Appraisal methods, comparable sales analysis, and property valuation concepts tested on state real estate licensing exams.
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- What are the three primary approaches to property valuation used in appraisals?
- Sales comparison approach, cost approach, and income approach.
- Which approach to valuation is most commonly used for residential properties?
- Sales comparison approach.
- What is the sales comparison approach based on?
- The principle that a property's value is indicated by comparing it to similar properties that have recently sold.
- Define a comparable property in appraisal.
- A property that is similar to the subject property in location, size, condition, and features, and has recently sold in an arm's length transaction.
- What is an arm's length transaction?
- A sale between unrelated parties who are each acting in their own interest and have no special relationship to each other.
- What does the cost approach to valuation estimate?
- The cost to construct the building new, plus the land value, minus depreciation.
- What is physical depreciation in appraisal?
- Loss in value due to wear, tear, and deterioration of the building materials and structure over time.
- Define external obsolescence in real estate appraisal.
- Loss in value caused by negative external factors outside the property, such as nearby industrial use, poor schools, or highway noise.
- What is functional obsolescence?
- Loss in value due to outdated or inadequate design, layout, or features of the building that do not meet current market standards.
- Which approach to valuation is most appropriate for income-producing properties?
- Income approach.
- What does the income approach value a property based on?
- The income that the property can generate, capitalized at an appropriate rate of return.
- Define capitalization rate in the income approach.
- The rate of return on investment, calculated by dividing net operating income by property value.
- What is net operating income (NOI)?
- Gross potential income minus vacancies and collection losses, plus miscellaneous income, minus operating expenses.
- What adjustment is made to a comparable property's sale price if it sold under duress or distress?
- An upward adjustment to the subject property's indicated value, because the distressed sale price is typically lower than market value.
- What does it mean to adjust comparable properties in a sales comparison analysis?
- To modify the sale prices of comparable properties to account for differences between them and the subject property.