Property Appraisal Methods & Valuation Flashcards
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Read the first 7 Property Appraisal Methods & Valuation flashcards as text
The 'principle of substitution' underpins all three appraisal approaches. Which statement best expresses this principle?
Answer: A prudent buyer will pay no more for a property than the cost of acquiring an equally desirable substitute
Substitution holds that the maximum value of a property is set by the cost of obtaining an equally desirable alternative, forming the basis for all three approaches.
In appraisal, 'effective gross income' (EGI) is derived from potential gross income (PGI) by:
Answer: Subtracting vacancy and collection losses, then adding miscellaneous income
EGI = PGI − Vacancy & Collection Losses + Miscellaneous Income, representing realistic income the property is expected to generate.
For insurance appraisal, why is the 'depreciated replacement cost' (DRC) method important?
Answer: It estimates the actual cash value (ACV) of improvements after accounting for depreciation
DRC provides the actual cash value (replacement cost new less accrued depreciation), which is the basis for ACV insurance settlements.
A warehouse sells for $1,200,000 with an annual gross rent of $120,000. What is the Gross Rent Multiplier (GRM)?
Answer: 10
GRM = Sale Price / Gross Rent = $1,200,000 / $120,000 = 10.
Which statement correctly describes 'plottage' (or assemblage) in real estate appraisal?
Answer: The increment of value created when two or more parcels are combined into one larger, more valuable parcel
Plottage is the added value that results from merging smaller parcels into a larger tract that has greater utility or development potential than the sum of its parts.
When reconciling value indicators from multiple appraisal approaches, an appraiser should:
Answer: Weight each approach based on its applicability and quality of data for that property type
Reconciliation requires professional judgment to assign emphasis based on data quality, property type, and the purpose of the appraisal — not a simple average.
A commercial building has a replacement cost new of $800,000 and accrued depreciation of $200,000. The land value is $150,000. What is the indicated value by the cost approach?
Answer: $750,000
Cost approach value = (RCN − Depreciation) + Land = ($800,000 − $200,000) + $150,000 = $750,000.