Modern Real Estate Practice in Texas, 16th Edition
Chapter 14 Answer Key
1. b
2. b
3. b
4. a
5. d
6. a
7. b
8. b
9. a
10. c
11. b
12. c
A competitive market analysis or comparative market analysis (CMA) is a
variation of the sales comparison approach used by a certified appraiser;
however, it is not an appraisal. The CMA is prepared by a real estate agent to
assist the seller in setting a price for the property and should include homes that
have sold within the past six months in the same neighborhood as the one being
evaluated.
To have monetary worth (value) based on desirability in the real estate market, a
property must have the following four characteristics: 1) Effective Demand
2) Utility 3) Scarcity 4)Transferability.
The increased utility and value resulting from the combining or consolidating of
adjacent lots into one larger lot is the principle of plottage value.
Market value is the most probable price a property should bring in a
competitive and open market. Market price is the actual selling price.
Effective September 1, 2011, only persons licensed or certified as an appraiser,
registered as a temporary out-of-state appraiser, or approved as an appraiser
trainee can perform an appraisal of real estate. Unless also licensed or certified
by TALCB, a TREC-licensed broker or salesperson can no longer appraise
property.
Maximum value is realized if the use of land conforms to existing neighborhood
standards; i.e., buildings should be similar in design, construction, size, and age.
Reconciliation is the art of analyzing and effectively weighing the findings
from the sales comparison approach, the cost approach, and the income
approach.
Using the quantity-survey method, the appraiser estimates the quantities of
raw materials to replace the subject structure such as lumber, plaster, brick, etc.
The appraiser also estimates the current price of such materials and installation
cost.
Annual Net Operating Income ÷ Value = Cap Rate
$37,500 ÷ $300,000 = 12.5% Cap Rate
Depreciation of the improvements is considered in the cost approach to value.
The logical basis of the income approach to value is that there is a relationship
between the income a property can earn and property’s value. The resulting
formula must, of necessity, utilize gross and net income and the annual return
on investment (capitalization rate).
Because most people will not pay more for a property than it would cost to
acquire a similar site and erect a similar structure on it, the reproduction cost
of the building plus the value of the land tends to set the upper limit of the
property’s value. Since improvements immediately begin to depreciate, new
construction has its upper limit of value the day it is completed.
The income capitalization approach is used for the valuation of incomeproducing properties such as apartments, offices, and retail and commercial
establishments. The approach assumes that the income derived from a property
will influence the value of the property.
©2014 Kaplan, Inc.
Modern Real Estate Practice in Texas, 16th Edition
13. a
14. b
15. a
16. a
17. d
18. b
19. c
20. c
21. b
The market value of a parcel of real estate is the most probable price a property
should bring in a competitive and open market under all conditions requisite to a
fair sale, with the buyer and seller each acting prudently and knowledgeably and
assuming the price is not affected by undue stimulus.
Capitalization is a mathematical process for estimating the value of an incomeproducing property by dividing the annual net operating income by the
capitalization rate.
Step 3 of the cost approach to value is to estimate the amount of accrued
depreciation resulting from physical deterioration, functional obsolescence,
and/or external obsolescence.
The sales comparison approach compares the subject property with recently
sold comparable properties and is based on the principle of substitution.
Depreciation, construction cost, and replacement cost are associated with the
cost approach to value.
The principal factors for which adjustments must be made fall into four basic
categories: 1) Date of sale 2) Location 3) Physical features 4) Terms and
conditions of sale. Due to the Principle of Change, the original cost is not
relevant in determining what the property may sell for today.
The premise of the income approach is that there is a relationship between the
income produced by a property and the amount an investor would be willing to
pay (value) in anticipation of receiving that future income. The capitalization
rate (rate of return, return on investment) converts the income stream (net
operating income) into an indication of value.
Depreciation refers to any condition that adversely affects the value of an
improvement to real property and, therefore, is subtracted from the total
estimated cost new (either Reproduction or Replacement cost) of all
improvements.
IRV: Income = Rate × Value
Therefore, Rate = Income ÷ Value
Functional obsolescence is caused by a relative loss of building utility. This
loss may be due to deficiencies such as faulty building design, outmoded
equipment, or a poorly arranged floor plan.
©2014 Kaplan, Inc.