Podcast
Questions and Answers
One of three approaches to value in which the appraiser derives a value indication by converting anticipated benefits through ownership of income-producing property is the ________ approach.
One of three approaches to value in which the appraiser derives a value indication by converting anticipated benefits through ownership of income-producing property is the ________ approach.
- Capitalization Approach
- Market Comparison Approach
- Income Approach (correct)
- Cost Approach
The economic principle of ________ states that value is created by the expectation of benefits to be derived in the future.
The economic principle of ________ states that value is created by the expectation of benefits to be derived in the future.
- Anticipation (correct)
- Substitution
- Balance
- Contribution
The economic principle of ________ states that a property's maximum value tends to be set by the lowest cost or price at which another property of equivalent utility can be acquired.
The economic principle of ________ states that a property's maximum value tends to be set by the lowest cost or price at which another property of equivalent utility can be acquired.
- Anticipation
- Contribution
- Substitution (correct)
- Competition
Four most common methods of financing real estate are:
Four most common methods of financing real estate are:
A personal property is termed a ________ mortgage.
A personal property is termed a ________ mortgage.
A ________ mortgage is also called a second mortgage.
A ________ mortgage is also called a second mortgage.
A payment on the balance due of a note at the end of the loan term that is in excess of the regular payment amounts is called a ________ payment.
A payment on the balance due of a note at the end of the loan term that is in excess of the regular payment amounts is called a ________ payment.
A ________ mortgage covers real estate as well as personal property included with the real estate.
A ________ mortgage covers real estate as well as personal property included with the real estate.
The four variables in real estate financing that affect the mortgage payment are:
The four variables in real estate financing that affect the mortgage payment are:
The ________ rate (or discount rate) reflects the return on the investment.
The ________ rate (or discount rate) reflects the return on the investment.
The summation concept is a theoretical procedure in developing the discount rate for a real estate investment and is comprised of the following four parts:
The summation concept is a theoretical procedure in developing the discount rate for a real estate investment and is comprised of the following four parts:
The ________ rate reflects the relationship between the real estate taxes and the value of the property.
The ________ rate reflects the relationship between the real estate taxes and the value of the property.
To obtain value using the IRV formula, one must ________ the income by the rate.
To obtain value using the IRV formula, one must ________ the income by the rate.
To obtain value using the VIF formula, one must ________ the income by the factor.
To obtain value using the VIF formula, one must ________ the income by the factor.
Real estate competes with other investments for the investor's dollar. As an
investor analyzes various opportunities, what will he or she consider?
Real estate competes with other investments for the investor's dollar. As an investor analyzes various opportunities, what will he or she consider?
Competition is created by the potential for profits. However, competition among sellers may lead to a/an ____________, which reduces prices and profits. Competition among buyers may lead to ____________, which increases prices and profits to sellers.
Competition is created by the potential for profits. However, competition among sellers may lead to a/an ____________, which reduces prices and profits. Competition among buyers may lead to ____________, which increases prices and profits to sellers.
The _____________________ rate reflects the return of the investment in the wasting asset.
The _____________________ rate reflects the return of the investment in the wasting asset.
List nine factors influencing investor decisions.
List nine factors influencing investor decisions.
_______________ leverage is achieved when funds are invested in property, which has a higher rate of return than the cost of borrowed funds.
_______________ leverage is achieved when funds are invested in property, which has a higher rate of return than the cost of borrowed funds.
List four types of mortgages classified according to repayment provisions:
List four types of mortgages classified according to repayment provisions:
Flashcards
Income Approach
Income Approach
A valuation method converting future income into present value.
Anticipation
Anticipation
The principle that value is based on expected future benefits.
Substitution
Substitution
A maximum property value is set by the cost of equally desirable substitutes.
Oversupply
Oversupply
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Shortage
Shortage
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Recapture Rate
Recapture Rate
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Positive Leverage
Positive Leverage
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Real Estate Financing Methods
Real Estate Financing Methods
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Chattel Mortgage
Chattel Mortgage
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Junior Mortgage
Junior Mortgage
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Balloon Payment
Balloon Payment
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Package Mortgage
Package Mortgage
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Mortgage Payment Variables
Mortgage Payment Variables
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Overall Yield Rate
Overall Yield Rate
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Summation Concept
Summation Concept
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Effective Tax Rate
Effective Tax Rate
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IRV Formula: Finding Value
IRV Formula: Finding Value
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VIF Formula: Finding Value
VIF Formula: Finding Value
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Factors Influencing Investment Decisions
Factors Influencing Investment Decisions
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Mortgages Classified by Repayment
Mortgages Classified by Repayment
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Study Notes
Approaches to Value
- The income approach derives a value indication by converting anticipated benefits through ownership of income-producing property.
Real Estate Investment Considerations
- Investors consider the cost, potential return, and associated risks when analyzing real estate opportunities.
- Investors consider when they will get return on investment.
- Investors also compare real estate investment returns to other similar risk investments.
Principle of Anticipation
- The principle of anticipation states that value is created by the expectation of future benefits.
- Anticipation forms the basis of the income capitalization approach.
Principle of Substitution
- The economic principle of substitution says that a property's maximum value is set by the lowest cost/price for an equivalent utility property.
- Buyers will not pay more for a property if a similar one is available at a lower price, according to this concept.
Market Competition
- Competition among sellers leads to oversupply, reducing prices and profits.
- Competition among buyers leads to shortages, increasing prices and profits for sellers.
Recapture Rate
- The recapture rate is the return portion allocated to recovering the investment in a wasting asset, such as a building.
- It accounts for depreciation and the eventual need for asset replacement.
- It is calculated as the reciprocal of the remaining economic life (e.g., 1 ÷ 25 years = 0.04 or 4%).
Factors Influencing Investor Decisions
- Safety and liquidity of the investment.
- Appreciation, time and income tax advantages
- Management and leverage.
- Size of the investment
- Use as collateral.
Positive Leverage
- Positive leverage is achieved when funds invested in property have a higher rate of return than the cost of borrowing.
- Positive leverage increases profitability.
Common Methods of Financing Real Estate
- Mortgages, trust deeds, cash, and land contracts are common ways to finance real estate purchases.
- Mortgages are the most common.
Chattel Mortgage
- A chattel mortgage involves a lien on personal property used as security for a loan
Junior Mortgage
- A junior mortgage is subordinate to first mortgages and often referred to as a second mortgage.
Types of Mortgages
- Mortgages can be classified as amortized, straight, reverse, or partially amortized based on repayment provisions.
- These classifications represent repayment structures in real estate financing.
Balloon Payment
- A balloon payment is a large, final payment at the end of a loan term exceeding prior periodic payments.
- It is often used in loans with lower initial payments.
Package Mortgage
- A package mortgage secures a loan for both real estate and personal property included with the real estate.
Variables Affecting Mortgage Payments
- Variables include loan amount (principal borrowed), the interest rate applied, the term (duration of the loan), and the payment frequency.
- All directly impact the mortgage payment calculation
Overall Yield (Discount Rate)
- Overall rate (or discount rate) indicates the total return an investor expects from a property
- Considers income and the time value of money.
Summation Concept
- The summation concept is a theoretical procedure for developing the discount rate for a real estate investment.
- It combines the safe rate (risk-free return) with adjustments for risk, non-liquidity, and management effort to form a specific discount rate.
Effective Tax Rate
- The effective tax rate reflects the relationship between real estate taxes and the property value.
- Is an essential measure for valuation.
IRV Formula
- To obtain value using the IRV formula, divide the income by the rate.
- The formula is Income = Rate × Value
VIF formula
- To get value using the VIF formula, multiply the income by the factor.
- The equation is Value = Income x Factor linking to the valuation of property.
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Description
This lesson covers the income approach to property valuation, emphasizing how it converts anticipated benefits into a value indication. It also explores real estate investment considerations, including cost, potential return, and associated risks. The lesson highlights the principles of anticipation and substitution.
