FINAL REVIEW

CHAPTER 6 SITE VALUATION

Question Interim Use

Four appraisers wannabes, Deano Frappuccino, I. Nita Starbucks,

Greene Tee and Lotto Latte, all went to an interview for an appraiser
trainee position. They were asked the definition of the term interim
use. Their answers as follows. Whose answer was WRONG?
a) Deano Frappuccino: An interim use is not the current highest
and best use.
b) I. Nita Starbucks: The highest and best use of an interim use
property is expected to change in the future.
c) Greene Tee: The immediate development of an interim use
property to its future highest and best use is probably not
financially feasible
d) Lotto Latte: An interim use may contribute to property value
depending on factors such as income produced and expected
demolition costs, if any.

Answer Interim Use

Correct Answer: a). Only Deano Frappuccino was wrong.

An interim use is the current highest and best use of
property as improved, although the highest and best use is
expected to change in the future. For instance, a cornfield
on the edge of an area being developed into residential
subdivisions may be at its highest and best use now as a
cornfield. However, after infrastructure is in place (such as
zoning), the highest and best use may be as residential
homes. If the field produced more income than other
similar vacant lots, the interim use of farming contributes
value to the property.

Question Site Value & Highest & Best Use

Mr. Thrifty recently acquired a 3-acre site

zoned for commercial use on Busy Street.
Currently there is a thriving grocery store on
one-third of the property. If Mr. Thrifty would
like to utilize his new property to its highest
and best use, which of the following would be
the best scenario?
a) If it can be subdivided, use the excess land to
develop a complementary highest and best
use, such as a strip mall
b) Mr. Thrifty should leave it as-is since changing
anything would cost more money and not be
economically feasible
c) Tear down the grocery store to free up 3 acres
of land on a busy street and sell to a large

Answer

Site Value & Highest & Best Use

Answer: A
According to the Principle of Highest and
Best Use, there is an optimal amount of
land associated with a given use. Since the
grocery store is only utilizing one-third of
the three acres, the other acreage is
excess land. If current zoning permits, Mr.
Thrifty could subdivide the excess land to
complement the existing land use. He
could not, however, develop the excess
land into multifamily since the property is
zoned for commercial and not multifamily

Question

Excess Land

Johnny B. Goode purchases two adjoining

lots on Better Street in the town of
Bestville. His appraisal estimates that the
value of the lots combined into a single lot
will almost double the total value of the
lots if kept separate. This added value is
known as:
(a) Assemblage
(b) Plottage
(c) Surplus

Answer

Excess Land and Plottage

Answer: B Plottage
Plottage is the increase in value that result
from combining two or more lots under one
ownership to allow for a more profitable
highest and best use. If two lots are worth
more when combined than they are
separately, the added value is called the
plottage value.
(Whereas assemblage is the process of
combining two or more separate lots into a
single ownership.)

Question

Building Residual Method

Burger King just opened a new restaurant

on Haveityour Way. It was determined
using land sales comps that the site value
of subject property is $600,000. The
market data indicated that the
capitalization rate for land is 10% and
improvements are 12%. The annual net
income is $100,000. What is the total
property value?
a. $1,110,500
b. $750,000
c. $867,500
d. $933,333

Answer

Building Residual Method

Answer: D $933,333
Step 1: Land Value x Land Cap Rate = Land NOI
$600,000 x 10%
= $60,000 Land
NOI
Step 2: Total NOI - Land NOI = Building NOI
$100,000 - $60,000 = $40,000 Building NOI
Step 3: Building NOI / Building Cap Rate = Building Value
$40,000
/ 12%
= $333,333
Building Value
Step 4: Land Value + Building Value = Total Property
Value
$600,000 + $333,333
= $933,333

Question

Site Value Allocation Method

Mary Q. Contrary determines that a

property is
worth a total of $300,000. The building
value
to land value ratio for similar properties is
2:1.
Under the allocation method, what is the
value
attributable to the land?
(a) $100,000
(b) $150,000

Answer

Site Value Allocation Method

Answer: A
The ratio 2:1 indicates a total of THREE
PARTS since 2 + 1 = 3. Therefore, twothirds of the propertys value is attributable
to the improvements and one-third of the
value is attributable to the land. One-third
of the total value of $300,000 is $100,000,
so the land is valued at $100,000.

Question Subdivision Development Method

After suffering a 50% vacancy rate for too long

because the rent was too damn high, Bank,
Rupp & Baroque Development decided to
demolish their old and decrepit Broken Arms
Apartments complex. They wish to subdivide
the now vacant land into 250 lots. Each lot is
expected to sell for $300,000. Development
costs are expected to run $80,000 per lot.
Sales expenses, overhead and profits are
estimated at 25% of sales. Without allowing
for discounting future cash flows, what is the
indicated value of the site?
(a) $36,250
(b) $36,250,000
(c) $362,500

Answer Subdivision Development Method

Answer = B

$36,250,000

Explanation:
First find the amount of total sales before deductions
$300,000 x 250 lots = $75,000,000
Next calculate the total development costs
$80,000 x 250 lots = $20,000,000
Then find the cost of sales expenses, overhead and profit (25% of
sales)
$75,000,000 x 25% = $18,750,000
(you can also calculate it like this:)
300,000 x 25 % = $75,000 x 250 lots = $18,750,000
Now, the indicated value of the site can be found by taking the total
sales and subtracting Development costs and sales expenses,
overhead and profit
$75,000,000 - $20,000,000 - $18,750.000 = $36,250,000

Question Highest & Best Use

An older neighborhood of single-family

residences has been recently rezoned to
allow high density dwellings. An appraisal
of these properties must include:
a) the phone number of the DRE complaint
hot- line
b) a disclosure of the current zoning and new
density requirements
c) an estimate of land value as if vacant for
commercial development
d) a good faith estimate

Answer Highest & Best Use

Answer: B
Disclosure of the current zoning and new density
requirements

CHAPTER 8 COST APPROACH

Answer

3 Step Formula Based on Principle of Substitution

In the cost approach which of the following

formulas is used to estimate value?
a.Reproduction or replacement cost less
depreciation plus land
b.Reproduction or replacement cost plus
depreciation plus land
c.Depreciated cost of land plus depreciated cost
of improvements
d.Replacement cost new plus accrued
depreciation

Answer

3 Step Formula Based on Principle of Substitution

Answer: A
In the cost approach, cost is related to value
by the formula:
Value = Replacement Cost New*
Depreciation of improvements + Land Value
* May be (but rarely is) substituted with
Reproduction Cost
In this formula, cost refers to cost of
reproducing or replacing the propertys
improvements. Depreciation is the difference
between cost and value, from any cause.

Question

Cost Approach

A well maintained turn of the (20th) century

4 bedroom/1 bathroom house in a
neighborhood of newer traditional homes
would best be considered:
(a) Charming
(b) Functionally obsolete
(c) Historic
(d) Non-conforming

Answer Cost Approach

Answer: B Functionally obsolete

It is essentially a misplaced asset.

Question Effective Age

Goldilocks house on Behr Lane was built in

1989 with an estimated economic life of 60
years. The house was appraised in 2011.
Since the house has been recently
remodeled with a brand new kitchen,
baths, windows and roof, Forest Appraisal
Group estimates that the house looks
similar to one built in 2006. What is the
effective age of the house and what is its
remaining economic life (REL)?
a.5, 55
b.22, 65
c.22, 60

Answer Effective Age

Answer: A
Although the house has a chronological age
of 22 years, its effective age is that of a 5
year old home due to its recent remodel.
Economic Life - Effective Age
= Remaining
Economic Life (REL)
60 years
- 5 years
= 55 years REL

Question Types of Depreciation

Wynken, Blynken and Nod have listed their house for sale
on Crystal Light River Drive. They hired a plumber to fix a
slab leak and are informed
that the sill plate is
completely rotted. A general contractor tells the owners
that the entire sill plate will need to be replaced requiring
the home to raised from its foundation. What type of
depreciation is this?
a.Curable physical depreciation
b.Incurable physical depreciation
c.Curable functional depreciation
d.Incurable functional depreciation

Answer Types of Depreciation

Answer: B Incurable physical depreciation

The cost-to-cure is more than the added value.

Question

Cost Approach

Which of the following refers to how long

an improvement will contribute to the
value of the property?
a. Physical life
b. Social life
c. Economic life
d. Remaining economic life

Answer Cost Approach

Answer: C Economic Life

Economic life refers to how long the improvement
will contribute to the value of the property.
Physical life refers to the length of time the
improvement can be expected to exist, with
normal maintenance.
Remaining Economic Life is the difference between
the estimated total economic life and the
estimated effective age.

Social life refers to something you dont have

during finals week.

Question Curable & Incurable Obsolescence

The Addams Family is moving. Their children Wednesday

and Pugsley are off to college, Uncle Fester has moved to
Miami, and even their trusty butler, Lurch, has retired. They
never thought the day would come but they are now empty
nesters and the house is just too large for the two of them.
Over the years, Gomez and Morticia have customized their
home to adapt to their familys needs. A walk through of
their home prior to listing it yielded the following. Next to
each item, indicate whether it is curable or incurable and
what type of obsolescence it might fall under - physical,
functional, or external.
1.
2.
3.
4.
5.
6.
7.

Located next to a cemetery ___

One car (hearse) garage __
A moat ___
A dungeon, complete with instruments of torture ___
Skeletons in the closet ___
Creaky doors and stairs ___
Cobwebs everywhere ____

Answer Curable & Incurable Obsolescence

1. Located next to a cemetery = Incurable/external obsolescence

2. One car (hearse) garage = Incurable/functional obsolescence
3. A moat = Curable/functional obsolescence
4. Dungeon = Curable/functional obsolescence (May be deemed
Incurable/Functional
Obsolescence , i.e.
Superadequate, in California)
5. Skeletons in the closet = Curable/physical obsolescence
6. Creaky doors and stairs = Curable/physical obsolescence
7. Cobwebs everywhere = Curable/physical obsolescence
8. No exterior landscaping
Curable/physical obsolescence

(except

for

grave

markers)

Question Age-Life Ratio

An appraiser estimates the replacement cost

of a house at $300,000. The home has an
economic life of 60 years and an effective
age of 15 years. The home was built to
replicate a home in the movie Lord of the
Rings and the ceiling height is only 5 feet
tall. The home has no modern appliances
and the cost-to-cure will be $7,500. What is
the economic age-life ratio?
(a) 25%
(b) 22%
(c) 20%
(d) Cannot be calculated because the
ceiling

Answer Age-Life Ratio

Answer: A
Age-Life Ratio is calculated as 15
divided by 60 = 25%

Question Accrued Depreciation

Replacement Cost New (RCN) of a

building is $500,000 plus additives of
$75,000. Total accrued depreciation
for this building is $260,000.
What is the current value of the
building only using the Cost Approach?
The property has no site
improvements.
(a) $200,000
(b) $300,000
(c) $315,000

Answer

Accrued Depreciation

Answer: C $315,000
RCN
$500,000
+ Additives
$ 75,000
Total Cost New:
$575,000
Less Accrued Depreciation:
<$260,000>
Indicated Value by Cost Approach:
$315,000

Question Economic Age-Life Method

The Economic Age-Life Method is:

a.Based on the assumption that an improvement
appreciates at a steady rate over the course of
annual upgrades, kitchen remodeling, and
bathroom remodeling.
b.Based on the assumption that an improvement
loses value at a very rapid rate over the course of
its economic life when it has failed to be
maintained properly.
c.Based on the assumption that an improvement
loses value at a steady rate over the course of its
economic life.
d.None of the above

Answer Economic Age-Life Method

Answer C - Based on the assumption that an

improvement loses value at a steady rate over
the course of its economic life.
Hence, the Economic Age-Life Method is
sometimes referred to as the Straight Line
Method.

Answer Economic Age-Life Method Calculation

There was an old woman who lived in a

house on Louboutin Lane with so many
children she didnt know what to do. The
house had an economic life of 80 years, a
chronological age of 10 years, but an
effective age of 60 years due to the
excessive wear and tear by the many
children. The replacement cost new (RCN)
of the house was estimated to be
$200,000. Using the economic age-life
method, what is the depreciated value of
the improvement?
(a) $200,000
(b) $100,000

Answer

Economic Age-Life Method Calculation

Answer: C $50,000
REMEMBER: RTQ (Read the Question)!
Divide the effective age by the economic life to find
the accrued depreciation rate: 60 80 = 0.75.
Then multiply the accrued depreciation rate by the
replacement cost to find the accrued depreciation:

0.75 $200,000 = $150,000.

Subtract the accrued depreciation from the
replacement cost to find the depreciated value of the
house: $200,000 $150,000 = $50,000.

Question Cost Index Trending

The Sundevil house at 666 Hellway Lane

was built in 1976 for $75,000. At that time
the construction cost index was 100.
Currently (as of the effective date of the
appraisal), the cost index for the subjects
market according to the latest data
released by Marshall & Swift Cost Services
is 350. What is the present cost based on
the cost index method?
(a) $250,400
(b) $262,500
(c) $274,800
(d) Cannot be determined using the

Answer Cost Index Trending

Answer: B $262,500
Current Index_________ x Original Cost =
Present Cost
Index at the time of construction
350 current index
$262,500
100 base year index

x $75,000 = 3.5 x $75,000 =

This method is the least reliable when used alone. It is

used extensively in the preparation of mass
appraisals, such as those done by the Assessor. Since
the Assessor uses raises your property taxes only 2%

Question Types of Costs -Direct Costs, Indirect Costs &

Entrepreneurial Profit

Mr. Green wants to construct a LEED-certified

platinum office building on Candy Lane adjacent to
his chocolate factory. He estimates hard costs of
$7,500,000 to Milky Way Construction for the
building materials and labor. Soft costs are
estimated to be $450,000 to the Three Musketeers
Architects for design and blueprints, $150,000 to
the City of Hershey for building permit fees,
property taxes of $20,000 to the Ghirardelli County
Assessor
during
the
development
period,
construction interest of $330,000 to Nestle Bank
and legal fees of $50,000 to the law firm of Dewey,
Cheatum & Howe. Mr. Green desires a 15%
entrepreneurial profit. Therefore the total estimated
cost is:
(a) $9,750,00
(b) $9,775,000
(c) $10,000,000

Answer Types of Costs - Direct Costs, Indirect Costs &

Entrepreneurial Profit

Answer: (See page 261 of Rockwell text for

similar problem.)
Hard Costs: $7,500,000
Soft Costs: $1,000,000
Total Hard and Soft Costs: $8,500,000
So 15% of the total cost will be allocated to
entrepreneurial profit and the remaining 85% is
the hard and soft costs.
$8,500,000 / 85% = $10,000,000 total cost
(Therefore $10,000,000 total costs $8,500,000
hard and soft costs = $1,500,000 entrepreneurial
profit)

CHAPTER 10 INCOME
APPROACH

Question

Income Approach

What Principle of Value forms the

foundation
of
the
Income
Approach?
a)
b)
c)
d)

Principle
Principle
Principle
Principle

of
of
of
of

Anticipation
Substitution
Consistent Use
Bracketing

Answer Income Approach

Answer: Principle of Anticipation

The value of a property is
determined by
its potential future benefits of its
ownership.

Question Rate of Return

Tiny Tim is looking for a rental condo and

requires a 15% return on his money. He
found a rather small condo on Lilliputian
Court which will rent at a market rate of
$1,700/month. What would Tiny Tim be
willing to pay for this property based on his
investment expectations?
a. $316, 000
b. $136, 000
c. $170,000
d. Nothing, the investment does not work

Answer Rate of Return

Answer: B $136,000
$1,700/mo. X 12 = $20,400 of annual
income
$20,400 annual income/15% rate of return
= $136,000

Question IRV

The net operating income on an annual basis for

Jumping Java Caf is $42,000. Research indicates
that the market capitalization rate for similar single
tenant properties is 8%. What is the value of the
this property?
a) $525,000
b) $3,360
c) $52,500
d) Worthless since they do not serve green tea
lattes

Answer IRV

Answer: A $525,000
Net Operating Income (annualized) / Cap
Rate = Value
$42,000 NOI/.08 Cap Rate = $525,000
Value

Question Gross Income Multiplier

Sandy Shell owns a seaside store on

Seashore Drive renting for $50,000 per
year before expenses. She just closed
escrow on the property 10 days ago for a
$500,000 purchase price. What was the
gross income multiplier?
(a) 1/10 or 10%
(b) 5
(c) 10

Question Gross Income Multiplier

Answer: C

10

$500,000 Value
50,000 Gross Annual Income

= 10

NOTE: Answer is 10x Gross and therefore it

is NOT a percentage

Question Vacancy Rates

The law firm of Dolittle & Phail has

requested an appraisal of their clients 50
unit apartment building located in town of
Incomeville. The subject property has a
100% occupancy rate. If the market
vacancy rate in the area is 8%, what
conclusion would you draw?
(a) Rents are too high
(b) Rents are too low
(c) Subject building has superior
advertising

Answer

Vacancy Rates

Answer: B Rents are too low

Why?