LOS e: Describe the various approaches to the valuation of real estate.

Q1. Which of the following is least likely a characteristic of the income method for real estate valuation?

A)   Require a discounted cash flow model.

B)   Account for the effects of income taxes.

C)   Ignore future changes in operating income.

Q2. Consider the following descriptions of approaches used in valuing real estate:

• Approach 1: In this approach, the present value of after-tax cash flows are calculated based on the investor’s required rate of return before the equity portion of the investment is deducted.
• Approach 2: In this approach, the value of land is estimated and is added to the price that would have to be paid if a property had to be replaced.
• Approach 3: In this approach, an appraisal price is estimated as the discounted net operating income based on the market required rate of return.
• Approach 4: This approach relies on examining recent transaction prices from a group of similar properties and depends on a reasonably liquid market.

List in order, from Approach 1 to Approach 4, the real estate valuation methods that correspond to each of the four valuation approaches listed above.

A)   The income method, the cost method, the sales comparison method, and the discounted after-tax cash flow model.

B)   The discounted after-tax cash flow model, the cost method, the income method, and the sales comparison method.

C)   The income method, the discounted after-tax cash flow model, the sales comparison method, and the cost method.

Q3. Consider the following descriptions of approaches used in valuing real estate:

• Approach 1: This approach relies on examining recent transaction prices from a group of similar properties.
• Approach 2: This approach suggests that projects with positive expected net present value should be accepted.
• Approach 3: In this approach, an estimate for net operating income is discounted by an estimate of the market required rate of return to obtain the appraisal price.
• Approach 4: In this approach an estimate for the value of land is added to the price tag that would have to be paid if a property had to be replaced.

List in order from Approach 1 to Approach 4 the real estate valuation method that corresponds to each of the four valuation approaches listed above.

A)   The sales comparison method; the discounted after-tax cash flow model; the income method and the cost method.

B)   The sales comparison method; the income method; the cost method and the discounted after-tax cash flow model.

C)   The income method; the cost method; the sales comparison method and the discounted after-tax cash flow model.

Q4. Which of the following is least likely a disadvantage of the cost approach method of estimating the market value for real estate?

A)   market value of a property may differ significantly from its construction cost.

B)   the replacement cost of existing improvements may be difficult to determine.

C)   estimating the value of the land may be difficult.

LOS e: Describe the various approaches to the valuation of real estate. fficeffice" />

Q1. Which of the following is least likely a characteristic of the income method for real estate valuation?

A)   Require a discounted cash flow model.

B)   Account for the effects of income taxes.

C)   Ignore future changes in operating income.

Correct answer is B)        

The income method does not consider the investment’s income-tax implications. However, it does use a discounted cash flow model based on net operating income. The income method does not account for potential changes in operating income.

Q2. Consider the following descriptions of approaches used in valuing real estate:

• Approach 1: In this approach, the present value of after-tax cash flows are calculated based on the investor’s required rate of return before the equity portion of the investment is deducted.
• Approach 2: In this approach, the value of land is estimated and is added to the price that would have to be paid if a property had to be replaced.
• Approach 3: In this approach, an appraisal price is estimated as the discounted net operating income based on the market required rate of return.
• Approach 4: This approach relies on examining recent transaction prices from a group of similar properties and depends on a reasonably liquid market.

List in order, from Approach 1 to Approach 4, the real estate valuation methods that correspond to each of the four valuation approaches listed above.

A)   The income method, the cost method, the sales comparison method, and the discounted after-tax cash flow model.

B)   The discounted after-tax cash flow model, the cost method, the income method, and the sales comparison method.

C)   The income method, the discounted after-tax cash flow model, the sales comparison method, and the cost method.

Correct answer is B)        

The approach that suggests that the present value of after-tax cash flows be calculated based on the investor’s required rate of return before the equity portion of the investment is deducted, is the discounted after-tax cash flow model. The approach that adds an estimate for the value of land to the price tag that would have to be paid if a property had to be replaced, is the cost method. The approach that requires an estimate for net operating income (NOI) which is subsequently discounted by an estimate of the market required rate of return to obtain the appraisal price, is the income method. Finally, the approach that relies on examining recent transaction prices from a group of similar properties, is the sales comparison method. The accuracy of this method depends on there being a liquid real estate market from transactions data that can be collected.

Q3. Consider the following descriptions of approaches used in valuing real estate:

• Approach 1: This approach relies on examining recent transaction prices from a group of similar properties.
• Approach 2: This approach suggests that projects with positive expected net present value should be accepted.
• Approach 3: In this approach, an estimate for net operating income is discounted by an estimate of the market required rate of return to obtain the appraisal price.
• Approach 4: In this approach an estimate for the value of land is added to the price tag that would have to be paid if a property had to be replaced.

List in order from Approach 1 to Approach 4 the real estate valuation method that corresponds to each of the four valuation approaches listed above.

A)   The sales comparison method; the discounted after-tax cash flow model; the income method and the cost method.

B)   The sales comparison method; the income method; the cost method and the discounted after-tax cash flow model.

C)   The income method; the cost method; the sales comparison method and the discounted after-tax cash flow model.

Correct answer is A)

The approach that relies on examining recent transaction prices from a group of similar properties is the sales comparison method. The approach that suggests that projects with positive expected net present value should be accepted is the discounted after-tax cash flow model. The approach that requires an estimate for net operating income which is subsequently discounted by an estimate of the market required rate of return to obtain the appraisal price is the income method and the approach that adds an estimate for the value of land to the price tag that would have to be paid if a property had to be replaced is the cost method.

Q4. Which of the following is least likely a disadvantage of the cost approach method of estimating the market value for real estate?

A)   market value of a property may differ significantly from its construction cost.

B)   the replacement cost of existing improvements may be difficult to determine.

C)   estimating the value of the land may be difficult.

Correct answer is B)        

The market value may be more or less than what it would cost to rebuild or replace it. Estimating the value of the land portion of a property with improvements is a difficult process. The replacement cost is usually easy to determine, although it may or may not reflect the value of the improvements.

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