California Real Estate Salesperson Exam Practice - Quesiton 37

Question

All of the following would have an effect on the final estimate of value when making an appraisal of an old family residence except: 

Selections

• A. Purpose of the appraisal

• B. Suitability of the residence to the site

• C. Physical condition of the building

• D. Original cost of the residence 

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Answer: D

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5 Keys Summary

• The factor that would not affect the final estimate of value is the Original cost of the residence.

• The original cost of construction is considered a historical cost and generally has little or no influence on the current market value of a used home.

• The appraisal process follows the Principle of Change, focusing on the future and current market conditions rather than past costs.

• The Purpose of the appraisal is crucial because it defines the type of value being sought (e.g., market value or insurance value), directly influencing the chosen valuation methodology.

• The Physical condition and Suitability (location, functional plan, obsolescence) are critical factors because they directly impact the current desirability, depreciation, and overall usefulness of the property.

Explanations

The original cost of the residence is a historical figure and generally does not directly affect the current market value determined by an appraisal, especially for an old family residence. Appraisal focuses on present-day value, considering current market conditions, the cost to replace the structure, and the property's income potential, rather than its initial acquisitioncost. The "Principle of Change" highlights that real estate values are constantly fluctuating, making past costs less relevant for current valuations.

In contrast:

• The purpose of the appraisal is the first crucial step, as it dictates the type of value being estimated (e.g., market value for a sale, insurance value for coverage) and influences the methods used in the valuation process.

• The suitability of the residence to the site is a significant factor, tied to principles like "Highest and Best Use" (the most profitable use of the property) and "Conformity" (how well the property aligns with its surroundings). External factors causing "Economic Obsolescence" (loss of value from outside the property) also relate to site suitability.

• The physical condition of the building directly impacts its value. Appraisers consider "Physical Deterioration" (wear and tear) and "Functional Obsolescence" (outdated design or features), which are forms of depreciation that reduce a property's value. The cost approach to appraisal, for instance, involves estimating replacement cost and then deducting accrued depreciation.

Concepts Definitions

• Appraisal: An estimate or opinion of the value of a property as of a specific date.

• Market Value: The most probable price a property should bring in a competitive and open market, assuming informed and willing buyers and sellers acting without undue pressure.

• Principle of Change: The economic principle stating that real estate values are constantly in flux due to various social, economic, governmental, and environmental factors; the future, not the past, is of primary importance in valuing a property.

• Principle of Highest and Best Use: The legal and physically possible use of a property that is most likely to generate the greatest return or value over time.

• Principle of Conformity: An appraisal principle stating that property values tend to be maximized when buildings are similar in design, construction, and age within a neighborhood.

• Depreciation: A loss in value of a property, specifically referring to the building structure, not the land.

o Physical Deterioration: The decline in value due to wear and tear, age, or environmental factors. It can be curable (fixable) or incurable.o Functional Obsolescence: A loss of value due to a property's outdated design, features, or poor interior layout, making it less desirable in modern times.

o Economic Obsolescence (External Obsolescence): A loss of value caused by external factors outside the property's boundaries, such as a declining neighborhood, increased crime rates, or undesirable nearby land uses.

• Cost Approach to Value: One of the three main appraisal methods, which estimates the property's value by calculating the cost to replace or reproduce the improvements, deducting accrued depreciation, and then adding the estimated market value of the land.