Property Valuation & Appraisal Flashcards

Which appraisal principle states that value is created and maintained when a property conforms to the standards of its neighborhood?

Answer: Principle of conformity

The principle of conformity holds that maximum value is achieved when a property is compatible with surrounding land uses and neighborhood standards.

Under the income approach, what does the term 'effective gross income' represent?

Answer: Potential gross income minus vacancy and credit losses

Effective gross income equals potential gross income minus an allowance for vacancy and collection (credit) losses.

A residential property generates a net operating income of $24,000 annually. If the capitalization rate is 8%, what is the estimated value?

Answer: $300,000

Value = NOI ÷ Cap Rate = $24,000 ÷ 0.08 = $300,000.

Which type of depreciation results from factors outside the property itself, such as a nearby industrial plant?

Answer: External obsolescence

External (economic) obsolescence is caused by negative influences originating outside the property, making it incurable from the owner's perspective.

When using the sales comparison approach, what adjustment is made when a comparable property has a feature that the subject property lacks?

Answer: A negative (downward) adjustment to the comparable's sale price

If a comparable has a superior feature the subject lacks, its price is adjusted downward to reflect what it would have sold for without that feature.

The gross rent multiplier (GRM) is calculated by dividing a property's sale price by its:

Answer: Gross monthly or annual rent

GRM = Sale Price ÷ Gross Rent, providing a quick ratio for comparing similar income-producing properties.

Which appraisal approach is generally considered most reliable for single-family residential properties in active markets?

Answer: Sales comparison approach

For owner-occupied single-family homes, the sales comparison approach is most reliable because comparable sales data is abundant in active markets.