Real Estate Appraisal Concepts Quiz

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Questions and Answers

What happens to the reliability of the sales comparison approach when substitute properties are not available?

It degrades. (correct)

It remains constant.

It increases significantly.

It becomes irrelevant.

What can cause a disturbance in the equilibrium of the property market?

Decreased consumer preferences.

Stable population growth.

Increased purchasing power.

Construction of new buildings. (correct)

How does an excess of amenities for a specific location impact property value?

It creates an imbalance that can lower the property's value. (correct)

It guarantees a premium price.

It has no effect on property value.

It generally increases the property value.

Which of the following factors could likely negatively affect property value?

Location near a drug addicted area. Signup and view all the answers

What effect does competition among buyers typically have on property prices?

It can lead to shortages which increase prices. Signup and view all the answers

Which of the following best describes the relationship essential for indicating optimum market value?

Between land and improvements. Signup and view all the answers

What role do external factors play in property valuation?

They can either positively or negatively affect property values. Signup and view all the answers

In real estate, what does competition among sellers lead to?

Over supply which reduces prices. Signup and view all the answers

Which characteristic is NOT considered a physical characteristic that may affect the sales price of comparable properties?

Quality of management Signup and view all the answers

What is the significance of the highest and best use in real estate appraisal?

It influences the potential sales price of the property. Signup and view all the answers

Which of the following is an example of an economic characteristic that can impact a property's income?

Tenant mix Signup and view all the answers

When appraising a property, why is zoning important?

It defines the legal permissibility of property use. Signup and view all the answers

Which of these features would typically NOT be included in the evaluation of economic characteristics?

Architectural features Signup and view all the answers

What should an appraiser do if two properties have similar physical characteristics but different uses?

Adjust the valuations accordingly. Signup and view all the answers

How can the presence of personal property items like furniture in a sales price impact comparables?

It can inflate the sales price of the comparable. Signup and view all the answers

What is a reason for eliminating certain properties from the comparable sales list?

They are not sold for the same purpose as the subject property. Signup and view all the answers

What must an appraiser verify to ensure accuracy in their valuation?

The information used for comparison Signup and view all the answers

Which of the following is a correct unit of comparison in real estate appraisal?

Potential gross income multiplier (PGIM) Signup and view all the answers

What should an appraiser do if three comparable properties are not conclusive?

Include additional comparable properties Signup and view all the answers

In the context of appraisal, what is the role of elements of comparison?

To facilitate comparison between the subject and comparable properties Signup and view all the answers

Which of the following is NOT considered an element of comparison?

Property taxes Signup and view all the answers

What is meant by 'relevant units of comparison' in property appraisal?

Units that are compatible with the subject property Signup and view all the answers

What adjustment can an appraiser make when analyzing comparable sales?

Modify the financing terms Signup and view all the answers

Which of these best exemplifies a physical unit of comparison?

Price per square meter of gross building area Signup and view all the answers

What does the reconciliation process in the sales comparison approach involve?

Combining values estimated by different appraisal methodologies Signup and view all the answers

Which of the following is NOT a factor to consider during the reconciliation of value indications?

Comparison of selling prices across different properties Signup and view all the answers

What primary features should appraisers look for when selecting comparable sales?

Timing of sale, location, and essential characteristics Signup and view all the answers

When is a larger number of comparable sales necessary in an appraisal?

When the sales are deemed less comparable Signup and view all the answers

Which condition must a property's sales price meet to be considered an appropriate comparable?

It should be a competitive property sold in the surrounding area Signup and view all the answers

How does the uniqueness of each property affect the appraisal process?

It complicates finding completely comparable sold properties. Signup and view all the answers

What is the maximum number of comparable properties an appraiser may need to consider?

Depends on the comparability and confidence level Signup and view all the answers

To whom does a competitive property primarily serve as a substitute?

Potential buyers considering the subject property Signup and view all the answers

What indicates the adjustment made for the difference between sale 1 and sale 4?

4,200 birr upward Signup and view all the answers

What is essential for appraisers to ensure when applying the sale comparison approach?

Properties must have the same highest and best uses. Signup and view all the answers

What zoning condition affects the existing improvements of the office building?

Zoning allows for equal size improvement if existing structures are demolished. Signup and view all the answers

What does the tighter range of price per square foot of allowed building area suggest?

A strong relationship between allowed building area and market value. Signup and view all the answers

How is the value of the subject site estimated based on the floor area ratio (FAR)?

$16.34 per sq.ft. based on FAR. Signup and view all the answers

What kind of adjustments may appraisers need to make for personal property or intangible items?

Adjustment for contributory value estimation. Signup and view all the answers

What important concept regarding zoning is highlighted in the content?

Zoning can be quantified through paired data analysis. Signup and view all the answers

What is indicated by the average price per square foot of the allowed building area?

It helps in reconciling property values across different zones. Signup and view all the answers

What is the purpose of adjusting the sales price of comparable properties?

To make the sales price comparable to the subject property Signup and view all the answers

Which factor would NOT typically influence the final adjusted sales price of a property?

Historical significance of the property Signup and view all the answers

If a subject property is found to be superior to comparable properties, which market value estimate should be chosen?

Maximum value Signup and view all the answers

What adjustment must be made to the sales price if there are changes in market conditions?

Adjustments reflecting current demand or supply Signup and view all the answers

Which of the following best describes the area method of sales comparison?

It uses the range of square meter prices to determine value. Signup and view all the answers

What role do economic characteristics play in determining a property’s adjusted sales price?

They assess market trends and financial conditions affecting property value. Signup and view all the answers

When using the sales comparison approach, what does the final adjusted sales price signify?

It represents the estimated market value after all adjustments. Signup and view all the answers

Which of the following does NOT typically get adjusted when calculating market values?

Personal aesthetic preferences Signup and view all the answers

Study Notes

Unit Three: Sales Comparison Approach

The sales comparison approach is a valuation technique that determines the value of a property by comparing it to recently sold similar properties in the market.
It is assumed that the subject property will sell for a price comparable to the adjusted price of the comparable properties.
This approach is best used when there is sufficient recent and reliable market data available on properties similar to the subject.
Appraisers must carefully verify the market data obtained and understand the behavioral characteristics of buyers and sellers involved in the transaction.
Appraisers need to be aware of the strength and weaknesses of the data collected and the thoroughness of the comparative analysis in the sales comparison method.

Applicability and Limitations

The sales comparison approach is applicable to all types of property interests when sufficient comparable recent sales are available and reliable transactions indicate a clear market value pattern.
It is most widely used and reliable when the data is from arm's-length transactions.
The method is limited when there is a shortage of market transactions of comparable properties.
Rapid market changes, such as changes in economic conditions or legislation, or inflation/deflation can limit the method's reliability because older data may be less valid.
If a lack of comparable properties exists within the required time frame, this approach becomes limited.

Procedures

Research the market: The first step involves identifying sales and listings, collecting contract information, purchase offers, and listing information on comparable properties.
Verify Information: Appraisers must verify the data's accuracy and identify potential weaknesses in the data provided by parties to the transaction. Including sufficient data/comparables.
Select relevant units of comparison: The appraiser must select appropriate units of comparison, which are usually specific to a particular market. This may include physical characteristics such as size in square meters or square feet and income units such as potential gross income multiplier(PGIM), effective gross income multiplier (EGIM) and net income multiplier(NIM).
Analyzing and Adjusting Comparable Sales: This involves observing differences between the comparable properties and the subject property, and adjusting total property prices or units of comparison in line with these differences. This includes adjusting for different legal, financing, or condition related issues.
Reconciliation of Value Indications: This is the final step where value opinions are reconciled to yield a range of values or a singular value estimate (point estimate). This step requires consideration of the strengths and weaknesses of each indication, the reliability and appropriateness of market data, and the analytical techniques used.

Relationship to Appraisal Principles

Supply and Demand: The price of real estate is determined by the interaction of supply and demand in the market, where buyers and sellers act in their own best interest to maximize their returns.
Substitution: Identical market values will exist for reasonably close substitutes within a suitable timeframe considering the elements of location, utility, and desirability.
Balance: The equilibrium price of a property is determined by the interaction of market demand and supply in a market economy.
Externalities: External factors such as the conditions of the street beyond the property, the availability of transportation and amenities, the level of police protection etc all play a role in determining the property value.
Competition: Potential profits and/or competition in the market for a property can increase the supply of sellers which eventually lower prices, or result in shortages causing increased prices and profits for sellers.
Conformity: Value is created and sustained when there is reasonably similar improvements in the neighborhood.

Adjusting Comparable Sales Data

Lump sum/monetary adjustment: This uses a specific monetary amount to adjust each sale for any property differences to approximate them to the subject property.
Percentage adjustments: The difference between a comparable property and a subject property is frequently expressed as a percentage which is useful in reflecting market conditions and location differences.
Units of comparison adjustment: The appraiser selects a unit of comparison such as square footage of building area to analyze sales on this basis.
Qualitative Analysis: Relative comparison analysis, ranking analysis, and/or personal interviews with market participants are part of qualitative analysis following quantitative adjustments if necessary.

Use/Zoning

Appraisers must confirm the use and zoning of comparable properties is consistent with the subject property.
Small differences in possible uses or zoning can be quantified using paired property/sales data analysis.

Expenditures After Purchase

The market participants' expected future expenditures for the property are considered when adjusting sales prices to reflect the potential costs. These expenditures may include costs to remediate, demolishing, or for zoning petitions.

Market Conditions

Market conditions may introduce differences in the pricing of comparable sales. Repeat sales analysis method is used to track past changes in prices of individual comparable properties to adjust sales prices for months since they were sold.

Location

When the subject and comparable properties are located in different locations, an appraiser must determine the required adjustment to the price.
Paired sales data analysis is used to compare the prices of nearly identical properties in the subject's neighborhood (central) and comparable's neighborhood (distant).

Physical Characteristics

There may be differences in sale prices due to physical differences in comparable properties compared to the subject property (e.g. Lot size, structure size, desirability of floor plan, architectural style and design, condition and construction materials).

Economic Characteristics

Economic characteristics affect the income of an income-generating property and can include operating expenses, quality of management, tenant mix, rent concessions, lease terms, lease expiration dates, and renewal options, as well as expense recovery clauses.

Non-Reality Components

Personal property or intangible items in comparable properties must be adjusted. Adjustments must be based on current market prices instead of original cost or current replacement cost.

Methods Used in Sales Comparison Approach

Area Method: The value of the subject property is estimated by determining the per unit area sales price of comparable properties and then applying that to the area of the subject property.
Assessment Value Method: An appraiser must determine the ratio of the sale price to the assessed value of comparable properties to estimate the value for a subject property.
Net Capitalization Method: The appraiser must determine the net operating income (NOI) and the yield of comparable properties in order to determine the subject property's value.

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Description

Test your understanding of key concepts in real estate appraisal with this engaging quiz. Explore topics such as the sales comparison approach, market equilibrium, and the impact of external factors on property value. Perfect for students or professionals looking to solidify their knowledge in real estate.