FINAL REVIEW

CHAPTER 6 SITE VALUATION

Question Interim Use

Four appraisers wannabes, Deano Frappuccino, I. Nita Starbucks, Greene Tee and Lotto Latte, all went to an interview for an appraiser trainee position. They were asked the definition of the term interim use. Their answers as follows. Whose answer was WRONG?

Deano Frappuccino: An interim use is not the current highest and best use.I. Nita Starbucks: The highest and best use of an interim use property is expected to change in the future.Greene Tee: The immediate development of an interim use property to its future highest and best use is probably not financially feasibleLotto Latte: An interim use may contribute to property value depending on factors such as income produced and expected demolition costs, if any.

Answer Interim Use

Correct Answer: a). Only Deano Frappuccino was wrong.

An interim use is the current highest and best use of property as improved, although the highest and best use is expected to change in the future. For instance, a cornfield on the edge of an area being developed into residential subdivisions may be at its highest and best use now as a cornfield. However, after infrastructure is in place (such as zoning), the highest and best use may be as residential homes. If the field produced more income than other similar vacant lots, the interim use of farming contributes value to the property.

Question Site Value & Highest & Best Use

Mr. Thrifty recently acquired a 3-acre site zoned for commercial use on Busy Street. Currently there is a thriving grocery store on one-third of the property. If Mr. Thrifty would like to utilize his new property to its highest and best use, which of the following would be the best scenario?If it can be subdivided, use the excess land to develop a complementary highest and best use, such as a strip mallMr. Thrifty should leave it as-is since changing anything would cost more money and not be economically feasibleTear down the grocery store to free up 3 acres of land on a busy street and sell to a large companyAdd a multi-family apartment next to the grocery store to attract additional grocery store customers

Answer Site Value & Highest & Best Use

Answer: AAccording to the Principle of Highest and Best Use, there is an optimal amount of land associated with a given use. Since the grocery store is only utilizing one-third of the three acres, the other acreage is excess land. If current zoning permits, Mr. Thrifty could subdivide the excess land to complement the existing land use. He could not, however, develop the excess land into multifamily since the property is zoned for commercial and not multifamily high density residential use.

Question Excess Land

Johnny B. Goode purchases two adjoining lots on Better Street in the town of Bestville. His appraisal estimates that the value of the lots combined into a single lot will almost double the total value of the lots if kept separate. This added value is known as: (a) Assemblage (b) Plottage (c) Surplus (d) Yield

Answer Excess Land and Plottage

Answer: B Plottage Plottage is the increase in value that result from combining two or more lots under one ownership to allow for a more profitable highest and best use. If two lots are worth more when combined than they are separately, the added value is called the plottage value. (Whereas assemblage is the process of combining two or more separate lots into a single ownership.)

Question Building Residual Method

Burger King just opened a new restaurant on Haveityour Way. It was determined using land sales comps that the site value of subject property is $600,000. The market data indicated that the capitalization rate for land is 10% and improvements are 12%. The annual net income is $100,000. What is the total property value?a. $1,110,500b. $750,000c. $867,500d. $933,333

Answer Building Residual Method

Answer: D $933,333

Step 1: Land Value x Land Cap Rate = Land NOI $600,000 x 10% = $60,000 Land NOI

Step 2: Total NOI - Land NOI = Building NOI $100,000 - $60,000 = $40,000 Building NOI Step 3: Building NOI / Building Cap Rate = Building Value $40,000 / 12% = $333,333 Building ValueStep 4: Land Value + Building Value = Total Property Value $600,000 + $333,333 = $933,333

Question Site Value Allocation Method

Mary Q. Contrary determines that a property is worth a total of $300,000. The building value to land value ratio for similar properties is 2:1. Under the allocation method, what is the value attributable to the land?(a) $100,000(b) $150,000(c) $200,000(d) $600,000

Answer Site Value Allocation Method

Answer: AThe ratio 2:1 indicates a total of THREE PARTS since 2 + 1 = 3. Therefore, two-thirds of the propertys value is attributable to the improvements and one-third of the value is attributable to the land. One-third of the total value of $300,000 is $100,000, so the land is valued at $100,000.

Question Subdivision Development Method

After suffering a 50% vacancy rate for too long because the rent was too damn high, Bank, Rupp & Baroque Development decided to demolish their old and decrepit Broken Arms Apartments complex. They wish to subdivide the now vacant land into 250 lots. Each lot is expected to sell for $300,000. Development costs are expected to run $80,000 per lot. Sales expenses, overhead and profits are estimated at 25% of sales. Without allowing for discounting future cash flows, what is the indicated value of the site?

(a) $36,250(b) $36,250,000(c) $362,500(d) $3,625,000

Answer Subdivision Development Method

Answer = B $36,250,000 Explanation:First find the amount of total sales before deductions $300,000 x 250 lots = $75,000,000 Next calculate the total development costs $80,000 x 250 lots = $20,000,000 Then find the cost of sales expenses, overhead and profit (25% of sales) $75,000,000 x 25% = $18,750,000 (you can also calculate it like this:) 300,000 x 25 % = $75,000 x 250 lots = $18,750,000 Now, the indicated value of the site can be found by taking the total sales and subtracting Development costs and sales expenses, overhead and profit $75,000,000 - $20,000,000 - $18,750.000 = $36,250,000

Question Highest & Best Use

An older neighborhood of single-family residences has been recently rezoned to allow high density dwellings. An appraisal of these properties must include: a) the phone number of the DRE complaint hot- line b) a disclosure of the current zoning and new density requirements c) an estimate of land value as if vacant for commercial development d) a good faith estimate

Answer Highest & Best Use

Answer: B

Disclosure of the current zoning and new density requirements

CHAPTER 8 COST APPROACH

Answer 3 Step Formula Based on Principle of Substitution

In the cost approach which of the following formulas is used to estimate value?

Reproduction or replacement cost less depreciation plus landReproduction or replacement cost plus depreciation plus landDepreciated cost of land plus depreciated cost of improvementsReplacement cost new plus accrued depreciation

Answer 3 Step Formula Based on Principle of Substitution

Answer: A In the cost approach, cost is related to value by the formula: Value = Replacement Cost New* Depreciation of improvements + Land Value

* May be (but rarely is) substituted with Reproduction Cost In this formula, cost refers to cost of reproducing or replacing the propertys improvements. Depreciation is the difference between cost and value, from any cause.

Question Cost Approach

A well maintained turn of the (20th) century 4 bedroom/1 bathroom house in a neighborhood of newer traditional homes would best be considered:

(a) Charming(b) Functionally obsolete(c) Historic(d) Non-conforming

Answer Cost Approach

Answer: B Functionally obsolete

It is essentially a misplaced asset.

Question Effective Age

Goldilocks house on Behr Lane was built in 1989 with an estimated economic life of 60 years. The house was appraised in 2011. Since the house has been recently remodeled with a brand new kitchen, baths, windows and roof, Forest Appraisal Group estimates that the house looks similar to one built in 2006. What is the effective age of the house and what is its remaining economic life (REL)?5, 5522, 6522, 60Cannot be determined

Answer Effective Age

Answer: A

Although the house has a chronological age of 22 years, its effective age is that of a 5 year old home due to its recent remodel.

Economic Life - Effective Age = Remaining Economic Life (REL)60 years - 5 years = 55 years REL

Question Types of Depreciation

Wynken, Blynken and Nod have listed their house for sale on Crystal Light River Drive. They hired a plumber to fix a slab leak and are informed that the sill plate is completely rotted. A general contractor tells the owners that the entire sill plate will need to be replaced requiring the home to raised from its foundation. What type of depreciation is this?

Curable physical depreciationIncurable physical depreciationCurable functional depreciationIncurable functional depreciation

Answer Types of Depreciation

Answer: B Incurable physical depreciation

The cost-to-cure is more than the added value.

Question Cost Approach

Which of the following refers to how long an improvement will contribute to the value of the property? a. Physical life b. Social life c. Economic life d. Remaining economic life

Answer Cost Approach

Answer: C Economic Life

Economic life refers to how long the improvement will contribute to the value of the property. Physical life refers to the length of time the improvement can be expected to exist, with normal maintenance. Remaining Economic Life is the difference between the estimated total economic life and the estimated effective age.Social life refers to something you dont have during finals week.

Question Curable & Incurable Obsolescence

The Addams Family is moving. Their children Wednesday and Pugsley are off to college, Uncle Fester has moved to Miami, and even their trusty butler, Lurch, has retired. They never thought the day would come but they are now empty nesters and the house is just too large for the two of them. Over the years, Gomez and Morticia have customized their home to adapt to their familys needs. A walk through of their home prior to listing it yielded the following. Next to each item, indicate whether it is curable or incurable and what type of obsolescence it might fall under - physical, functional, or external.

1. Located next to a cemetery ___2. One car (hearse) garage __3. A moat ___4. A dungeon, complete with instruments of torture ___5. Skeletons in the closet ___6. Creaky doors and stairs ___7. Cobwebs everywhere ____8. No exterior landscaping well, except for the grave markers ___

Answer Curable & Incurable Obsolescence

1. Located next to a cemetery = Incurable/external obsolescence

2. One car (hearse) garage = Incurable/functional obsolescence

3. A moat = Curable/functional obsolescence

4. Dungeon = Curable/functional obsolescence (May be deemed Incurable/Functional Obsolescence , i.e. Superadequate, in California)

5. Skeletons in the closet = Curable/physical obsolescence

6. Creaky doors and stairs = Curable/physical obsolescence

7. Cobwebs everywhere = Curable/physical obsolescence

8. No exterior landscaping (except for grave markers) = Curable/physical obsolescence

Question Age-Life Ratio

An appraiser estimates the replacement cost of a house at $300,000. The home has an economic life of 60 years and an effective age of 15 years. The home was built to replicate a home in the movie Lord of the Rings and the ceiling height is only 5 feet tall. The home has no modern appliances and the cost-to-cure will be $7,500. What is the economic age-life ratio?

(a) 25%(b) 22%(c) 20%(d) Cannot be calculated because the ceiling height is incurable functional obsolescence.

Answer Age-Life Ratio

Answer: A Age-Life Ratio is calculated as 15 divided by 60 = 25%

Question Accrued Depreciation

Replacement Cost New (RCN) of a building is $500,000 plus additives of $75,000. Total accrued depreciation for this building is $260,000.What is the current value of the building only using the Cost Approach? The property has no site improvements. (a) $200,000 (b) $300,000 (c) $315,000 (d) $460,000

Answer Accrued Depreciation

Answer: C $315,000 RCN$500,000+ Additives$ 75,000Total Cost New:$575,000Less Accrued Depreciation: Indicated Value by Cost Approach: $315,000

Question Economic Age-Life Method

The Economic Age-Life Method is:

Based on the assumption that an improvement appreciates at a steady rate over the course of annual upgrades, kitchen remodeling, and bathroom remodeling. Based on the assumption that an improvement loses value at a very rapid rate over the course of its economic life when it has failed to be maintained properly. Based on the assumption that an improvement loses value at a steady rate over the course of its economic life.None of the above

Answer Economic Age-Life Method

Answer C - Based on the assumption that an improvement loses value at a steady rate over the course of its economic life. Hence, the Economic Age-Life Method is sometimes referred to as the Straight Line Method.

Answer Economic Age-Life Method Calculation

There was an old woman who lived in a house on Louboutin Lane with so many children she didnt know what to do. The house had an economic life of 80 years, a chronological age of 10 years, but an effective age of 60 years due to the excessive wear and tear by the many children. The replacement cost new (RCN) of the house was estimated to be $200,000. Using the economic age-life method, what is the depreciated value of the improvement?(a) $200,000(b) $100,000(c) $50,000(d) None of the above

Answer Economic Age-Life Method Calculation

Answer: C $50,000REMEMBER: RTQ (Read the Question)!

Divide the effective age by the economic life to find the accrued depreciation rate: 60 80 = 0.75.

Then multiply the accrued depreciation rate by the replacement cost to find the accrued depreciation: 0.75 $200,000 = $150,000.

Subtract the accrued depreciation from the replacement cost to find the depreciated value of the house: $200,000 $150,000 = $50,000.

Question Cost Index Trending

The Sundevil house at 666 Hellway Lane was built in 1976 for $75,000. At that time the construction cost index was 100. Currently (as of the effective date of the appraisal), the cost index for the subjects market according to the latest data released by Marshall & Swift Cost Services is 350. What is the present cost based on the cost index method? (a) $250,400 (b) $262,500 (c) $274,800 (d) Cannot be determined using the data provided

Answer Cost Index Trending

Answer: B $262,500

Current Index_________ x Original Cost = Present Cost Index at the time of construction

350 current index x $75,000 = 3.5 x $75,000 = $262,500 100 base year index

This method is the least reliable when used alone. It is used extensively in the preparation of mass appraisals, such as those done by the Assessor. Since the Assessor uses raises your property taxes only 2% under Prop 8, in what cases do you think this might be most often used by the Assessor ?

Question Types of Costs -Direct Costs, Indirect Costs & Entrepreneurial Profit

Mr. Green wants to construct a LEED-certified platinum office building on Candy Lane adjacent to his chocolate factory. He estimates hard costs of $7,500,000 to Milky Way Construction for the building materials and labor. Soft costs are estimated to be $450,000 to the Three Musketeers Architects for design and blueprints, $150,000 to the City of Hershey for building permit fees, property taxes of $20,000 to the Ghirardelli County Assessor during the development period, construction interest of $330,000 to Nestle Bank and legal fees of $50,000 to the law firm of Dewey, Cheatum & Howe. Mr. Green desires a 15% entrepreneurial profit. Therefore the total estimated cost is: (a) $9,750,00 (b) $9,775,000 (c) $10,000,000 (d) None of the above

Answer Types of Costs - Direct Costs, Indirect Costs & Entrepreneurial Profit

Answer: (See page 261 of Rockwell text for similar problem.) Hard Costs: $7,500,000 Soft Costs: $1,000,000 Total Hard and Soft Costs: $8,500,000 So 15% of the total cost will be allocated to entrepreneurial profit and the remaining 85% is the hard and soft costs. $8,500,000 / 85% = $10,000,000 total cost (Therefore $10,000,000 total costs $8,500,000 hard and soft costs = $1,500,000 entrepreneurial profit)

CHAPTER 10 INCOME APPROACH

Question Income Approach

What Principle of Value forms the foundation of the Income Approach?Principle of AnticipationPrinciple of SubstitutionPrinciple of Consistent UsePrinciple of Bracketing

Answer Income Approach

Answer: Principle of Anticipation

The value of a property is determined by its potential future benefits of its ownership.

Question Rate of Return

Tiny Tim is looking for a rental condo and requires a 15% return on his money. He found a rather small condo on Lilliputian Court which will rent at a market rate of $1,700/month. What would Tiny Tim be willing to pay for this property based on his investment expectations?

a. $316, 000b. $136, 000c. $170,000 d. Nothing, the investment does not work

Answer Rate of Return

Answer: B $136,000

$1,700/mo. X 12 = $20,400 of annual income$20,400 annual income/15% rate of return = $136,000

Question IRV

The net operating income on an annual basis for Jumping Java Caf is $42,000. Research indicates that the market capitalization rate for similar single tenant properties is 8%. What is the value of the this property?

a) $525,000b) $3,360c) $52,500d) Worthless since they do not serve green tea lattes

Answer IRV

Answer: A $525,000

Net Operating Income (annualized) / Cap Rate = Value$42,000 NOI/.08 Cap Rate = $525,000 Value

Question Gross Income Multiplier

Sandy Shell owns a seaside store on Seashore Drive renting for $50,000 per year before expenses. She just closed escrow on the property 10 days ago for a $500,000 purchase price. What was the gross income multiplier?

(a) 1/10 or 10% (b) 5 (c) 10 (d) None of the above

Question Gross Income Multiplier

Answer: C 10

$500,000 Value = 10 50,000 Gross Annual Income

NOTE: Answer is 10x Gross and therefore it is NOT a percentage

Question Vacancy Rates

The law firm of Dolittle & Phail has requested an appraisal of their clients 50 unit apartment building located in town of Incomeville. The subject property has a 100% occupancy rate. If the market vacancy rate in the area is 8%, what conclusion would you draw?

(a) Rents are too high (b) Rents are too low (c) Subject building has superior advertising (d) Management is better

Answer Vacancy Rates

Answer: B Rents are too low

Why?

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