TEXAS REAL ESTATE PREP__Chapter 3

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Define market value.
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Market value is the price a willing seller will sell for, and the price a willing buyer will pay, when neither party is acting under exceptional pressure.
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Another definition of market value is?
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Market value is also defined as the most probable price a property will sell for. This is a test question.
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Define VALUE.
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Value is an estimate of the FUTURE BENEFITS to be derived from the property. This is a test question.
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Define PRICE.
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Price is generally what one must PAY for a property. This is a test question.
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Define COST.
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Cost is an estimate of PAST EXPENDITURES.
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What is the ancronym for the four basic characteristics of VALUE and what does each letter stand for?
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DUST
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Define DEMAND.
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Demand is a value characteristic and there must be a demand for the item and the purchasing power to acquire it.
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Define UTILITY.
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Utility is a value characteristic and the item must be NEEDED OR WANTED.
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Define SCARCITY.
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Scarcity is a value characteristic and there must be a LIMITED supply.
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Define TRANSFERABILITY.
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Transferability is a value characteristic and the item must be able to be sold. In other words, the ownership rights must be transferable to another.
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Define CMA.
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A CMA is a comparative market analysis and is a tool used by licensees to help sellers determine a realistic PRICE for their property.
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How does a CMA determine a PRICE for a property?
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A CMA compares the subject property to current actives, in contract, solds, and expired/withdrawn/terminated properties resulting in a price range of value for a property rather than an EXACT price.
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What is another name for a Comparative Market Analysis or CMA?
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Competitive Market Analysis
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Is a CMA an appraisal?
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NO
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Define BOV
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This is a Broker Opinion of Value.
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What is another name for a BOV?
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Broker Price Opinion
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Define a BOV or BPO.
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A Broker Opinion of Value or Broker’s Price Opinion is similar to a CMA but is used by a relocation firm, or is commissioned by a Bank or and attorney handling a divorce or estate issues.
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What is the difference between a BOV and CMA?
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The broker who produces a BOV is usually PAID. A CMA is usually done for FREE. This is test question.
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Define APPRAISAL.
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An appraisal is an opinion. It is an ESTIMATE of VALUE.
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How accurate is an appraisal?
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An appraisal is only as accurate as the integrity and skill of the appraiser along with the availability of market data.
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What are the 3 basic approaches to appraisal?
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The 3 basic approaches to appraisal are the 1. market data approach; 2. the income approach; 3. the cost approach.
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What are market data approach, the income approach, and the cost approach defining?
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These are the 3 basic approaches to doing an appraisal or estimating or rendering an opinion of value of a property.
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What is the most common approach used, when rendering an opinion or estimate of value for a residential property?
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Market Data Approach
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What is another name for the Market Data Approach process?
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Sales Comparison. This is a test question and this term is what is used on the test for market data approach but know and understand both terms.
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List the common criteria for the sales comparison or market data approach that an appraiser uses when pulling data from the market.
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1. a minimum of 3-5 sales are pulled; 2. data is typically 6 months old or LESS; 3. adjusting for amenities is used; 4. and the best choice of a sold home will be the one with the LEAST amount of adjustments, regardless of cost. (this last statement is a TEST question).
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What is considered the BEST COMP by an appraiser ?
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The one that fits into a certain time line and which has the LEAST amount of adjustments.
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Define INCOME APPROACH.
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The INCOME APPROACH is a form of appraisal and is used on INCOME PRODUCING properties.
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What is another term for the Income Approach?
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Capitalization Method
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Define CAPITALIZATION METHOD.
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The Capitalization Method is the conversion of an income stream into an INDICATION OF VALUE of a property OR, Net Annual Income divided by Cap Rate or ROI x Market Value (better check this formula out, may not be correct).
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If a property collects RENT, what approach will an appraiser use to determine the VALUE of that property?
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The Income Approach OR the Capitalization Method.
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What IS the Capitalization Rate of a property?
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The Capitalization Rate is the rate of return of a property.
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What is another name for RATE OF RETURN on an income producing property?
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Capitalization Rate
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Explain why the capitalization rate or ROI and MARKET VALUE are an inverse relationship.
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The Capitalization Rate or ROI have an inverse relationship with Market Value because when there is an INCREASE in one, there is a DECREASE with the other. So, when the ROI is HIGH, a SMALL investment gives a good rate return but when the ROI is low, a larger investment is needed to get a good return.
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Define 2 backup procedures that an appraiser uses to give him a starting point, rather than a result (determining the value of a property) when using the income approach on a property.
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Gross Rent Multiplier
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Gross Rent Multiplier is used primarily for what type of property and is an example of what approach?
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GRM is used by an appraiser on RESIDENTIAL properties and is a factor based on location and rent or PRICE/RENT
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What does the GRM actually indicate?
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This factor or number, when multiplied by the MONTHLY RENT gives an ESTIMATE OF VALUE for the property.
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What is the formula used by an appraiser to determine the GRM or Gross Rent Multiplier?
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GRM x Rent = price
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How is the GRM calculated?
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The GRM or Gross Rent Multiplier is calculated by taking the subject property’s value and dividing it by the monthly rent. This number is generally fairly uniform per neighborhood.
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State the formula for the
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If a property in a residential neighborhood is valued at $175K and charges $1000/month rent, then the GRM on that property is?
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$175k/$1000 = 175 GRM
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What is a GIM and how does it apply to the income approach used by an appraiser?
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Gross Income Multiplier is a back up procedure, used by an appraiser to get a starting point rather than a value on a COMMERCIAL PROPERTY and, is based on the ANNUAL RENT. It works just like the GRM. GIM x Price = Rent
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The cost approach is also used by an appraiser for other kinds of properties such as:
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The cost approach can be used by unique properties such as 1. churches; 2. government buildings; 3. historical buildings; 4. for other buildings when there is NO other comparables out in the current market.
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Define Replacement cost:
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Replacement cost is the cost to build a building of SIMILAR size and usefulness using todays methods and materials.
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Define Reproduction cost:
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Reproduction cost would be the cost to exactly DUPLICATE a building.
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What is the formula used by an appraiser when using the Reproduction Cost approach when there are NO comparable sales in an area?
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Land Value + Building Reproduction Cost – Depreciation = Value
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What is the formula used by an appraiser when using the Replacement Cost approach when there are NO comparable sales in an area?
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Land Value + Building Replacement Cost – Depreciation = Value
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When using the cost approach, what method will he use to place a value on the land and why?
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When using the cost approach, the appraiser will use the MARKET DATA approach because the value of land is heavily dependent on the location.
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What are the 3 types of depreciation when using the cost approach to determine value of a property?
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The 3 types of depreciation are PHYSICAL DETERIORATION; FUNCTIONAL OBSOLESCENCE and EXTERNAL OBSOLESCENCE.
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Define Physical Deterioration and give an example.
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Physical Deterioration is one type of depreciation used by an appraiser when using the cost approach and is considered the ORDINARY wear and tear on a property, it is curable and has the least impact on an appraisal because ALL buildings have it. Examples of this would be chipped paint and worn flooring.
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Define Functional Obsolescence with examples.
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Functional Obsolescence is one type of depreciation used by and appraiser when using the cost approach and is brought about by factors in the property, it is often or mostly curable. Examples of this would be inferior building materials to cut costs, curb appeal or not enough baths or bedrooms.
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What is the difference between GRM or Gross Rent Multiplier and GIM or Gross Income Multiplier as it applies to the Income Approach used by appraisers for rental property.
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GRM IS used for residential properties and is based on the MONTHLY RENT. GIM is used for commercial properties and is based on the ANNUAL RENT.
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Define economic Obsolescence and give an example.
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Economic Obsolescence is a loss of value due to OUTSIDE forces. Also called EXTERNAL and/or ENVIRONMENTAL Obsolescence, is INCURABLE and an example is air pollution, noise, traffic, jobs etc..
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List the nine ‘Principles of Values’ used by appraisers to help them arrive at a final opinion of value on a property.
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The nine principles of values are 1. Highest and Best Use; 2. Principle of Substitution; 3. Principle of Conformity; 4. Principle of Increasing and Decreasing Returns; 5. Principle of Contribution; 6. Principle of Regression; 7. Principle of Competition; 8. Principle of Change; 9. Principle of Anticipation.
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Define the principle of value called ‘Highest and Best Use’ and give an example.
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Highest and Best use is the legal use that gives the greatest return in money and/or amenities. An example is commercial parking is more valuable than residential parking.
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Define the principal of value called “Principle of Substitution” and site an example.
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The principle of value called ‘Principle of Substitution is a principle that truly sets an upper limit on a price on a property. Why? Because a buyer can not justify in paying more for a property when a similar substitute property can be purchased for less with similar risks and yield.
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Define the principle of value called “Principle of Conformity” and site an example.
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Principle of Conformity states that MAXIMUM VALUE is found when there is a reasonable degree of SIMILARITY or sameness. Properties in the same neighborhood tend to conform in price. (Please note: A test question might be presented as “Maximum Value is seen with the principle of comformity. True or False. Apparently there will be several questions on this value.)
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Define “Principle of Increasing and Decreasing Return” and give an example.
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This principle states that an investor needs to invest in a property whenever each dollar invested will return a dollar OR more of increased value and then STOP when each dollar invested returns LESS than a dollar in value. Another way to say this is “Do not over-improve a property”.
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Define “Principle of Contribution” and give an example.
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The value principle of “Principle of Contribution” states that the value of a part, is determined by its contribution to the TOTAL value of the property rather than by its cost.
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Define “Principle of Regression AND Principle of Progression” and give examples.
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The “Principle of Regression” states that the presence of lowered valued properties in the neighborhood lead to a decline in the value of my property. Conversely, the presence of higher valued properties will increase the value of my property and this is called PROGRESSION.
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Define “Principle of Competition” and give an example.
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The “Principle of Competition” states that an increase in competition will result in decreased profits for current providers. The more competition there is, the lower the final sales price…..Supply and Demand
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Define the “Principle of Change” and give an example.
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The “Principle of Change” states that change is constant and is reflected in values. Please note that appraisers must make adjustments for changes in market conditions, and for time. An appraisal is only considered to be accurate for six months or less.
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Define the “Principle of Anticipation” and give an example.
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The “Principle of Anticipatation” states that the purchase price is affected by the expectations of future appeal and benefits.
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In addition to the ‘Principles of Value’, list six other factors that can affect property values.
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Other factors that can affect value of a property other than the 9 Principles of Value are: Market Cycles; Political Actions; Economic Forces; Physical Forces; Environmental Forces and Sociological Forces.
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Define Assemblage and give an example of why this process is important.
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Assemblage or PLOTTAGE is when several parcels of land are combined into one unit. The result is often times increased usability and increase value altogether.
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Even though Assemblage and Plottage technically mean the same thing, how are they used and define in real life life situations?
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Assemblage is more often used to DESCRIBE THE ACTION of combining several parcels of land. Plottage is more often used to describe the INCREASE USABILITY AND PRICE.
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What are the 5 steps of the appraisal process?
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The 5 steps of the appraisal process are 1. state the purpose of the appraisal; 2. Collect and verify information about the property; 3. Estimate value using all 3 approaches, or as many approaches as needed to get the best result; 4. Reconcile the estimates by determining weighted averages; 5. Prepare the report.
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Why do appraisers reconcile?
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An appraiser must reconcile because the appraisal process will and can result in up to 3 different values using the various approaches. Reconciliation completes the process by determining an exact number rather than a range of value (a range is usually what a Realtor will provide versus an exact number/value).
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What does USPAP stand for and what does it refer to?
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Uniform Standards of Professional Appraisal Practice. The USPAP refers to the rules governing the appraisal process.
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Does the USPAP require that a special promulgated form always be used by all appraisers?
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NO however, it is usually a LENDER REQUIREMENT to us the FANNIE MAE appraisal form if the purpose of the appraisal is to secure RESIDENTIAL FINANCING. (PLEASE NOTE: Memorize the 3 facts above [lender requirement, Fannie Mae and Residential Financing] when this USPAP question is asked…definitely a test question).
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Define ‘Chronological Age’ of a property.
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Chronological age is the age of the property in years or YEAR BUILT.
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Define ‘Effective Age of a property.
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Effective Age tells the condition of the property.
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Define ‘Deferred Maintenance.
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Deferred Maintenance is a type of depreciation (ordinary wear and tear) that results from postponing maintenance of the property.
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Define “LIFE CYCLE” of a neighborhood.
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The Life Cycle of a neighborhood is defined as the stages of growth and development consisting of the following stages: Growth, Stabilize, Decline, Revitalize.
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Define the ‘Revitalization’ stage of a neighborhood.
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The Revitalization Stage of a neighborhood means that the area is up and coming. EX the Heights in Houston, older homes now being improved making them more desirable.
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How is square footage determined by an appraiser?
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By measuring the exterior walls of a property an appraiser can determine square footage. Unfinished spaces are not included. Price per square foot is the properties sales price divided by the square footage of the home.
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What is GROSS AREA of a property?
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the total area of a building measured from the exterior walls excluding uncovered areas such as patios and courtyards. The area under the roof including unfinished spaces such as the attic and garages. (This is a test question.)
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What is a set back of a property?
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A set back is the amount of space required between the lot line and the building line. The set back is usually determined by zoning or deed restrictions. (This is a test question)
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What is the STRAIGHT LINE METHOD of depreciation?
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The ‘Straight Line Method’ of depreciation is a method of depreciation of EQUAL ANNUAL INSTALLMENT AMOUNTS. Example: $100,000 depreciated over 10 years would be $10,000 per year. Using this method, you can calculate the depreciation of a property (depreciation is gone) OR the depreciated value of a property (depreciated value remains after depreciation is deducted).
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Define Modular of Module housing.
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This is housing that is prefabricated off site.
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Why do lenders require an appraisal?
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To demonstrate COLLATERAL or SECURITY of the property.
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Why does an appraiser charge a FLAT or HOURLY fee when doing an appraisal?
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A flat or hourly fee is charged when doing an appraisal because there would be an ethical conflict if he was paid on the basis of the appraised value of the property. Other rules that an appraiser must follow are: 1. he should not have any personal interest in the property, either present or in the future; 2. he should only reveal his appraisal to his client. If the appraisal is for the purpose of securing financing, then the appraiser client is the LENDER.
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What does MAI stand for?
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Member, Appraisal Institute
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What types of transactions require an appraisal?
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Transactions involving any kind of financing and those involving the courts such as divorce, settling an estate, challenges to Eminent Domain awards and cases of Partition and properties valued over $250K must use an appraisal. Note: In partition cases ONLY AN APPRAISAL may be used NOT a CMA

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