Chapter 16 Section 1

Question 1

cost

Answer 1

-the actual or estimated amount required to create, produce, or obtain a property
-includes labor, materials, financing expense, land, management and overhead, and the contractor’s profit necessary to bring the finished product to the market

Question 2

price

Answer 2

-the amount that is actually being paid in a real estate transaction
-not necessarily the asking amount or amount offered, and may not represent the actual market value of the property
-nonetheless, its the amount the buyer is willing to pay and the amount the seller is willing to take

Question 3

value

Answer 3

-an opinion of the worth of a property at a given time in accordance with a specific definition of value
-it is the monetary relationship between properties and those who buy, sell, or use those properties

Question 4

market value

Answer 4

-the value most often estimated in a real estate valuation is market value
-the amount that should be paid for a property, but not necessarily the amount that is asked or actually paid

Question 5

purpose of an appraisal

Answer 5

-to estimate some type of defined value
-most appraisals are performed to estimate market value

Question 6

intended use of an appraisal

Answer 6

-the use or uses of an appraiser’s reported appraisal, opinions and conclusions, or other valuation services by the appraisal client is referred to as its intended use

Question 7

characteristics of value

Answer 7

-demand
-utility
-scarcity
-transferability

Question 8

demand

Answer 8

-demand has two components: desire for the item or service and the financial ability to pay for it

Question 9

utility

Answer 9

-real estate must serve a purpose or be useful in order to have value

Question 10

scarcity

Answer 10

-real estate that is in short supply relative to the demand for it has value

Question 11

transferability

Answer 11

-the ability to convey a marketable title is paramount to the value of real estate

Question 12

assessed value

Answer 12

-the value assigned by the property appraiser for ad valorem taxes purposes
-generally, properties with a higher assessment should sell for more than properties with lower assessments

Question 13

going concern value

Answer 13

-the value of a business that assumes it will remain in business indefinitely and continue to be profitable

Question 14

insurable value

Answer 14

-the value used by insurance companies as the basis for insurance coverage
-often considered to be the replacement or reproduction cost plus allowances for debris removal or demolition and non-insurable items

Question 15

investment value

Answer 15

-the value of a particular property to a particular investor
-potential purchasers of income-producing properties commonly request investment value appraisals
-investment value is the highest price an investor will pay for a property and the lowest price a seller will accept

Question 16

liquidation value

Answer 16

-the amount that remains after all assets of a business have been sold in a hurried, but not forced, sale and all liabilities have been paid
-the value of a failing business that is not expected to continue

Question 17

market value

Answer 17

-the value to a typical buyer and a typical seller
-the most probable price at which specified property rights should sell

Question 18

salvage value

Answer 18

-the amount that can be received from the sale of the parts from a demolished structure

Question 19

plottage value

Answer 19

-the increase in value resulting from an assemblage, or combining, or two or more adjacent parcels of land under one owner

Question 20

value-in-use

Answer 20

-the net present value (income) which is generated by the property in a certain use for a certain owner
-may be higher or lower than market value but is usually lower than market value

Question 21

principle of anticipation

Answer 21

-the value of a property today is the sum of its future benefits
-when a potential buyer considers the purchase of a property, the benefits it will provide during that owner’s period of ownership forms the basis for the decision to buy, and at what price

Question 22

principle of change

Answer 22

-states that circumstances can cause changes to occur in the market, which in turn may affect the value of real estate
-an appraisal is made as of a specific date in order to take into account the market forces that influence value at that point in time

Question 23

principle of completion

Answer 23

-recognizes that sellers compete with other sellers, and buyers compete with other buyers
-focuses on the effect of changes in supply and demand

Question 24

principle of conformity

Answer 24

-states that the value of a property is sustained when it is in conformity with other properties in the same area
-conformity refers to size, architectural style, and other features

Question 25

principle of contribution

Answer 25

-the value of a component of the property is the amount it adds to the total value of the property; the amount by which the value of the property would decrease by its absence

Question 26

principle of highest and best use

Answer 26

-the best use for the property, known as its highest, best, and most profitable use, is that which will most likely produce the greatest net return to the land over a given period of time

Question 27

principle of progression

Answer 27

-applies when a lower-priced property is built or an existing property is inadequate in an area that consists of property that is more expensive -the lower priced property will progress in value toward the level of the more expensive properties in the area

Question 28

principle of regression

Answer 28

-applies when a higher-priced property is constructed or an existing property is over-improved in an area that consists of lower-priced properties -the higher-priced property will regress in value toward the level of the less expensive properties of the area

Question 29

principle of substitution

Answer 29

-recognizes that no one would pay more for a property than the amount necessary to acquire an acceptable substitute -the basis for all mathematical method that are used by appraisers to estimate value