Real Estate Test 2 ReviewChapter 12Chapter 13Chapter 14Chapter 15Chapter 16Real Estate Test 2 ReviewChapter 123 approaches to estimating value:- Sales comparison- Cost approach- The income capitalization approachSales comparison and cost approaches are both for residential property.The income capitalization approach is for residential and commercialSales comparison approach (great for houses)- Identify 3 comparable properties that have been sold recently- Adjust each properties sales price to account for its differences from the subject property. o This yields final adjusted price for each comparable property- Reconcile the comparable properties final adjusted sale prices to determine asingle indicated value- Types and sequences of adjustmentso Transaction price- +/-Conditions of sale- +/-Financing terms (below market, non market) =Normal sale price- +/-Market conditions =Market adjusted normal sale price- +/-location - +/-physical characteristics- +/-legal characteristics- +/-use- +/-nonreality itemso =final adjusted sale price- In reconciliation the appraiser may put more weight on one or more sale because he believes it represents the property better. Cost approach- Cost estimate: the value of a new building equals the cost to reproduce today.o Estimate the current reproduction cost of the improvement as if new – estimate the total physical, functional, and external depreciation. = the depreciated value of the improvements + estimate the value of the land (including the site improvements) = indicated value using the cost approach- reproduction costs: the cost to construct the building today, replicating it in exact detail. - Replacement costs: denotes the cost required to construct a building of equalutility using modern construction techniques, materials, and design.- Accrued depreciation estimateo Physical deterioration Curable short live items are those whose cost of replacement will be no greater than the value added by replacing them. The estimated physical deterioration of these items is equal to the cost of replacing them. —You get your money back Incurable short-lived items are those whose cost of replacement will be greater than the value added by replacing them.  Long-lived components consist of the main parts of the building itselfo Functional obsolescence: when the usefulness of the building is limited when compared to newer buildingso External obsolescence: denotes the loss of a buildings value through influences external to the property. It is always deemed incurable. Study questi ons(ALL statements are stated as true)In the traditional sales comparison approach the appraiser reconciles the final adjusted sale prices to determine the indicated value.Changes in market conditions result from: increases or decreases in demand, inflation, and increases or decreases in supply. Know math problems 4,5, and 7 from target copy.A technique which identifies tow or more properties that are similar in all respects except for one, in order to estimate the value of that component is termed: paired-data analysis. The cost of a building to construct the building today, replicating it in exact detail, is termed: reproduction cost.The estimated constant in a linear multiple regression models represent: the contribution of all of the factors that are not explained by the equation and to which the coefficients are added. Any loss of a building’s value due to excess traffic noise is termed: external obsolescence. The monthly gross rent multiplier is defined as the sale price divided by the monthlygross rent.The cost approach is most valuable for estimating the value of new propertiesThe sale comparison approach is applicable to almost all one-four family residential properties and to many larger income-producing propertiesIf the subject property is better than the comparable property the comparable would be adjusted upwardA nonarm’s length transaction is one in which the buyer or sellers do not have equal bargaining powers with respect to negotiating the sale priceAn adjustment to the normal sale price due to changes in market conditions results in a market-adjusted normal sale price estimateMultiple regression analysis is especially useful in estimating the value of residentialproperties when there are a large numbers of transactionsIn multiple regression models the R2 statistic measures how well the model “fits” the dataThe estimated beta coefficient on the square footage of living area variable represents its marginal valueCurable elements of depreciation are those whose cost will be no greater than value added by replacing themChapter 13The income approach- Fundamental equation: V = I / R- V: value I: income R: capitalization rate- V = I(NOI)/R- R = NOI/APDirect Market Extraction- This is the most straightforward method for estimating R- Refer to this is the target packetA projects NOI is calculated by deducting all expenses and allowances from the property’s effective gross incomeStudy questi ons(ALL statements are stated as true)A projects NOI is calculated by: deducting all expenses and allowances from the property’s effective gross incomeKnow math problems 2,5,6 in the target copy.Which of the following expenses is not an operating expense? Capital improvement expendituresIn cases in which appreciation is expected in a property’s NOI and market value, the overall yield, Yo on a property is greater than the overall capitalization rate, Ro.Dividing the equity income (BTCF) by equity dividend rate (Re), yields the: value of the equity. The capitalization rate found by dividing the NOI by a selling price. Take in account future cash flows expected.The allowance known as the reserve for replacements and other nonrecurring expenses is estimated by annualizing all the costs of periodically replacing the components of improvement that depreciation faster than the building itself, such ascarpeting. The equity dividend rate = BTCF / VeThe preferred method to estimate Ro is direct market extraction from comparable sales dataThe mortgage constant can be though of as the capitalization rate of debt financingDiscount rates are the largest component of most capitalization rates. Chapter 14Recourse financing: when you sign a promissory noteHomestead extension protects $10,000 cash and 1 vehicle. You can protect ½ acre inthe city and 160 acres out of the cityMortgages: real estate financing involves two separate obligations—the promissory