Chapter 12 - Test Questions
An appraiser determines the most probable price that a buyer would be willing to pay for a property. This type of value is known as: A. subjective or fair market value B. objective or fair market value C. liquidation value D. assessed value
B. The most probable price a buyer would be willing to pay describes the property's market value, an objective measure.
Which of the following describes the difference between the reproduction cost method and the replacement cost method? A. Reproduction refers to a property with the same functional ability; replacement means exact duplication B. Reproduction refers to a replica property; replacement means one with equivalent utility C. Replacement cost is calculated by the sales comparison method: reproduction cost is estimated by the square foot method D. Reproduction cost and replacement cost are treated as synonymous terms
B. The reproduction cost method is concerned with what it would cost to build a replica of the subject property. The replacement cost method is concerned with what it would cost to build a suitable replacement with equivalent utility.
The value of a property won't be affected by: A. zoning regulations B. title insurance C. location near a major freeway D. improvements to the land
B. Title insurance won't affect the appraised value of a property.
A small house is situated on a large lot in a mixed-use neighborhood. The city de- cides that the area will, in the future, be zoned commercial. What will most likely happen to the property's value? A. It will decrease, because of fears of new businesses being built nearby B. It will increase, in anticipation of the changing uses C. No effect, since the house is a nonconforming use D. No effect, until the change actually occurs
B. Under the principle of anticipation, a property's value may change based on expectations of what will happen to the property in the future.
A four-unit building rents for $1,500 a month per unit. If the GRM (gross rent multiplier) is 127, what is the value of the property? A. $190,500 B. $381,000 C. $762,000 D. $914,400
C. $1,500 x 4 units = $6,000. 127 x $6,000 = $762,000.
When performing a competitive market analysis, a real estate agent should: A. disregard current and expired listings B. consider the land and improvements separately C. pick comparables similar in age and quality to the subject property D. use the gross rent multiplier method
C. A competitive market analysis should be based on comparables that are as similar as possible to the subject property in size, age, quality, and location. A CMA can include current or expired listings in addition to recently sold properties.
Which of the following is an example of functional obsolescence? A. Boards need to be replaced on deck B. House downwind from paper mill C. Only bathroom can be accessed only through bedroom D. Worn-out carpet in hallway
C. A design flaw, such as a bathroom that is accessible only through a bed- room, is functional obsolescence. Items that need to be replaced because of wear and tear are physical deterioration, while problems outside the property's boundaries (such as a nearby factory) are external obsolescence.
"The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale" is a widely accepted definition of: A. highest and best use B. market price C. market value D. utility value
C. A property's market value is the most probable price that a property should bring in a competitive market with fair conditions.
Which of the following most accurately describes an appraisal? A. Determination of value B. Statement of value C. Estimate of value D. Unilateral contract
C. An appraisal is an estimate of value. Buyers and sellers determine value.
In selecting comparables for the sales comparison approach, an appraiser must investigate the circumstances of each sale to determine whether: A. the investor realized the return that she expected B. the reproduction cost was the same as the replacement cost C. it to ok place under normal conditions D. there was a vacancy factor
C. An appraiser must investigate the circumstances of each comparable sale to make sure that normal conditions applied (for example, the sale has to be an arm's length transaction). A comparable transaction affected by outside factors would not be a reliable indicator of value.
A vacancy factor is: A. only used in the gross rent multiplier method B. a percentage of the property's operating expenses C. deducted from potential gross income to arrive at effective gross income D. deducted from the property's debt service to arrive at the capitalization rate
C. An appraiser using the income approach will subtract a vacancy fact or from the property's potential gross income in order to calculate the effective gross income.
Which of the following is an example of external obsolescence? A. A loss in value because of cracks in the building's foundation B. A loss in value because of an extremely small kitchen C. A loss in value because of odors from a nearby factory D. A loss in value because of a poor floor plan
C. External obsolescence involves factors outside the property, such as neighborhood deterioration or exposure to nuisances (such as industrial emissions).
An appraiser is attempting to estimate the value of a 20-year-old home. Which of the following would provide the most reliable indication of the property's value? A. The property's most recent selling price B. The original cost of construction C. The selling price of a nearby comparable that sold six weeks ago D. The property's income, capitalized at a rate comparable to other homes similarly appraised within the past two months
C. Recent selling prices of comparable properties are strong indications of the subject property's current worth.
In a residential neighborhood, strictly enforced zoning and private restrictions: A. tend to depress property values B. have a regressive effect on the subject property C. promote conformity and protect property values D. prevent the highest and best use of the property
C. Strict restrictions on land tend to promote conformity within a neighborhood, which tends to increase the value of the land.
While using the sales comparison (market data) approach to value, an appraiser finds three comparable properties that recently sold for $195,000, $202,000, and $207,000 respectively. In order to determine what the comparables indicate about the value of the subject property, the appraiser should: A. add the three sales prices together and divide by three for an average selling price B. emphasize the middle property, as it represents the middle range of the value spectrum C. make adjustments for the differences between the comparable properties and the subject property D. ignore the comparables, because the difference between their selling prices is too great
C. The appraiser should make adjustments for the differences. The adjustments are made to each comparables price, so that it represents what the comparable would be worth if it were just like the subject property.
One of the economic characteristics of real estate is: A. immobility B. location C. scarcity D. topography
C. The four elements of value are demand, scarcity, transferability, and utility.
Which of the following is the proper method for determining the gross income multiplier? A. Divide monthly income by sales price B. Divide annual income by sales price C. Divide sales price by gross income D. Divide assessed value by gross income
C. The gross income multiplier method involves dividing a comparable's sales price by its gross income to determine the multiplier.
In what order would these steps be performed when using the income approach to value? 1. Apply the cap rate to the net income. 2. Estimate the potential gross income. 3. Determine the net operating income. 4. Calculate the effective gross income. A. 3, 1, 4, 2 B. 1, 3, 2, 4 C. 2, 4, 3, 1 D. 2, 3, 1, 4
C. This is the order of steps involved in the income approach. (Note that selecting and applying the cap rate may be viewed either as one step or as two separate steps.)
Which of the following has the most impact on the value of property? A. The type of financing available B. The ethnic makeup of the neighborhood C. local economic conditions D. The financial qualifications of the buyer
C. local economic conditions have the most impact.
A property has lost value because its maintenance and upkeep have been neglected. This would be an example of: A. external obsolescence B. functional obsolescence C. internal obsolescence D. physical deterioration
D. A loss in value due to wear and tear or other damage is called physical deterioration.
A percolation test will examine the: A. likelihood of landslides or subsidence B. presence of toxic contamination in soil C. roofing material's ability to repel rain D. soil's ability to absorb and retain water
D. A percolation test measures the soil's ability to absorb and retain water. The test is usually performed to determine whether a property is suitable for a septic system that will meet applicable health standards.
Highest and best use refers to the use that would: A. have the longest economic life B. generate the greatest historical and contract rent C. maximize the integration phase D. provide the greatest net return
D. A property's highest and best use is the use that will provide the greatest net return over a period of time.
Mike is appraising a property for a lender. Which of the following will he consider when conducting the appraisal? A. The cost to update the subject property B. The original price paid for the property C. The average value of all available comparables D. A reconciliation of values if more than one appraisal method has been used
D. A reconciliation represents the assembly and interpretation of all the facts that influence a property's value, based upon whatever methods of ap- praisal have been used.
The sales comparison approach to value is also known as the: A. square foot method B. capitalization approach C. gross multiplier method D. market data approach
D. Because the sales comparison approach involves an analysis of recent comparable sales within the same real estate market it is also known as the market data approach.
The rent that a property would generate if it were currently available for lease on the open market is called the: A. contract rent B. historical rent C. gross rent D. economic rent
D. Economic rent is what a property would earn if it were currently on the market (as compared to contract or historical rent, which is what the property is actually earning now).
Adams purchased a home that was wired for 100 amps of electricity, but the power company only offered 125-amp service. This is an example of: A. extern al obsolescence B. deferred maintenance C. physical obsolescence D. functional obsolescence
D. Functional obsolescence is any problem other than wear and tear found within the property's boundaries.
Which of the following is an example of functional obsolescence? A. A loss in value because of a high crime rate in the neighborhood B. A loss in value because of a leaking roof C. A loss in value because of noise from a nearby airport D. A loss in value because of outdated bathroom and kitchen fixtures
D. Functional obsolescence is caused by problems relating to age or poor design, such as outdated fixtures.
A sale has not taken place under normal market conditions unless the: A. property was appraised before the purchase and sale agreement was signed B. buyer intends to put the property to its highest and best use C. price was adjusted to take into account accrued depreciation D. buyer and seller were well informed and not acting under any unusual pressure
D. Normal market conditions require parties who are informed and not acting under unusual pressure.
Charles takes very good care of his home, but recently discovered that some termites have made a nest in the floor. This type of depreciation is probably: A. curable external obsolescence B. curable functional obsolescence C. incurable physical deterioration D. curable physical deterioration
D. Provided that the termite damage is recent, this is probably an example of curable physical deterioration. The damage might be incurable if the owner had not maintained his property in good condition, however.
Replacement cost (as opposed to reproduction cost) is the: A. original cost of constructing an exact duplicate of the subject building B. original cost of constructing a building with the same utility as the subject building C. current cost of constructing an exact duplicate of the subject building D. current cost of constructing a building with the same utility as the subject building
D. Replacement cost is the cost of constructing a building with the same utility as the subject building, while reproduction cost is the cost of creating a building that is an exact replica.
After taking a listing on a home, K wants to measure its square footage. To do this, he must measure the: A. interior dimensions of each room, compute for area, then add them together B. interior dimensions of each room, add six inches for each interior wall. compute for area. then add them together C. exterior dimensions, including the garage exterior dimensions, excluding the garage
D. The home's square footage is determined by measuring the exterior dimensions, excluding the garage.
Lawrence is planning to buy a home. His ability to pay for the property is his first consideration, but he's also concerned about price. Which factor below will prob- ably have the greatest impact on the price of homes he's looking at? A. Style B. Color C. Age D. Location
D. The location of a property has one of the greatest impacts on the property's value. Buyers will be concerned with access to transportation, employment areas, and amenities, among other considerations, and will usually pay more for a similar home in a more favorable location.
A seller asks an appraiser to help determine a realistic listing price for her single- family, owner-occupied house. Which approach to value would the appraiser rely on when making this decision? A. Cost approach B. Gross rent multiplier method C. Income approach D. Market data approach
D. The market data approach, or sales comparison approach, is most commonly used when estimating the value of a single-family residence.
The sales comparison approach to value is based primarily on the principle of: A. anticipation B. conformity C. contribution D. substitution
D. The sales comparison approach is based on the principle of substitution. It supposes that an informed buyer would pay no more for a property than it would cost to obtain an equivalent property in the same market.
Of the following, which would have the greatest effect on the supply of real estate in a particular market? A. Demographic change B. Employment rates C. Local amenities D. Size of labor force
D. The size of the labor force has the greatest influence on supply and demand for real estate. The size of the labor force determines how many people are able to afford to purchase homes within the local market.
In the sales comparison approach, after making all necessary adjustments to the prices of the comparables, the appraiser uses them to estimate the value of the subject property. The value estimate : A. is usually the highest of the adjusted prices B. should not be any greater than the lowest of the adjusted prices C. should be the median adjusted price is never merely an average of the adjusted prices
D. The value estimate is not simply an average of the prices of the comparables. Instead, the appraiser may use her judgment to weight the comparables differently.
In selecting comparables for the sales comparison approach, an appraiser looks for properties that: A. are similar to the subject property and have recently been sold B. cost the same amount to build as the subject property C. had similar assessed values in the most recent tax year D. are similar to the subject property and have generated the same historical rent
A. An appraiser will look for comparables that have sold within the last six months, and have comparable physical characteristics as the subject property.
Which of the following actions would most likely create the largest increase in the value of a property? A. Installing a second bathroom in a house with four bedrooms and only one bath B. Putting a swimming pool in the yard of a small house C. Replacing an obsolete, inefficient furnace D. Repairing a leaking basement
A. Installing a second bathroom in a house with four bedrooms and only one bathroom would rectify a serious case of functional obsolescence. An own- er who adds a swimming pool to a lower-end house is not likely to recoup the costs of the addition, and the other options are maintenance issues more oriented toward preserving, not increasing, the property's value.
The value of a property will NOT be reduced by the fact that the home: A. is next to a local playground B. has several large cracks in the basement walls C. is located a few blocks from a new factory D. has only one bathroom for five bedrooms
A. Location next to a playground or park will not cause a loss of value in the property.
To appraise a single-family home using the sales comparison approach, an appraiser generally needs: A. at least three good comparables B. a recent quantity survey C. an accurate capitalization rate D. an estimate of accrued depreciation
A. Ordinarily, an appraisal will require at least three comparables.
The principle of anticipation holds that: A. value is created by the anticipated future benefits of owning a property B. a property's physical life invariably ends before its economic life C. values tend to rise as demand increases D. property values are generally expected to decline over the long run
A. The principle of anticipation is based on the idea that value is created by anticipated future benefits of owning a property.
The simplest way to estimate replacement cost is the: A. square foot method B. unit-in-place method C. quantity survey method D. benchmark method
A. The simplest method of estimating replacement costs is to use the average cost per square foot of construction for recently built comparable homes.
Regional growth leads to the addition of a third runway at the airport. The in- creased airplane noise causes nearby houses to suffer: A. external obsolescence B. functional obsolescence from poor design C. curable depreciation D. functional obsolescence from airport noise
A. This is an example of obsolescence caused by something outside the property.
In the income approach to value, an appraiser deducts the property's operating expenses from its effective gross income to arrive at its: A. net operating income B. capitalization income C. reserves for replacement D. adjusted gross income
A. To arrive at a property's net operating income, the appraiser will subtract operating expenses from its effective gross income.
When is the effective date of an appraisal? A. The date of valuation B. The date of delivery of the appraisal to the client C. For a period of six months from the date of valuation D. The date on which the person who requested it accepts the appraisal
A. Unless otherwise stated in the appraisal report, an appraisal is valid only for the date on which the valuation was made.
An appraiser makes projections about how the population of a metropolitan area will grow and how much residents' income will increase, using data about both basic and non-basic industries. This is known as: A. anticipation B. economic-base analysis C. economic life analysis D. highest and best use
B. Economic-base analysis looks at economic activity in both basic industries (those that drive a local economy) and non-basic industries (those that support the basic industries), in order to predict employment and other economic trends.
An appraiser is valuing a commercial property that contains a restaurant run by the property owner. Which method of valuation would be most appropriate? A. Cost B. Income C. Market data D. Sales comparison
B. For a commercial property, the most appropriate method of valuation would be the income approach (regardless of whether it contains an owner-operated business).
In the cost approach, the appraiser: A. subtracts the value of the land from the value of the improvements to estimate the accrued depreciation B. estimates the value of the improvements separately from the value of the land C. must estimate both the replacement cost of the improvements and the reproduction cost of the land D. capitalizes the value of the land and adds it to the reproduction cost of the improvements
B. In the cost approach, the appraiser first estimates the cost of replacing the improvements, then subtracts any accrued depreciation, and finally adds the value of the land.
An appraiser refers to information concerning matters outside the subject property that affect its value as: A. comparable data B. general data C. specific data D. site data
B. Information on matters out side of the subject property is considered general data.
The purpose of most appraisals is: A. determining the property's value in use B. estimating the property's market value C. certifying the property's utility value D. confirming the property's market price
B. Most appraisals are concerned with estimating the property's market value.
The direct sales comparison approach indicates that a single-family residence's market value is $375,000. The property's reproduction cost is $385,000. The property just was sold by the seller as part of bankruptcy proceedings for $370,000. The best estimate of the property's value is: A. $370,000 B. $375,000 C. $380,000 D. $385,000
B. The best appraisal method for estimating the value of a single-family residence is the direct sales comparison approach, so the likeliest value is $375,000. Reproduction cost and liquidation value would be less relevant.
The reconciliation process in an appraisal: A. involves calculation of the average value of comparable properties B. represents the appraiser's comparison and conclusion from the results of the appraisal methods used C. is a determination of the highest possible value D. is the calculation of the capitalization rate
B. The final value estimate represents the appraiser's reconciliation of the value indicators arrived at through one or more of the approaches to value. Reconciliation is a matter of judgment, not a mathematical proce- dure like averaging.