Property Valuation Techniques Flashcards
7 cards from real Real Estate Investing practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Property Valuation Techniques flashcards as text
What is 'functional obsolescence' in real estate valuation?
Answer: Value loss from outdated design, layout, or features within the property
Functional obsolescence is caused by flaws or outdated features within the property itself, such as a poor floor plan or outdated kitchen.
An investor uses a 10% discount rate to evaluate a property. If the required rate rises to 12%, how does the present value of future cash flows change?
Answer: It decreases
A higher discount rate reduces the present value of future cash flows because future dollars are worth less in today's terms.
In the cost approach, what does 'reproduction cost' mean?
Answer: The cost to rebuild the exact same structure with identical materials and methods
Reproduction cost is the cost to construct an exact replica using the same materials, design, and quality as the original structure.
What does a cap rate compression indicate about market conditions?
Answer: Investor demand is strong, driving prices up relative to income
Cap rate compression (falling cap rates) signals strong buyer demand, which pushes prices up faster than income, reducing yield.
Which type of comparable sale adjustment is NOT typically applied in the sales comparison approach?
Answer: Appraiser's personal preference adjustment
Adjustments must be market-derived and objective; personal preference has no role in a credible appraisal.
What is the 'band of investment' technique used to derive?
Answer: An overall capitalization rate blending mortgage and equity return requirements
Band of investment calculates a blended cap rate by weighting the lender's mortgage constant and the equity investor's required return by their respective shares of value.
Which scenario best illustrates 'paired sales analysis'?
Answer: Isolating a single feature's value contribution by finding two sales identical except for that feature
Paired sales analysis identifies the value of a specific feature by finding two otherwise identical sales that differ only in that feature.