Chapter Quiz Answer Key
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Appraising Green Residences Chapter Quiz Answer Key
Chapter 1 Quiz
1. The source of the largest energy use in the average American home is for
a. cooling.
b. heating.
c. lighting.
d. refrigeration.
Correct Answer: b—See graph on page 10, which shows the energy usage at 45% for space heating.
2. The most common gas found between panes in thermal windows is
a. argon.
b. helium.
c. kryptonite.
d. radon.
e. Correct Answer: a—Page 8 “The gas…is most commonly Argon”
3. With respect to the U-value of windows, which is correct?
a. The higher the U-value, the higher the energy efficiency.
b. The lower the U-value, the higher the energy efficiency.
c. The lower the U-value, the more likely the window is to leak.
d. Windows are rated using R-ratings. Correct Answer: b—Page 8, “Unlike R-values, where the higher number indicates better insulating properties, in windows, the lower the number, the better insulating the window is.”
4. A home has poor indoor air quality. Which of the following most likely did NOT contribute to the poor indoor air quality?
a. electric on demand water heater
b. owner’s smoking of cigarettes in the house
c. use of VOCs in building materials and furnishings
d. wood stove in the basement
Correct Answer: a—cigarettes, VOCs and wood stoves all cause indoor air pollution; electricity does not cause air pollution inside a house IAQ discussed on page 10.
5. Ground source heat pumps work on the principle that, throughout the United States,
a. hot springs and geysers are present to provide heat.
b. ponds are available for an open loop system.
c. the temperature below the frost line is an even 50º.
d. the temperature below the frost line is constant year round.
Correct Answer: d—Page 4 “ground source refers to the constant temperature of the earth at certain depth year round”
6. A buyer is considering buying an older home but is concerned about the energy use. Which of the following would be MOST useful to the buyer?
a. all-inclusive energy audit, including an infrared camera use and a blower door test
b. evaluation of the current owner’s utility bills
c. online review of the house via website d. visual inspection by the appraiser or agent of the property
Correct Answer: a—see discussion of blower door tests and infrared cameras, both of which are used to perform an audit. B is incorrect because the current owner’s lifestyle will influence utility use; an online review via a website is not as thorough as an on-site inspection; appraisers and agents are not trained to be energy auditors, so d is incorrect.
7. Which of the following types of insulation would BEST be suited to an area where the insulation needs to go around existing barriers, and fill an irregular space?
a. batts
b. blown in
c. ICFs
d. rigid foam
Correct Answer: b—See pages 7 and 8 where types of insulation are discussed. Batts are used on unfinished walls, between studs; ICFs are for unfinished walls in new construction only; rigid foam is placed on walls, especially exterior walls.
8. One of the down sides of photovoltaic shingles is that they
a. do not blend in with the other shingles.
b. do not work.
c. produce DC current, which requires an alternator on site to convert to AC current.
d. require maintenance.
Correct Answer: c—See page 6, “The electron produces an direct current (DC). Because most homes and businesses run on alternating current (AC), an inverter must be installed to convert the energy for use.” A is incorrect because. they blend in fairly well ; b, they do work; d, unlike solar panels, they do not require maintenance.
9. Currently, which of these is being phased out by the U.S. Government? a. coal stoves
b. fluorescent lights
c. incandescent light bulbs
d. tanked hot water heaters
Correct Answer: c—Page 12 “As most readers know, the US Government has been on course to phase out incandescent light bulbs”
10. A double pane, low-E window with a 1/2” space filled with argon is ____times as efficient as a single pane window in an aluminum frame.
a. 2
b. 2.5
c. 3
d. 4 Correct Answer: a—See page 8 and 9; single glass in an aluminum frame has a U value of 1.30; double glass, low-E with a ½” space filled with argon is a .64 U value; .64 x 2 = 128, just about exactly 2 times.
Chapter 2 Quiz
1. Jose is in the market for a new home, and has narrowed his choices down to two. One has a ground source heat pump, and the other has a conventional heat pump. The homes are identical except for this feature. The cost of the ground source heat pump is an additional $4,000. The estimated energy savings provided by the ground source heat pump is estimated at $67 a month. What is the anticipated pay back time for the upgraded heat pump?
a. two years
b. four years
c. five years
d. ten years Correct Answer: c—$4000 ÷$67 = 59.70 months; round to 60 months; equals five years.
2. An advantage to a “Green” MLS is that
a. every agent uses it.
b. it is paperless.
c. it provides known adjustments for green features to appraisers and agents.
d. it provides more information on green features in homes than typical MLS services do.
Correct Answer: d—we discuss the Green MLS in the chapter, and it is identified as one which provides more information on green features. A is incorrect because we have not discussed at all which agents use the MLS: b is incorrect, because we are not discussing green in terms of paper printed; c is incorrect because MLS systems do not provide adjustments
3. Karl, a buyer, is looking at new homes. Karl anticipates he will be in this house no more than 5 years, because of his job. Below are four options for energy efficient upgrades available to him, the estimated cost of the upgrade, and the energy savings per month. Based on that, which of these features would make sense for Karl to invest in?
a. high energy gas furnace versus regular gas furnace – it’s $2,000 more with anticipated energy savings of $1,500 per year
b. extra insulation package –it’s $2,000 more with anticipated energy savings of $30 a month
c. on demand gas hot water heater – it’s $5,000 more with anticipated energy savings of $300 a year
d. triple pane windows – it’s an additional cost of $3,600 with anticipated energy savings of $17 a month
Correct Answer: a— Karl’s time frame is five years a. is correct because he spends $2000 more, but will save $7500 ($1500 x 5) over the next five years, for a net savings of $5500; b is incorrect because he would only save $1800 over 5 years ($30 x 12 x 5); and the improvement costs $2000; c is incorrect, because he would only save $1500 over 5 years, and the improvement costs $5000; d is incorrect because he would only save $1020 over the next 5 years ($17 x 12 x 5) and the cost is $$3600.
4. A relevant characteristic is
a. any difference between the subject and a comparable.
b. any item unique to a home.
c. one defined by USPAP as being relevant.
d. one which impacts the value of the property. Correct Answer: d—The definition at the beginning of the chapter states: Relevant Characteristics Those characteristics of a property, whether location, physical, legal, or economic, which affect value. In the chapter we discuss that not all differences are relevant (makes a and b incorrect) and that c requires the appraiser to identify the relevant characteristics.
5. Which of the following features would most likely appear in an MLS system which has been “greened”?
a. number of bathrooms
b. on-site energy producing items
c. type of heating
d. type of roofing material
Correct Answer: b—discussed on page 24 and 25
Chapter 3 Quiz
1. Which certification/designation would be available for those in the real estate industry who are NOT builders?
a. LEED® AP +BD + C
b. LEED® AP Homes Credential
c. LEED® Green Associate
d. LEED® Fellow
Correct Answer: c—see page 37, This credential is designed for professionals who want to demonstrate their green building expertise in non-technical fields of practice There are several certifications available from LEED, but as the definitions for the various certifications indicate, this credential is for professionals who want to demonstrate their green building expertise in non-technical fields of practice, which would include appraising and selling, not building. A. is incorrect because “AP + BD +C” is “Designed for professionals who participate in the design and construction phases of environmentally sound commercial, institutional, and high-rise residential buildings”, which would not typically be those in real estate; b is incorrect because LEED AP Homes Credential is for “- Designed specifically for single family residential real estate. It provides a standard for professionals participating in design and construction of high-performance green homes;”—again it specifies design and construction; and d, “LEED Fellow” is incorrect because this is an honorary designation, given to those who already hold a previous designation.
2. Energy Star estimated that typical utility costs for a home annually are
a. $2,200.
b. $3,600.
c. $4,000.
d. $5,200.
Correct Answer: a—See p. 31 “Per Energy Star’s website, typical utility costs for a home are $2,200 annually”.
3. The vast majority of green certified single family homes are certified by
a. Energy Star.
b. HERS.
c. LEED®.
d. NAHB®.
Correct Answer: a—Page 33: Energy Star is universally acknowledged to be the most popular home energy rating system of the three mentioned earlier. b is incorrect because HERS is the name of the rating system; c is incorrect because, quoting from the text: “According to the Green Building Market and Impact Report, the estimated LEED® Certified Homes for 2007-2011 included:
• Total units: 15,966
• Single-family (attached and detached): 6942 • Multi-family (including duplex and triplex): 9004”—these numbers, for a several year period are significantly lower numbers than Energy Star for one year;
and d is incorrect because NAHB, per the text: The National Association of Green Builders does have members. “They claim a membership of 235,000, or about 80 percent of the homebuilders in the US. From 2004-2007 about 36,000 homes were certified (nationwide) under green guidelines by local builders’ associations.” Again, in a several year period they certified substantially fewer homes than Energy Star.
4. The National Green Building Standards were developed by
a. LEED® and Energy Star.
b. NAHB® and ICC.
c. NAHB® and LEED®.
d. RESNET and NAHB®.
Correct Answer: b—Page 33 “Since 2004, the NAHB® and ICC have developed and published the NAHB® National Green Building Standards”In 2007, NAHB® partnered with the ICC to develop a nationally recognized standard of green building. This is known as the ICC 700 Green Building Standard.
5. NAHB® requires an “owner’s manual” for a Green certified house at which level of certification?
a. Bronze
b. Emerald
c. Gold
d. Silver
Correct Answer: c—Page 34, One of the interesting requirements at the Gold level is that the buyer gets an “owner’s manual” from the builder. This contains basic information about the certification level of the home, maintenance and operation, warranty manuals.
6. The ratings produced by RESNET are a. Gold.
b. HERS.
c. LEED®.
d. NAHB®.
Correct Answer: b—The ratings produced by RESNET are Home Energy Rating Systems (HERS) ratings. HERS (Home Energy Rating Systems) is the index used by Energy Star Certified Raters. In the HERS rating system, 0 = zero net energy home; the higher the score, the less efficient the home is. A. Gold is a rating produced by LEED; LEED is a rating system and NAHB is a group which performs ratings.
7. A commercial tenant who is remodeling his space and seeking a green certification from LEED® would probably seek
a. CI.
b. CS.
c. EB.
d. NC.
Correct Answer: a—Commercial Interior page 36, list at top Text says: Non-residential LEED® categories are shown below, with the associated abbreviation (if any) used by LEED®:
• New Construction (NC)
• Core and Shell (CS)
• Commercial Interior (CI)
• Existing Buildings with limited construction (EB)
• Schools
• Neighborhood Development
8. The benefit to real estate appraisers regarding any of the three most prevalent rating systems is that they
a. are all the same. b. demonstrate their value in the marketplace.
c. provide quantitative analyses of homes and buildings.
d. provide qualitative assessments of homes and buildings.
Correct Answer: c—As we touched on in the last chapter, appraisers are concerned with quantitative data and adjustments which makes c correct; we explain the differences among the 3, which makes a in correct; their value in the marketplace was not discussed; and their assessments are quantitative, not qualitative, which makes d incorrect.
9. HERS levels are based on a HERS index of
a. 0.
b. 75.
c. 80.
d. 100.
Correct Answer: d—RESNET specifications are set to a reference house, which has a HERS index of 100, based on the 2006 International Energy Conservation Code. A net zero energy home has an index of zero. Each point on the scale represents 1 percent (1%) of energy efficiency. For an appraiser, this is a reference point which is quantifiable, as in “This house has a HERS rating of 50, and comparable #1 has a HERS rating of 75”.
10. For sixteen states, which is the minimum code compliance with respect to energy-efficiency?
a. Energy Star HERS rating
b. LEED® certification level of Silver
c. NAHB® certification level of Bronze
d. net zero HERS rating Correct Answer: a—A RESNET Energy Star rating is also the minimum code compliance with respect to energy efficiency for sixteen states. Chapter 4 Quiz
1. According to USPAP, competency means the
a. ability to properly identify the problem to be addressed; and
the knowledge and experience to complete the assignment competently.
b. appraiser can deliver an appraisal which suits the client.
c. appraiser has taken a seminar in this type of appraisal.
d. appraiser possesses actual experience in this type of appraisal.
Correct Answer: a—see page 43; answer a is two of the three things listed in USPAP. The appraiser must determine, prior to accepting an assignment, that he or she can perform the assignment competently. Competency requires: 1. The ability to properly identify the problem to be addressed 2. The knowledge and experience to complete the assignment competently 3. Recognition of, and compliance with, laws and regulations that apply to the appraiser or to the assignment Competency may apply to factors such as, but not limited to, an appraiser’s familiarity with a specific type of property or asset, a market, a geographic area, an intended use, specific laws and regulations, or an analytical method. If such a factor is necessary for an appraiser to develop credible assignment results, the appraiser is responsible for having the competency to address that factor or for following the steps outlined below to satisfy this COMPETENCY RULE. [2012-2013 USPAP, page U-11, lines 323-337].
2. “Credible” in the context of USPAP means
a. defensible.
b. provable in a court of law.
c. worthy of belief.
d. worthy of remuneration. Correct Answer: c—see page 43; Credible is defined in USPAP as: worthy of belief. Credible assignment results require support, by relevant evidence and logic, to the degree necessary for the intended use. [2012-2013 USPAP, page U-3, lines 73-75.
3. Fannie Mae’s requirement for having competency before accepting an appraisal assignment is found in
a. Certification #7.
b. Certification #10.
c. Certification #11.
d. Certification #12. Correct Answer: c—see page 44; In the Appraiser’s Certification, which is part of every Fannie Mae form (and the Fannie Mae forms are used by Fannie, Freddie, FHA, VA, and portfolio lenders) #11 reads
“I have knowledge and experience in appraising this type of property in this market area.”
4. Sources for the costs of green building can be found
a. from Marshall and Swift valuation service.
b. in the Fannie Mae guidelines.
c. in USPAP.
d. in your appraisal software.
Correct Answer: a—page 56: You are going to have to start somewhere, and a logical place to start is by calculating the cost paid per square foot for each house. You want to compare this data with published cost tables for Green Construction, available from Marshall and Swift. Their data is available for purchase in either book form, or online, and you can select a full subscription, or simply pay as you go for usage. http://www.marshallswift.com/
B is incorrect because Fannie Mae does not provide cost data; c is incorrect for the same reason; d is incorrect; if an appraiser had cost data in their appraisal software, it would have had to have come from a third party source, Marshall and Swift valuation is basically THE cost data source for appraisers. 5. According to NAR, one of the reasons that about 9 percent of the sales failed to close in 2011 was
a. agent’s failure to hold the transaction together.
b. buyer’s lack of financial ability.
c. low appraisals.
d. poorly worded agreements of sale.
Correct Answer: c—page 44: Real estate agents are also well aware of this problem. In 2011, NAR reported that 16 percent of AMC contracts taken failed to close, and estimated that 9 percent of total failed transactions were due to low appraisals. Source: http://www.realtor.org/news-releases/2011/11/existing-home-sales-down-in- july-but-up-strongly-from-a-year-ago
6. Which of the following is true about adjustments appraisers make?
a. adjustments should be made based on market analysis of the behavior of typical buyers
b. all adjustments are cost-based
c. once an appraiser has developed an adjustment for a feature, it will work for all the properties in his market area
d. the more adjustments made, the more fine tuned the appraisal is
Correct Answer: a—based on page 56. This is a knowledge based question that most appraisers know (or should know) instantly. We have said that adjustments are not cost based, so b is incorrect; elsewhere in the text, we have discussed how adjustments vary depending upon the purchaser expectations for that type of property; d is incorrect because appraisers know the greater the number of adjustments, the less reliable the data is considered to be. The text says: Few adjustments are cost-based. Most are market-based. Additionally, Fannie Mae prefers that net adjustments per comparable not exceed 15 percent, and gross adjustments should not exceed 25 percent. This is not to say that appraisal reports are not prepared and delivered with greater adjustments than these - this is what Fannie Mae prefers. A truly odd house might end requiring substantial adjustments. However, as you know from basic appraisal education, the more adjustments made to a property, the less reliable the data is considered to be. With the increased scrutiny given to appraisals, all appraisers should be prepared to defend their adjustments, which means document how they were made. 7. Fannie Mae’s preferred guidelines with respect to maximum net and gross adjustments, per comparable are
a. 10% net and 20% gross.
b. 15% net and 25% gross.
c. 25% net and 15% gross.
d. 20% net and 10% gross.
Correct Answer: b—page 55; Fannie Mae prefers that net adjustments per comparable not exceed 15 percent, and gross adjustments should not exceed 25 percent. This is not to say that appraisal reports are not prepared and delivered with greater adjustments than these—this is what Fannie Mae prefers. A truly odd house might end up requiring substantial adjustments.
8. Which statement is true about wall insulation in houses?
a. 2 x 4 walls can be insulated to the same R value as 2 x 6 walls
b. all homes have wall insulation
c. existing homes without wall insulation have no way of being insulated
d. some homes, due to the type of construction, do not have a cavity for wall insulation
Correct Answer: d—pages 51 and 52. Reasoning is required to rule out a, but anyone in the real estate business should be able to understand that the size of the cavity dictates the amount of insulation, and 6 is bigger than 4.
Chapter 5
Case Study 1 Discussion Question, page 68
Based on your knowledge, list several key differences that immediately stood out to you between the subject house and choices #1, #2, and #3.
Suggested Answer: Difference in HERS ratings with choice #1.
Difference in hot water heater with choice #1.
Difference in builder’s estimate of monthly gas and electric with choices #1, #2 and #2.
Difference in style of home, square foot, and number of rooms with choices #2 and #3.
Reviewing Choices, page 69
Without making any adjustments, but by simply reviewing the available choices, if you had to pick three to discard immediately, which three would they be and why?
Suggested answer:
Choice. #1, because it lacks the U-rated windows and upgraded insulation package.
Choice. #3, because it is a ranch.
Choice. #6, because it is zero net energy.
Most appraisers will employ the logic that buyers of Cape Cods may consider two-story homes.
Check Your Knowledge, page 71
1. Based on these calculations, if you make adjustments to Choice #2 - which you are using as Comp. 1 - how many do you make?
a. none
b. one
c. two
d. three
The answer is C. The two adjustments are for square footage and for age.
2 What is the total dollar amount you have adjusted Comp. 1?
a. $5,772
b. $8,000 c. $13,612
d. $13,772
The answer is D. The first part is two percent (2%) of the sales price, or $5,772. Then you adjust the square footage at $40 per square foot for $8,000. $5,772 + $8,000 = $13,772.
3 What is the reconciled value of Comp. 1?
a. $275,000
b. $285,000
c. $280,100
d. $288,600
The answer is A. $275,000 (rounded). The sale price was $288,600; the adjustments total $13,772, and are all negative adjustments to this comparable (this comparable was superior to the subject); $288,600- = $274,828, which would typically be rounded to $275,000, and in any case, in the number closest to those given as choices.
4 How many adjustments do you make to Comp. 2?
a. one
b. two
c. three
d. four
The answer is B. The two adjustments are for lot size and for square footage.
5 What is the dollar amount of the adjustments you have made to Comp 2?
a. $8000
b. $10,000
c. $12,000
d. $14,000 The answer is D. $10,000 for the lot difference [$.50 x 20,000 sf ] and $4,000 for the square footage. $10,000 + $4,000 = $14,000.
6 What is the adjusted value of Comp. 2?
a. $272,000
b. $275,000
c. $276,000
d. $285,000
The answer is C. Comp. #2 sold for $290,000; the adjustments made were $14,000 and were negative adjustments to this comparable (it was superior to the subject, $290,000 - $14,000 = $276,000.
7 How many adjustments do you make to Comp. 3?
a. two
b. three
c. four
d. five
The answer is C. The four adjustments are for new vs. used, lot size, square footage, and full bath vs. half bath.
8 The adjustment for lot size you make for Comp. 3 is
a. $5,000.
b. $10,000.
c. $15,000.
d. $20,000.
The answer is B. Although the lot has 40,000 square feet, 25 percent (or one-quarter) of it is unusable. The known adjustments information says to adjust based on useable land. 9 The other adjustments you make to Comp 3, in addition to the $10,000 site adjustment total are in the amount of
a. $16,078.
b. $18,000.
c. $19,078.
d. $22,078.
The answer is C. Sales price of $303,900 x 2 percent = $6,078 age adjustment; $8,000 square footage adjustment; and $5,000 full bath vs. half bath adjustment.
10 What is the reconciled value of Comp. 3?
a. $265,800
b. $274,800
c. $275,000
d. $290,000
The answer is B. Sales price was $303,900; total adjustments made were $19,078, and all adjustments were negative (minus) because the comparable was superior to the subject. $303,900 - $29,078 ($10,000 for site plus $19,078 for age, square footage, and bath) = $274,822, which (rounded) is answer b.
11 Based on the above data, what would you be inclined to value the subject property for Comp. 3?
a. $250,000
b. $265,000
c. $275,000
d. $272,000
The answer is C. Appraisal methodology requires you to adjust to the comparable which is most similar to the subject, and generally requires the least net and least gross adjustments. The adjusted values of the comparables are clustered around $275,000, which makes the case for adjusting to $275,000. 12 Based on the data among the comparables and the subject, which is correct regarding HERS ratings of 60 and GOLD LEED ratings?
a. The market pays a two percent (2%) premium for the GOLD LEED rating.
b. The market penalizes the HERS rated home by two percent (2%).
c. The market treats both the GOLD LEED rated home and the HERS 60 rated home the same.
d. There is not sufficient data to determine this answer.
The answer is C. The market treats both the GOLD LEED rated home and the HERS 60 rated home the same. After making the known adjustments; there is no difference in price between comps 1 and 2 or comps 1 and 3.
Defend Your Choices, page 72
After you submit your report, the underwriter sends you an email and lists choice #1, choice #3, and choice #6, which the AVM (Automated Valuation Model) has found as possible comparables for you to use, and questions why you did not use them.
1. Choice #1 was the Cape in the same development, which had the same amount of square footage, but a higher HERS rating (70 vs. 60), fewer insulation upgrades, and a conventional hot water heater. It sold with a seller assist. The actual energy costs for the house were unknown. The best reason to NOT use this as a comparable is
a. it had a seller concession, and no matter how you adjust for those, the underwriters don’t like it.
b. it had a HERS rating of 70, and you had a comparable with a HERS rating of 60, which was the same as the subject.
c. the house was 18 months old at time of sale.
d. you could not verify the actual energy costs for the house. The answer is B. The HERS rating is one which would make the comparable either functionally the same (or not the same). As you had comps with the same HERS rating, you complied with #7 of the certifications page by using those.
2. Choice #3 was the ranch style home in the subdivision. The sale is three (3) months old, it has the same room count (1,900 square feet), same U-rated windows, same upgraded insulation package, and same amenities (fireplace, screened porch, garage) as the subject. It has a HERS rating of 60. The estimated monthly utility bills are $85 a month. The BEST reason NOT to use this as a comparable is
a. the estimated utility bills are too low.
b. the one-story style is physically and functionally different from the subject, and you had comparables which were more similar to the subject.
c. three (3) months is too old a comparable to use.
d. the square footage is less.
The answer is B. This is a ranch and you had some two-story and Cape comps in your pool.
3. Choice #6 was the zero net energy home with concrete siding, solar panels, and a contemporary style. Which statement BEST represents why you did NOT use this comparable? “I did not use this comparable because
a. I think the solar panels are an ugly distraction to the house overall.”
b. I think concrete siding is a fad, and buyers will not want it in the future. Also, there is no way to calculate the effect of concrete siding on a sale. ”
c. it is a contemporary style home, and adjusting for a style difference is unreliable.”
d. many of its elements (solar panels, photovoltaic shingles, concrete siding, zero net energy) were substantially different from the subject property and would have required adjustments; I had comparables which were more similar to the subject both physically and functionally.”
The answer is D. Always, when defending a report, go back to the certifications.
4. The next question from the underwriter appears to have come from either the agent who handled the sale or the buyers of the property. “The owners of the subject property house stated that their actual total utility bills, for a family of four, have been $80 a month. They attribute this to use of energy savings devices and strategies, particular to these occupants. The builder’s estimates were $100 a month. Why did you NOT make adjustments to the other comparables for the obvious additional energy savings available in the subject property? Your best answer would be
a. Any adjustment based on energy savings needs to be qualified. b. I did not have access to the actual utility costs of all of the comparables, so, therefore, utility costs and HERS or other ratings were not a consideration in this appraisal.
c. I do not make adjustments for energy savings, as they are not quantifiable.
d. The reported energy usage results from lifestyle decisions made by the current occupants. The typical purchaser may not choose to continue the same lifestyle decisions, and thus have the same savings. However, the HERS rating and builder’s estimated costs are a yardstick most typical buyers will consider as quantifiable data they can use.
The answer is D. Making adjustments for one particular buyer or owner moves from the accepted practice of typical purchaser into valuation for one specific purchaser, which is NOT acceptable appraisal methodology. Also, the HERS rating and the builder’s estimates are from a third party, as opposed to someone with a financial interest in the transaction, e.g., the seller or the agent.
Case Study 2
Calculate the GRM, page 73
Remembering that Sales Price ÷ Monthly Rent = GRM, what is the indicated GRM for all of the properties?
The answers are
Property GRM
Choice #1 $121,500 ÷ $1,350 = 90
Choice #2 $130,500 ÷ $1,400 = 93.2
Choice #3 $112,500 ÷ $1,250 = 90
Choice #4 $94, 500 ÷ $1,050 = 90
Choice #5 $ 153,000 ÷ $1,700 = 90 Calculate Adjustments, page 74
You begin research in the market by doing a rent survey, and gather the following information from landlords and brokers engaged in property management.
1) For these types of homes (all are ranch style homes near the military base), additional square footage equals a dollar ($1) per square foot per month in rent. For example: Choice #3 would have received $150 a month more in rent because it is 150 square feet larger.
2) A full bathroom generates an additional $100 per month in rent; a half bath generates an additional $50 per month in rent.
3) Air conditioning is worth $150 a month.
Based on these known adjustments, what would the adjustments look like as far as rents go for the choices?
Suggested answer: Have students fill out a grid. The answer appears on the next page.
Item Base Choice #1 Adjustments Choice #2 Adjustments Rent $1200 $1200 $1200 Sf 1200 1300 +100 1250 +50 Rm Ct. 6/3/1 6/3/1.1 +50 6/3/1 FHA Gas/ Yes Yes 0 Yes, High 0 CAC efficiency Adjusted rent $1350 $1250
Item Base Choice #3 Adjustments Choice #4 Adjustments Rent $1200 $1200 $1200 SF 1200 1350 +150 1200 Rm Ct. 6/3/1 6/3/1.1 +50 6/3/1 FHA Gas/ Yes No a/c -150 No a/c -150 CAC Adjusted rent $1250 $1050
Item Base Choice #5 Adjustments Rent $1200 $1200 SF 1200 1400 +200 Rm Ct 6/3/1.1 6/3/2 -100 A/C Yes Yes 0 $1500
Calculate Adjusted Rent to Actual Rent Comparison, page 74
Next, you will create a grid that explains the choice vs. adjusted rent vs. actual rent vs the difference
Suggested answer:
Choice Adjusted Rent Actual Rent Difference
#1 $1350 $1350 0
#2 $1250 $1450 +$200
#3 $1250 $1250 0
#4 $1050 $1050 0
#5 $1500 $1700 +$200
Value the Subject Property, page 75
Knowing this, let’s value our subject property:
Subject has 1450 square feet; 2 full baths, a high efficiency gas furnace, and central air.
Base rent is: $1200
1. What adjustments will you make?
Suggested answer:
Square footage +250
Bath +100
High efficiency furnace +200
2. What is your estimated market rent for the subject?
Suggested answer: Estimated rent $1750
3. Using the known GRM of 90, what is the indicated value of the subject?
Suggested answer:
Estimated value using a GRM of $157,500 90
Check Your Knowledge, page 76
1. What is the range of indicated values using the income approach with a GRM for the subject and all five comparables?
a. $76,000 to $157,500
b. $94,500 to $155,00
c. $94,500 to $153,000
d. $94,500 to $157,500 The answer is D.; the rents are $1050 to $1750; these numbers times the GRM of 90 yields the range indicated
2. Which of the following comments would be appropriate to explain your estimated monthly rent of $1,750 for the subject?
a. My analysis of the pool of rentals indicates that the base rent is $1200 a month for a 1,200 square foot house, with a 6/3/1 configuration, and an far gas furnace and central air. From there, I have adjusted the rent based on: Square footage, baths, central air, and high efficiency gas furnace. These adjustments are market derived.
b. My analysis of the rental market indicates that a fair market rent for the subject is $1,750 a month based on location, condition, and other factors.
c. The subject is in superior condition to all of the choices, and has a remodeled kitchen, as well as a high efficiency gas furnace. Both command more rent in the market.
d. The closest sale is comp. #5, which we have adjusted upwards to take into consideration the date of sale, and the nicer décor in the subject property. The answer is A. Answer A is defensible; you have the data to support it, and you say so. C is wrong because we did not factor in remodeled kitchens; nor did you have data to support an adjustment, in the income approach, for a remodeled kitchen. D is incorrect because we did not give and/or discuss data regarding time of sale or décor. B is incorrect because it is not as defensible as C.
3. Assuming that all of the choices you used were purchased by investors, and that in fact, most of the homes like this are purchased by investors, what would be an appropriate reconciliation comment for the report?
a. The cost and income approaches are not necessary with a home of this age and type. The market approach is the best and only approach to value.
b. The cost approach was not developed due to the age of the house. The income approach supports the market approach, which is the best approach to value.
c. The income data, although interesting, does not reflect what the typical owner- occupier would pay for a home of this type. I found no sales to owner-occupiers, so I have adjusted the choices based on my opinion of what a typical owner-occupier would pay.
d. The income data supports the market approach and reflects that most of the purchasers of homes of this type are investors, who are driving the market. The extremely close correlation among the Germs further supports this approach. The typical purchaser, based on our research, is an investor-buyer. This makes the market approach a reflection of the income approach.
The answer is D. A is incorrect, because you did develop and rely upon an income approach. A is probably boilerplate that was inadvertently entered into the report. B is too limited a statement, because you do not explain that the typical purchaser is an investor. C is wrong, because you are trying to value the property for a buyer who is not the typical purchaser, and this is not a correct approach in appraisal.