Ch.11 Real Estate Appraisal Study Guide

Flashcards covering the fundamentals of real estate appraisal, including principles of value, the three approaches to valuation, licensing, and depreciation.

How is an appraisal formally defined in the real estate industry?

An appraisal is an estimate or opinion of a property's value, generally rendered by an expert appraiser in a formal written statement called an appraisal report.

What are the four 'Elements of Value' that an item must possess to have value?

The four elements are Utility (filling a need), Scarcity (short supply), Demand (desire to own), and Transferability (ability to transfer ownership rights).

What is the difference between Market Value and Market Price?

Market Value is the most probable price a property should bring in a competitive and open market, while Market Price is the actual price paid in a specific transaction.

What ethical restriction applies to an appraiser's fee structure?

An appraiser's fee must be set before the appraisal is performed and cannot be based on a percentage of the opinion of value or contingent upon arriving at a specific price.

Under federal law, what set of guidelines must state-licensed or state-certified appraisers follow?

They must follow the Uniform Standards of Professional Appraisal Practice (USPAP).

What are the four levels of appraisal licenses issued by the California Bureau of Real Estate Appraisers?

Certified General Real Estate Appraiser, Certified Residential Real Estate Appraiser, Licensed Residential Real Estate Appraiser, and Trainee Appraiser.

What is the principle of 'Highest and Best Use'?

It is the theory that a property's value is based on the use that is most likely to produce the greatest net return, provided it is legally permissible, physically possible, and financially feasible.

According to the principle of change, what are the four phases of a property's life cycle?

The four phases are Integration (growth), Equilibrium (stability), Disintegration (decline), and Rejuvenation (revitalization).

Explain the principle of Substitution.

The value of a property is limited by the cost of obtaining an equally desirable substitute; it is the theoretical basis for all three methods of appraisal.

What is the difference between the principle of Progression and the principle of Regression?

Progression states an inexpensive home is worth more in a neighborhood of better homes; Regression states an expensive home is worth less in a neighborhood of inexpensive or rundown homes.

In the appraisal process, what is the '4-3-2-1 rule' used to describe?

It is a rule of thumb for lot depth where the front quarter accounts for $40\%$ of value, the second quarter $30\%$, the third quarter $20\%$, and the back quarter $10\%$.

What is 'Plottage' (or Plottage Increment)?

The increase in value that occurs when two or more properties are combined into one larger parcel, making it more valuable than the sum of its individual parts.

How is the square footage of a residential house calculated for an appraisal?

By using outside dimensions of the improved living area, excluding the garage, basement, or porches.

In the Sales Comparison Approach, if a comparable property lacks a feature the subject property has, how is the adjustment made?

The value of that feature is added to the sales price of the comparable property.

What is the difference between 'Replacement Cost' and 'Reproduction Cost'?

Replacement Cost is the cost to build improvements with the same utility using modern materials; Reproduction Cost is the cost to build an exact replica.

What are the three categories of depreciation in an appraisal?

Physical Deterioration (wear and tear), Functional Obsolescence (design defects), and External Obsolescence (factors outside the property).

Why is 'External Obsolescence' always considered incurable?

Because it is caused by forces outside the property's boundaries, such as a declining neighborhood or zoning changes, which are beyond the owner's control.

Using the Straight-Line Method, what is the annual depreciation of a building with a replacement cost of $\$600,000$ and a projected useful life of $50\, \text{years}$?

$\frac{\$600,000}{50\, \text{years}} = \$12,000\, \text{per year}$.

What is the formula for calculating Net Operating Income (NOI)?

$\text{Potential Gross Income} - \text{Vacancy Factor} = \text{Effective Gross Income} - \text{Operating Expenses} = \text{Net Operating Income}$.

What is the mathematical formula for the Capitalization Process?

$\frac{\text{Income}}{\text{Rate}} = \text{Value}$.

How does risk affect the capitalization rate (Cap Rate)?

Higher investment risk generally requires a higher capitalization rate, which translates into a lower value for the property.

What is the Gross Income Multiplier (GIM) or Gross Rent Multiplier method?

A simplified version of the income approach for single-family rentals where the value is estimated by multiplying the property's income by a multiplier derived from comparable sales.

What is 'Reconciliation' in the appraisal process?

The final step of assembling and interpreting value indicators from different appraisal methods to arrive at a final value estimate, emphasizing judgment over simple averaging.