Residential Sales Comparison & Income Approaches: concepts and techniques Answer key (updated )

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1 Residential Sales Comparison & Income Approaches: concepts and techniques Answer key (updated ) CHAPTER 1 Chapter 1 Case Study Who is the Client? The client is the mortgage banker with which the loan originator is employed. From the information given in the scenario, the loan originator is engaging the appraiser on behalf of his employer. Are there other intended users? From the scenario given, there is no indication that there will be other intended users. A future audit of the lender s files does not constitute the company s auditor as an additional intended user. Other intended users are specified by the client at the time of the assignment. What is the intended use of the appraiser s opinions and conclusions? The intended use is to facilitate a mortgage finance transaction. What is the effective date of the appraiser s value opinion? This element is not specifically clear in the scenario and should be clarified by the appraiser. However, there is no indication, based on the intended use, that the effective date of the value opinion would be anything other than current. Most appraisals for mortgage financing in a sales transaction use a current date. Just as a reminder, many students may base their decision to respond with Wednesday because that is the date of the inspection. While this may be the most logical date and the date in which the appraiser would have the most confidence, the effective date and the date of inspection are not necessarily the same, even in a current appraisal.

2 What is the date of the report? In a current appraisal, the date of the report is always the same as the effective date. The terms date of inspection, date of appraisal, date of report signature, and date of report completion are not referenced by USPAP and may or may not have a relationship to the date of the report. What relevant characteristics of the property can be noted from the scenario? Specifically, the following could be identified: Single-family, one-story residential property Predominately owner-occupied neighborhood Recently renovated dwelling for which little information is available Location is in a subdivision Lender has indicated that the property may be superior in reflection to surrounding properties What level of property inspection and identification would most likely be warranted in the assignment? Interior and exterior property inspection. Review of subdivision (and/or deed) restrictions, and possibly determining if there were building permit(s) for the renovations, and if the improvements are in compliance with current zoning, etc. Why? Since the subject dwelling has recently undergone extensive renovations, it may be very unlikely that the character of the renovations (both physical and functional) can be determined from an exterior-only inspection. An extraordinary assumption might be used if the use of the extraordinary assumption would lead to credible results. However, that may prove risky or careless in context of the intended use. In order to comply with Standards Rule 1-3 of USPAP, the appraiser should be familiar with, and analyze, the compliance of the renovations with public and private regulations, such as deed/subdivision restrictions, and zoning. Some regulations have compliance issues regarding the character of improvements. Determining if a building permit was obtained and verifying compliance with building codes and other regulations may be a good idea in this case since the owner is now relocated and individuals with personal knowledge may not be available. At a minimum, an extraordinary assumption might be used, if the appraiser determines that the use of the extraordinary assumption is appropriate and would lead to credible results.

3 Note: Even though the loan originator has stated that a drive-by inspection would be acceptable, it is the sole determination of the appraiser as to the property characteristics and the acceptability of this direction for the intended use. In particular, from the information provided, what fundamental valuation principle should be a specific concern in this assignment? Conformity/Regression Why? The statement of the borrower that was conveyed to the appraiser by the loan originator that the property is better than other properties in the area should raise a red flag. If that statement proves true, the property may be over-improved and contribution of the renovated improvements may be an issue in this market value assignment. Of the sales comparison and income approaches, what would be the appraiser s choices to develop as part of the valuation analysis? Sales comparison approach and possibly the income approach. Why? The scenario indicates that the appraiser has completed several assignments of single-family properties that were part of an arm s-length transaction and that the neighborhood is predominantly owner-occupied. Regardless of the borrower s use of the property, the information would certainly imply that the highest and best use of the property likely would be as an owneroccupied, single-family property. In such case, the sales comparison approach would be applicable in the assignment and, given the recent sales data was comparable, may produce the assignment results which are most credible, in context of the intended use in the market value assignment. A key factor in the appraiser s scope of work decision regarding applicability of the valuation methods would depend on what predominantly owner-occupied translates to. If there is significant, but not predominant, level of tenant-occupied property in the neighborhood/market area, the income approach would probably be applicable and could be developed with credible results provided that relevant income data is available. The appraiser needs to be cautious about reliance on the income approach, however, if the results would be misleading.

4 Chapter 1 Quiz 1. d 7. a 2. b 8. d 3. c 9. d 4. d 10. d 5. a 11. b 6. c

5 CHAPTER 2 Chapter 2 Case Study Once the data has been organized on the data array grids, the following result is illustrated: Possible Comparable Data from the Subject s Subdivision Subject 629 Logan Ave. 427 Evergreen Ct. 432 Washington Dr. 299 Peachtree Ct. Sales Price -- $279,400 $310,000 $265,000 $266,900 Date of Sale -- 7 weeks ago 1 month ago 9 months ago 5 months ago Location Sale Terms Sale Conditions Through street Assumed Cash Equivalent Assumed Typical Through street 3 blocks away Same subdivision Conventional No seller concessions Cul-de-sac 2 blocks away Same subdivision Conventional Seller paid $3,000 buyer costs Through street 1 block away Same Subdivision Seller Financing Seller paid all of buyer s costs No Atypical No Atypical Some furnishings were included in sale Cul-de-sac 2 blocks away Same Subdivision Conventional No seller concessions No Atypical Style/Design 2-Story Colonial 2-Story Colonial 2-Story Colonial 1 ½ Story Cape Cod 1 ½ Story Cape Cod GLA 2,169 SF 2,248 SF 2,356 SF 1,879 SF 2,038 SF Bedrooms/Baths 4/2 ½ 4/3 5/3 ½ 3/2 ½ 4/2 ½ Other Features 2-Car Garage Patio Fireplace 2-Car Garage Deck Fireplace 3-Car Garage Deck 2-Fireplaces Pool 2-Car Garage Patio 1-Car Garage Deck

6 Possible Comparable Data from Outside of the Subject s Subdivision Subject 152 Goodson Dr. 861 Cranberry Dr. 591 Apollo Ln. Sales Price -- $269,000 $271,500 $315,000 Date of Sale -- 2 weeks ago 1 week ago 3 months ago Location Through street Through street 12 blocks away Different market Through street 5 blocks away Adjacent subdivision Gated access Golf course view 11 blocks away Different market Sale Terms Sale Conditions Style/Design Assumed Cash Equivalent Assumed Typical 2-Story Colonial Conventional No seller concessions Conventional Seller paid $2,000 buyer Costs Cash No Atypical No Atypical No Atypical 2-Story Colonial 2-Story Colonial 2 Story Contemporary GLA 2,169 SF 2,112 SF 2,089 SF 2,457 Bedrooms/Baths 4/2 ½ 4/3 4/2 ½ 4/3 ½ Other 2-Car Garage Patio Fireplace 2-Car Garage Deck 2-Car Garage Deck Fireplace 3-Car Garage Patio 3-Fireplaces

7 Discussion Comments/Suggestions Subject Subdivision 629 Logan Avenue Likely considered as relevant in the assignment Fairly recent 7 weeks ago Same subdivision 3 blocks away Less than 100 square feet difference in GLA Only significant physical difference was the third bath compared to the subject s half bath. 427 Evergreen Court While this comparable sale is only 2 blocks away and sold only 1 month ago, there may be some good basis to discard it (now or possibly later) given the other relevant data that is available. Location is on a cul-de-sac vs. a through street Seller financing concessions Nearly 200 square feet difference in GLA Differences in livability with one additional bedroom and full bath. (could represent a different buyer) Greater features with additional garage stall, fireplace, and in-ground pool 432 Washington Drive Eliminate as a comparable due to several concerns Oldest sale 9 months ago Seller financing Personal items (some furnishings) included in sale Different design and style Significantly smaller with a differing livability (3 bedrooms vs. 4) 299 Peachtree Court This comparable sale may spur the most discussion as to its relevance. An argument could certainly be built to either discard it or leave for future analysis. At this point it probably should be left primarily due to its similarities in overall livability and the amount of data that would be left if it were discarded. Here are the pros and the cons: Will be the oldest sale (after discarding the Washington Drive sale) Cul-de-sac vs. through street One of the most recent sales Very similar livability with same bedroom/bath count and 100+ square foot difference in GLA Different design/style Features are inferior with a 1-car garage and no fireplace

8 Outside Subject Subdivision 152 Goodson Street Characteristically, it is closely aligned with the subject Very recent sale 2 weeks ago Livability is similar (with the exception of the full bath vs. the subject s half bath) Only significant difference in features is the lack of a fireplace Downside This property is the most distant of all comparables in a different market 861 Cranberry Drive Relevant Most recent sale Located in an adjacent subdivision almost as near as the data from the subject s subdivision Very similar in most physical characteristics Did have seller financing concessions 591 Apollo Lane Discard Aging when compared to the majority of the data Completely different locational characteristics (could be a different buyer with different motivations) Design, features, GLA, and somewhat livability are dissimilar Chapter 2 Quiz 1. c 6. d 2. a 7. d 3. b 8. a 4. a 9. b 5. c 10. D

9 CHAPTER 3 Case Study #1 Comparable Properties versus Competitive Properties For a tract home in a developer's neighborhood with several builders offering many similar models, there may be many properties that are simply comparable; or both comparable and competitive. <For example:> If the subject is a Heritage II by Builtgood Homes, there may be several other Heritage II models that have recently sold, which would be truly competitive as well as comparable. There also could be several other homes of similar size and utility and with similar features that are comparable but not truly competitive because they are built by different builders and are not exactly like the Heritage II. <end> Subject Information: The subject is located at 1105 North Star Drive in Denville. It is a two-story traditional design with 2,350 square feet and contains eight rooms, four bedrooms and two full baths and one half bath. It was built in 2003 by Well-Built Homes, sits on 1/2-acre site and is in average condition. It abuts Branch Elementary school to the west. Your research assistant collected some additional information that is included on the data sheet. Data Grid Address Location Sale Price Rooms Bed Bath Size Style Stories Yr. Built 330 Segweg Ave Denville $213, :00 2,400 Traditional North Star Dr. Denville $211, :01 2,350 Traditional Wontell Litonburg $148, :01 1,450 Cape Cod Brampter Ct. Denville $216, :01 2,480 Traditional Centinal Ave. Denville $108, :00 1,250 Ranch Research Comments 4 block NE of Bra elementary. Lot size acr Average condition 2 houses east of Branch elementar same side of stree Lot size acr Average condition Property abuts Seaside elementar Lot acre. Average condition 2 blocks SW of Branch elementar Lot size acr Average condition Ranch on slab. No garage. Across the street from Baylor elementary. Lot size acr

10 23 State Route 45 Denville $198, :00 1,800 Farm Tomly Ave. Bilton $196, :00 2,500 Contemporary Segweg Ave. Denville $215, :00 2,420 Traditional Cedarridge Bilton $194, :00 2,500 Ranch North Star Dr. Denville $211, :01 2,400 Traditional Sale Yr. Address Location Price Rooms Bed Bath Size Style Stories Built 330 Segweg Ave Denville $213, :00 2,400 Traditional North Star Dr. Denville $211, :01 2,350 Traditional Wontell Litonburg $148, :01 1,450 Cape Cod Brampter Ct. Denville $216, :01 2,480 Traditional Centinal Ave. Denville $108, :00 1,250 Ranch State Route 45 Denville $198, :00 1,800 Farm Older farm home located on 6 acres the edge of Denvi 4 miles from Bran Elementary. Home in poor condition. 1/2 block from Washington elementary: same side of street. Average condition Better than Avera landscaping. Lot size acr 5 blocks NE of Branch elementar Lot size acr Average condition Approximately 1. miles north of Washington elementary. Average condition Lot size acr 2 houses west of Branch elementar same side of stree Lot size acr Research Comments 4 block NE of Bra elementary. Lot size acr Average condition 2 houses east of Branch elementar same side of stree Lot size acr Average condition Property abuts Seaside elementar Lot acre. Average condition 2 blocks SW of Branch elementar Lot size acr Average condition Ranch on slab. No garage. Across the street from Baylor elementary. Lot size acr Older farm home located on 6 acres the edge of Denvi 4 miles from Bran Elementary. Home in poor condition.

11 4896 Tomly Ave. Bilton $196, :00 2,500 Contemporary Segweg Ave. Denville $215, :00 2,420 Traditional Cedarridge Bilton $194, :00 2,500 Ranch North Star Dr. Denville $211, :01 2,400 Traditional /2 block from Washington elementary: same side of street. Average condition Better than Avera landscaping. Lot size acr 5 blocks NE of Branch elementar Lot size acr Average condition Approximately 1. miles north of Washington elementary. Average condition Lot size acr 2 houses west of Branch elementar same side of stree Lot size acr Suggested Answer Key: Competitive: 1099 North Star Drive and 987 North Star Drive Comparable: 330 Segweg Avenue, 4343 Brampter Court, and 438 Segweg Avenue The rest of the properties are neither comparable nor competitive.

12 Case Study #2 Paired Data Sale Rooms Bedrooms Baths Size (sq. ft.) Family Room Fireplace Garage Price # :0 2,220 No Yes Yes $262,800 # :0 2,120 Yes Yes Yes $260,500 # :1 2,232 Yes No No $263,400 # :1 2,382 Yes Yes Yes $264,500 # :1 2,120 Yes Yes Yes $262,500 # :0 2,220 No No Yes $259,400 # :0 2,224 Yes No Yes $259,000 # :1 2,232 No No No $253,100 # :0 2,224 Yes No No $256,000 # :1 2,262 Yes Yes Yes $259,500 Matched Pairs: Fireplace #1 $262,800 Half-bath #2 $260,500 Family Room #3 $263,400 Garage #7 $259,000 #6 $259,400 Difference $3,400 #5 $262,500 Difference $2,000 #8 $253,100 Difference $10,300 #9 $256,000 Difference $3,000 Size #4 $264,500 #10 $259,500 Difference $5,000 Per Sq Ft $41.66

13 Case Study #3 Adjustments Apply the following adjustments to a comparable sale that had a sale price of $272,000. Market conditions: +6.5% Property rights conveyed: +2% Location: -20% Physical characteristics: +12% Financing terms: -5% Concessions: -$1,500 Conditions of Sale: -10% Element of Comparison Adjustment % Adjustment Sale Price $272,000 Property Rights Conveyed +2% +$5,440 Adjusted Price $277,440 Financing Terms Financing Concessions -5% -$1,500-13,872-1,500 Adjusted Price $262,068 Conditions of Sale -10% -26,207 Adjusted Price $235,861 Market Conditions +6.5% +15,331 Adjusted Price $251,192 Location -20% -50,238 Physical Characteristics +12% +30,143 Adjusted Sale Price $231,097 What is the final adjusted sale price of the comparable sale? $231,097 What was the total percent of net and gross adjustments? Net Adjustments: -15% ($272,000 - $231, 097 = $40,903; -$40,903 $272,000 = , or rounded, -15%) Gross Adjustments: 52.5% (The total of all adjustments is $142,731. $142,731 $272,000 = , or rounded, 52.5%)

14 Chapter 3 Quiz 1. a 11. c 2. c 12. b 3. a 13. a 4. a 14. d 5. a 15. b 6. c c a b a 20.

15 CHAPTER 4 Practice Problems Note: Obviously, many of the practice problem exercises are a matter of simple math and are not intended to challenge the learner s basic mathematic knowledge. As an introduction to the HP-12C calculator, becoming familiar with the calculator s operation and gaining a comfort level with basic keystroke functions can eliminate frustration as the learner moves on to more complex calculations. Therefore, it is considered important to dedicate some time to gaining proficiency in basic calculations using RPN. Simple Arithmetic Functions Page A one and one-half story residential dwelling has 1,400 square feet of GLA on the first floor and 546 square feet of GLA on the second floor. What is the total GLA of the dwelling? Correct answer: 1,946 [1400] [ENTER] [546] [+] 2. A residential dwelling has a total gross area of 1,830 square feet. Included in the gross area is a porch that has 260 square feet of area that will not be included in the total gross living area. Excluding the porch, what is the total gross living area of the dwelling? Correct answer: 1,570 [1830] [ENTER] [260] [-] 3. If a parcel of land contains 38,000 square feet and can be divided into three building lots of equal size, how many square feet will each building lot contain? Correct answer: 12, [38000] [ENTER] [3] [ ]

16 4. The fenced-in portion of a rear yard is 52 x 37. How many square feet does the fenced-in yard contain? Correct answer: 1,924 [52] [ENTER] [37] [x] Combined Arithmetic Methods Page An appraiser is determining the total cost of carpeting a room that is 22 x If the carpet costs $38 per square yard installed, what is the total cost of the carpet? Correct answer: $1, [22] [ENTER] [18.5] [x] [9] [ ] [38] [x] 2. How many acres are contained in a parcel that has dimensions of 366 x 407? Correct answer: 3.42 [366] [ENTER] [407] [x] [43560] [ ] 3. A jurisdiction allows for 65% of a residential building lot to be covered by the primary dwelling. How many square feet can the first floor of the dwelling be if the lot dimensions are 110 x 165? Correct answer: 11, [110] [ENTER] [165] [x] [65] [%]

17 4. A storage building is 25 x 30 and is 12 high. How many cubic feet are contained in the building? Correct answer: 9,000 [25] [ENTER] [30] [x] [12] [x] Chain Calculations Page The rear yard of a residence measures 50 x 40 and a 16 x 20 section of this area is fenced. What percent of the yard is fenced? Correct answer: 16% Note: In order to obtain the correct result, the dimensions of the smaller portion must be entered first. [16] [ENTER] [20] [x] [50] [ENTER] [40] [x] [ ] 2. An L-shaped ranch dwelling, including a porch and a garage, consists of a portion that is 38 x 30 and a portion that is 18 x 20. The appraiser has determined that 80% of the structure is considered living area. What is the gross living area? Correct answer: 1,200 [38] [ENTER] [30] [x] [18] [ENTER] [20] [x] [+] [80] [%]

18 3. Two building parcels have been assembled. Individually, the parcels have dimensions of 80 x 160 and 75 x 160. In acres, what is the gross area of the assembled site? Correct answer: 0.57 [80] [ENTER] [160] [x] [75] [ENTER] [160] [x] [+] [43560] [ ] 4. Two rooms of a residential dwelling must be carpeted. One room is 12 x 12, and the carpet will cost $28 per square yard installed. The other room is 15 x 17, and the carpet will cost $34 per square yard installed. What is the total cost of the carpet? Correct answer: $1, [12] [ENTER] [12] [x] [9] [ ] [28] [x] [15] [ENTER] [17] [x] [9] [ ] [34] [x] [+]

19 Prefix Keys (Setting the Decimal Point) Page 126 In order to answer the following questions, clear your calculator and key in the following number, with eight (8) places set to the right of the decimal point: What is displayed when the decimal places are changed to five (5)? Correct answer: Keystroke: [f] [5] 2. What is displayed when the decimal places are changed to three (3)? Correct answer: Keystroke: [f] [3] Data Storage Registers Page 129 For the practice problems the data storage registers should be set with the following data: R 0 = R 1 = 27 R 2 = 640 [f] [43560] [STO] [0] [27] [STO] [1] [640] [STO] [2] 1. A land parcel contains 112,795 square feet. Rounded to six places, How many acres does the parcel contain? Correct answer: [112795] [ENTER] [RCL] [0] [ ]

20 2. Rounded to a whole number, how many cubic yards of concrete will be needed for a concrete slab that will be 100 x 42 and 6 inches thick? Correct answer: 78 [100] [ENTER] [42] [x] [0.50] [x] [RCL] [1] [ ] 3. Rounded to the nearest ½ percent, what percent of a township section is 80 acres? Correct answer: 12.50% [80] [ENTER] [RCL] [2] [ ] 4. How many square feet are contained in ¼ of a township section? Correct answer: 6,969,600 [RCL] [2] [25] [%] [RCL] [0] [x]

21 Percentage Problems Page 133 Note: For the purpose of these practice problems, the decimal should be set at six places. 1. A property that sold for $153,500 today sold for $172,000 eighteen months ago. What was the percent of downward change noted? Correct answer: % [f] [172000] [ENTER] [153500] [ %] 2. If a house sold for $400,000 six months ago and just resold for $420,000 today, what was the monthly appreciation in value? Correct answer: % [400000] [ENTER] [420000] [ %] [6] [ ] 3. Verification of a recent sale of a property for $205,000 has revealed that the seller carried a first mortgage of $155,000. What was the percent of the mortgage (LTV)? Correct answer: % [205000] [ENTER] [155000] [%T]

22 4. The sale price of a property was $300,000. The purchaser obtained a 70% first mortgage though a bank and the seller carried a second mortgage of $10,000. What was the LTV? Correct answer: % [300000] [ENTER] [70] [%] [STO] [0] [%T] [10000] [STO] [+] [0] [RCL] [0] [300000] [ ] Time Value of Money Functions Page If $750 is deposited in a savings account earning 11.50% interest, how much will be in the account at the end of 3 years? Correct answer: $1, [750] [PV] [11.5] [i] [3] [n] [FV] 2. A heating system will need to be replaced in 10 years at a cost of $16,000. To have enough set aside when the replacement is necessary, what amount will need to be deposited monthly if the account will earn 2.5% interest? Correct answer: $ [f] [16000] [FV] [10] [g] [n] [2.5] [g] [i] [PMT]

23 3. The monthly debt service on a new loan is $1, If the interest rate for the loan is 6.75% for a 30-year term, what is the original loan amount? (Round your answer to the nearest thousand.) Correct answer: $248,000 [f] [1,608.52] [PMT] [6.75] [g] [i] [30] [g] [n] [PV] 4. If $30 is deposited each month for a period of 6.5 years, what will the balance be in a savings account earning 3.25 percent? Correct answer: $2, [f] [30] [PMT] [6.5] [g] [n] [3.25] [g] [i] [FV]

24 Chapter 4 Quiz 1. A residential dwelling measures 78 x 28 which includes a 2-car attached garage that has exterior dimensions of 24.5 x 28. What is the gross living area of the dwelling? a. 1,235 b. 1,498 c. 1,752 d. 1,814 [78] [ENTER] [28] [x] [24.5] [ENTER] [28] [x] [-] 2. What is the current value of $25,000 discounted at 11%, due in one year (rounded to the nearest whole dollar)? a. $22,250 b. $22,523 c. $22,755 d. $23,122 [25000] [FV] [11] [i] [1] [n] [PV]

25 3. What is the monthly debt service on a 30-year mortgage loan at 5.5% interest if the beginning principal balance is $92,000? a. $ b. $ c. $ d. $ [92000] [PV] [5.5] [g] [i] [30] [g] [n] [PMT] 4. The basement of a house has exterior foundation dimensions of 40 x 35. The finished area is 1,100 square feet. What percent (rounded to a whole number) of the basement is finished? a. 79% b. 81% c. 83% d. 85% [40] [ENTER] [35] [x] [1100] [%T]

26 5. A comparable property sold for $112,000 and was financed with a 95% loan. If the sale price included three and one-half seller-paid points, what percent of the sale price were the seller concessions? a % b % c % d % [112000] [ENTER] [95] [%] [3.5] [%] [112000] [ ] 6. An investment property owner wants to assure that he has enough funds set-away to replace these capital items in 15 years. How much must be deposited each month in an account bearing 4% interest (rounded to the nearest whole cent)? Furnace - $18,500 Roof - $17,000 a. $ b. $ c. $ d. $ [f] [18500] [ENTER] [17000] [+] [FV] [15] [g] [n] [4] [g] [i] [PMT]

27 7. What is the current value of $100,000 compounded monthly for 10 years at 8% interest (rounded to the nearest cent)? a. $45, b. $48, c. $56, d. $61, [f] [100000] [FV] [10] [g] [n] [8] [g] [i] [PV] 8. Rounded to four places, what annual percent of increase is indicated as the market condition adjustment if a comparable property sold for $285,000 yesterday and the same property sold for $212,500 fourteen months ago? a b c d [212500] [ENTER] [285000] [ %] [14] [ ] [12] [x]

28 9. Over the next five years, a land contract pays $400 payments at the end of each month. If an investor wanted to make a 10% return on investment, what is the value today of the land contract (rounded to a whole dollar)? a. $18,153 b. $18,826 c. $18,983 d. $24,000 [f] [400] [PMT] [5] [g] [n] [10] [g] [i] [PV] 10. Carpet in a 12.5 x 16 room and a x room needs to be replaced. Rounded to the nearest whole dollar, what will be the total cost of the carpet if it is priced at $26.50 per square yard, including installation? a. $1,239 b. $1,251 c. $1,274 d. $1,288 [12.5] [ENTER] [16] [x] [15.25] [ENTER] [14.75] [x] [+] [9] [ ] [26.50] [x]

29 Chapter 5 Chapter 5 Case Study How does this information change the appraiser s initial scope of work decision regarding the income approach? The information that the appraiser has received will likely change the appraiser s planned scope of work. The income approach has become relevant due to the transitioning of the neighborhood to predominately tenant-occupied and the property use of the recent sales. The availability of reliable income data is also an element of this decision. How does the client s request to only develop the sales comparison approach in the assignment affect the appraiser s decision? The appraiser should consult with the client regarding the request to develop only the sales comparison approach as was initially agreed. Assuming this was an assignment condition, the client either may modify the condition to allow the appraiser to also develop the income approach and allow its indications to be considered in the final reconciliation and value indication. If the client does not agree to modify the assignment condition to only develop the sales comparison approach, the appraiser might need to withdraw from the assignment. Is the sales comparison approach still applicable in the assignment? Due to the quantity and quality of data that is available of sales transactions of similar properties in the subject s market, the sales comparison approach could be valuable and lend significant support. In addition, there remains notable acquisition of properties in the market for the purpose of owner-occupancy. Chapter 5 Quiz 1. b 6. c 2. c 7. b 3. a 8. b 4. a 9. a 5. a 10. b

30 Chapter 6 Chapter 6 Case Studies Case Study #1 Valuation of a Single-Family Dwelling Using a GRM A real property appraiser is appraising a property for use in assisting with a mortgage finance transaction. The purchase price of the single-family dwelling is $145,000. The parties to the transaction are the sellers (a retiring and relocating couple) and their son and daughter-in-law, who are purchasing the property to use as an investment property. The subject property has no income history; however, there is a presence of similar properties, which are rented, in the immediate market. The appraiser has gathered data for his analysis and produced the following rent survey of similar properties that are rented in the immediate market: Comparable Rental #1 #2 #3 #4 #5 #6 #7 #8 Monthly Rent $950 $925 $950 $975 $950 $910 $890 $950 In addition, the appraiser collected market level data from the subject market for sales transactions of other properties that were rented at the time of the transaction. The following sales were verified to reflect arm s-length transactions of similar single-family dwellings: Comparable Sale #1 #2 #3 #4 #5 #6 Sale Price $177,500 $158,000 $159,000 $187,000 $175,000 $185,000 Monthly Rent $925 $875 $890 $975 $910 $900 GRM Based on the appraiser s best supported conclusion in the analysis, the appraiser s opinion of value, rounded to the nearest thousand should be $182,000. Instructor notes: The prevailing monthly rent of similar properties given is $950 per month. For deriving the GRM, Comparable Sale #1 and Comparable Sale #4 are the most consistent and equally bracket the subject s monthly rent of $950. Therefore, the best support is at the mid-point between the GRM indications, $950 x = $182,248, or $182,000 rounded to the nearest one thousand dollars (Regardless of where within the range of the student concludes, rounded to the nearest one thousand dollars, the result will be $182,000)

31 Case Study #2 Valuing a Small Residential 4-Unit Property Using a GIM A four-unit apartment building is being appraised for mortgage refinancing purposes. The two apartments on the first floor each rent for $500 per month, while the two upstairs units each rent for $400 per month. All rents have been verified at market level. A divided two-stall garage is at the rear of the property. The two stalls are rented to two of the tenants for $50 per month each. A vacancy rate of 3.15% for the property has been observed from the market. Annual operating expenses of the property are $3,875 per year. The appraiser analyzed data from two prior transactions to extract a GIM. His conclusions will be supported by the mean of the GIM indications. Sale Price Monthly Income Annual Income Indicated GIM Comparable Sale #1 $497,000 $2,100 $25, Comparable Sale #2 $435,500 $1,800 $21, Rounded to the nearest five-hundred dollars, the appraiser s value opinion of the subject should be $454,500. Mean of GIM indications: Subject s Income: First floor apartments: 2 x $500 x 12 = $12,000 annually Second floor apartments: 2 x $400 x 12 = $9,600 annually Garage stalls: 2 x $50 x 12 = $1,200 annually $12,000 + $9,600 + $1,200 = $22,800 total gross annual income GIM Conclusions: $22,800 x = $454,632, or $454,500 rounded to the nearest five-hundred dollars. Instructor notes: A PGIM is appropriate in this scenario since the tenants utilize the garages and they are directly connected to the living units. Vacancy loss is not considered. Operating expenses are not considered when developing any form of GIM.

32 Case Study #3 Appraising a Small Retail Property Using Direct Capitalization A small retail property is being appraised. The market rent for the property is $1,625 per month. The property is leased to a long-term tenant with a net/net/net lease scenario, which is common for the market for this type of property. Insurance and real estate taxes total $2,945 per month. The monthly expenditure for maintenance varies, but averages approximately $150 per month. The roof on the building will need to be replaced in approximately 10 years at an estimated cost of $40,000. The HVAC system has an estimated remaining economic life of eight years with estimated replacement cost of $35,000. The property owner does not use a sinking fund account for his replacement reserves. A market derived vacancy rate for the property is 1.65%. Using the following market derived sales data, what is the indicated value of the subject property (rounded to the nearest dollar) if the overall capitalization rate is based on the median indicator of the data? $118,717 Sale Price NOI Indicated Rate (%) Comparable #1 $125,000 $11, % Comparable #2 $130,000 $11, % Comparable #3 $120,000 $10, % NOI Calculation: PGI ($1,625 x 12) $19, Vacancy ($19,500 x 1.65%) EGI $19, Reserves for replacements* - 8, NOI $10, * Insurance, real estate taxes, and maintenance have not been considered as the lease terms are net/net/net. Reserve for replacements are calculated as follows: Roof: $40, years $4,000 HVAC: $35,000 8 years + 4,375 $8,375 annual replacement reserve IRV: The indicated median overall capitalization rate indicated from the data provided is 9.10%: $10, % = $118,717

33 Chapter 6 Quiz 1. b 7. a 2. b 8. b 3. d 9. d 4. c 10. b 5. c 11. d 6. b 12. c

34 Chapter 7 Chapter 7 Case Study A residential investment property is generating $1,250 per month. Using the mean of the data provided, rounded to the nearest one-hundred dollars and a GRM of 127, determine if the scenario represents a positive leasehold or a negative leasehold and the value of the leased fee or leasehold interest. Rent Comparable Monthly Rent 1 $1,475 2 $1,275 3 $1,150 4 $1,175 5 $1,200 6 $1,250 7 $1,400 8 $1,425 9 $1, $1,300 The mean of the rents surveyed is $1,302.50, or rounded to the nearest one-hundred dollars, $1,300 per month. Therefore, the scenario represents a positive leasehold (lessees advantage). The leasehold interest is $6,350 $1,300 x 127 = $165,100 $1,250 x 127 = $158,750 $165, ,750 = $6,350 Chapter 7 Quiz 1. d 5. a 2. c 6. b 3. c 7. b 4. b 8. d