Question 1

$\begin{array}{rrr}
\begin{array}{l}
\
Price\
Effective ~gross ~income \
\% ~operating ~expense\
\mathrm{NOl}\
\end{array}
\begin{array}{rrr}
\text { Comp 1 } & \text { Comp 2 } & \text { Comp 3 } \
\hline \$ 300,000 & \$ 350,000 & \$ 375,000 \
50,000 & 55,000 & 60,000 \
50 \% & 55 \% & 54 \% \
25,000 & 30,000 & 32,500
\end{array}
\end{array}$
-Consider the table above. Assume that the subject property has effective gross income of $53,000 and a NOI of $27,500. What value would a GIM approach yield rounded to the nearest $100)?

Accepted Answer

The Gross Income Multiplier (GIM) is calculated by dividing the price by the effective gross income for each comparable. The average GIM is then applied to the subject property's effective gross income to estimate its value. Calculations: Comp 1 GIM = 300,000 / 50,000 = 6; Comp 2 GIM = 350,000 / 55,000 = 6.36; Comp 3 GIM = 375,000 / 60,000 = 6.25. Average GIM = (6 + 6.36 + 6.25) / 3 = 6.20. Subject property value = 6.20 * 53,000 = 328,600.

Question 2

An overall capitalization rate can be calculated by dividing the net operating income by the property value.

Accepted Answer

This is a correct statement. The overall capitalization rate, also known as the cap rate, is commonly used in real estate investing to determine the potential return on investment. It is calculated by dividing the net operating income (NOI) by the property value.

Question 3

The sales comparison approach to appraisal is preferred because it is the only objective appraisal approach.

Accepted Answer

The sales comparison approach is not the only objective appraisal approach. There are other methods such as the cost approach and the income approach that can also be used to appraise property.

Question 4

When conducting an appraisal, only one of three approaches should be selected to determine the property value.

Accepted Answer

It is recommended to use all three approaches (sales comparison, cost and income approach) and then reconcile the results to arrive at a final value estimate.

Question 5

Appraisers use bracketing in order to estimate the upper and lower range of value.

Accepted Answer

Bracketing is a technique in which the appraiser uses comparable properties with varying characteristics (such as size, age, location, etc.) to estimate the upper and lower range of value for the subject property. By using bracketing, the appraiser can narrow down the potential value range of the subject property and arrive at a more accurate market value estimate.

Question 6

A gross income multiplier can be calculated by dividing the gross income by the sales price.

Accepted Answer

The answer of A gross income multiplier can be calculated...

Question 7

In the cost approach to value, land value can be estimated by comparing sales of vacant land that are similar to the subject land.

Accepted Answer

The cost approach involves estimating land value separately, often using comparable sales of similar vacant land, and then adding the cost of constructing a replacement for the building.

Question 8

Return on investment and change in net operating income are essential factors for cost analysis.

Accepted Answer

The answer of Return on investment and change in net...

Question 9

A property is purchased for $350,000. Based on an annual growth rate of 3%, the resale value at the end of year 10 would be $456,671.

Accepted Answer

Using the formula for compound interest, $FV = PV(1 + r)^n$, where $FV$ is the future value, $PV$ is the present value ($350,000), $r$ is the annual growth rate (3% or 0.03), and $n$ is the number of years (10), the correct calculation is $FV = 350,000(1 + 0.03)^{10}$, which equals approximately $470,000, not $456,671.

Question 10

The rationale for using the cost approach to appraisal is that any informed buyer would not pay more for property that what it would cost to buy the land and build the structure.

Accepted Answer

The cost approach is based on the principle of substitution, which suggests that a buyer will not pay more for a property than the cost to acquire a similar site and construct a similar building.

Question 11

Economic obsolescence is the loss of value caused by inefficient layout of technological changes.

Accepted Answer

Economic obsolescence refers to the loss of value due to external factors such as changes in market conditions or regulatory environment, not inefficient layout or technological changes.

Question 12

The capitalization rate is equal to the discount rate minus any expected annual growth in income and property value.

Accepted Answer

This statement is true. The capitalization rate, also known as the cap rate, is a measure used to estimate the potential return on investment for a real estate property. It is calculated by dividing the property’s net operating income by its value. The discount rate is the rate of return that investors require to invest in the property, and it is typically based on factors such as interest rates and risk. The expected annual growth in income and property value is subtracted from the discount rate to arrive at the cap rate, which helps investors compare the potential returns of different properties.

Question 13

One advantage of the gross income multiplier approach to appraisal is that it is most suitable for properties in which operating expenses vary widely across the properties being surveyed.

Accepted Answer

The gross income multiplier approach is best suited for properties with similar operating expenses, as it does not account for variations in operating costs.

Question 14

$\begin{array}{rrr}
\begin{array}{l}
\
Price\
Effective ~gross ~income \
\% ~operating ~expense\
\mathrm{NOl}\
\end{array}
\begin{array}{rrr}
\text { Comp 1 } & \text { Comp 2 } & \text { Comp 3 } \
\hline \$ 300,000 & \$ 350,000 & \$ 375,000 \
50,000 & 55,000 & 60,000 \
50 \% & 55 \% & 54 \% \
25,000 & 30,000 & 32,500
\end{array}
\end{array}$
-Consider the table above. Assume that the subject property has effective gross income of $53,000 and a NOI of $27,500. What value would a cap rate approach yield rounded to the nearest $100)?

Accepted Answer

The cap rate approach value is calculated by dividing the NOI by the cap rate. The cap rate is typically derived from comparable sales data. In this case, we do not have comparable sales data, so we will use the average cap rate of the three companies in the table. The average cap rate is (50% + 55% + 54%) / 3 = 53%. Therefore, the cap rate approach value is $27,500 / 0.53 = $328,600.

Question 15

The capitalization rate for a leased fee estate should always be lower than the capitalization rate for a fee simple estate.

Accepted Answer

The capitalization rate for a leased fee estate may be higher or lower than the capitalization rate for a fee simple estate depending on the terms and conditions of the lease. Factors that affect the capitalization rate for a leased fee estate include the length and terms of the lease, tenant creditworthiness, and market conditions.

Question 16

Capitalization rate of newly constructed apartment building will be more than that of relatively old apartment building, which is comparable in all other aspects.

Accepted Answer

The capitalization rate is generally lower for newly constructed buildings due to lower risk and higher expected growth, while older buildings may have higher rates due to increased risk and potential maintenance costs.

Question 17

A building has 12 foot ceilings that cause the electric bill to be $1,200 higher per year. Depreciation caused by the ceilings can be estimated by calculating the present value of the $1,200 per year over the remaining economic life of building.

Accepted Answer

Depreciation can be estimated by calculating the present value of future costs, such as higher electric bills, over the building's economic life.

Question 18

When using the gross income multiplier approach to appraisal, potential gross income is preferred to effective gross income.

Accepted Answer

The gross income multiplier approach uses effective gross income, which accounts for vacancy and collection losses, rather than potential gross income.

Question 19

The market method or direct sales comparison method of estimating site value is not the most reliable method available.

Accepted Answer

This method is considered one of the most reliable and commonly used methods for estimating site value in real estate appraisal. It involves comparing similar properties in the same area that have recently sold to determine the fair market value of the subject property.

Question 20

The equity value can be estimated by subtracting debt service from net operating income and dividing this amount by the equity dividend rate.

Accepted Answer

This formula is known as the direct capitalization approach to estimating equity value. It assumes that the income generated by the property will remain stable for the foreseeable future and does not take into account any potential changes or growth in the property's income.

Quiz 10: Valuation of Income Properties: Appraisal and the Market for Capital