Chapter 14
A property is being appraised using the Income Capitalization Approach. Annually, it has an estimated gross income of $30,000, Vacancy and Credit Losses of $1,500, and operating expenses of $10,000. Using a capitalization rate of nine percent, what is the indicated value (to the nearest $1,000)? a) $206,000 b) $167,000 c) $222,000 d) $180,000
a) $206,000
A property is estimated to produce a Net Operating Income of $1,000,000. Which of the following capitalization rates would produce the greatest estimated value for the property? a) 5% b) 6% c) 7% d) 8%
a) 5%
What are two analytical tools used by appraisers? a) Elements of comparison and units of comparison b) The MLS systems and cost indices c) Market studies and cost indices d) Units of comparison and market value comparison
a) Elements of comparison and units of comparison
What is the term given to the ratio of the monthly or yearly rent divided into the property's selling price? a) Gross Rent Multiplier b) Gross Rent Metrics c) Annual Gross d) Net Rent Multiplier
a) Gross Rent Multiplier
The Sales Comparison Approach to value is also called the a) Market Approach. b) Cost Approach. c) Income Approach. d) Value Approach.
a) Market Approach.
When information is available on a sufficient number of comparable sales, offerings, and listings in the current market, the resulting pattern is the best indication of what? a) Market Value for the subject property b) Cost new for the subject property c) Future income potential for the subject property d) Market oversaturation
a) Market Value for the subject property
The GRM is a popular method used to value rental income because a) it is less complex than other methods. b) it gives a more accurate value than other methods. c) it is more complex than other methods. d) more documentation is required than other methods.
a) it is less complex than other methods.
Reproduction cost is easier to use but has a matter of practicality because it becomes quite difficult to estimate for a) older buildings. b) new buildings. c) new and older buildings. d) proposed construction.
a) older buildings.
According to exhibit 16.7, what amount is given for total land value? a) $38,000 b) $40,000 c) $23,000 d) $15,000
b) $40,000
How many sales must the appraiser choose to use the matched pairs technique? a) 6 b) 2 c) 4 d) 1
b) 2
The quantity survey method is the one generally used by whom? a) Consumers b) Contractors and builders c) The government d) Investors
b) Contractors and builders
Which direct capitalization method is only used to value bare land, or to value properties that are immediately ready for development or redevelopment? a) Accounts method b) Development method c) Comparable method d) Investment method
b) Development method
What describes the loss of value due to adverse changes in the surroundings of the subject property that make the subject property less desirable? a) Declining balance b) Economic obsolescence c) Functional obsolescence d) Physical obsolescence
b) Economic obsolescence
Potential Gross Income minus an allowance for Vacancy and Credit Losses equals a) Net Operating Income. b) Effective Gross Income. c) Gross Income. d) Total Operating Expenses.
b) Effective Gross Income.
According to exhibit 16.9, what is the first step in the Income Capitalization method? a) Estimate Effective Gross Income b) Estimate Potential Gross Income c) Select capitalization rate d) Estimate Net Operating Income
b) Estimate Potential Gross Income
What is not a step in the Income Capitalization Approach? a) Estimate Potential Gross Income. b) Estimate accrued depreciation c) Estimate Net Operating Income d) Select a capitalization rate
b) Estimate accrued depreciation
The Sales Comparison Approach was formerly known as the a) best approach to value. b) Market Data Approach. c) similar approach to value. d) Income Approach.
b) Market Data Approach.
What technique is the best to use to extract the amount of the adjustment from the market? a) Related pairs b) Matched Pairs c) Associated Pairs d) Tandem Pairs
b) Matched Pairs
Which of the following would not be categorized as "soft" costs? a) Architect's and engineer's fees b) Materials and overhead c) Interest, taxes, selling expenses and commissions d) Building permits, licenses and insurance
b) Materials and overhead
According to exhibit 16.5, which comparable does not have a two car garage? a) Comparable A b) None c) Comparable C d) Comparable D
b) None
What is evidenced by an improvement's decay, cracks, structural defects, wear and tear, dry rot and more? a) External obsolescence b) Physical depreciation c) Deficiencies d) Adequacies
b) Physical depreciation
What term describes the bringing together of the valuation methodology to arrive at a supportable, final conclusion? a) Amalgamation b) Reconciliation c) Accumulation d) Dispersal
b) Reconciliation
What describes the cost of constructing, at current prices, a precise duplicate of the subject improvements? a) Rehab cost b) Reproduction cost c) Comparison cost d) Replacement cost
b) Reproduction cost
What is the formula for determining the Gross Income Multiplier? a) Sales Price x Gross Annual Income b) Sales Price ÷ Gross Annual Income c) Sales Price ÷ Net Annual Income d) Sales Price ÷ Gross Adjusted Monthly Income
b) Sales Price ÷ Gross Annual Income
A market study is made to find those comparable sales and listings that are what? a) Exactly like the property being appraised b) Similar to the property being appraised c) In the same neighborhood as the subject property, regardless of the comparable homes' size, value, or other features d) Taken from the past 5 years
b) Similar to the property being appraised
What method does an appraiser use to estimate land value? a) The Cost Approach. b) The Sales Comparison Method c) The Income Capitalization Approach d) The General Data Approach
b) The Sales Comparison Method
What principle states that when several commodities, products, or services offer or provide the same basic uses, then the one priced the lowest will be in the most demand, and consequently, receive the widest distribution? a) The principle of Demand b) The principle of Substitution c) The principle of Supply d) The principle of Replacement
b) The principle of Substitution
What cost improvement method begins with the contractor listing all materials, equipment and labor necessary to install each item? a) The segregated cost method b) The quantity survey method c) The comparative-unit method d) The unit-in-place method
b) The quantity survey method
The strength of the Income Capitalization Approach is that it is used by investors to a) determine how much rent to charge. b) determine how much they should pay for a property. c) estimate interest rates. d) make net adjustments.
b) determine how much they should pay for a property.
The Cost Approach is based on a) the assumption that the future income potential of a property is a good indication of what the property is worth. b) the assumption that the cost to produce a building plus the cost to acquire and improve the site makes it suitable for building, which is a good indication of what the property is worth. c) the difference of cost new versus cost to construct similar. d) the principle that market value and cost are the same thing.
b) the assumption that the cost to produce a building plus the cost to acquire and improve the site makes it suitable for building, which is a good indication of what the property is worth.
One method an appraiser uses to estimate a building's replacement or reproduction cost is the square foot or cubic foot method which is also called a) the segregated cost method. b) the comparative-unit method. c) the quantity survey method. d) the unit-in-place method.
b) the comparative-unit method.
What is the final indication of value for the subject property in exhibit 16.5? a) $100,000 b) $104,500 c) $112,000 d) $115,000
c) $112,000
When a comparable sale is superior to the subject property, what kind of an adjustment must be made? a) A minus (-) adjustment to the subject b) A plus (+) adjustment to the subject c) A minus (-) adjustment to the comparable d) A plus (+) adjustment to the comparable
c) A minus (-) adjustment to the comparable
What describes the sum of depreciation from all causes? a) Diminishing depreciation b) Accumulated depreciation c) Accrued depreciation d) Considerable depreciation
c) Accrued depreciation
What is defined as the difference between the current cost of an improvement on the date of the appraisal and the value of the improvement in place on the property? a) Allowance b) Value c) Depreciation d) Inflation
c) Depreciation
Ways to estimate value using capitalization include which of these? a) Market Value less depreciation b) Gross Potential Income less expenses c) Direct Capitalization and Yield Capitalization d) Site value plus improvements
c) Direct Capitalization and Yield Capitalization
What adjustment in an appraisal reflects the difference in the real estate market between the time of the comparable sale and the current time? a) Location b) Property rights conveyed c) Market conditions d) Financing terms
c) Market conditions
Which of the following is NOT an "unknown" sales variable? a) An individual's motivation b) Buyer's knowledge c) Market norm d) A specific sale's condition
c) Market norm
Effective Gross Income minus total operating expenses equals a) Net Gross Income. b) Net Loss. c) Net Operating Income. d) debt service.
c) Net Operating Income.
In which of the following is the sequence of adjustments most important? a) Estimates b) Replacement costs c) Percentage adjustments d) Dollar adjustments
c) Percentage adjustments
What approach to value is based on the principle of anticipation? a) The Sales Comparison Approach b) The value unit approach c) The Income Capitalization Approach d) The Cost Approach
c) The Income Capitalization Approach
What method of calculating depreciation do appraisers apply by using market data to discover some indication about a property's depreciation amount? a) The age life method b) The Cost Approach method c) The abstraction method d) The Sales Comparison Method
c) The abstraction method
In terms of adjustments an appraiser must make, what type of adjustments are the best indicator of value? a) The comparable with the most adjustments b) Physical adjustments c) The comparable with the fewest adjustments d) Cost adjustments
c) The comparable with the fewest adjustments
Acceptable methods for completing Direct Capitalization include all of the following EXCEPT which? a) Comparable method and investment/income method b) Accounts profile method and development/residual methods c) The cost approach method d) Contractor's/cost method
c) The cost approach method
What is the only technique acceptable to many sophisticated purchasers of appraisals? a) The technique of comparison b) The sales technique c) The technique of matched pairs d) The value of technique
c) The technique of matched pairs
Which of the following is NOT a direct method of estimating a property's accrued depreciation? a) By observing and analyzing the components of depreciation affecting the property b) Using a formula that is based on the property's physical age-life factors c) Using the Sales Comparison Approach to value d) Using a formula that is based on the property's economic age-life factors
c) Using the Sales Comparison Approach to value
External obsolescence can be caused by a) the property's age. b) mechanical inadequacy of the property. c) a decline in the neighborhood's value. d) a poor floor plan.
c) a decline in the neighborhood's value.
The Income Capitalization Approach is especially common for commercial real estate appraisals and a) residential appraisals. b) mixed-use appraisals. c) business appraisals. d) nonprofit appraisals.
c) business appraisals.
The segregated cost method is also known as the a) piece place method. b) replacement method. c) unit-in-place method. d) individual part method.
c) unit-in-place method.
What describes an estimate of the rate of return an investor will demand on the investment of capital in a property? a) Accrued interest b) Book Value c) Capital gain d) Capitalization rate
d) Capitalization rate
What is the second step an appraiser would use when applying the Sales Comparison Approach? a) Analyzing and comparing properties b) Making adjustments c) Selecting comparables d) Collecting and verifying data
d) Collecting and verifying data
What components that fall under the heading of incurable functional obsolescence refer to those components that simply do not meet the current expectations of the market? a) Sufficiencies b) Super adequacies c) Dereliction d) Deficiencies
d) Deficiencies
Which of the following is NOT a disadvantage of using the Income Approach? a) At times, relevant information is not available from internal reporting systems. b) It requires subjective cash flow allocation. c) The appraiser is forced to use limiting assumptions. d) It requires an objective cash flow allocation.
d) It requires an objective cash flow allocation.
What is not considered a cause of depreciation? a) Physical deterioration b) Functional obsolescence c) Economic obsolescence d) Neighborhood improvements
d) Neighborhood improvements
What type of expenses include fixed expenses and variable expenses? a) Fixed expenses b) Variable expenses c) Gross expenses d) Operating expenses
d) Operating expenses
What is not a principal factor for comparison and adjustment when an appraiser values a property? a) Time of sale b) Location c) Physical characteristics d) School district
d) School district
What approach is often the best indication of Market Value, provided there is information available about an adequate number of other homes that have been sold, listed or offered? a) The Cost Approach. b) The Income Approach c) The Replacement Approach d) The Sales Comparison Approach
d) The Sales Comparison Approach
Which replacement cost method is generally used by builders, contractors, and cost estimators? a) The quality survey method b) The equable survey method c) The cost plus survey method d) The quantity survey method
d) The quantity survey method
The final value selected is a judgment made by the appraiser based on a) the comparable sales used within the last 12 months. b) the most reliable indicators. c) the most recent comparables. d) all the information available.
d) all the information available.
Appraisers usually find that "ideal" comparables a) are the norm. b) are easy to locate. c) are available the when more variables are used in the search options. d) are not the norm.
d) are not the norm.
A disadvantage when using the Income Approach is a) there is no need for market transactions because this approach does not use comparable market info, but instead, gathers the future returns from the owner. b) this approach illustrates the relationship between the returns of investment on a security and the returns on the overall market portfolio. c) this approach uses forecasted cash flows or technology-generated earnings (or tech-related cost savings). d) by translating theory into practice, the appraiser is forced to use limiting assumptions.
d) by translating theory into practice, the appraiser is forced to use limiting assumptions.
The Income Approach is only reliable a) if there is enough income to adjust for expenses. b) if there is limited historical data. c) if there is enough forecasting data from which to add previous income data. d) if there is enough market data from which to draw the necessary information.
d) if there is enough market data from which to draw the necessary information.
