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Real Estate Test 2 Review Chapter 12 3 approaches to estimating value Sales comparison Cost approach The income capitalization approach Sales comparison and cost approaches are both for residential property The income capitalization approach is for residential and commercial Sales 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 a single indicated value Types and sequences of adjustments o 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 items o 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 equal utility using modern construction techniques materials and design Accrued depreciation estimate o 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 itself o Functional obsolescence when the usefulness of the building is limited when compared to newer buildings o 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 monthly gross rent The cost approach is most valuable for estimating the value of new properties The sale comparison approach is applicable to almost all one four family residential properties and to many larger income producing properties If the subject property is better than the comparable property the comparable would be adjusted upward A nonarm s length transaction is one in which the buyer or sellers do not have equal bargaining powers with respect to negotiating the sale price An adjustment to the normal sale price due to changes in market conditions results in a market adjusted normal sale price estimate Multiple regression analysis is especially useful in estimating the value of residential properties when there are a large numbers of transactions In multiple regression models the R2 statistic measures how well the model fits the data The estimated beta coefficient on the square footage of living area variable represents its marginal value Curable elements of depreciation are those whose cost will be no greater than value added by replacing them Chapter 13 The income approach Fundamental equation V I R V value I income R capitalization rate V I NOI R R NOI AP Direct Market Extraction This is the most straightforward method for estimating R Refer to this is the target packet A projects NOI is calculated by deducting all expenses and allowances from the property s effective gross income Study 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 income Know math problems 2 5 6 in the target copy Which of the following expenses is not an operating expense Capital improvement expenditures In 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 as carpeting The equity dividend rate BTCF Ve The preferred method to estimate Ro is direct market extraction from comparable sales data The mortgage constant can be though of as the capitalization rate of debt financing Discount rates are the largest component of most capitalization rates Chapter 14 Recourse financing when you sign a promissory note Homestead extension protects 10 000 cash and 1 vehicle You can protect acre in the city and 160 acres out of the city Mortgages real estate financing involves two separate obligations the promissory note and the mortgage The borrower who gives the mortgage is the mortgager the landowner The lender who receives the pledge is the mortgagee the bank The story of a mortgage typically an 18 page contract The primary mortgage market money

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