Chapter 7 Three Approaches to Value Flashcards

Chapter 7 Three Approaches to Value Flashcards variable expensesexpenses that change from month to month The sales comparison approach is based upon which of the following appraisal principles?Substitution CBSComparison Better Subtractif sales price is more desirable than that of the comp, subtract the value of that feature from the sale price of the comp Which appraisal approach is the best reflection of market value?Sales comparison approach Curable Functional ObsolescenceAn element of depreciation; a curable defect caused by a flaw in the structure, materials, or design, which can be practically and economically corrected.Which combination of property type and appraisal method is most appropriate in estimating value?Raw land and market approach Under the cost approach, an appraiser has calculated the current replacement cost (new) for a structure that is 15 years old. What is the next factor an appraiser will consider in completing the approach?Accrued depreciation If the comparable property is inferior in lot size, compared

with the subject property, the price of the:

Comparable is adjusted downward Which of the following is not subtracted from the potential gross income to obtain the net operating income?Mortgage payments Reproduction CostThe construction cost at current prices of an exact duplicate of the subject property.operating expensesCosts involved in operating a business, such as rent, utilities, and salaries.A lender would most likely rely on which of the following approaches to value when underwriting a mortgage on an office complex?Income The income approach to value is based upon past income of the property? (T or F) False unit-in-place methodThe appraisal method of estimating building costs by calculating the costs of all of the physical components in the structure, with the cost of each item including its proper installation, connection, etc.; also called the segregated cost method.Income Approachappraising property based on theory the value of a property can be estimated by the amount of net income it can produce over its remaining economic life; suitable for small apartment buildings and businesses What is the cost estimating technique used by architects and contractors more often than by appraisers to estimate

the reproduction cost of a building?Quantity survey method

Curable Physical Deteriorationa reduction in a property's value resulting from a decline in physical condition; repairs that are physically possible and economically feasible and will result in an increase in

appraised value. Ex: Roof replacement, painting

Which method estimates all accrued depreciation in a lump sum by estimating the effective age of the structure dividing by its total economic life and multiplying by the replacement cost?Economic age-life method Cost approach to valueAn estimate of value based on current construction costs, less depreciation, plus land value. Contrast with the income approach to value and the sales comparison approach to value. Used for schools, courthouses, jails, churches and civic centers The cost approach is not normally used to appraise which of the following?Older residential buildings An appraiser is appraising a building that has an unusual design and inefficient floor plan. The building suffers from which type of depreciation?Functional obsolescence If a rural subdivision loses the benefit of fire protection form a nearby city, which of the following forms of depreciation best describes the loss of value?External obsolescence If the net operating income remains constant, what will happen to the present value of the property if the capitalization rate decreases?Increase Five steps of income approachEstimate annual future potential gross income, Estimate the effective gross income, Estimate net operating income, Select a capitalization rate and Apply capitalization rate The three approaches to value(1) The Sales Comparison Approach, (2) The Cost Approach, (3) The Income Approach.Incurable Physical Deteriorationrepairs to major structural components of a building, which deteriorate at different rates, may not be economically

feasible. Ex: load-bearing walls and foundations, replacing

the roof or ac system External ObsolescenceIncurable depreciation caused by factors not on the subject property, such as environmental, social, or economic factors.Reserves for ReplacementAn amount of money set aside for future replacement of major items, such as the roof or heating system. Also called reserves A house that is over-improved in relation to its value is an example of which of the following types of depreciation?Incurable functional obsolescence vacancy and collection lossesThe amount of income lost due to empty units or tenants not paying full rent.Six Steps of Cost ApproachEstimate the replacement cost, Estimate the accrued depreciation, Subtract accrued depreciation from current

reproduction cost, Estimate land (site) value as if vacant, Depreciate site improvements and Derive a final estimate of value