Real Estate Appraiser Examination cheat sheet

Value in exchange is the most probable price in a competitive market; value in use is the worth of a property to a specific owner for a specific purpose.

The four agents of production are land, labor, capital, and entrepreneurship (coordination); land's share of total income is attributed through land residual techniques.

Anticipation: value is created by the expectation of future benefits, so present value equals discounted expected future income.

Substitution: a buyer will pay no more for a property than the cost of acquiring an equally desirable substitute; this principle underlies all three approaches.

Conformity: value is maximized when a property fits the standards of its neighborhood; regression and progression describe the effect of neighboring values on a subject.

Contribution: the value of a component equals the amount it adds to total value, not its cost; measured through paired analysis or capital budgeting.

Increasing and decreasing returns: adding units of an agent of production raises income until marginal cost equals marginal benefit, then returns diminish.

Balance: maximum value occurs when the agents of production are in equilibrium; surplus productivity and overimprovement are the two imbalances.

Change and externalities: value is dynamic and affected by physical, economic, governmental, and social forces outside the property boundaries.

Sales comparison: adjusted price = sale price ± dollar or percentage adjustments for property rights, financing, conditions of sale, market conditions (time), location, and physical characteristics.

Adjustments are made to the comparable to make it equivalent to the subject; if the comparable is superior, subtract; if inferior, add.

Gross rent multiplier = sale price ÷ gross monthly rent; the subject value = subject monthly rent × GRM drawn from comparable sales.

Cost approach: value = replacement or reproduction cost new − physical deterioration − functional obsolescence − external obsolescence + land value.

Cost new is estimated by quantity survey, unit-in-place, or comparative (square-foot) method; cost does not equal value.

Straight-line depreciation = (cost new − salvage) ÷ economic life; age-life method: effective age ÷ total economic life × cost new.

Income approach (direct capitalization): value = net operating income ÷ capitalization rate; cap rate = NOI ÷ sale price.

Yield capitalization discounts or capitalizes future cash flows at a market-derived discount rate reflecting risk, time, and capital recovery.

Gross income multiplier and overall cap rate must come from comparable sales with similar risk, growth, and remaining economic life.

Highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive, tested in that order.

HBU is analyzed as though vacant (land) and as improved; if the existing improvement's contribution is negative, demolition may be the HBU.

Market analysis defines the market area, demand drivers, supply (competitive properties, pipeline), and absorption; absorption rate = units sold or leased per period ÷ total inventory.

Six forces affecting value: social, economic, governmental, environmental (physical), technological, and demographic trends.

Physical analysis covers site size, shape, topography, frontage, utilities, zoning, easements, and any environmental contamination or hazard.

Improvements analysis covers age, condition, quality, layout, functional utility, and remaining economic life.

Market segmentation: define property type, price or rent range, buyer/tenant profile, and geographic boundaries before selecting comparables.

Competitive supply analysis compares vacancy rates and new construction in the subject's submarket to forecast rent and price trends.

USPAP requires the appraiser to identify the client, intended use, intended users, type and definition of value, effective date, and scope of work before accepting an assignment.

The Scope of Work Rule requires the work necessary to produce credible assignment results; scope is not fixed by a checklist but by the problem.

The Competency Rule: an appraiser must decline or disclose lack of knowledge and take steps to gain competence before accepting.

The Jurisdictional Exception Rule allows departure from a USPAP requirement only when a law or regulation of a jurisdiction precludes compliance; the appraiser must cite it.

Record keeping: workfiles must be retained for at least five years after delivery, or two years after final disposition of a judicial proceeding, whichever is later.

The Ethics Rule prohibits accepting compensation contingent on a predetermined value, misrepresenting the appraiser's role, and disclosing confidential information.

An appraisal must be reported as a Restricted, Summary, or Detailed report; the reporting option does not change the required analyses.

USPAP is not law; it is enforced by state licensing boards and through the appraisal standards for federally related transactions.

The bundle of rights includes possession, use, enjoyment, disposition, exclusion, and quiet enjoyment; each may be separated and valued independently.

Fee simple absolute is the highest estate; lesser estates include life estates, leaseholds, and easements.

Easements are nonpossessory interests; an appurtenant easement benefits a dominant tenement and burdens a servient tenement.

A lien is a charge against property securing a debt; liens are classified as voluntary or involuntary, and by priority, generally first in time, first in right.

Eminent domain requires public use, due process, and just compensation; the measure is market value of the interest taken plus severance damages.

Police power includes zoning, building codes, and subdivision regulation; it is not a taking unless it deprives the owner of all economically viable use.

Deed restrictions and covenants run with the land and can limit HBU; restrictive covenants are enforced by private parties, zoning by government.

Title vs. interest: title is evidence of ownership; the interest appraised may be leased fee, leasehold, or a partial interest such as a fractional share.

Every report must state the value conclusion, the effective date of value, the interest appraised, and the definition of value used.

The reconciliation section explains why the approach or approaches relied upon are most credible, not merely an average of the approaches.

An extraordinary assumption is an assumption about a condition that, if false, would change the value opinion; a hypothetical condition is contrary to fact as of the effective date.

An appraisal review is the act of critically examining another appraiser's report; the reviewer must form an opinion of the quality of the work and may agree or disagree with the value.

Review levels: administrative, technical, and field review; the scope of review must be stated and the reviewer must have competence in the property type.

The report must disclose exposure time, marketing time, and any prior sales of the subject within the required period.

A value conclusion must be supported by market evidence; a range of value is acceptable if the report explains the basis for the range.

Communication of value must be clear, non-misleading, and consistent with the intended use and intended users identified in the report.

Compound interest: future value = present value × (1 + i)^n; present value = future value ÷ (1 + i)^n.

Sinking fund factor = i ÷ [(1 + i)^n − 1]; it converts a future amount into a level periodic payment.

Mortgage constant = annual debt service ÷ loan amount; it equals the interest rate plus the sinking fund factor when payments are level.

Ellwood formula: capitalization rate = (loan-to-value × mortgage constant) + [(1 − loan-to-value) × equity dividend rate] − (appreciation or depreciation × sinking fund factor).

Band of investment (mortgage-equity): cap rate = (LTV × mortgage constant) + [(1 − LTV) × equity dividend rate].

Mean, median, and mode describe central tendency; standard deviation and variance measure dispersion; a coefficient of variation compares dispersion across data sets.

Linear regression estimates price as a function of variables (e.g., square footage, lot size); the coefficient of determination (R²) measures the proportion of variance explained.

Adjusted sale price should be tested for reasonableness; a coefficient of variation above roughly 15% suggests the comparables are not tightly clustered.

Time value adjustment: adjusted price = sale price × (1 + market change rate)^(months between sale and effective date).