Questions and Answers
When using the cost approach to valuation, what must be obtained?
Current market data for land values
What is the purpose of deducting an amount for depreciation in the cost approach?
To account for the decrease in value of the improvements over time
What is an important area of research when considering an investment in 'distressed' properties?
Market research to determine an expected future price
What is the maximum deduction for a qualified residence?
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What is an important consideration in regional dynamics?
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What is the primary purpose of a title search?
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What is the main concept behind the Sales Comparison Approach?
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What is the formula used to estimate the value of a property using the Cost Approach?
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What is the Gross Rent Multiplier (GRM) used for?
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What is the purpose of the Sales Comparison Approach?
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What is the formula used to estimate the value of a property using the Income Approach?
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What type of property is the Cost Approach most effective for?
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What is the purpose of the Cost Approach?
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What is the purpose of the Income Approach?
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What is homeownership considered besides shelter?
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What is a result of population growth on housing demand and price appreciation?
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What happens to demand for purchased housing when federal income taxes increase?
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What is the relationship between the cost of rental housing and demand for purchased housing?
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What is the impact of employment increase on demand for purchased housing?
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What is the approach used to appraise property by comparing selling prices of similar properties?
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What is a driver of housing demand and price appreciation?
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What happens to demand for purchased housing when mortgage interest rates increase?
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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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