For which type of property is the income approach to value considered MOST appropriate?
Correct Answer
B) A commercial office building leased to multiple tenants
The income approach estimates value by converting a property's anticipated income stream into a present value estimate, making it most applicable to income-producing properties where investors base purchasing decisions on expected returns. A commercial office building with lease income is the paradigmatic use case for this approach.
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Related Topics & Key Terms
Key Terms:
Related Concepts
Foreclosure is the legal process by which a lender takes possession of a property when a borrower fails to make mortgage payments. It allows the lender to sell the property to recover the outstanding debt.
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
A comparison of the major mortgage loan types—conventional, FHA, VA, and USDA—covering their eligibility requirements, down payment amounts, mortgage insurance rules, and best use cases.
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Example of economic obsolescence in real estate?
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Under California law, when a real estate licensee prepares a Comparative Market Analysis (CMA) for a property, what is the legal distinction between a CMA and a formal appraisal?
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- → The appraisal approach that estimates value by comparing a property to similar recently sold properties is the:
- → The period of time a structure continues to earn sufficient income to continue operations is referred to as the structure’s:
- → An appraiser in California is using the cost approach for a property in Sacramento and must account for entrepreneurial profit (also called developer's profit). A local developer confirms that typical profit margins in the Sacramento market are 15-20% of total development costs. How should the appraiser handle entrepreneurial profit?
- → A California buyer's agent is reviewing comparable sales data and notices that the county recorder's office lists different documentary transfer tax amounts for similar properties in the same city. Some properties show both a county and city transfer tax, while others show only the county tax. What does this difference indicate about the sale verification process?
- → When conducting a sales comparison analysis in California, an appraiser discovers that the subject property has an Accessory Dwelling Unit (ADU) that was built under California's recent ADU legislation. How should the appraiser handle this feature?
- → A California real estate agent is selecting comparable sales for a CMA on a property in Fresno. The agent finds a sale from 14 months ago in the same neighborhood. Under standard California CMA practice, why might the agent hesitate to use this comparable?
- → A California real estate licensee is preparing a CMA and notices that one comparable property sold in a foreclosure auction conducted by a trustee under a deed of trust. How should this sale be handled in the CMA?
- → Compared to other appraisal factors, appraisers generally find the the most difficult calculation to measure precisely.
- → When a comparable sale used in an appraisal was not an arm’s length transaction, this affects the:
- → A property’s cost basis is most affected by an owner’s:
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Previous Question
A 12-unit apartment building in California has the following annual financials: Scheduled Gross Rent $180,000; Other Income $9,000; Vacancy and Collection Loss 5%; Operating Expenses (taxes, insurance, maintenance) $42,000; Management Fee 7% of EGI; Replacement Reserves $6,000. Using a 6.5% cap rate, what is the indicated property value?
Next Question
An appraiser in California is determining operating expenses for a rental property in a Mello-Roos Community Facilities District in Temecula. The property's annual tax bill shows: Base Prop 13 tax $8,500, Mello-Roos special tax $4,200, and a school bond assessment of $600. For the income approach NOI calculation, how should these taxes be handled?