information and details about the subject property and the comparables. General data is information about the property's location - its country, region, city, and neighborhood.What is the definition of highest and best use?The definition of highest and best use is that use that is: Legally permissible Physically possible Financially feasible Maximally productiveList and describe three techniques used to value a land component.Direct sales comparison—sales of comparable vacant parcels are analyzed and adjusted to indicate a value for the subject land. Allocation—a typical ratio of land value to total value is derived from comparable properties and applied to the subject. Extraction— land value is estimated by deducting the depreciated cost of improvements on a property from the total sale price of the property.What does replacement cost include?All the costs of building a house or other real estate improvement from the ground up and having the same utility as the one being valued, but with a modern design, new materials and current standards of workmanship.How does the income approach work?The income approach capitalizes a single year's income or discounts a projected income stream to derive an indication of the property's value.What forms can appraisal reports take?Short- or Long-Form Narrative ReportsForm ReportsLetter or Oral ReportsThe first step in the valuation process is what?Define the problem.Which of the following is NOT a technique used in valuing land? Direct sales comparison Allocation Extraction Land marketingLand marketingWhich appraisal approach is a method of estimating value based on the economic principle of substitution?CostWhich best describes the process of allocation?A ratio of land value to total value derived from comparable properties and applied to the subjectIn simple terms, how does an appraiser estimate land value?The appraiser must compare the features and sales prices of comparable sites to those of the subject property based on the value of the land alone.Typically, what evaluation approach do appraisers use when determining the value for commercial and investment properties?Income ApproachWhat approach depends on obtaining income and expense data from the subject property and also comparable properties?The Income ApproachWhat type of cost refers to the cost associated with buying a replacement copy of the item?Replacement costWhat happens when an appraiser simply averages the values reached by using different approaches of value to arrive at the final value estimate?It gives equal weight to all the approaches.Which statement is TRUE about data collection? It is comprised of recording of market figures which tend to be random and conflicting. It is the extension of all data points in a cogent figure of value. It is comprised of an orderly set of procedures that establish the precise manner in which data is collected and analyzed. It is the ranking data in a ratio that results in an extrapolation of future value.It is comprised of an orderly set of procedures that establish the precise manner in which data is collected and analyzed.What appraisal approach is not considered reliable for valuing older structures?The cost approachThe most common type of appraisal assignment is todevelop an opinion of market value.Appraisal reports must include a signed certification, according toUSPAP guidelines.What is an acceptable form for an appraiser's report?Short- or Long-Form Narrative Reports Form Reports Letter or Oral ReportsWhat is the key element in a narrative report?The appraiser must provide all the information needed to support the value conclusions, estimates, and opinions he expresses in the report to convince the client that his value estimate is sound.Define capitalization rate of a property?The rate of return considered to be a reasonable yield on investment given the riskThe majority of today's single-family appraisals are made on theUniform Residential Appraisal Report (URAR).The appraisal process is what type of procedure?An ordered procedureIn what situation can the sales comparison appraisal approach not be effectively utilized?If no other comparable sales have occurred recentlyAppraisers divide collected data into what two primary classes?Specific and generalWhat evaluation process is an ordered, specific set of steps that must also follow an established, predetermined path to arrive at an accurate value estimate?The appraisal processWhat does the economic principle of anticipation indicate about real estate value?The worth of a commodity or service is associated with its future profitability and benefits.What is the term for excess value created by assemblage?Plottage valueAccording to the balance principle, the correct combination of what four production agents results in economic stability?Land Labor Capital Entrepreneurial coordination/managementWhich economic principle is a direct result of the supply and demand principle?CompetitionWhat principle holds that there is a single use for a property that produces the greatest income and return?Highest and best useDefine the principle of increasing and decreasing returns.When improving a property, there is a point where the property's maximum current market value has been realized. Further improvements do not repay their cost by any increase in market value.Define the principle of substitution.A buyer will pay no more for a property than the buyer would have to pay for an equally desirable and available substitute property.What does the principle of transferability indicate about properties that are encumbered?The value of such properties is impaired, since buyers do not want unmarketable title.Real estate markets are considered to operate at what level of effectiveness?Inefficient in operation.What distinguishes a real estate asset market?Properties are bought and sold, not for their utility in use, but for investment purposes.What is the meant by the term illiquid investment?An investment that is durable, fixed in location, and oftentimes a long time in development.For appraisers, the most important use of market analysis is what?Its role in the appraisal processWhat type of real estate market is interested in buying, improving, and selling property?Development marketThe principle of ___________ holds that a property's maximal value is attained when its form and use are in tune with surrounding properties and uses.conformityCompetition is a direct result of:the supply and demand principle.Economic balance occurs whenthe ideal state of any industry or market is achieved.In what real estate market are physical properties bought and sold, occupied and used?The real estate space marketThe real estate market is notconcrete.What is a requirement to qualify as the highest and best use?A legal use A physically possible use A financially feasible useSome of the most recognized economic principles figure so directly in appraisals that they are often referred to simply asappraisal principles.When demand for properties exceeds supply,a condition of scarcity exists.The worth of a commodity or service is associated with its future profitability and benefits according to theanticipation value theory.What process does an appraiser use to determine the highest and best use for a property?Market analysisWhen production agents are unstable,productivity diminishes.In the study of markets, the differentiation of properties on the basis of differing product categories and uses is calleddisaggregation.In the real estate asset market, properties are bought and sold for:investment purposes.What principle is concerned with how readily or easily title or rights to real estate can be conveyed?The transferability principleWhat is it called when the cost for a property's improvement exceeds the improvement's contribution?Diminishing marginal returnProperty that is encumbered is said to havevalue impairment.T/F Real estate markets are cyclical.TrueAccording to the principle of supply and demand, too much supply leads to a ___________, which is characterized by lower values.buyer's marketThe principle of _________ in the appraisal of real property refers to the fact that having a use in a certain marketplace contributes to the demand for a property.utilityWhy are appraisal reports always dated?Because the real estate market is always changingWhat are 3 characteristics of an efficient market?There are few regulations or restrictions. Items for trade are supplied quickly, transported easily, and consumed quickly. Items for trade are homogeneous and easily substituted for each other.Real estate markets are considered to be _________ in operation.inefficientWhat is not a characteristic of the real estate market? There are numerous restrictions and regulations coming from public and private controls Sellers can easily be stuck in a market where demand is down because they have to sell for personal reasons Supply and demand may shift suddenly Participants are knowledgeable and fully informed about the marketParticipants are knowledgeable and fully informed about the marketWithout something to justify a higher valuation, the maximum value of a property probably will not exceed the highest sales price of a/n ____________ in the same market area.comparable propertyWhich of the following statements is TRUE? Appreciation is absolute, but is not a universal catalyst for residential real estate purchasers. Appreciation is absolute and plays no factor in the real estate purchasers. Appreciation is only absolute in the purchase of residential real estate. Appreciation is not absolute; it remains a universal catalyst for residential real estate purchasers.Appreciation is not absolute; it remains a universal catalyst for residential real estate purchasers.What elements that immediately "surround" a property can impact its value?Public Transportation Access by Car Abutting and Nearby Streets and Traffic FlowWhat must an appraiser do when comparable sites are in different neighborhoods?The appraiser must conduct a detailed analysis of the two properties based not only on the typical elements of comparison, but on the neighborhood characteristics as well.Stage One of a neighborhood is known as what?The growth periodChanges in neighborhoods tend to lead to changes where?In surrounding neighborhoodsName three physical and environmental forces that influence a neighborhood.Utilities, support services and geologic factorsThe income levels of a neighborhood's residents tend to set what for that neighborhood?Value rangeWhat areas in a neighborhood can governmental forces impact?The taxes, schools, restrictions, and planning and building regulations of a neighborhoodDescribe what neighborhood associations are empowered to do.Sell and purchase property. Establish and charge members an annual membership fee. Put a lien on the property of the owners that did not pay their membership fees. Borrow money on the members' behalf.What is the definition of "site?"The term "site" includes both the land and its improvements, which refer to the buildings on the land, as well as the utility connections, streets, sewer systems, etc.What are two types of encroachments?Improvements on abutting properties which encroach onto the subject site Improvements which extend over the property line onto neighboring propertiesHow does landscaping affect a property's value?It generally adds value, if it conforms to and complements the propertyWhat type of test must be conducted before implementing a septic system?Percolation testWhich of the following factors is essential in determining a neighborhood's value? On-street parking Off-street parking Crime rate LandscapingCrime rateWhy would a neighborhood with good schools be attractive to homeowner's with no children?Such houses can mean good resale value down the road.A type of encroachment includesImprovements on abutting properties encroach onto the subject site Improvements extend over the property line onto neighboring propertiesWhich two types of restrictions are designed to protect a property from being used in a negative manner and create stability?Public and privateProviding for the future uses of undeveloped areas, as well as providing protection to preserve the existing neighborhood's character and integrity falls undergovernment planning.What process describes a neighborhood containing poorly-maintained homes alongside some well-maintained homes?Decline and revitalizationPublic restrictions include building codes andzoning regulations.What type of forces impact neighborhoods in terms of population characteristics, community and neighborhood organizations and crime level?Social forcesAppraisals are conducted to levy real estate taxes on a property based on that property's value. Another name for this tax is what?Ad valoremWhat is a physical and environmental factor that would affect a neighborhood's value? Economic profile of residents Public and private restrictions Subdivision regulations UtilitiesUtilitiesWhat are restrictions that control building design called?Building codesThe income levels of a neighborhood's residentsset a value range for that neighborhood.The length of the property boundary that abuts an access way, road or thoroughfare is itsfrontage.No amount of improvements can change where a property is located because property isimmobile and constant.Depth is always considered together withthe width and frontage of a lot.What is not a social force that would be a factor in a neighborhood analysis? Neighborhood associations Population characteristics Crime level Special assessmentsSpecial assessmentsWhat term refers to both the land and its improvements?SiteWhich of the following is NOT a major support facility? Public transportation Schools Employment centers Public utilitiesPublic utilitiesWhich of the following statements best defines a party wall? A common wall used by neighboring property owners A wall placed on the frontage side of a property A wall built and owned by a public utility A wall built to divert water runoffA common wall used by neighboring property ownersWhat is not a transportation factor that can impact property value? Public transportation Access by car Abutting nearby streets Neighborhood locationNeighborhood locationWhat is a strong governmental influence in neighborhoods for families with children?SchoolsWhich of the following factors are NOT a social force? Turnover and Vacancy Neighborhood Associations Population Characteristics Crime LevelsTurnover and VacancyThe appraiser should avoid reliance on what? The properties in a neighborhood The condition of the neighborhood's properties The ethnic characteristics of the residents The schools and amenities like parks and recreation facilitiesThe ethnic characteristics of the residentsWhat is the purpose of a percolation test?To determine if the soil can absorb any runoff from the septic systemDeed restrictionsare contractual.What type of environmental force describes how accessible a neighborhood is to public transportation?Proximity to support facilitiesDescribe the Cape Cod style house.One or one and a half stories; gabled roof with dormers; central entrance door; central chimney; decorative shutters; little ornamentation.Historians claim that the colonial revival is Victorian, others say it was a newer style based loosely on what other styles?Georgian and Federal house styles that came about after the Victorian periodDefine the characteristics of a split-level home.A split-level ranch is a ranch-style house that has been divided into several sections, with one part raised and another part lowered. Split-levels have various floor plans, but all contain at least three levels, and the front door is almost always found on the home's center level.What feature is prominent in the "national" style farmhouses throughout the U.S.?The Greek Revival trademark - the front-gable designWhat is the main difference between a plan view and an elevation?The plan view is a view from overhead down onto a structure; an elevation is a ground-level view at one side of a structure.What would you expect to find in a mechanical plan?The location and layout of all plumbing, heating, and cooling fixtures and components.Why is it important for footings to rest on undisturbed soil?Disturbed soil as a base increases the risk of uneven settling of the foundation.Name three materials shingles can be made from.Shingles can be made from many materials, including asphalt, wood, fiberglass, and stoneWhat are the four basic types of wood siding?Panel siding, shingle siding, vertical siding, horizontal sidingWhy are some whole house cooling systems referred to as split systems?Part of the components are outside the house and part insideDescribe the two halves of a plumbing system and the types of piping used with each.One of the halves is the supply side, consisting of the service main and the supply pipes within the house; supply pipes are small-diameter and often copper, and must withstand 160 pounds per square inch in pressure. The other half is the drain/waste/vent side, consisting of large-diameter pipes made of cast iron or plastic. These pipes are subject to atmospheric pressure only.What are the most important requirements for a deck?A deck, whether attached or free-standing, must be able to withstand wind, water, and other weather forces; be sturdy; and be safe.What is the air conditioning unit that contains both a fan and the condenser coil?CompressorWhat type of house style is a take-off on the traditional ranch-style house and offers more space flexibility?Raised ranchIn platform framing each floor is framedseparately.HVAC is an acronym for what?Heating, ventilation and air conditioningA Greek Revival home typically boasts which of the following features? Either a flat roof with a balustrade or a low-pitched roof The entry porch with columns and narrow windows around the front door A low-pitched gable roof and deeply set eaves A low-pitched gable roofThe entry porch with columns and narrow windows around the front doorWhich drawing plan would you look at to determine where a kitchen sink would be located?"Mechanical Plan "A set of architectural plans consists of what views?Different viewsHomes that strongly resemble medieval castles or churches and are constructed of brick and stone, are called which of the following?Gothic RevivalWhich type of drawing gives a "bird's eye" view of a structure?Plan ViewThe waste side of the plumbing system is also called theDWV.An expensive and elaborate style of larger and elaborately decorated houses using expensive materials is known as what style?Renaissance RevivalWhat popular heating system is comprised of a furnace, ducts, and registers?Forced hot-airOn which drawing would you find details that show complicated design features such as tray ceilings?Reflected Ceiling PlanWhat is a foundation plan?A top view of footings and foundation wallsWhat percent of heat is lost in houses through windows?20-30%What part of the HVAC system contains a blower to circulate cooled air through the ducts and the evaporator coil?Air handlerSmall-diameter pipes that carry water into the system and evenly distribute water throughout the house are called which of the following?Supply pipesWhich pipe connects to the municipal water system and brings water into the house?Service main pipeWhich design plan shows large portions of the structure and general drawings including plan views and elevations?General DrawingsAlthough in "normal" conditions, footings are placed a minimum of 12 inches below grade, in the northern U.S., what is the typical frost penetration depth?48"What does an elevation drawing show?An elevation drawing shows the front, back, and end-on views of a structure as seen from ground level facing straight ahead at the middle of one exterior wall, minus any effects of perspective.In a forced hot-air heating system, what part returns cool air back to the system?Return-air registersConventional wood framing consists of what?Many individual piecesWhich style of house usually has an attached garage?RanchHow is land value related to highest and best use?Land value is a component of the highest and best use of a property; highest and best use is a fundamental consideration in estimating land value.Describe the tests of a potential use of a property that determine whether it is the highest and best use possible.Legal permissibility—the use must comply with laws, regulations, and ordinances. Physical possibility—the use must be consistent with the site characteristics and physical features of the property. Financial feasibility—the use must add more value than it costs to implement. Maximal productivity—the use must yield the most value in comparison with other potential uses.While a site is waiting to be developed into its future highest and best use, it may be improved to what type of use?A temporary, interim useDescribe two benefits of determining the value of a property as if vacant.It helps reveal the use of the land that will produce the greatest income or value; it helps reveal comparable properties for use in the approaches to value.What kind of legal restrictions are investigated in applying the legal permissibility test for highest and best use as if vacant?Public restrictions—environmental regulations, building codes, zoning ordinances. Private restrictions—deed restrictions, covenants, leases, agreements, easements, encroachments.What are some ways that the physical characteristics of a property can affect the determination of highest and best use as if vacant?Soil conditions may not support a use; the size and shape (frontage and depth) may eliminate a use; Climate conditions and environmental features may make a use impossible or too expensive to develop for a use; Offsite limitations such as access to utilities may make a use physically impossible.How is residual land value derived?A value is estimated for a site developed for a certain use, and the combined costs of capital, labor, and coordination needed to create the improvements are subtracted from it. The remainder is the value attributed to the land in that use.Why is it probable that the existing use of a property automatically passes the legal permissibility and physical possibility tests?By the fact that the improvement already exists, it most likely complies with zoning and other regulations. If it were not physically possible, it wouldn't exist as it does. However, the appraiser cannot assume either to be true and must check for compliance with laws and for physical problems.Describe two methods of testing an existing use for financial feasibility.Check the return on investment for the existing use; if positive, it passes the test. Compare the value of the property as improved with the value as if vacant. If it is greater, it passes the test.What problems associated with physical property are addressed in the physically possible test?Functional and condition problemsThe test for maximum productivity of the property as improved takes into account what factors?The costs of, and return on, making modifications to deal with deficiencies discovered in any of the previous testsHighest and best use analysis may result in several kinds of conclusions including that:of a number of potential uses, one is highest and best.A site's developed value for a certain use, when reduced by the combined costs of capital, labor, and coordination needed to create the improvements results inresidual land value.Even though it may be so, it should not be assumed that an improved property's existing use is thehighest and best use.On a leased property, the highest and best use should produce the maximum of which type of income?RentalHighest and best use analysis often uses techniques and data from how many approaches to value?ThreeBy the fact that the improvement already exists, it most likely complies with what regulations?ZoningIf there are already dozens of competing gas stations in the area, a site that is zoned appropriately and offers the ideal physical configuration for a gas station would be consideredfinancially unfeasible.Which of the following is NOT one of the four highest and best tests for use of the land? Legally permitted Physically possible Financially feasible Comparable based The most productiveComparable based The four tests are: Legally permitted Physically possible Financially feasible The most productiveIf a property improvement violates a zoning code, the property is said to benon-conforming."Residual land value is the difference between the"estimated value of a proposed use and the combined costs of capital, labor, and coordination needed to create the improvements.The conclusion to a highest and best use analysis should specifywhen the optimal use could be achieved and who would be the most likely buyer or user.Which of the following items would NOT be included as a physical characteristic of a property? Environmental regulations Soil Subsoil Sloping terrainEnvironmental regulationsWhen valuing the land, if the residential improvements actually detract from the value of the land one option is todemolish and remove the improvements, returning the property to the condition as if vacant.When land value is estimated by deducting the depreciated cost of improvements on a property from the total sale price of the property, this is known asextraction.The fourth test (what is most profitable) is essentially a test for what?Maximum productivityThe conclusion of the highest and best use analysis should specify when the optimal use could be achieved and who would be the most likelybuyer or user.On a leased property, the highest and best use approach shouldproduce the maximum rental income.Which of the four tests deals with compliance with regulations and ordinances? Legal productivity Financial feasibility Maximal productivity Legal permissibilityLegal permissibilityThe physical characteristics of a property can affect the determination of highest and best usewhen the size and shape (frontage and depth) may eliminate a use.Over-improvement and under-improvement would both affect the suitability of the existing improvement ashighest and best use.An ordinance requiring water retention ponds and wetlands offsets may diminish the feasibility of a small shopping center development, eliminating that as what kind of candidate?Highest and best useWhat if a proposed use in a highest and best use analysis fails to meet any of the four tests considered by the appraiser?It is discarded and another use is reviewed.The test for maximal productivity of the property takes into account which of the following factors?The costs of, and return on, making modifications to deal with deficiencies discovered in any of the other highest and best use testsEvery appraisal report contains not just the information acquired throughout the appraisal, but also thestatements and comments of the appraiser.Land is not subject to:depreciationWhat two types of legal restrictions are investigated in applying the legal permissibility test for highest and best use with vacant land?Private and public land restrictionsWhat is replacement cost?The cost of creating a structure and other improvements that provide the same or very similar usefulness, but using current material and design standards, based on the current prices for materials and labor.What is meant by reproduction cost?The cost of constructing an exact duplicate of the subject building, at current prices.The reproduction cost and replacement cost estimates can be further categorized into what?Direct and indirect costsList four costs that are typically considered "soft" costsProfessional services Building permits and licenses Interest TaxesWhat are the three methods by which an appraiser can estimate a building's replacement or reproduction cost?Square foot or cubic foot method Unit-in-place method Quantity survey methodWhich method generally provides the most accurate cost estimate and is generally the one used by builders, contractors, and cost estimators?Quantity survey methodAll unit-in-place cost estimates are made using what?Using the "standard" costs for each building components as it is installedWhen an appraiser considers the cost of building an improvement, construction cost estimates must include what?All materials Equipment LaborWhat are the three most reliable sources for obtaining cost data?Cost Services Cost Indices Cost Data FileWhich method of costing improvements entails creating a very detailed inventory of all the necessary materials and equipment to build the house?Quantity Survey MethodExplain what a Cost Data File gives the appraiser.A cost data file gives the appraiser a way to check the costs of reproducing or replacing an existing residence; project the probable costs of reproducing or replacing the different components of a house; and/or a way to check the costs of the various trades or work involved in such projects.What are the four Mechanical Systems used in the costing of the Quantity Survey Method?Plumbing: Copper water and waste pipes connected to municipal services in street. Electric 60-gallon domestic hot water heater. One double, stainless steel kitchen sink. Each bathroom has standard water closet, lavatory and tub with shower. Laundry tub in basement and washer/dryer hook-up. Heating: Oil-fired hot water furnace; two circulators; baseboard radiators. Electrical: 100-ampere service; 16 circuits protected with circuit breakers; BX cable; adequate outlets and features. Built-in Appliances: Gas oven and range; hood with exhaust fan in kitchen.What is depreciation?The difference between the current cost of an improvement on the date of the appraisal and the value of the improvement in place on the propertyDescribe the difference between external and functional obsolescence.External obsolescence is caused by changes external to the property, such as the decline of value in a neighborhood. Functional obsolescence is caused by changes within the property, such as a poor floor plan or mechanical inadequacy or over-adequacy.What three techniques do appraisers use to measure depreciation?Breakdown method Abstraction or market method Age-life methodWhen a property has reached the end of its economic life, the depreciation is said to be at what percentage?100%Short lived components refer to what?Items whose remaining physical life is less than, or shorter than the overall property's total estimated remaining economic lifeTasks that any prudent homeowner should have completed by the appraisal date to ensure he receives the maximum profit when he sells his home refers to what type of deterioration?Curable Physical DeteriorationTo determine if a particular form of obsolescence is curable, what must be decided?If the value added by correcting the problem is more than it costs for the correction itselfDefine External Obsolescence.External obsolescence is the loss of value to a property's improvements that is caused by factors that are external to (or outside of) a property's boundaries.How do appraisers apply the abstraction method of depreciation?By using market data to discover some indication about a property's depreciation amountDescribe the difference between a home's physical life and its economic life?Physical life is the amount of time that a home is expected to physically remain in existence. Economic life is the time period during which the property's improvements (the house, etc.) continue to add value to the property.Why is creating an estimate of a home's remaining economic life difficult?Because the appraiser cannot assume that the home will continue to deteriorate at the exact rate it is currently deteriorating nor can the appraiser predict how changes in the economy, public tastes, or the property owners' maintenance and care of the property will affect the estimate.The age life method of estimating depreciation is based primarily on what?ObservationWhat is the first step in deriving depreciation using the abstraction method?Gather data for all recently sold comparables for the purpose of estimating their reproduction costs.What most often occurs because the property and/or its components are old and have suffered wear and tear?Incurable physical deteriorationHow is accrued depreciation estimated?Directly and indirectlyExternal obsolescence can be caused bya decline in the neighborhood's value.The cost approach is based onthe assumption that the cost to produce a building plus the cost to acquire and improve the site makes it suitable for building, which is a good indication of what the property is worth.Which statement best defines remaining economic life?The length of time that spans from the appraisal date to the end of the house's economic lifeThe procedure for developing the estimated value of the improvements requires the conversion of"cost to construct" figures to market figures.The segregated cost method is also known as theunit-in-place method.Economic life refers tothe amount of time during which a house can be profitably used.Which of the following would not be categorized as "soft" costs? Architect's and engineer's fees Materials and overhead Interest, taxes, selling expenses and commissions Building permits, licenses and insuranceMaterials and overheadWhat components refer to the items whose remaining physical life is less than or shorter than the overall property's total estimated remaining economic life?Short-lived componentsAn appraiser typically estimates the value of a site by assuming thesite is unimproved and ready to be utilized for its highest and best use.What is evidenced by an improvement's decay, cracks, structural defects, wear and tear, dry rot and more?Physical depreciationWhat are improvements called that were made after the property's construction or anything that was originally constructed with the house, usually added by the homeowners?Super adequaciesMost functional obsolescence-curable in residential properties is caused by what?Some kind of deficiencyOne method an appraiser uses to estimate a building's replacement or reproduction cost is the square foot or cubic foot method which is also calledthe comparative-unit method.What source for obtaining cost data contains data on current material and labor costs plus the appraiser's own grading system to classify the quality of construction?Cost data fileReproduction cost is the dollar amount required to construct what?An exact duplicate, but at current pricesA swamp in a neighborhood would be classified asexternal obsolescence.What source for obtaining cost data will provide the current construction costs for a home which was built years earlier?Cost indicesWhat reproduction/replacement method generally provides the most accurate cost estimate because all of the building's components are analyzed?The quantity survey methodThe quantity survey method is the one generally used by whom?Contractors and buildersWhat indicator can show how much depreciation the property has suffered in the market?Current Sales AnalysisOnce an improvement cannot be profitably utilized because it no longer contributes to the value of the property, it is said to beat the end of its economic life.Which of the following is NOT a step in the cost approach to value? Estimating the value of the site and reproduction cost of the improvements Estimating depreciation Adding the estimated depreciation to each improvement's replacement cost Estimating the site valueAdding the estimated depreciation to each improvement's replacement costWhat occurs when the value of the site itself is worth the same value as the value of the site and its improvements?The house's economic life is over.What are the three major types of depreciation?Physical Deterioration, Functional Obsolescence, External ObsolescenceWhy do appraisers apply the abstraction method of depreciation?To discover some indication about a property's depreciation amountWhat occurs when improvements stop adding value to a structure?A house's economic life is over once the improvements stop adding value.What term refers to those components that simply do not meet the current expectations of the market?DeficienciesWhich of the following is NOT a direct method of estimating a property's accrued depreciation? By observing and analyzing the components of depreciation affecting the property Using a formula that is based on the property's physical age-life factors Using the market data approach to value Using a formula that is based on the property's economic age-life factorsUsing the market data approach to valueWhat type of components impact the entire property because they are not easily replaced?Long-lived componentsUnder the quantity survey method of costing improvements what do concrete footings and foundation walls refer to?General constructionWhat are three reliable sources for obtaining cost data?Cost Services, Cost Indices, Cost Data FileWhat is the term used to identify non-direct costs that are associated with the construction of a building?Indirect CostsWhat is defined as the difference between the current cost of an improvement on the date of the appraisal and the value of the improvement in place on the property?DepreciationHow do you determine the average annual rate of depreciation?Divide the annual amount of depreciation by the improvements' reproduction cost.What is measured by dividing the specific deteriorated components into the categories of short-lived and long-lived?Incurable physical deteriorationUnit-in-place methods are made in terms of what?Standard costs for each of the building components as installedIn residential properties, most curable functional obsolescence is due toa deficiency of some type.What is the term given to the amount of time that a house is expected to physically remain in existence?Physical LifeIn the quantity survey method of improving costs what does plumbing refer to?Mechanical systemsWhat does the sales comparison approach require an appraiser to do?It requires an appraiser to make direct comparisons between the subject property (the one being appraised) and other sold or listed (for sale) properties.How does the principle of substitution apply to a single-family residence?A home's value is basically set at whatever it would cost to purchase an equally desirable "substitute" home.Someone who wishes to purchase an investment property generally compares what elements when looking at one particular property:The potential return on his investment Tax shelter possibilities The burden of management Numerous additional factorsWhat are the five steps of the sales comparison approach?1. Study the market. 2. Collect and verify data. 3. Analyze and compare properties. 4. Adjust the prices of the comparables. 5. Reconcile the newly adjusted prices.What impact does a special assessment have on an appraisal?When a property is sold subject to a special assessment, an adjustment must be made if comparable properties are not subject to the same special assessment.Regarding data collection, name three places this data is collected.Comparable property sales, listings and offerings, appraisers' filesList two questions of motivation-specific elements in a sale.Were both parties (the buyer and the seller) knowledgeable about the property and market in which the sale took place?Did each party (the buyer and the seller) act without financial pressure?Were there any special sale conditions? (For example, did the transaction include personal property -- furniture, appliances, etc. -- in the sale?)Was the sale an "arm's-length" transaction, or were the parties related to each other?What are the two analytical tools used in data analysis and comparison?Elements of Comparison Units of ComparisonWhat are the criteria for using the "matched pairs" technique?The appraiser must choose two sales in the market. One sale must contain the item for which the adjustment is being sought. The other must not contain that adjustment item.When is the "matched pairs" technique the most reliable?If there is only one difference present between the matched pairsIn our matched pairs' illustration, even though there is more than one difference in each matched pair, Comparable Sale 4 can still be paired with each of the others by doing what?First adjusting for the other differencesIn an actual sales analysis, why do adjustment calculations rarely work out precisely?The adjustment for one item of difference may already include a partial adjustment for another item of difference.For each property, there can be a range of prices (to apply to adjustments) that are considered reasonable for the applicable market.What is regression analysis?A technique that is used when more than one set of matched pairs is used to extract adjustment factorsHow can a market adjustment for the differences between a subject property and comparable sales be expressed?As a dollar amount As a percentageDollar adjustments are needed to complete which documents?The Uniform Residential Appraisal Report (URAR) form The Small Income Property Report form The Condominium-PUD Appraisal Report formTo arrive at the most accurate appraisal, the appraiser should do what?Try to make the fewest adjustment possible to the estimatePercentage adjustments are generally used to express what kinds of differences between the subject property and the comparables?Time adjustments Location Special conditionsPercentage adjustments can be converted to what other type of adjustment, if needed?Dollar adjustmentIf a subject property and a comparable property are equal, what type of adjustment is necessary?There is no adjustment required if the subject and comparable property are equalWhen an appraiser analyzes residential properties, what can be used to come up with a dollar adjustment for location of properties of similar value?DiscountingWhat is the sequence of adjustments recommended by the Appraisal Institute?1. Property rights conveyed 2. Financing terms 3. Conditions of sales 4. Market conditions 5. LocationA clear difference between the expression of adjustments in dollar figures versus percentages is seen when?The sequence adjustments are made to the appraisalDefine Reconciliation.Reconciliation by definition is the final resolution, the bringing together of the valuation methodology, to arrive at a supportable, final conclusion.Those comparable sales upon which the most weight is placed in the final reconciliation is based upon what?Those comparable sales whose value estimates required fewer and smaller adjustmentsWhich question is not a motivation-specific element in a home sale? Were both parties knowledgeable about the property and the market in which the sale took place? Did each party act without financial pressure? Is the home subject to HOA dues? Was the sale an "arms-length" transaction?Is the home subject to HOA dues?When carefully collected, analyzed, verified and reconciled, what does market data usually provide?How many sales must the appraiser choose to use the matched pair's technique?The best indication of market value for the subject propertyWhat approach is often the best indication of market value, provided there is information available about an adequate number of other homes that have been sold, listed or offered?The sales comparison approachIf a property is sold subject to a special assessment and comparable properties are not subject to the same special assessment what should an appraiser do?Make adjustments.Houses that are listed substantially above market value generallyremain unsold, no matter how long they are offered for sale.To arrive at the most accurate appraisal, the appraiser should try to makethe fewest adjustment possible to the estimate.When using dollar figures for adjustments, any sequence can be used becausethe dollar figures are constant and not dependent on any other variables in the appraisal.What principle states that when several commodities, products, or services offer or provide the same basic uses, then the one priced the lowest will be in the most demand, and consequently, receive the widest distribution?The principle of substitutionIf a subject property is 10% superior to a comparable property, the resulting percentage adjustment to the price of the comparable is plus10%.A property's market value estimate is best determined byby the appraiser's own judgment.The final value selected is a judgment made by the appraiser based onall the information available.What term describes the bringing together of the valuation methodology to arrive at a supportable, final conclusion?ReconciliationWhat type of analysis is used when more than one set of matched pairs is used to extract adjustment factors?RegressionWhich of the following is NOT an "unknown" sales variable? An individual's motivation Buyer's knowledge Market norm A specific sale's conditionMarket normIf an appraiser is using the technique of matched pairs, one sale must contain the item for which the adjustment is being sought and the other salemust not contain that adjustment item.When a comparable sale is superior to the subject property, what kind of an adjustment must be made?A minus (-) adjustment to the comparableWhat are two analytical tools used by appraisers?Elements of comparison and units of comparisonWhat adjustment in an appraisal reflects the difference in the real estate market between the time of the comparable sale and the current time?Market conditionsAccording to the Appraisal Institute, what is the last adjustment to be made in the sequence of adjustments in the sales comparison approach?LocationThe technique that is used when more than one set of matched pairs is used to extract adjustment factors is known as what?Regression analysisNo adjustment needs to be made ifthe subject and comparable are equal.Appraisers usually find that "ideal" comparablesare not the norm.How many sales must the appraiser choose to use the matched pair's technique?2Why should an appraiser make as few adjustments as possible?It creates the most accurate appraisal.What type of adjustments are generally used to express the differences between a subject property and a comparable sale?Percentage adjustmentsThe two analytical tools used by appraisers areelements of comparison and units of comparison.An appraiser must always personally inspect comparable information and confirm that information with the buyer, seller orbroker.A commonly used INDIRECT technique for adjusting the comparable is what?Estimate the cost new less depreciation of the item for which the adjustment is needed.Data collection for a sales comparison approach to value must beaccurate.According to the Appraisal Institute, which of the following adjustments should be made first in the sales comparison approach's sequence of adjustments?Property rights conveyedIn which of the following is the sequence of adjustments most important? Estimates Replacement costs Percentage adjustments Dollar adjustmentsPercentage adjustmentsWhat are the two different ways that a market adjustment for the differences between a subject property and comparable sales can be expressed?As a dollar amount or as a percentageWhen sequence adjustments are made to the appraisal, what type of adjustment translates the comparables' transaction price into its cash equivalent?Financing termsThe technique to extract the amount of the adjustment from the market is calledmatched pairs.The sales comparison approach to value is also called themarket approach.What are taxes that are levied by a specific taxing authority called?Special assessmentsMore sales and listings are usually analyzed than are used in the appraisal. What comparables are used in the appraisal report?The best comparablesA market study is made to find those comparable sales and listings that are what?Similar to the property being appraisedAppraisal practices require that appraisersuse verifiable market data to arrive at their conclusions.Buyers often base their value conclusions primarily on which of these? Closed listings Closed sales Expired listings Properties that are currently being offered for saleProperties that are currently being offered for saleWhat must an appraiser be when stating the relationship between the subject and comparables?ConsistentAppraisers must follow the accepted procedure of reviewing and judging each sale based on how it compares to thesubject property.The two ways in which a market adjustment for the differences between a subject property and comparable sales can be expressed are as percentages ordollar amounts.What is the order of the five steps in applying the sales comparison approach?1) Study the market, 2) collect and verify data, 3) analyze and compare comparables, 4) make an adjustment, 5) reconcile the newly adjusted prices on comparablesAfter the best comparable sales have been selected and each one is adjusted to give an indicated value of the appraised property, the indications must then bereconciled.What is the only technique acceptable to many sophisticated purchasers of appraisals?The technique of matched pairsWhen information is available on a sufficient number of comparable sales, offerings, and listings in the current market, the resulting pattern is the best indication of what?Market value for the subject propertyWhen an analysis of residential properties is made, what can one use to come up with a dollar adjustment for location of properties of similar value?DiscountingThe math equations, computer programs and other calculations an appraiser uses are meant tonarrow a range of possible numbersWhat are the two primary factors where calculations would rarely work in a matched pair's technique?The adjustment for one item of difference may already include a partial adjustment for another item of difference and that there can be a range of prices considered reasonable for the applicable market because buyers and sellers have different opinions of the value of each comparable itemWhat technique is the best to use to extract the amount of the adjustment from the market?Matched PairsPercentage adjustments are generally used to express the differences between a subject property and a comparable sale, especially for special conditions, location andtime adjustments.What technique is often used to takes into account the depreciation factor of a property?Depreciation FactorIf comparable home 1 has a 1 acre lot, a 1 car attached garage and is priced at $114,000 and comparable home 2 has a 1 acre lot, a 1 car attached garage but is near a service station and is priced at $105,000, what is the amount attributed to adverse influence of the location being near a service station?$9,000What is the income approach?The income approach is a valuation method used to estimate the value of income-producing real estate: commercial properties and investment properties.What principle of value is the basis for the income approach?AnticipationThere are several acceptable methods of calculating the income approach. Most of these acceptable methods fall into what three categories?Direct capitalization Gross income multiplier Discounted cash flowWhat are the five methods of direct capitalization?Contractor's Method Development Method Comparable Method Investment Method/Income Method Accounts Method/Profits MethodWhat are the five steps that make up the income approach?Step 1 -- Estimate potential gross income.Step 2 -- Estimate effective gross income.Step 3 -- Calculate the net operating income.Step 4 -- Select a capitalization rate.Step 5 -- Apply the capitalization rate.After estimating the property's annual potential gross income, then deducting an appropriate, market-based allowance for losses due to vacancies and collections, the remainder is termed what?The property's effective gross incomeWhat types of expenses are NOT considered operating expenses?Operating expenses do not include debt service, expenditures for capital improvements, or expenses not related to operation of the property.What is the definition of capitalization rate?The rate of the return on an investmentThe income capitalization formula can be converted to similar equations that solve for a property's cap rate or income. What are the three formulas?Income/Rate = Value Income/Value = Rate Value x Rate = IncomeWhat is the formula for determining the gross rent multiplier?Sales Price ÷ Gross Rent = Gross Rent MultiplierWhat is the formula for determining the gross income multiplier?Sales Price ÷ Gross Annual Income = Gross Income MultiplierUsing the information provided below, complete the appraisal using the income approach. Rent: $1,300/month, with no additional income and no vacancy loss Real estate taxes: $2,000 Insurance: $750. Repairs: $1,000 Assume a cap rate of 4.7%Income Scheduled rent ($1,300/month) 15,600 Additional Income 0 Potential Gross Annual Income 15,600 Less Vacancy Loss 0 Effective Gross Annual Income 15,600 Expenses Real Estate Taxes 2,000 Insurance 750 Repairs 1,000 Total Expenses: 3,750 Net Operating Income Effective Gross Operating Income 15,600 Less Total Expenses 3,750 Net Operating Income 11,850 Value Estimation (Cap Rate = 4.7%) Value ($11,850 ÷ .047) $252,128When is direct capitalization used?When a property's income is not expected to vary much over time.What is the first step to value in the income approach?Estimate potential gross income.Which direct capitalization method is used for most rent-producing commercial and residential property when the property's cash flow is projected to come from leasing the property?Investment/income methodPotential gross income minus an allowance for vacancy and credit losses equalseffective gross income.Which of the following is an advantage of using the income approach over other methods? The appraiser must use limiting assumptions. Necessary, relevant market information is easily available and accessible. It uses the capitalization technique to calculate the systematical component of risk. It uses a subjective cash flow allocation.It uses the capitalization technique to calculate the systematical component of risk.Effective gross income minus total operating expenses equalsnet operating income.The income capitalization approach, or income approach, is most effectively used for appraisingincome or rental properties.Why is the income capitalization method generally considered less effective than other methods for appraising single-family residences?There is often little market data to use in setting rents and cap rates for the analysis.When estimating potential gross income, scheduled rent is:the amount of rent the property will collect if fully leased at the current rental rates.Acceptable methods for completing direct capitalization include all of the following EXCEPT which? Comparable method and investment/income method Accounts profile method and development/residual methods The cost approach method Contractor's/cost methodThe cost approach method Comparable method Investment/income method Accounts/profits method Development/residual methods Contractor's/cost methodWhat is the equation to determine a property's capitalization rate?Net Income ÷ ValueWhen the income approach method is used for a single-family residence,the method is considered less effective than other appraisal approaches.Future cash flow dictates what?The present value of what a buyer is willing to pay for the propertyThe capitalization rate representsan investor's desired rate of return on capital invested in a property.A property is estimated to produce a net operating income of $1,000,000. Which of the following capitalization rates would produce the greatest estimated value for the property? 5% 6% 7% 8%5%What is the term given to the ratio of the monthly or yearly rent divided into the property's selling price?Gross Rent MultiplierGross income multiplier (GIM) is:is the ratio used to convert annual income into market value.The ratio to convert annual income into market value is calledgross income multiplier.The value of a property is determined by calculatingnet operating income ÷ capitalization rate.When calculating the effective gross income in the income approach, credit losses arethe result of tenants not paying rent.The simplest and most widely used form of capitalization isdirect capitalization.The income approach is only reliableif there is enough market data from which to draw the necessary information.The income approach to value is NOT used for which of the following property types? Apartment buildings Residential properties Commercial properties Industrial propertiesResidential propertiesWhich method of direct capitalization is only used to value bare land or to value properties immediately ready for development?Development methodWays to estimate value using capitalization include which of these? Market value less depreciation Gross potential income less expenses Direct capitalization and yield capitalization Site value plus improvementsDirect capitalization and yield capitalizationWhat types of properties is the income approach used to value?Commercial and investment propertiesWhich of the following is NOT a disadvantage of using the income approach? At times, relevant information is not available from internal reporting systems. It requires subjective cash flow allocation. The appraiser is forced to use limiting assumptions. It requires an objective cash flow allocation.It requires an objective cash flow allocation.What is the first step in creating a value estimate using the income approach?Estimate the property's annual potential gross income.Describe the two aspects of reconciliation reporting the results of an appraisal assignment.The first aspect is resolving the various results obtained within each approach to value into a single value; the second aspect is resolving the different results from the three approaches to value into a single range or value.What other purposes does reconciliation serve in the appraisal process besides arriving at a final value opinion?Reconciliation acts as a quality control process by revealing parts of the appraisal where more research and analysis are required. It also reveals factors that must be explained in the report.The intended outcome of the final reconciliation may be a range of values or a single dollar value known as what?The final value opinionList some of the general questions the appraiser is seeking to answer about the appraisal when carrying out the reconciliation procedure.Consistency of results with highest and best use Consistency of results with the type of value stated as the purpose Uniformity of assumptions about physical condition Utilization of all available data Conclusions meaningful and relevant to the intended use Appraisal solves client's problem or provides information for the solutionDescribe the three criteria for reconciliation that ensure that the final opinion of value is meaningful, defensible, and credible.Appropriateness of the appraisal approaches to the property type-- income approach for income properties, cost approach for special-use properties, etc. Accuracy of data, adjustments, and logic used in obtaining the final opinion—depreciation, cost data, income and expense projections, number and value of adjustments made. Quantity of evidence provided by each comparable or approach—sufficient to support the conclusions and final opinion.The single dollar amount opinion, called a point estimate, is a traditional form and is required for certain purposes. In property management, what purpose is it used for?Determining value-based rentsExplain the role that rounding of numbers plays in reconciliation.Rounding suggests the degree of accuracy represented by the final value opinion. The more significant digits, the greater the accuracy implied. Thus, an estimate rounded to $216,500 implies accuracy to within $500, while one rounded to $216,000 implies accuracy only to the nearest $1,000.In reporting a final opinion of value as a range of numbers, how is the width of the range significant?If the range is very narrow, a high degree of accuracy is implied; if the range is very wide, the opinion may be perceived as useless, or the client may see the upper and lower ends as a guaranteed maximum and minimum.There are three options in terms of written appraisal reports. Each must be prepared and prominently labeled under one of three categories. What are they?Self-contained appraisal report Summary appraisal report Restricted use appraisal reportThe valuation professional selects one of three appraisal reporting types depending on what four items?The purpose of the appraisal What party is using it Type of content required Level of information needed or requestedIn a self-contained appraisal report, appraisers must provide their clients and intended users what?With enough information to understand the rationale of their opinions and conclusionsExplain who would use the restricted use appraisal report and why?It is ideal for a business owner client who only wants an opinion of value to be used internally, requires minimal detail, and is the only client and intended userWhich of the following questions would an appraiser ask when reevaluating a land valuation approach? Does the market support the capitalization method used? Are there enough rental comparables? Are all cost estimates reliable? Are there enough comparable land sales?Are there enough comparable land sales?The intended outcome of the final reconciliation isthe final value opinion, which may be a range of values or a single dollar value.The bottom-line test for an appraisal's viability is whether the results aremeaningful, defensible and credible.In essence, reconciliation is an appraiser's form ofquality control.According to USPAP's Standards Rule 1-6, the underlying drivers for an appraisal's proper reconciliation arequality of data and relevance of methods used to derive value.Which of the following is NOT a general question an appraisal would ask when reevaluating an appraisal? Are the results of the approaches consistence with the conclusion of highest and best use? Is the same physical condition assumed in each of the three approaches? Does the appraisal solve the client's problem or provide the necessary information for the solution? Do market estimates support all expense projections?Do market estimates support all expense projections?The rounding of a point estimate suggeststhe degree of precision the appraiser has of the opinion value.In the re-evaluation activity of reconciliation, the appraiser will look at questions relevant to which of the following categories? Land valuation and the three valuation approaches Scope of work, data collection, and highest and best use Problem definition, comparable selection, and comparable adjustments Problem definition, scope of work and USPAP Ethics RuleLand valuation and the three valuation approachesWhat does the effective date establish in written appraisal reports?Whether the opinion is current, past, or prospectiveWhich appraisal report is suited for a client wanting an opinion with little detail for internal use?The Restricted Use ReportIn general, the validity of a value opinion is augmented or diminished bythe quantity of evidence that supports the conclusion.One characteristic of the Restricted Use Appraisal Report is thatit requires a higher level of confidentiality.A requirement of the Self-Contained Appraisal Report is that itpresents value assumptions, methods, conclusions, and supporting data.Resolving the differences of value indications is referred to as the process ofreconciliationDespite its size, the Restricted Use Appraisal Report must stillcontain sufficient information for the appraiser to be able to produce a summary appraisal report.The process of reconciliationmay reveal that more research and analysis are required to determine a value opinion.An appraisal's evidence must besufficient to support the value conclusion.The appropriateness of a valuation approach is primarily a function of which of the following? The appraiser's relative amount of data available The subject's location The intended use The property typeThe property typeWhich of the following factors does NOT indicate appraisal accuracy? Number of comparables Uniformity of patterns of market activity Size of property Number of adjustmentsSize of propertyConsidering all report types, if the appraiser feels that a report will be inadequate, she shouldwithdraw from the assignment.While the appraiser's experience and judgment play the ultimate role in deciding the most appropriate appraisal approach, which approach is typically used for non-rental residential homes?Sales Comparison ApproachThe criteria for an acceptable appraisal result isappropriate approaches, accurate data, and sufficient evidence.In reporting the final value figure(s), the point estimate is used whenthe appraisal is to determine value for tax purposes.Which of the following is NOT a required content component of a written appraisal report? Existing and highest and best use Scope of work Property rights being appraised Outline of the workfileOutline of the workfileA critical reevaluation question the appraiser considers in troubleshooting cost approach results iswhether the cost estimate data considered all costs.The valuation professional chooses the type of report based onthe purpose of the appraisal, the type of content required, what party will be using it, and level of information needed.One important question underlying a reconciliation iswhether the results contain sufficient supporting information.Why is a system of ethics particularly important for appraisers?Because of the role they play both in the real estate market and in the community at large, where they are looked to as value experts and financial consultantsWhat does professional due diligence involve?Basing conclusions on a correct reading of current market trends and other value influences and explaining those conclusions to consumersAn appraiser must determine an estimate of value by doing what three things?thoroughly analyzing current, relevant statistics deciding which factors carry the most weight using the appropriate valuation method establishing a value range from that investigation which the report's final figure reasonably falls intoWhat do Appraisal Standards Board (ASB) and the Appraisal Qualifications Board (AQB) do?The ASB maintains and amends USPAP on a regular basis while the AQB develops professional criteria for appraisers.List three things appraisers are prohibited from doing. (See page 9 for other correct answers.)Making predetermined estimates Misrepresenting or intending to misrepresent their findings Misconstruing their role as a professional appraiserWhat is a key part of remaining unbiased?Full client disclosure about the appraiser's personal or professional interest in the property being assessed.What are appraisers required to reveal?The fact that they are compensated professionals; receiving a commission, fee or other form of consideration for their services.With regard to advertising, an appraiser may not do what?Guarantee results or publicize a professional designation that he or she does not rightfully possessWhat is true about confidential information and peer reviews?If a legitimate professional appraisal organization is investigating a matter between its members, confidential information may have to be divulged during the proceedings in order for the organization to effectively resolve the issue.When might an appraiser be prevented from disclosing his or her prior relationship with a client?If it's specified in their contract with that clientHow long must an appraiser keep a record of an appraisal transaction?For whichever is the longer of the following periods: Five years after preparation. Two years after the final ruling in a court case in which the appraiser testified about the assessment.To whom must appraisers give access to their records?Parties determined by law State agencies Peer review committees Fellow professionals with workfile obligations related to an assignmentOnly one of the following valuation specialists is complying with the USPAP Ethics Rule. Which one? Joe Value publicly advertises his availability as a licensed appraiser. Tim Prazer tells a potential client in advance that her property will most likely fall into a certain value range. Luc Value, who works for a corporation and not independently, uses the company signature instead of his own on the appraisal report. J.T. Werth uses his client's positive comments in an advertisement without obtaining his consent.Joe Value publicly advertises his availability as a licensed appraiser.What is the goal of the USPAP Ethics Rule?To promote and preserve the public trust inherent in appraisal practice through high standards of professional ethicsConfidentiality is impacted by legitimate professional organization procedures, also calleda peer review committee.USPAP-compliant appraisers must disclose to customers if they assessed the same subject property within the past3 yearsAn appraiser's experience is gained through education, enhanced through continual training, and shaped byethical principles.Since the real estate market is shaped by a variety of different factors, appraisers must know how tocorrectly describe, examine, and draw conclusions from the market.Appraiser George is hired by a bank to appraise a property. The bank instructs George that he will be paid $1200 for finding a value that supports the bank's desire to grant a $200,000 mortgage loan. What should George do?Decline the assignment.Which valuation professionals are legally required to follow the USPAP Ethics Rule?All licensed appraisers whose states have adopted USPAP.When appraisers abandon objectivity or have inadequate training the result may betoo many homeowners have upside down mortgages.Confidentiality is a key component of appraisal ethics. If legal procedures occur, the appraisermust follow the law and disclose confidential information, if needed.Which of the following topics is NOT addressed in the management section of the USPAP Ethics Rule? Compensation Performance of duties Advertising Signature usePerformance of dutiesWhich of the following statements about the appraiser-customer relationship as defined by the USPAP Ethics Rule is true? If another appraiser aids in the valuation of the customer's property, two separate reports must be issued. The appraiser's first obligation is loyalty to his customer. The appraiser may make his professional relationship with the client public without prior consent. The appraiser does not act as the client's agent.The appraiser does not act as the client's agent.USPAP considers that an appraiser's disclosable interest in the subject property pertains only toownership, property management, brokerage agency and past appraisals of the same real estate.What do we call the idea that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity?Time value of moneyList three other risk factors an investor must consider besides financial risk. (See page 5 for other correct answers.)Business risk Inflation risk Management riskWhat is liquidity?A term that refers to an asset's ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value.How is financial leverage created?Financial leverage is created by mixing borrowed funds with equity (the cash contributed by the investor).What is probably the riskiest of all property investments?Investment in unimproved or undeveloped propertyTypically how many floors will you find in low-, mid- and high-rise office buildings?Low-rise - Usually 1 to 3 floors Mid-rise - 4 to 15 stories High-rise - Normally over 15 stories tallList two reasons investors purchase residential property.To keep for the long term benefits To flip in hopes of a quick profitUnder what circumstances could purchasing a home to flip be a problem?If the investor cannot find a buyer for it who is willing to pay more than the amount investedWhy did real estate experts advise investors not to invest in single-family homes?Because they believed that single-family homes provided a poor return on the investmentUnder the like-kind definition, a rental home can be exchanged for what type of property?Another rental home, multiple units, an apartment complex, commercial property, or landList three advantages of investing in a single-family home. (See pages 18 and 19 for other correct answers.)There is usually a large selection of properties available from which to choose. Management of a single residence can be easier than with other types of income properties. The investment is more liquid than other kinds of property.List three disadvantages of investing in a single-family home. (See pages 20 and 21 for other correct answers.)Most single-family homes generate a negative cash flow for at least the first few years. When home is vacant, the investor loses all of the rent until he or she is able to get a new tenant. Tax benefits are not as numerous as they once were.If a buyer wanted to purchase a vacation home as an investment, what would be considered an important criterion in choosing the home?It should be close to a popular recreational interest, such as a ski resort or a lake, or be in a year-round warm, sunny location.List two advantages of purchasing a condominium as an investment.Ease of rental Services provided by the association do not have to be provided by the ownerWhat is the most important consideration when deciding to purchase a fixer-upper as an investment?What the demand for the property will be when it's ready for resale.List two advantages and two disadvantages of investing in a two-to-four unit dwelling. (See pages 29, 30 and 31 for other correct answers.)Advantages Properties of this size can be found in most communities. Tenants often pay all of their own utilities and do repairs. Disadvantages Fewer of these types of buildings are being newly built, so they are becoming harder to find. Due to the growing scarcity, it is becoming more expensive to purchase units that already exist.When would it be easy for an investor to obtain an apartment house at an extremely fair price?If the supply of apartment homes is greater than the demand.What happens when new construction stops?The demand for apartment units increases and the vacancy rate declines.Why is an apartment investment generally safer than other real estate investments?Because apartment housing is always in constant demandWhat is the result if an inexperienced investor does not understand the level of maintenance costs and fails to set aside reserves for repairs and replacements?This will usually result in a negative cash flow.What is mixed-use development?The practice of allowing more than one type of use in a building or set of buildings.What is the main tenant in a shopping center called?Anchor tenantWhat is the difference between a warehouse property and a manufacturing property?A warehouse property focuses on storage and distribution of goods. Manufacturing buildings are large facilities designed to accommodate the equipment for various manufacturing processes.Name two advantages of investing in commercial property. (See page 47 for other correct answers.)Unlike apartment properties, there is very little risk of any kind of rent control. Business tenants are generally easier to deal with than apartment house tenants.Which of the following is NOT an advantage of investing in commercial properties? Most commercial leases contain either a cost-of-living increase or a percentage lease. There is very little risk of any kind of rent control with commercial properties. During times when many buildings are being built, the market can become flooded with unused commercial space. That if a property has a long-term lease with a strong tenant, the likelihood of a steady income is strong.During times when many buildings are being built, the market can become flooded with unused commercial space.When purchasing a fixer-upper for resale, generally the worse a property looksthe better the deal an investor can make.Investments in land are notdepreciable.What type of property found in apartment buildings can be written off on a 200% declining balance ranging from 5 to 7 years?Personal property_________ is NOT a disadvantage of investing in a single-family home. Economy of operations Repairs Scarcity VacancyScarcityThe definition of residential properties isdwelling places for individuals or families.Which of the following is NOT a way investors can realize profits in real estate? Tax benefits Appreciation Inflation Positive cash flowInflationA property purchased to flip isone that is intended to be resold as soon as possible.According to what principle will a person not pay more for a property than he or she would pay for one that is comparable in utility and desirability?The principle of substitutionWhat is a common reason why inexperienced investors of apartment buildings sometimes experience negative cash flow problems?They usually do not understand the level of maintenance costs to expect and fail to set aside reserves for repairs and replacements.A mixed-use district will most commonly be in what area?DowntownWhat type of property investment is more liquid than any other?Single-family dwellingsWhich type of retail center is anchored by three or more full-line department stores?Mega mallWhat is an advantage to investing in a two-to-four unit dwelling?An investor can occupy one of the units.What is the concept of using other people's money for investing?LeverageWhat is the practice of allowing more than one type of use in a building or set of buildings?Mixed-use developmentWhat does the principle of contribution mean in regards to making improvements on an investment property?In order for an improvement to be economically feasible, it must increase the value of the property by more than what the improvement actually cost.The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity is based on which of these?Time value of moneyWhat type of homes are characterized as detached units found in subdivisions, neighborhoods or in cluster home developments?Single family homesThere are a number of advantages to investing in a single-family dwelling, includinga larger selection of properties available from which to choose.The primary advantage/s for investing in single-family homes is/are?They are the most liquid real estate asset and easiest to rent.Of the following, which one is NOT a disadvantage of investing in a single-family home? Economy of operations Larger homes yield less rent per square foot compared to smaller homes or apartment buildings. Negative cash flow for first few years Many tenants rent unfurnished homes.Many tenants rent unfurnished homes.How did risk management develop into a formal discipline?From the insurance industryWhat are the three ways of controlling loss?Avoid LossLimit LossReduce LossWhat are the four main reasons that investors invest their equity capital?Return rateProperty appreciationDiversificationTax benefitsWhat is often said about development in the real estate industry?Because the real estate industry is cyclical, the real estate industry is often said to have a tendency toward cycles of overdevelopment.If investor Jim is skilled at predicting when to buy or sell property based on property types and economic conditions, what investment strategy would he be most likely to use?Market timingWhat is arbitrage investing?The investment strategy based on the ability of an investor to recognize the differences in prices that buyers are willing to pay for the same real estate investments that are located in different markets.Define financial leverage.The benefits that may result for an investor who borrows money at a rate of interest lower than the expected rate of return on the total funds he or she invested in the property.What kind of risk results from a slow real estate market with few buyers and sellers?Liquidity riskList three risk management procedures. (See page 23 for other correct answers.)Diversification Property management Shifting risk to insurance companiesUse of a triple-net lease is an example of which risk management procedure?Shifting risk to tenantsList two types of hedging mechanisms.Purchase options Interim financing commitmentsWhen investors hold diversified portfolios, why can they expect a more stable and predictable pattern of earnings?Because issues that have an impact on profitability and market value do not influence all properties in the same wayRent control would be what form of risk?LegislativeWhat type of arrangement involves a promoter who arranges and manages an enterprise for a fee plus a percentage of ownership?A syndication arrangementWhich of the following is NOT a real estate investment strategy? Strategy as to Tenants Strategy as to Size of Property Value Investing Pedantic InvestingPedantic InvestingInvestor Al bought a number of row houses and repurposed them into town houses. He has sold the units quickly and recognized a sizeable profit. The investment strategy is known asturnaroundWhat style of investing uses economic and demographic research to come to the belief that, over the long term, one property type will outperform other property types?Property Sector InvestingLoss can be eithermonetary or non-monetary.Which of the following is NOT a reason an investor would combine his or her own money with a loan to purchase an investment property? The investor may not have enough equity capital to buy the property. The investor wants to decrease inflation risk. The investor may choose to borrow to take advantage of the tax deductibility of mortgage interest. The investor may use debt to realize the potential benefits related to financial leverage.The investor wants to decrease inflation risk.Real estate tends to bea highly leveraged business.Which of the following is NOT a risk reduction strategy? Reducing hazard insurance coverage Reducing risk through careful selection Diversification Market researchReducing hazard insurance coverageWhich kind of risk occurs when the real estate market is slow with not many buyers, sellers or transactions?LiquidityWhich type of risk is based on a manager's competence?Management riskWhich style depends heavily on market research and the ability of an investor to understand changes in the economic environment and its effect on all types of real estate?Growth InvestingWhich of the following is not a reason people invest? Interest rate Tax benefits Appreciation DiversificationInterest rateWhich of the following statements best describes risk management? The process of dealing with market trends The act of establishing a plan of action for future growth Dealing with net profits to minimize tax liabilities The process of analyzing exposure to risk and determining how to best manage such exposureThe process of analyzing exposure to risk and determining how to best manage such exposureInstalling sprinklers in a factory to control the effects of a fire is exercising what risk control technique? Avoiding Limiting Reducing AcceptingReducingReal estate investor Rick owns a number of warehouses that have shown a good return on investment. However, a major client has just moved their shipping center to another state. What type of risk is Rick dealing with due to a market change?BusinessName three factors that affect net operating incomeMarket rent Vacancy ExpensesIn addition to the demographic makeup of the population and the median income of families in a particular area, what will the market rents for retail space depend on?The percentage of income families in the area usually spend on the purchase of goods and services from the retail companies in their area.List two examples of variable expenses. (See screen 7 for other correct answers.)Management fees Utility expensesList three examples of fixed expenses. (See screen 7 for other correct answers.)Real estate taxes Insurance premiums AdvertisingList five items normally contained in a lease. (See screen 23 for more correct answers.)The date of the agreement The starting date and the length of the lease The parties to the lease The description of the leased space A description of how the property can be usedWhat is a step-up lease?A lease containing a provision that spells out how the rent will increase periodically and gives the specific amounts and specific dates of those increases.What is base rent?The initial rent that a tenant pays under a lease contract which is usually a precise dollar amountWhat is the percentage method of calculating rent based on?The tenant's sales volumeDescribe the difference between a gross lease and a net lease.A gross lease is defined as one in which the owner pays all of the operating expenses and the tenant has no responsibility for these expenses. A net lease is defined as one in which the tenants pay the operating expenses.During times when the market is soft, what might an owner offer as a means of attracting tenants to the building?An equity interest in the buildingUnder what conditions is a lease renewal option valuable?If the renewal rate at the time of the expiration and renewal is below the current market rates at that timeWhy might tenants leasing industrial property prefer to have very long-term leases?They might have this preference if they are installing expensive equipment that would be very difficult to move.Which of the following is true about market rents of real estate investment properties? Market rents usually remain stable for the life of the real estate investment. Market rents are usually easy to predict and avoid. An investor does not need to be concerned with market rents since any fluctuations will even out over the life of the investment. Unpredictable changes in market rents can significantly affect the amount of rental income a property receives over time.Unpredictable changes in market rents can significantly affect the amount of rental income a property receives over time.Landlord Mel will pay up to $3,000 each year on improvements that a renter chooses to make to the property. This practice is known as offeringlease concessions.Under what agreement does the owner pay all of the operating expenses and the tenant has no responsibility for these expenses?Gross LeaseWhat information can a commercial broker provide to help the investor figure out the rate-of-return on a property?Local capitalization ratesMost industrial leases arenet leases.Most investors use a vacancy allowance of3-6%A net lease is also called afull-service lease.Which type of method for calculating rent is based partially on the tenant's volume of sales?Percentage rentWhat type of lease clause spells out how rent will increase periodically?Step-up provisionTypically, when evaluating a lease proposal, the owner does NOT consider the following information? Financial statements Credit ratings Reports on the firm or the industry Lease release dataLease release dataWhich of the following information would NOT be found in a typical lease agreement? A copy of the warranty deed The method for handling delinquent payments Tenant relocation options The description of the leased spaceA copy of the warranty deedGross scheduled income isthe total amount of rent for all units in a property.Once an investor has estimated the market rent for a property, its vacancy rate and operating expenses, he or she can calculatethe potential net operating income.With what kind of lease does the owner pay all of the operating expenses?GrossWhy is underwriting the lease a critical aspect of risk assessment?It ultimately affects the cash flow produced by a property.When calculating expense percentages, the expense amounts are divided by the GOI then multiplied by100What two factors determine the market value of an investment property?The NOI The capitalization (cap) rateWhat is the definition of before-tax cash flow?The measure of the cash received after the net operating income has been calculated and any mortgage-related expenses or capital expenditures have been paid, but before taxes are taken into considerationWhat is debt service?The mortgage expense for the property, which is the total loan payment, including both interest and principalHow do capital expenditures and repairs differ?Capital expenditures are any improvement or addition to a property that has a useful life of more than one year and will likely prolong the life of the property. Repairs are maintenance expenses that are accounted for in the operating expense section of the income statement when calculating the NOI.What deductions are allowed when computing taxable income?Interest portion of the mortgage loan payments Depreciation on the property itself Depreciation on any capital additions made to the property AmortizationWhat is the period of years for depreciating residential and nonresidential investment properties?An investor can depreciate residential investment property over a period of 27.5 years. The investor can depreciate nonresidential property over a period of 39 years.How do you calculate an investor's tax liability?By multiplying the investor's taxable income by his or her marginal tax bracketHow do you derive the after-tax cash flow?By subtracting the tax liability from before-tax cash flowWhat is a tax shelter?A tax shelter is any investment designed to reduce or avoid income taxes.How does an operating statement differ from a typical income statement?Unlike at typical income statement which shows operating revenues when they are earned and operating expenses when they are incurred, a real estate operating statement usually presents cash inflows and outflows from operations and is broadened to include non-operating cash flows, such as those that come from debt service, income taxes, and capital expenditures.What is gross scheduled income?The amount of revenue a property would generate if it had no vacancies.Investor Alice has a property with a net operating income of $75,000. Her BTCF is $45,100 and her tax liability is $11,477. What is Alice's ATCF?$33,623Non-cash losses can be deducted from income to reduce the investor'stax liability.What describes any improvement or addition to a property that has a useful life of more than one year and will likely prolong the life of the property?Capital expendituresInvestor Tom has a property with a net operating income of $52,000. His monthly mortgage interest is $1600. The property depreciation is $600 per month. He made no capital improvement and he can deduct $200 for the points he paid on his loan. The interest on the bank accounts associated with the investment property is $150. What is Tom's taxable income?$25,550What is the term that describes when the gross scheduled income amount is adjusted to reflect losses from vacancies or uncollected rents?Effective rental incomeWhat refers to the proceeds of financing that the investor might get at a later time?Loan proceedsAlice's taxable income is $34,780 and her marginal tax bracket is 33%. What is Alice's tax liability?$11,477An investor can depreciate residential investment property over a period of27.5 years.An investor can depreciate residential and nonresidential investment properties over what period of years?27.5 years for residential and 39 years for nonresidential propertyWhat describes all cash expenditures that are needed to maintain and operate a property?Operating expensesOne way to forecast the future benefit of a property is by looking atits past operating history.Investor Frank has a taxable income of $106,060 and his marginal tax bracket is 33%. What is Frank's tax liability?$34,999.80Tom's taxable income is $25,550 and his marginal tax bracket is 28%. What is Tom's tax liability?$7,154 Tax liability is calculated by multiplying the investor's taxable income by his or her marginal tax bracket. Therefore, $25,550 X 28% = $7,154The difference between the gross operating income and the operating expenses is calledthe net operating income.After-tax cash flow is the before-tax cash flow minus thetax liability.List some of the applications of time value of money concepts to analyzing commercial properties.Comparing lease proposals Valuing expense items Comparing lease vs. own options Determining a property price or value Valuing a leasehold Measuring investment results Projecting incomeHow is it that a future dollar amount is "worth" more or less than the same amount in present dollars?A future amount includes a portion attributable to earnings from interest that could have been earned on a present amount. If the interest contribution is removed from the future amount, the "actual" value of the future amount is revealed to be less than that of the present amount. Also, money loses value over time to inflation and gains value when it earns interest.Describe the compounding process.An interest rate is applied to an initial present amount. The interest is added to the original amount and the interest rate is applied again to the new total. The process is repeated for each payment period over the entire holding periodDescribe the discounting process.An interest rate (the discount rate) is applied to a future amount to reduce it to a present amount. The process is repeated for each payment period of the holding period.Where does the analyst get the discount rate to use in discounting?Investors typically have an interest rate that they want to use, based on consideration of other interest and lending rates, cost of opportunity, cost of capital, required returns, acceptable risk, inflation, and competing investments.What is the difference between discounting a single future amount and discounting a stream of cash flows?Discounting a cash flow stream is simply discounting each individual cash flow and totaling all the present values.Why is it better to receive a certain cash flow next year than five years from now? Conversely, why is it better to spend a certain amount five years from now than next year?The closer the cash flow is to the present, the closer it is to its present value, and hence the larger it is. Receive as soon as possible, spend as late as possible.How does Net Present Value differ from Present Value?Present value does not include the cost of acquiring the investment or the potential reversionary value from selling it in the future. Net Present Value includes both of these in the cash flow streams to be discounted.How is the average annual gain of an investment calculated?The NPV is divided by the initial investment amount to reveal the total gain as a percentage; this total gain is then divided by the number of years in the holding period to get the annual average.Describe the factors that create the differences in income generated by the Maeve Apartment and Kinza Arms Apartment buildings in the comparison example.The income differences come from the different number of rental units of various sizes, the different rental rates, the different vacancy and loss rates, and the different incomes received from non-rental sources. In addition, the rate of annual rent escalation for the Kinza is twice that of the Maeve.Describe the factors that account for the differences in the operating expenses of the two buildings.The buildings differ in terms of repair and maintenance profiles (the Kinza is lower), utilities profiles, and the profiles for other expenses; these lead to a difference in the profile for total operating expenses, In addition, the rate of escalation for property taxes in the Kinza is double that of the Maeve.Which building turned out to have a higher annual average gain on the investment?The Maeve yielded 8.2% to The Kinza's 7.2%.Which factors contributed most to the fact that The Maeve had a higher average gain?The Maeve's higher rent per unit and slower cost escalations.Bonus question: What would happen to the NPV and average return of either investment if the initial cost of acquisition had been lower than the amount quoted?The NPV and average gain would increase. This is because the NOI cash flows would remain the same, while the difference between the proceeds from sale and the initial cost would increase.Because the Kinza Arms was larger than The Maeve in the apartment building comparison,it had lower operating costs per unit.A commercial property is purchased for $250,000, creates NOI of $20,000 each year for 3 years, and is sold after year 3 for net proceeds of $300,000. Which of the following represents the correct cash flow stream (reading earlier to later, left to right)-$250K, $20K, $20K, $320KHow does calculating the net present value help when evaluating lease proposals?It converts all the terms to cash flow streams and discounts them to the present so they can be compared in today's dollars.Amounts paid or received in the future are worthless than their face amounts in today's dollars.A dollar in the future is worth less than a dollar today becausea smaller amount could be invested today and grow to become the future dollar.What was the final measure used to compare the two apartment properties?Average annual gainBecause there was no debt service in either of the buildings in the apartment comparison, the before-tax cash flows used for discounting were the same asnet operating income.What is the affect on present value of using a lower rather than a higher discount rate?The lower rate yields a higher present value.For which of the following situations would time value of money calculations be necessary?Comparing lease vs. own alternativesWhat two points regarding cash flow are important to remember when discounting cash flow streams over time?The timing and direction of flowThe present value of a stream of cash flows is equal tothe sum of the present values of each single cash flow.If an investment is purchased for $100, creates income of $10 each year for 3 years, and is sold after year 3 for net proceeds of $115, which of the following represents the correct cash flow stream (reading earlier to later, left to right)?-$100, $10, $10, $125What is the two-step process for estimating current operation costs?Identify comparable properties. Compare data to published sources.What is functional efficiency?An assessment of how well a property does the job it is supposed to doWhat is physical durability?A calculation of the building's remaining physical life, which is based on how well the building was originally designed coupled with how well it has been maintained over its life.The desirability of a location is dependent on its ability to do what?To minimize the transfer costs associated with the businessWhat does a payback period refer to?The period of time required to recoup the funds expended in an investment, or to reach the break-even pointWhat is the cash-on-cash return?The ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. Cash-on-cash return is also known as equity dividend rate.What do income multipliers do?Express the relationship between price and either gross or net incomeWhy would an investor choose to invest in a property with a high operating ratio?The investor would make this choice with the intention of having the ratio reduced by good management, which would increase the indicated value of the property.What does a debt coverage ratio measure?The investor's ability to pay the property's monthly mortgage payments from the cash generated from renting the propertyWhat is a capitalization rate designed to do?To reflect the recapture rate of an investor's original investment over the economic life of the investment to give that investor an acceptable rate of return on his or her investment.What is the benefit of using the capitalization rate method?It uses NOI rather than effective income, making it a good tool to compare a property's current performance to that of other similar properties.How does a pro forma income statement differ from an historical income statement?It projects the future rather than tracks the past.What is an assessment of how well a property does the job it is supposed to do?Functional efficiencyLenders typically want to see a debt coverage ratio of1.20 or better.What do appraisers use to estimate the value of properties that produce income usually from rent paid on leases?The income approachPublished sources of information on operating expenses for various propertiescan be valuable but are not specific enough to be the main source of information.Cash-on-cash return is also known asthe equity dividend rate.What tool emphasizes the relationship between a property's price and its gross income?Gross income multiplierOne of the simplest measures to forecast investment success that determines the time required to recoup investment expenditures isthe payback period.The two crucial physical traits that affect a property's ability to stay competitive arefunctional efficiency and physical durability.What type of statement is similar to a historical income statement except it projects the future rather than tracks the past?A pro forma income statementWhat do analysts use to determine the reasonableness of operating results that have been reported or forecast to help make decisions about purchasing or selling investment property?RatiosWarehouses are evaluated based on modern storage needs andadvances in transportation technology.The activity at one location can generate movement of people and things which results in an expense that is calledtransfer costs.What is a property's initial tax basis?Everything of value that was given in exchange for the property, including any commissions, legal fees, title insurance and other items that the purchaser had to pay to complete the purchase that are not deductible as a current operating expense.Define depreciation allowance.An amount an investor can deduct from his or her taxable income to recover some of his or her investment capital.Glenda purchased a nonresidential building in June 2004. Her initial tax basis on the building is $480,500. What is her monthly depreciation allowance?$480,500 ÷ (12 X 39) = $480,500 ÷ 468 = $1,026.71 (Remember: Nonresidential buildings have a cost recovery period of 39 years.)What kind of circumstance would decrease the tax basis of a property and what type of circumstance would increase the basis?Damage to the property would result in a decrease in the tax basis, while money spent to increase the property's value or useful life would increase the tax basis.What is the most important consideration when choosing an investment ownership type?Maintaining decision-making control over the operationsUnder what circumstances would the joint tenancy form of ownership be a bad idea?Because of the right of survivorship, joint tenancy is not a good idea unless the other joint tenant or tenants are people to whom the investor intended to leave the property to anyway.List two advantages of corporate ownership. (See page 16 for other correct answers.)Limited shareholder liability LiquidityWhat types of ownership gives investors no personal liability, but also avoids the double taxation found with corporations?Limited partnershipWhen is the interest on money borrowed for rental real estate usually deductible?In the taxable year in which it is paidWhat is a property's equity?The difference between the market value of the property and the remaining balance on the mortgage loan.Explain the difference between a tax deduction and a tax credit.A tax deduction reduces a person's taxable income. A tax credit reduces the actual tax liability dollar for dollar, after the tax due amount has been computed.What does the Foreign Investment Real Property Tax Act of 1980 require?The act requires that any person who purchases property from a seller who is not a US citizen must withhold and send to the IRS 10% of the gross sales price.Why might an investor choose to refinance rather than sell an investment property?Refinancing would allow the investor to increase financial leverage. Refinancing at a higher loan-to-current-value ratio could give the investor extra funds to invest.Explain the difference between realized and recognized gains or losses.A gain or loss is realized at the time the property or asset is sold. A recognized gain or loss is the amount incurred that must be reported on income taxes for a specific year (either the year of the transaction or later) and is determined by how the transaction is structured.Which kinds of assets are considered Section 1231 assets and which are not?Assets used in a trade or business are Section 1231 assets. Assets held for investments or personal use are not Section 1231 assets.What is the potential important advantage to a seller who uses the installment sales method when selling a property?The seller may be able to defer the taxes on the gain until he or she is in a lower tax bracket.What is the definition of a like-kind exchange?One property can be exchanged for another property regardless of the property type, as long as it is held as an investment or for use in a trade or business.List three kinds of property eligible for like-kind exchange. (See page 41 for other correct answers.)Commercial property Industrial property Leaseholds greater than 30 yearsWhat is boot and is it taxable?In a like-kind exchange, any cash or relief one party receives in addition to the actual property is called boot. The person who receives the boot has a net gain and must pay taxes on it.What are the two critical timelines that apply to 1031 exchanges?The identification period, during which the party selling a property must identify other replacement properties that he or she proposes or wishes to buy. This period is scheduled as exactly 45 days from the day of selling the relinquished property. The exchange period, within which a person who has sold the relinquished property must receive the replacement property. This period ends at exactly 180 days after the date on which the person transfers the relinquished property or the due date for the person's tax return for the taxable year in which the transfer of the relinquished property took place.What term describes any cash or relief one party receives in addition to the actual property?A bootThe owners of corporations who choose to have the corporation's income be taxable directly to the shareholders are calledS corporations.Eligibility for depreciation allowance is determined bythe intent to produce income.How long does a property have to be held for it to be considered a "long-lived" asset?12 monthsWhat is the critical period during which the party selling a property must identify other replacement properties that he or she proposes to buy?The identification periodIf more than one investor takes an equity position in a property it is calledco-tenancy arrangement.Tax shelter benefits have been significantly reduced by legislation since1986An important factor that increases the likelihood of an investor entering an investment with others isthe ability to quickly liquidate whenever the investor chooses.What describes when the exchange of relinquished property for replacement property occurs at the same time?Simultaneous exchangeIf an investor owns a property for less than 12 months of a specific taxable year, the investor takes the depreciation allowance foronly the number of months during that year that he or she owned the property.What is the recovery period for nonresidential buildings purchased after May 12, 1993?39 yearsA property that is held for productive use in a trade or business can be exchanged forlike-kind property.While a gain or loss is realized at the time a property or asset is sold, what determines when the gain or loss is recognized and incurred for tax purposes?How the transaction is structured How the transaction is structured actually determines whether or not the gain or loss is recognized and incurred for income tax purposes in the year of the transaction.Real estate rental income and expense aresometimes passive.Realized gain may be treated as ordinary income or asa capital gain.When investors contribute funds to an investment but they don't want to be involved in the day-to-day operations it is calleda limited partnership.The initial basis in property that is purchased iswhat it cost to make the purchase.The chief consideration when choosing an ownership type is the importance ofmaintaining decision-making control over operational matters.What are the potential benefits of seller financing over a conventional lender loan?Lower interest rates Longer loan termsHow is an installment land contract different from other types of financing?With this financing arrangement, the seller keeps title and sometimes keeps possession and use of the land as well. After all the payments have been made, the seller transfers ownership of the property to the buyer.What is the advantage of using an option to obtain property?A developer who options land does not incur any holding costs, such as taxes, insurance, interest and maintenance, until he or she exercises the option. If the economy weakens or the developer believes that the development of the parcel is not feasible, he or she can simply decline to exercise the option.In what situations might the entity that develops the land be different from the entity that does the building on the land?In the single-family residential home market, where a land company will subdivide large pieces of land and sell packages of lots to individual builders. In industrial parks, where many of the users have special needs that will require custom-designed buildings.How do construction loans differ from regular financing on an existing structure?A construction loan is a short-term, interim, or temporary loan usually lasting from 9 to 12 months for a single-family home and 18 to 24 months for a more major project such as an apartment building.What are the two basic kinds of construction loan?A combination loan, which combines a construction loan with a permanent take-out mortgage and requires only one loan closing. An interim, short-term, straight construction loan, which involves the financing of the construction phase only.When does a construction loan originate?Before construction beginsBefore deciding to do a construction loan, what things will the lender consider?Plans and specifications Breakdown of costs Contract Repayment plan Financial informationWhat must a builder-borrower submit with a loan application?All the necessary accompanying data and documents, including the plans and specifications, the estimated cost for the proposed project, the construction contract, the credit report, and a financial statement of the borrower and the builder, if there are two separate parties involved.What is the major distinguishing characteristic of the construction loan over other real estate loans?A disbursement system for releasing money as the construction progresses according to a predetermined scheduleHow are the payments on a construction loan disbursed?Lenders can disburse funds using the draw method, the percentage-of-progress system (which is a type of draw), the voucher method, or a builder's control service.What is a take-out commitment?A promise by the permanent lender that if certain conditions are met, the lender will issue a permanent loan to the borrower once the construction is completed in a satisfactory manner.What is a subordination clause and what must it specify to be enforceable?An agreement to reduce the priority of an existing loan to allow a new future loan to take a higher priority. To be enforceable, a subordination clause must specify the maximum amount, the maximum rate of interest and the loan repayment terms.What is a rental achievement clause?A clause that requires the developer-borrower to pre-lease a certain amount of space in the building. To meet this contingency, the developer will give the lender a certified rent roll that specifies who the tenants will be and which space they will be leasing, the length of each lease and the annual rent each of the tenants will be paying.Under what circumstances can a mechanic's lien be placed on a property?If the builder does not complete the project or if the job is completed and the builder does not pay those suppliers or contractors who worked on the project.What is a gap commitment in commercial financing?It is a commitment from another lender that guarantees that the developer will have access to the difference between the floor loan and the upper level of the permanent loan if the developer does not reach his or her rental goals.What types of property development is it common for the land development phase to be done by a separate business entity who then sells the improved parcels to other parties to build?Single-family homes and industrial parksBuilder Jim will receive a payment of $60,000 when the foundation, rough plumbing, subfloor, and framing are completed. What type of payment schedule is Builder Jim on?Percentage-of-Progress ScheduleA building loan payout system calls for the establishment of aLIP (loans in progress) account.Which of the following is not a soft cost of construction? Profit Supervision Grading OverheadGradingWhich aspect of seller financing might be attractive to land developers?Lower front-end feesA take-out commitment is promise by the lender thatif certain criteria and conditions are met, the lender will provide a permanent loan once construction is complete.What kind of disbursement system is used when construction funds are dispersed upon presentation of a receipted bill by a contractor?VoucherConstruction loans are typically made bylocal financial institutions such as banks and credit unions.Why has seller financing become so popular on undeveloped land?Conventional lenders are hesitant to lend money on raw land.Prior to the release of funds for a building project, a lender wouldanalyze rental and expense trends.When a builder decides to do a short-term, straight construction loan and then a separate take-out mortgage,the builder will likely have two lenders and two sets of loan documents.Installment land contractsinvolve periodic payments of principal and interest to repay the purchase price over the contract timeframe.What are the two sources for construction loans?A line of credit and a building loanWhat type of payment system allows for payments to be made at stages in the construction process?Draw System