Real Estate Valuation

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Questions and Answers

When using the cost approach to valuation, what must be obtained?

Historical data for depreciation

Future predictions for land values

Past market data for improvement values

Current market data for land values (correct)

What is the purpose of deducting an amount for depreciation in the cost approach?

To determine the value of the land

To determine the current market value of the improvements

To account for the decrease in value of the improvements over time (correct)

To calculate the cost of reproducing the improvements

What is an important area of research when considering an investment in 'distressed' properties?

Market research to determine the current market price

Regional dynamics to determine the growth of the area

Title search to determine the value of the property

Market research to determine an expected future price (correct)

What is the maximum deduction for a qualified residence?

$250,000 Signup and view all the answers

What is an important consideration in regional dynamics?

All of the above Signup and view all the answers

What is the primary purpose of a title search?

To determine any defects in the title and/or liens Signup and view all the answers

What is the main concept behind the Sales Comparison Approach?

Estimating the value of a property by comparing it with recently sold similar properties Signup and view all the answers

What is the formula used to estimate the value of a property using the Cost Approach?

Cost New - Depreciation + Land Value Signup and view all the answers

What is the Gross Rent Multiplier (GRM) used for?

To estimate the value of a property using the Income Approach Signup and view all the answers

What is the purpose of the Sales Comparison Approach?

To estimate the value of a property in an active residential market Signup and view all the answers

What is the formula used to estimate the value of a property using the Income Approach?

GRM x Rental Income Signup and view all the answers

What type of property is the Cost Approach most effective for?

Special use property or newer homes Signup and view all the answers

What is the purpose of the Cost Approach?

To estimate the value of a property by calculating its cost new minus depreciation and adding land value Signup and view all the answers

What is the purpose of the Income Approach?

To estimate the value of a property that generates cash flow Signup and view all the answers

What is homeownership considered besides shelter?

An investment Signup and view all the answers

What is a result of population growth on housing demand and price appreciation?

Increase in demand and price appreciation Signup and view all the answers

What happens to demand for purchased housing when federal income taxes increase?

Demand decreases Signup and view all the answers

What is the relationship between the cost of rental housing and demand for purchased housing?

Inverse relationship Signup and view all the answers

What is the impact of employment increase on demand for purchased housing?

Increase in demand Signup and view all the answers

What is the approach used to appraise property by comparing selling prices of similar properties?

Market approach Signup and view all the answers

What is a driver of housing demand and price appreciation?

Population growth Signup and view all the answers

What happens to demand for purchased housing when mortgage interest rates increase?

Demand decreases Signup and view all the answers

Study Notes

Homeownership

Homeownership is not just a shelter, but also an investment vehicle.
Price influences are driven by income, employment, interest rates, and renting vs. owning.

Economic Influences on Housing Demand

Population growth increases demand and house price appreciation.
Increased federal income taxes decrease demand for purchased housing.
Increased mortgage interest rates decrease demand for purchased housing.
Increased cost of rental housing increases demand for purchased housing.
Employment increases lead to increased demand for purchased housing.
Household income increases lead to increased demand for purchased housing.
Household formations increase demand for purchased housing.

Economic Influences on Housing Demand (Table)

Population growth: +
Household formation: +
Employment: +
Household income: +
Interest rates: -
Federal income tax rates: -
Cost of renting housing: +

Appraisal Approaches

Market Approach (Sales Comparison Approach)
- Estimates value by comparing selling prices of similar properties.
- Adjusts values for dissimilarities.
Cost Approach
- Establishes a value for the site.
- Determines the cost of reproducing the improvements.
- Adds the two values and deducts depreciation.
Income Approach
- Uses Gross Rent Multiplier (GRM) to estimate value.
- Estimates value by multiplying GRM by rental income.

Appraisal: Qualifying the Property

Sales comparison approach is most effective for active residential markets.
Cost approach is most effective for special use property or newer homes.
Income approach is most effective for cash flow generating property.

Cost Approach Example

Cost New = $200,000 (2,000 Sq Foot x $100 per square foot new)
Depreciation Estimate = $20,000 (10% of total effective 100 year life span)
Site Value = $30,000
Subject Value Estimate = $200,000 - $20,000 + $30,000 = $210,000

Income Approach Example

GRM = 4, derived from the market
Subject potential gross income (PGI) = $200,000 per year
Subject Value Estimate = 4 x $200,000 = $800,000

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Description

This quiz covers the cost approach to property valuation, including adjusting for dissimilarities and determining land values and improvement costs.