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32 Cards in this Set
- Front
- Back
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Which of the following is not acceptable in figuring the capitalized value of a five-plex? Maintenance cost Managerial fees Principal payments Vacancy factor |
A: Principal payments Principal and interest payments are not deducted to reach net income for capitalization. |
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The owner of a commercial warehouse has the building listed for $250,000. The net income of the building is $20,000. An investor wants to buy it at a cap rate of 12%. Will the investor offer the owner the same price as the owner has it listed for? If not, by how much will the owner have to change his price to meet the investor's request for a 12% cap rate? Hint: Income Generated/Rate = Value. Yes, $0 No, $166,667 No, $83,333 No, $250,000 |
A: No, $83,333 Here is the formula: Income Generated / Rate = Value. Therefore $20,000 / .12 = $166,667 as a value for the property. The list price of $250,000 seems high. Seller would have to lower his price by:$250,000 - $166,667 = $83,333 More about Cap Rate: Since Cap Rate uses income, it is only used for income producing properties, not for example, the home you are buying for yourself. First let’s define cap rate AKA Capitalization Rate: Cap rate indicates how fast an investment will pay for itself. For example, a 10% Cap Rate means you will get 10% of your purchase price back each year. If a commercial apartment building is purchased for $5,000,000 and it generates $500,000 a year in net operating income (the dollars left over after operating costs are subtracted from your gross income), then: $500,000 / $5,000,000 = 10% cap rate This means 10% of the building's purchase price is paid each year by the proceeds. Another way of saying this - the property will pay for itself in 10 years. How do you use this tool? Way one; it allows investors a fairly easy and quick method of comparing investment properties. For example: take two properties as identical as the cute twins you flirted with in high school, with the same net operating income. One has a cap rate of 8% (same income, priced higher) and the other a cap rate of 15% (same income, priced lower). The 15% cap rate property MIGHT just be a heck of a deal or the 8% one overpriced. BUT you have to dig deeper, because it might be that the higher cap rate property is in a bad neighborhood and the owner has to discount the price to get it sold. Higher risk means you as a buyer get more bang for the buck with the 15% cap rate property, but you are going to have to work harder for it and your spouse is mad because you haven’t been able to take a vacation in years because of that “dang” property you bought. The 8% cap rate property may be more expensive and have a longer payback period, but that is because there is less risk and more investors want to buy it. The rents just come in without grief and it could save your marriage. Way two: Cap Rate is also used in the Income Method of appraisals to value a property. Generally, investors could care less if a property is pretty; they want to know how much they are going to make off it. The Income Method allows an investor to value a property based on its income. If most like investment properties in an area have an average cap rate of 7%. You can divide the net operating income of the property your client is interested in (provided by the listing agent) by the average cap rate in the area (digging in sold comps of various MLS’s) and it will give you the approximate market value of the property. For example: $225,000 net operating income / 7% = $3,214,285 market value. If the property is listed for $5,000,000 you might want to pass it by because it is overpriced for the neighborhood. If it is listed for $2,500,000 you call your client quick because you think you found a good deal. So, If you want to play with investors you will need to make cap rates your well understood best buddy. |
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Physical deterioration results from: tax liens overcrowded occupancy deferred maintenance management cost |
A: deferred maintenance Physical deterioration is a type of depreciation resulting from wear and tear, deferred maintenance, etc. |
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The capitalization rate has considerable effect upon the appraised value of property. Which of the following statements is true? The capitalization rate consists only of the component related to return on investment An increase in the capitalization rate produces an increase in the appraised value A decrease in the capitalization rate produces an increase in the appraised value The capitalization rate will be higher for property where a long-term tenant has shown a good record of payment than for one with a relatively new tenant with a poor record of payment |
A: A decrease in the capitalization rate produces an increase in the appraised value A decrease in capitalization rate would indicate less risk and, therefore, greater value of the investment. |
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To find the value of a property, using the income approach to appraisal, if the net operating income was $238,000, and the capitalization rate was 7%, an appraiser would: multiply net income by the capitalization rate multiply gross by the net income divide net income by the capitalization rate divide the CPA rate by net income |
A: divide net income by the capitalization rate Income / Rate = Value More on Cap Rate: Since Cap Rate uses income, it is only used for income producing properties, not for example, the home you are buying for yourself. First let’s define cap rate AKA Capitalization Rate: Cap rate indicates how fast an investment will pay for itself. For example, a 10% Cap Rate means you will get 10% of your purchase price back each year. If a commercial apartment building is purchased for $5,000,000 and it generates $500,000 a year in net operating income (the dollars left over after operating costs are subtracted from your gross income), then: $500,000 / $5,000,000 = 10% cap rate This means 10% of the building's purchase price is paid each year by the proceeds. Another way of saying this - the property will pay for itself in 10 years. How do you use this tool? Way one; it allows investors a fairly easy and quick method of comparing investment properties. For example: take two properties as identical as the cute twins you flirted with in high school, with the same net operating income. One has a cap rate of 8% (same income, priced higher) and the other a cap rate of 15% (same income, priced lower). The 15% cap rate property MIGHT just be a heck of a deal or the 8% one overpriced. BUT you have to dig deeper, because it might be that the higher cap rate property is in a bad neighborhood and the owner has to discount the price to get it sold. Higher risk means you as a buyer get more bang for the buck with the 15% cap rate property, but you are going to have to work harder for it and your spouse is mad because you haven’t been able to take a vacation in years because of that “dang” property you bought. The 8% cap rate property may be more expensive and have a longer payback period, but that is because there is less risk and more investors want to buy it. The rents just come in without grief and it could save your marriage. Way two: Cap Rate is also used in the Income Method of appraisals to value a property. Generally, investors could care less if a property is pretty; they want to know how much they are going to make off it. The Income Method allows an investor to value a property based on its income. If most like investment properties in an area have an average cap rate of 7%. You can divide the net operating income of the property your client is interested in (provided by the listing agent) by the average cap rate in the area (digging in sold comps of various MLS’s) and it will give you the approximate market value of the property. For example: $225,000 net operating income / 7% = $3,214,285 market value. If the property is listed for $5,000,000 you might want to pass it by because it is overpriced for the neighborhood. If it is listed for $2,500,000 you call your client quick because you think you found a good deal. So, If you want to play with investors you will need to make cap rates your well understood best buddy. |
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A property with amenities is best appraised by: capitalization observed condition replacement cost comparative analysis |
A: comparative analysis Amenities are benefits incidental to property ownership, such as views, close proximity to shopping and public transportation or even the prestige that goes with living in a certain area. The only way to estimate what buyers will pay for these benefits is to compare the subject property's amenities against similarly endowed properties that have sold in the recent past. |
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An apartment building is valued at $450,000. The investor interested in purchasing is pleased that it has a cap rate of 12%. How much is the net operating income of the building? 48000 54000 64000 72000 |
A: 54000 Income = Rate x Value, Rate = 12% = .12, Value = $450,000, Income = $450,000 x .12 = $54,000 More about Cap Rate: Since Cap Rate uses income, it is only used for income producing properties, not for example, the home you are buying for yourself. First let’s define cap rate AKA Capitalization Rate: Cap rate indicates how fast an investment will pay for itself. For example, a 10% Cap Rate means you will get 10% of your purchase price back each year. If a commercial apartment building is purchased for $5,000,000 and it generates $500,000 a year in net operating income (the dollars left over after operating costs are subtracted from your gross income), then: $500,000 / $5,000,000 = 10% cap rate This means 10% of the building's purchase price is paid each year by the proceeds. Another way of saying this - the property will pay for itself in 10 years. How do you use this tool? Way one; it allows investors a fairly easy and quick method of comparing investment properties. For example: take two properties as identical as the cute twins you flirted with in high school, with the same net operating income. One has a cap rate of 8% (same income, priced higher) and the other a cap rate of 15% (same income, priced lower). The 15% cap rate property MIGHT just be a heck of a deal or the 8% one overpriced. BUT you have to dig deeper, because it might be that the higher cap rate property is in a bad neighborhood and the owner has to discount the price to get it sold. Higher risk means you as a buyer get more bang for the buck with the 15% cap rate property, but you are going to have to work harder for it and your spouse is mad because you haven’t been able to take a vacation in years because of that “dang” property you bought. The 8% cap rate property may be more expensive and have a longer payback period, but that is because there is less risk and more investors want to buy it. The rents just come in without grief and it could save your marriage. Way two: Cap Rate is also used in the Income Method of appraisals to value a property. Generally, investors could care less if a property is pretty; they want to know how much they are going to make off it. The Income Method allows an investor to value a property based on its income. If most like investment properties in an area have an average cap rate of 7%. You can divide the net operating income of the property your client is interested in (provided by the listing agent) by the average cap rate in the area (digging in sold comps of various MLS’s) and it will give you the approximate market value of the property. For example: $225,000 net operating income / 7% = $3,214,285 market value. If the property is listed for $5,000,000 you might want to pass it by because it is overpriced for the neighborhood. If it is listed for $2,500,000 you call your client quick because you think you found a good deal. So, If you want to play with investors you will need to make cap rates your well understood best buddy. |
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Which of the following would be classified as external obsolescence in the appraisal of real property? Termite damage Poor architectural design of appraised property Normal wear and tear Adverse legislative regulations affecting the property |
A: Adverse legislative regulations affecting the property Economic obsolescence also referred to as "external obsolescence" is always considered to be incurable. It basically refers to is the loss in value resulting from influences external to the property itself External conditions causing this may be international, national, industry-based, or local in origin. Various external factors affect potential economic returns, thus having a direct impact on the market value of an asset or property. |
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4-3-2-1 is a familiar approach to one facet of real estate practice. It normally refers to which of the following? Lot, house, garage and furniture Tract, parcel, quadrant in county House, lot furnishing, and garage Method used in appraising vacant land of different depths |
A: Method used in appraising vacant land of different depths On a lot with varying depths, appraisers will often assign 40% of the overall market value to the front 25% of the lot, 30% to the second 25%, 20% to the third 25% and 10% to the remainder of the lot. |
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A Building that cost $300,000 to build 10 years ago has depreciated 25% the land costs are $51,000; what is the current value of the property? 274000 265000 276000 300000 |
A: 276000 Take the value of $300,000 times the undepreciated amount of the property .75 = $225,000 and add in the land value of $51,000 = $276,000. Land is never depreciated |
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If Jon's property has a net income of $54,800, and returns 8 percent annually on the investment, then what is her property's value? 680000 685000 700000 725000 |
A: 685000 Divide the income by the interest rate to equal property value,. $54,800/.08 = $685,000 |
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Find the annual rate of return percentage on an $88,000 investment if the weekly gross income is $225 and monthly expense is $370 0.072 0.085 0.0825 0.0775 |
A: 0.0825 Calculate the annual income which is $225 X 52 = $11,700. Then calculate the annual expenses $370 X 12 = $4,440. Next subtract $4,440 from $11,700 = $7,260 then divide this by $88,000 = 8.25 % |
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On a service property, (i.e. church, school), which approach to value is most reliable? Income approach Sales Comparison approach Cost approach Gross multiplier |
A: Cost approach Since they do not produce income and are not frequently sold, the only method of appraisal is the replacement or reproduction cost approach. A library or public swimming pool would fall into this category. The cost appraoch is based on the premise that the value of a property is limited by the cost of replacing it. (This is the principal of substitution: if the asking price for a home is more than it would cost to build a new one just like it, no one will buy it.) The estimate of value arrived at through the cost approach usually represents the upper limits of the property's value. The cost approach involves estimating how much it would cost to replace the subject property's existing buildings, then adding to that the estimated value of the site on which they rest. Because the cost approach involves estimating the value of land and buildings separately, then adding the estimates together, it is sometimes called the summation method. |
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The steps in the appraisal process include all of the following except: gathering general and specific data verifying data analyzing and interpreting data considering seller's subjective value |
A: considering seller's subjective value In order to determine the market value of property it is necessary to gather, verify, analyze and interpret data. The seller’s subjective value is not a factor. |
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Which of the following types of depreciation would be most difficult to eliminate? Physical deterioration Functional obsolescence Physical depreciation Economic obsolescence |
A: Economic obsolescence Economic obsolescence is considered incurable. No amount of investment can correct an adverse zoning change or blighting influences. |
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What is the appraiser's most important consideration in estimating the value of commercial property? The gross rent multiplier The gross income The net income The reproduction cost. |
A: The net income When estimating value of income or commercial property the most important element for an appraiser is the net income. |
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A house, which is located at the end of runway for a large airport, suffers from: incurable location obsolescence curable economic obsolescence incurable economic obsolescence incurable functional obsolescence |
A: incurable economic obsolescence Economic obsolescence is loss in value due to conditions in the area of the property. It is incurable. |
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Donna leases 12 apartments for a total monthly income of $4,500. This figure represents an 8 % annual return. What was the original cost of the property 675000 690000 725000 775000 |
A: 675000 Multiply the monthly income $4,500 by 12 = $54,000 divide that by 8% = $675,000 |
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Which of the following would be the most expensive method of appraisal of large, income-producing properties? Market data approach Comparative approach Replacement cost approach Capitalization approach |
A: Replacement cost approach The replacement cost method is normally the most time consuming and expensive method. |
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Which of the following processes is used in the income approach to value? Equalization Capitalization Amortization Depreciation |
A: Capitalization To determine value of income property the appraiser divides the net income by the cost of the property to get the capitalization rate. |
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A property's gross income is $27,600 and has monthly expenses of $550. It has been valued at $483,000. What is the capitalization rate? 0.0621 0.0529 0.0496 0.0435 |
A: 0.0435 $27,600 - ($550 X 12 = $6,600) = $21,000 / $483,000 = .0435 or 4.35% More on Cap Rate: Since Cap Rate uses income, it is only used for income producing properties, not for example, the home you are buying for yourself. First let’s define cap rate AKA Capitalization Rate: Cap rate indicates how fast an investment will pay for itself. For example, a 10% Cap Rate means you will get 10% of your purchase price back each year. If a commercial apartment building is purchased for $5,000,000 and it generates $500,000 a year in net operating income (the dollars left over after operating costs are subtracted from your gross income), then: $500,000 / $5,000,000 = 10% cap rate This means 10% of the building's purchase price is paid each year by the proceeds. Another way of saying this - the property will pay for itself in 10 years. How do you use this tool? Way one; it allows investors a fairly easy and quick method of comparing investment properties. For example: take two properties as identical as the cute twins you flirted with in high school, with the same net operating income. One has a cap rate of 8% (same income, priced higher) and the other a cap rate of 15% (same income, priced lower). The 15% cap rate property MIGHT just be a heck of a deal or the 8% one overpriced. BUT you have to dig deeper, because it might be that the higher cap rate property is in a bad neighborhood and the owner has to discount the price to get it sold. Higher risk means you as a buyer get more bang for the buck with the 15% cap rate property, but you are going to have to work harder for it and your spouse is mad because you haven’t been able to take a vacation in years because of that “dang” property you bought. The 8% cap rate property may be more expensive and have a longer payback period, but that is because there is less risk and more investors want to buy it. The rents just come in without grief and it could save your marriage. Way two: Cap Rate is also used in the Income Method of appraisals to value a property. Generally, investors could care less if a property is pretty; they want to know how much they are going to make off it. The Income Method allows an investor to value a property based on its income. If most like investment properties in an area have an average cap rate of 7%. You can divide the net operating income of the property your client is interested in (provided by the listing agent) by the average cap rate in the area (digging in sold comps of various MLS’s) and it will give you the approximate market value of the property. For example: $225,000 net operating income / 7% = $3,214,285 market value. If the property is listed for $5,000,000 you might want to pass it by because it is overpriced for the neighborhood. If it is listed for $2,500,000 you call your client quick because you think you found a good deal. So, If you want to play with investors you will need to make cap rates your well understood best buddy. |
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Broker’s commission is shown as: debit to the seller credit to the broker credit to the seller debit to the buyer debit to the buyer credit to the broker debit to the buyer credit to the seller |
A: debit to the seller credit to the broker Commission is shown as a debit to the seller and a credit to the broker. |
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Mr. Davis was assessed by the city 6 cents per square foot of his property as a special assessment, his property measured 80 X 135. What did the special assessment cost him? 64.8 648 6480 592.75 |
A: 648 Take the length 135 times the width 80 to get the total square footage = 10800 X .06 = $648 |
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Depreciation, defined as loss of value from any cause, is generally divided into three classes. The loss of value due to wear and tear and action of the elements is called: economic obsolescence functional obsolescence physical deterioration replacement cost |
A: physical deterioration Physical deterioration, functional obsolescence and economic obsolescence are the 3 classes of depreciation. Wear and tear is physical deterioration. |
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A property has a monthly net income of $1800, and an appraiser believes a 9 percent rate of return is appropriate for the property. Its value would be estimated at 20000 21600 240000 2400000 |
A: 240000 $1800 x 12 (months) = $21,600 (annual net income) / .09 (9%) = $240,000 estimated value |
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Each unit in a duplex, rents for $400 per month, with a sales price of $96,000, the monthly gross rent multiplier would be: 10 120 240 20 |
A: 120 $400 x 2 = (duplex = $800 ); $ 96,000 sales price divided by $800 monthly rent = 120 Gross Rent Multiple (GRM) More info - the Gross Rent Multiplier or GRM is a ratio that is used to estimate the value of income producing properties. The GRM provides a rough estimate of value. Only two pieces of financial information are required to calculate the Gross Rent Multiplier for a property, the sales price and the total gross rents possible. If this information is available for multiple recent sales of similar types of income properties in a particular area, it can then be used to estimate the market value of other similar properties in that area. Some investors use a monthly Gross Rent Multiplier and some use a Yearly GRM. The monthly Gross Rent Multiplier is equal to the Sales Price of a property divided by the potential monthly rental income and the Yearly GRM is the Sales Price divided by the yearly potential rental income. Generally speaking, properties in prime locations have higher GRMs than properties in less desirable locations. When comparing similar properties in the same area or location, the lower the GRM, the more profitable the property. This statement assumes that operating expenses are proportionate for the properties being compared. Since the GRM calculation doesn't include operating expenses, this statement might not hold true for similar properties where one of the properties has significantly higher operating expenses. |
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Typically, the least important factor influencing the value of an owner-occupied home would be: potential rental income demand quality of construction functional plan of the home |
A: potential rental income Income would only be important in commercial property,ie for apartments. |
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The period of time during which a property may be profitably utilized is known as its: gross life net life economic life amortized life |
A: economic life The economic life of a property is the time period during which the property may be profitable. There is no amortized life of a property. |
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The cost approach to appraisal would best be used in which of the following situations? A 1,100-square-foot ranch house located in a residential neighborhood with Houses ranging in size from 1,000 square feet to 1,200 square feet, all ranch style A new house being constructed in a new subdivision A restaurant that is being sold with land A duplex that is only four years old |
A: A new house being constructed in a new subdivision Cost approach is used when no comparables exist, such as new construction, library, or a school. |
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An apartment has an annual income of $53,500. If you must have a 14% rate of return, what is the maximum you can pay for the apartment building? 382143 415674 489542 563821 |
A: 382143 $53,500 / .14 = $382,143 |
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In analyzing gross income of a property, the characteristic of the income that the appraiser is concerned with is: quantity quality durability all of the above |
A: all of the above Quantity means adequacy of income. Quality refers to financial stability and credit worthiness of tenants. Durability concerns itself with the terms of the building's leases. |
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Whenever possible all three approaches to value are used. The comparison approach is given greater weight than the others are when appraising: apartment property service property single-family dwellings industrial property |
A: single-family dwellings The comparison of market data approach is most often used in appraising residential property, because of the widespread availability of acceptable comparables. The comparison approach loses its reliability when there are few comparable sales. |
