Lesson 12: Real Estate Appraisal: Pop Quiz
If the gross rent multiplier of a property is 115 and the rent is $800 a month, what is the value of the property? A.$92,000 B.$95,000 C.$112,000 D.$115,500
A.$92,000 115 x $800 = $92,000.
Generally, what is the use for a competitive market analysis as compared to an appraisal? A.A CMA is used for marketing; an appraisal is a formal estimate of market value B.A CMA is used for home improvement loans; a market analysis for primary financing C.A CMA is used for valuing vacant land; a market analysis for land with improvements D.They are identical
A.A CMA is used for marketing; an appraisal is a formal estimate of market value Appraisals are used to estimate actual value, usually at the request of a lender. A CMA is used to help set a listing price.
Which of the following situations would cause prices for residential real estate to go up in a particular area? A.A large new factory that will employ thousands B.Interest rates are going up C.There is a large supply of recently built homes on the market D.Zoning change to allow an assisted living facility for seniors
A.A large new factory that will employ thousands If a new large employer arrives in the area, that will increase the population seeking to buy homes. The increased demand will cause prices to go up. Higher interest rates, on the other hand, will lower demand and thus lower prices, while an oversupply of houses will also lower prices.
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 bath Installing a second bathroom in a house with four bedrooms and only one bathroom would rectify a serious case of functional obsolescence. An owner 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.
In the appraisal of a single-family home, which of the following is an example of functional obsolescence? A.Outdated plumbing B.A leaky roof C.A high crime rate in the neighborhood D.A bowling alley next door
A.Outdated plumbing Functional obsolescence is depreciation resulting from inadequate or outmoded design features that make the property less appealing, such as outmoded fixtures or an inconvenient floor plan. A leaky roof is an example of deferred maintenance, while a high crime rate and a neighboring bowling alley are examples of external obsolescence.
Regional growth leads to the addition of a third runway at the airport. The increased 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.external obsolescence This is an example of obsolescence caused by something outside the property.
An appraiser is most likely to use the cost approach when trying to determine the value of a/an: A.hospital B.single-family residential property C.condominium D.apartment building
A.hospital The cost approach to value is often used to appraise the value of properties that lack comparables or are special-purpose properties.
The capitalization rate is used to estimate the value of rental real estate from the: A.income (rate of return) generated by the property B.rate of capital required to keep the property operating smoothly C.depreciation D.amount of equity gained by the property
A.income (rate of return) generated by the property Capitalization is a method of converting a property's income stream into a present 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.is next to a local playground Location next to a playground or park will not cause a loss of value in the property.
A property's market value is described as the: A.present worth of future benefits B.ad valorem value C.price paid by a purchaser D.price accepted by the seller
A.present worth of future benefits A concise definition of market value is "the present worth of future benefits." The price paid and accepted is considered the property's market value only if the sale took place under normal conditions. (For instance, if the buyers were not acting prudently and knowledgeably, the price they paid may be higher than the true market value.)
What principle underlies competitive market analysis? A.A property's highest and best use is the most profitable use it can legally be used for B.A property's selling price can be estimated using selling prices of comparable properties C.Competition within the marketplace leads to lower interest rates D.Market value can only be determined precisely through an appraisal
B.A property's selling price can be estimated using selling prices of comparable properties Competitive market analysis is a process similar to the sales comparison approach to appraisal, where a real estate agent uses the sales prices of similar properties to estimate what a property might sell for.
An agent is performing a competitive market analysis for a potential client, working with four comparables. Which of the following comparables would require an upward adjustment in its sales price? A.Comparable W: is on a larger lot size than the subject property B.Comparable X: lacks a garage, which the subject property has C.Comparable Y: has a swimming pool, which the subject property lacks D.Comparable Z: is in a superior neighborhood compared to the subject property
B.Comparable X: lacks a garage, which the subject property has When performing a CMA (or applying the sales comparison approach in an appraisal), you adjust a comparable's sales price upward if it does not have a feature that the subject property has. The object is to make each comparable as similar as possible to the subject property. In this case you would increase Comparable X's sales price to what it would have been if Comparable X (like the subject property) had a garage. All of the other comparables listed would require a downward adjustment rather than an upward adjustment.
Which of the following relates to the appraisal of real property? A.Foreclosure value B.Highest and best use C.Deeded value D.Operating expense ratio
B.Highest and best use A property's highest and best use is the most profitable use it can be put to, the use that will provide the greatest net return to the owner over a period of time.
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.Income For a commercial property, the most appropriate method of valuation would be the income approach (regardless of whether it contains an owner-operated business).
An appraiser is trying to estimate depreciation when valuing an older residential rental property, but is finding it difficult because no comparables have sold recently. However, the appraiser can find sufficient data on rental rates in the same market, and a capitalization rate can be supported. Which approach to value should the appraiser use? A.Cost B.Income C.Market data D.Sales comparison
B.Income If comparable sales aren't available and the accrued depreciation is difficult to estimate (which is generally true for older properties), but the data necessary to use the income approach are available, then it's appropriate to use the income approach.
A small house is situated on a large lot in a mixed-use neighborhood. The city decides 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.It will increase, in anticipation of the changing uses Under the principle of anticipation, a property's value is based on expectations of what will happen to the property in the future. Generally commercial land is worth more than residential land. A small house on a large lot would be viewed as a tear down.
Which of these factors is most important when estimating value? A.Age of property B.Location C.Architectural style D.Taxes and homeowner dues
B.Location Location is generally the single greatest factor affecting value.
Incurable depreciation: A.can be cured in a cost-effective manner B.cannot be cured in a cost-effective manner C.is not a valuation consideration D.affects only the land
B.cannot be cured in a cost-effective manner Depreciation is said to be incurable when it will cost more to remedy it than the repair will add to the property's value.
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 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 does a neighborhood analysis to determine: A.functional obsolescence B.external obsolescence C.deferred maintenance D.racial composition of the neighborhood
B.external obsolescence External obsolescence (also called economic obsolescence or external inadequacy) is a loss in value resulting from factors outside the property itself, such as proximity to an airport.
A former mansion has been divided into three apartments. The best approach to finding the property's value is: A.cost B.income C.reconciliation D.sales comparison
B.income The income approach is appropriate for properties that are oriented toward generating income for the property's owner. That would be true even if the property originally was intended as a single-family residence.
The supply and demand in a local housing market will not be influenced by: A.new zoning regulations B.new real estate licensing laws C.decreased interest rates D.the closing of a major employer
B.new real estate licensing laws New laws affecting the licensing of real estate agents won't affect the supply of or demand for housing in a local housing market.
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.objective or fair market value The most probable price a buyer would be willing to pay describes the property's market value, an objective measure.
Sometimes the combination of two lots results in a value that is more than if the two lots were sold individually (a case of the whole being worth more than the sum of its parts). In appraisal, this gain in value is known as: A.progression B.plottage C.assemblage D.highest and best use
B.plottage The increment of value that results when two or more lots are combined to produce greater value is called plottage.
The reconciliation process in an appraisal: A.involves calculation if 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.represents the appraiser's comparison and conclusion from the results of the appraisal methods used 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 procedure like averaging.
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 Title insurance won't affect the appraised value of a property.
A physical characteristic of real estate includes its: A.scarcity B.uniqueness C.transferability D.mobility
B.uniqueness Scarcity and transferability are economic characteristics of real estate (which is considered to be immobile). Uniqueness is a primary physical characteristic of real estate.
A real estate licensee is performing a competitive market analysis. He locates a comparable property that is slightly older than the subject property. The age of the comparable makes it worth $2,000 less. The comparable has a small porch worth $1,000 that the subject property lacks. If the comparable sold for $269,500 recently, what is the estimated value of the subject property? A.$266,500 B.$268,500 C.$270,500 D.$272,500
C.$270,500 To estimate the value of the subject property, adjust the comparable's sales price to reflect what it would sell for if it were identical to the subject property. Add $2,000 to the comparable's sales price (to make it more like the subject property, which is newer), and then subtract $1,000 from the comparable's sales price (again, to make it more like the subject property, which lacks a porch). The result is $270,500.
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.$762,000 $1,500 × 4 units = $6,000. 127 × $6,000 = $762,000. Note: This question involves a monthly gross rent multiplier. A monthly multiplier is typically well over 100, while an annual multiplier will be 1/12th of that (meaning down in the teens typically). You multiply a monthly multiplier by the monthly rent, or an annual multiplier by the annual rent.
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.2, 4, 3, 1 When one performs the income approach to value, the steps are to estimate potential gross income, calculate effective gross income, determine net operating income, and then apply the cap rate to the net income. (Note that selecting and applying the cap rate may be viewed either as one step or two separate steps.)
ABC Mortgage just received an appraisal report. Which of the following will not be in the report? A.Condition of the property B.Date of the appraisal inspection C.Adjustments to the subject property D.Reason for the appraisal
C.Adjustments to the subject property An appraiser makes adjustments to comparable properties, not to the subject property.
An appraiser who calculates the building's reproduction cost and then analyzes depreciation is most likely using what valuation method? A.Income approach B.Market data approach C.Cost approach D.Capitalization approach
C.Cost approach The cost approach to value is the appraisal method in which the appraiser's first step is to calculate the reproduction cost (or, more commonly, the replacement cost) of the improvements. Unless the improvements are brand new, depreciation makes their present value less than their reproduction cost or their replacement cost, so the appraiser's next step is to estimate how much depreciation has accrued and subtract that from the cost figure to arrive at the present value of the improvements. (In the final step, the appraiser adds the estimated value of the land to arrive at a value indicator for the property as a whole.)
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.Divide sales price by gross income The gross income multiplier method involves dividing a comparable's sales price by its gross income to determine the multiplier.
Of the following factors, which one is the most significant in influencing value? A.Building materials B.Annual property tax bill C.Location D.Style of building
C.Location A property's location is usually the most determinative factor in terms of its value. A view or a prestigious neighborhood can boost the value of an otherwise unremarkable property.
Which of the following methods would be most appropriate for valuing a recently built, single-family home? A.Replacement cost and income approach B.Income approach and cost approach C.Market analysis and replacement cost D.Income approach and cap rate
C.Market analysis and replacement cost The sales comparison approach (also known as the market data or market analysis approach) is the best method for appraising residential property. Replacement cost, which is based upon the idea that a property is not worth more than it would cost to replace it, may also be suitable for a newer residential property.
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.Only bathroom can be accessed only through bedroom A design flaw, such as a bathroom that is accessible only through a bedroom, 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.
Which of the following would have the greatest negative effect on a residential subdivision property's value? A.The home's electrical system needs to be updated B.The improvements are more than 30 years old C.The property is located next to a busy freeway D.The property is in a subdivision of very similar-looking houses
C.The property is located next to a busy freeway External obsolescence, such as that caused by a freeway being located near a house, often has the greatest effect on a property's value.
An example of physical depreciation of a property is: A.external obsolescence because of nearby industrial pollution B.functional obsolescence because the only bathroom is located directly off the kitchen C.deterioration because of normal wear and tear D.deterioration because of outmoded design
C.deterioration because of normal wear and tear Physical depreciation (also known as physical deterioration) is loss in value due to wear and tear, damage, or structural defects.
A seller wanting to get an estimate of the value of her property before settling on a listing price should obtain a/an: A.abstract of title B.assessment C.fee appraisal D.title search
C.fee appraisal An appraisal is an estimate of a property's value, as of a given date. A seller would obtain an appraisal from a fee appraiser, an independent appraiser hired to value a particular property for a fee.
An older retail building has narrow hallways and window air conditioning units rather than central AC. These would be examples of: A.economic obsolescence B.external obsolescence C.functional obsolescence D.physical deterioration
C.functional obsolescence Functional obsolescence includes both undesirable or out-of-date design elements (such as the narrow hallways) and undesirable or out-of-date fixtures or appliances (such as the window units).
A buyer who is concerned with whether a property's soil is suitable for construction of a septic system would, as part of the inspection process, order a/an: A.absorption test B.geological inspection C.percolation test D.toxic waste report
C.percolation test A percolation test, which measures the soil's capacity to absorb water, is usually performed to determine whether a property is suitable for a septic system that will meet applicable health standards.
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.pick comparables similar in age and quality to the subject property 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 also include current or expired listings, as well as recently sold properties.
As the last step in the appraisal process, the appraiser: A.makes copies for the seller B.bills the mortgage company C.reconciles any differences D.makes adjustments
C.reconciles any differences The process of interpreting the value indicators to arrive at a final estimate of value is called reconciliation (or, sometimes, correlation).
When determining the value of a vacant lot, an appraiser will typically use the: A.cost approach B.income approach C.sales comparison approach D.summation approach
C.sales comparison approach An appraiser will estimate the value of vacant land using the sales comparison approach, referring to the sales prices of similar lots that were recently sold.
One of the economic characteristics of real estate is: A.immobility B.location C.scarcity D.topography
C.scarcity The four elements of value, for anything at all with value, are: demand, scarcity, transferability, and utility.
The comparable has a two-car garage and the subject property only has a one-car garage. The appraiser estimates that space for a second car contributes about $800 to the value of a home. To take this into account, the appraiser will: A.add $800 to the sales price of the subject property B.add $800 to the sales price of the comparable property C.subtract $800 from the sales price of the comparable property D.subtract $800 from the sales price of the subject property
C.subtract $800 from the sales price of the comparable property Since the comparable has a feature the subject property lacks, the appraiser will subtract the value of that feature ($800) from the sales price of the comparable property. The resulting figure will suggest what the comparable might have been worth if it, like the subject property, only had a one-car garage. (Note that the sales price of the subject property is not an appropriate consideration in appraising its market value.)
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 of values if more than one appraisal method has been used A reconciliation represents the assembly and interpretation of all the facts that influence a property's value, based upon whatever methods of appraisal have been used.
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 probably have the greatest impact on the price of homes he's looking at? A.Style B.Color C.Age D.Location
D.Location 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.
Simon is buying a single-family home as an investment. The appraiser will probably use which appraisal method? A.Gross income B.Reproduction C.Cost D.Market data
D.Market data The sales comparison (market data) method of appraisal is sometimes referred to as the market value method. It is the best way to appraise most residential properties.
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.Market data approach The market data approach, or sales comparison approach, is most commonly used when estimating the value of a single-family residence.
While preparing a competitive market analysis, an agent finds four comparables to choose from. Comparable 1 sold for $180,000 13 months ago under normal conditions. Comparable 2 sold for $190,000 14 months ago under normal conditions. Comparable 3 sold for $175,000 10 months ago as a foreclosure. Comparable 4 sold for $180,000 16 months ago as a foreclosure. The agent should use: A.the oldest two B.the newest two C.all four D.None, because they are all older than nine months
D.None, because they are all older than nine months
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.Size of labor force 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.
Which principle of appraisal forms the basis for the sales comparison method and all other approaches to appraising? A.Change B.Contribution C.Conformity D.Substitution
D.Substitution Appraisal 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.
What information does an appraiser need in order to calculate a capitalization rate? A.Price and gross income B.Price and net income C.Value and gross income D.Value and net income
D.Value and net income In order to calculate a property's value, an appraiser using the income approach would need to know the property's net income and capitalization rate. So, conversely, if the appraiser wanted to find the capitalization rate, he would need to know the property's value and net income.
A licensee who is taking a listing on a property finds a number of problems that need to be fixed, such as several leaking faucets and faulty electrical outlets. This would be an example of: A.economic obsolescence B.external obsolescence C.functional obsolescence D.curable depreciation
D.curable depreciation Physical deterioration is a loss in value caused by wear and tear or by damage. The depreciation mentioned in the question would probably be classified as curable physical deterioration (deferred maintenance), since it's likely that the cost of correcting the problems could be recovered in the sales price when the property is sold.
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.curable physical deterioration 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.
Agent Kelly is helping her seller decide on a proper listing price for his property. The agent must do all of the following, except: A.perform a comparative market analysis B.encourage the seller to get an independent appraisal C.examine the home's square footage and improvements D.determine the amount of private mortgage insurance that will be necessary
D.determine the amount of private mortgage insurance that will be necessary PMI has no impact on the value of a property, and would not be considered when determining a property's value or listing price.
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.physical deterioration 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.soil's ability to absorb and retain water 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.
When using the income approach to value and determining a property's net operating income, a property manager must first factor in: A.income taxes B.debt service C.the capitalization rate D.the vacancy factor
D.the vacancy factor The vacancy factor is a deduction, expressed as a percentage, of the property's potential gross income, that represents the expected loss of income from empty rentals or delinquent accounts. Income taxes and debt service are not deducted from gross income. The capitalization rate is only applied after the appraiser determines the property's net income.