Property Valuation and Financial Analysis
25) When an appraiser attempts to establish the value of a commercial building, what type of property is least affected by changing economic conditions? a. A medical building. b. A videogame outlet. c. An automobile dealership. d. Fast-food franchise.
a. A medical building. (This is a LEAST question. A medical building is the least impacted by changed economic conditions. The tenants of a medical building are generally under long-term leases where no rent is charged based on the volume of receipts, as occurs under a percentage lease. Alternatively, automobile sales decline and fast food restaurants may see a rise in volume during recession.)
36) An appraiser notices an abandoned auto salvage yard on the adjoining lot of a property they are appraising. The appraiser should recommend which of the following? a. A toxic waste study. b. A zoning change for the property being appraised. c. A geological study of the surrounding area by a civil engineer. d. A land survey.
a. A toxic waste study. (The nature of the adjoining auto salvage auto yard will lead the appraiser to recommend a toxic waste study. An auto salvage yard has the potential of emitting hazardous wastes into the neighboring property being appraised, and thus a toxic waste study is advisable.)
71) An appraiser was hired by Whitney to appraise DuPont's property. With whom does the appraiser discuss their findings? a. Whitney. b. DuPont. c. Any lender interested in the property. d. Mr. DuPont's attorney.
a. Whitney. (An appraiser can ethically share the contents with an appraisal report with the client or anyone named by the client, a peer review committee and a court of law.)
5) The stability of a residential neighborhood is maintained by all of these, except: a. a high home sale turnover rate and increasing population density. b. being located in the pathway of growth. c. having many family households with school age children. d. the conformity of residents with similar occupations.
a. a high home sale turnover rate and increasing population density. (This is an EXCEPT question. Stability and a high turnover may be seen as the converse of one another. The alternative answer selections either support stability or at least do not directly work against it.)
49) To calculate replacement cost, compute the cost to replace: a. an equally desirable property with the same utility value. b. the identical structure using the original materials. c. the identical structure using modern materials. d. the most economical structure having the same utility value.
a. an equally desirable property with the same utility value. (A replacement property is to produce a similar level of utility and be as desirable as the subject property.)
28) All of the following are essential elements of value, except: a. anticipation. b. demand. c. scarcity. d. utility.
a. anticipation. (Anticipation is a principle. The elements of value are listed in Question 8. Notice it is not unusual to recognize answers for questions embedded in other questions and answer selections.)
14) The task of evaluating a property to qualify it as collateral for the repayment of a loan is completed by a(n): a. appraiser. b. agent. c. broker. d. home inspector.
a. appraiser. (An appraiser determines value of a property rather than its condition, which is performed by a home inspector. For the purposes of qualifying the collateral which secures the loan, the lender requires an appraiser's determination of the property's value.)
13) The elements of value do not include: a. cost and age. b. utility and demand. c. scarcity and transferability. d. demand and scarcity.
a. cost and age. (The elements of value are Demand, Utility, Scarcity and Transferability (DUST). Therefore, the correct answer, that which is not included as an element of value, is A.)
75) The correct sequential steps of the appraisal process are: a. define the problem, gather the data, analyze the data, reconcile the results, reach a conclusion. b. gather the data, reconcile the data, arrive at a conclusion. c. analyze the data, define the problem, reach a conclusion. d. define the problem, analyze the data, gather the data, reach a conclusion.
a. define the problem, gather the data, analyze the data, reconcile the results, reach a conclusion. (The correct answer is A. define the problem, gather the data, analyze the data, reconcile the results, reach a conclusion. Answer selection B has the correct order but lacks several steps, and is thus not the best choice. Answer choices C and D are not in the correct sequence and lack various steps.)
47) When comparing the economic life and the physical life of an improvement: a. economic life is shorter. b. economic life is the same as the physical life. c. economic life is longer. d. physical life is shorter.
a. economic life is shorter. (A building will become economically undesirable long before it is physically unusable.)
41) The period for which a property can show a return attributable to the improvements is known as the property's: a. economic life. b. chronological life. c. effective age. d. depreciation life.
a. economic life. (Economic life is that length of time during which the building remains viable and generates a return on investment.)
37) When a residence has a physical age of 20 years, but the appraiser notes the building has the appearance of being only 10 years old, the appraiser is referring to: a. effective age. b. economic life. c. actual age. d. progressive age.
a. effective age. (Effective age refers to the 10 year old condition of the property. Actual age is 20 years.)
8) An appraiser uses a site analysis to determine the: a. highest and best use of a property. b. appropriate zoning designation for a property. c. type of soil under an improved property. d. comparable values of similar properties.
a. highest and best use of a property. (The purpose of a site analysis is to determine the highest and best use of a property.)
12) The final step in the appraisal process is to: a. reconcile the different approaches and arrive at a conclusion. b. average the values from the different approaches to arrive at a conclusion. c. assign values and estimate the total. d. justify the sales price.
a. reconcile the different approaches and arrive at a conclusion. (Reconciling the appraisal analysis explains how the conclusion of the appraisal report was reached. The reconciliation will weigh the differences between the various appraisal approaches used by the appraiser.)
24) Loss of value of an expensive home due to the close proximity of lower-priced homes in a neighborhood is known as: a. regression. b. progression. c. functional obsolescence. d. physical depreciation.
a. regression. (Regression is the loss of value of nicer homes due to lower-value neighboring properties, progression is the increase in value of lesser homes due to higher-value neighboring properties. Both are elements of the principle of conformity.)
92) Compared to a property's physical life, economic life is generally: a. shorter. b. longer. c. about the same. d. varies with property type.
a. shorter. (This is similar to Question 37. Note that economic life represents the length of time a building produces a reasonable return. Alternatively, physical life is based on how long the building would remain physically standing. Thus, a property's economic life is the shorter of the two.)
3) Marta's city built a new park in her neighborhood. This may result in a(n): a. special assessment. b. general assessment. c. tax rate increase. d. income tax increase.
a. special assessment. (In this question, the park is built within a specific neighborhood. If an assessment is made for the cost to build and/or maintain the park, it would apply to just the owners of property in that neighborhood as a special assessment.)
18) The relationship between the thing desired and the potential purchaser could be described as: a. value. b. the present worth amortized. c. depreciation. d. cost.
a. value. (Value is the relationship. Cost is simply the price.)
29) Each unit in a duplex rents for $1,000 per month. With a price of $240,000, the monthly gross multiplier is: a. 10 b. 120 c. 240 d. 20
b. 120 (As shown in Question 3, $240,000 (value) / $2,000 (rent) = 120. Note the property is a duplex, requiring the given rent amount to be doubled to solve for the gross multiplier.)
26) In estimating the value of Fran's single family residence (SFR), the appraiser uses the same gross rent multiplier (GRM) that has been computed for comparable properties in the same neighborhood. The comparable properties generate a rental amount of $3,000 per month and were recently sold for an average of $450,000. The owner's property currently generates $3,200 per month in rent. The estimated value of the subject property is: a. 450000 b. 480000 c. 510000 d. 540000
b. 480000 (To use the gross rent multiplier (GRM) method of the income approach, you need to first determine the value of the multiplier by using the figures for the comparable property. As the rent increases, so will the property's value when the same multiplier is used. In this example, solve by using the comparable rent and sales price: $3000 x GRM = $450,000. Thus, $450,000/$3,000 = 150 (GRM). Then, apply the GRM to the subject property using the subject property rent: $3,200 X 150 (GRM) = $480,000 (value).)
21) While appraising a single family residence (SFR), an appraiser observes cracks in the walls and floor. In response, the appraiser best recommends which of the following? a. A structural pest control report. b. A soil engineer's report. c. An environmental impact report (EIR). d. A home warranty policy.
b. A soil engineer's report. (The cracks in walls or floors are more likely to be a soil stability concern rather than a pest issue, and thus are best addressed with a soil engineer's report. The environmental impact report (EIR) will have no value nor will the home warranty insurance.)
9) A residential neighborhood suffers economic obsolescence from which of the following? a. Functional inadequacies. b. Airplanes landing at a nearby local airport. c. Physical wear and tear. d. Obsolete heating and cooling systems.
b. Airplanes landing at a nearby local airport. (Economic obsolescence occurs off the property. In this question, the existence of airplanes landing at a local airport refers to a neighborhood effect. All the other answer selections refer to conditions which exist on the property.)
87) What must an appraiser do when they are hired to appraise a property owned by a corporation in which the appraiser owns a share? a. Refuse the assignment. b. Disclose their ownership interest in the property and accept the assignment. c. Disclose their ownership interest in the property and reduce their fee in equal proportion to their ownership share in the corporation. d. Ignore the issue unless they hold a majority interest in the property.
b. Disclose their ownership interest in the property and accept the assignment. (Disclosure is the necessary action as it provides the client the opportunity to select a different appraiser if they feel the appraiser's interest in the property is too significant, even after the appraiser accepts the assignment. Here, the choice of whether to retain the appraiser is left to the client.)
46) What type of depreciation is the most challenging to correct? a. Functional. b. Economic obsolescence. c. Physical. d. Wear and tear.
b. Economic obsolescence. (Economic obsolescence is the most challenging type of depreciation to correct. Economic obsolescence exists off the property and it is out of the direct control of the property owner. Examples of economic obsolescence include reduced employment opportunities in the area or changed aircraft landing patterns at a local airport. Physical obsolescence and wear and tear are one and the same. Functional obsolescence often requires replacing outdated equipment.)
7) Which of the following basic real estate economic principles is the best expression of how the value of real estate is maximized? a. Anticipation. b. Highest and best use. c. Contribution. d. Overleveraging .
b. Highest and best use. (Highest and best use is achieved when the property's use maximizes its value and income.)
66) Which of the following is of least interest to an appraiser? a. Value in exchange. b. The original cost of the property. c. The objective value of the property. d. The sales price received for comparable properties.
b. The original cost of the property. (This is a LEAST question. The original cost of a property has no significance in an appraisal to determine its current value.)
59) When a seller writes a counteroffer, what happens to the original offer? a. The original offer becomes a backup offer. b. The original offer is voided. c. The original offer is voidable by the buyer. d. The counteroffer cannot be countered.
b. The original offer is voided. (A counteroffer constitutes an entirely new offer, which rejects and voids the original offer. An offer is either accepted in its entirety or voided by rejection.)
62) The value of unimproved property is best estimated by which of the following appraisal approaches? a. The income approach. b. The sales comparison approach. c. The cost approach. d. Capitalization rate (cap rate).
b. The sales comparison approach. (The sales comparison is always the preferred appraisal approach when comparable sales are available. For unimproved property, the cost approach is not possible as the property does not contain existing improvements. Answer choices A and D both require a rental income stream which is not stated in the question and unlikely for an unimproved property.)
51) A property's effective gross income is found by deducting which of the following from the scheduled gross income? a. Property management fees. b. Vacancies and credit losses. c. Debt service. d. Depreciation.
b. Vacancies and credit losses. (To estimate the effective gross income, subtract the vacancies and credit losses from the scheduled gross income. To determine net operating income (NOI), subtract operating expenses from effective gross income.)
40) When is the usefulness of the appraisal cost approach the least appropriate? a. When appraising homes in a new subdivision. b. When appraising an old structure with many functional deficiencies. c. When appraising raw land intended for future construction. d. When appraising a mixed use property.
b. When appraising an old structure with many functional deficiencies. (This is a LEAST question. The cost approach to appraisal is of least utility when appraising an old structure with numerous functional deficiencies. This is a result of the difficulty in accurately applying accrued depreciation for both age and functional issues. This is of little concern when appraising newer properties of any kind or estimating future costs for property development.)
27) Which of these most nearly refers to a loss in value due to economic obsolescence: a. an architectural design which is out of style. b. a zoning change. c. improper maintenance of the property. d. an increased demand for more luxurious units.
b. a zoning change. (When demand for a property type changes, it can cause a diminished value for existing buildings. Answer selection B. a zoning change is the best answer since it suggests a need for an entirely different property use.)
91) Which of the following is not one of the four important elements of value: a. transferability. b. appreciation. c. utility. d. demand.
b. appreciation. (Appreciation is an increase in property value, not an element of value. The four elements of value are: Demand, Utility, Scarcity and Transferability (DUST).)
44) In appraising a property with two bathrooms, the appraiser used a comparable property with 2 1/2 baths. The appraiser should: a. add the cost of the half bath to the subject property. b. deduct the cost of the half bath from the sale price of the comparable property. c. disregard the difference since it is insignificant. d. add the cost of the half bath to the comparable property.
b. deduct the cost of the half bath from the sale price of the comparable property. (Appraisers always adjust the comparable, not the subject property. When a comparable has an extra amenity (such as the 1/2 bath in the question), it needs to be removed by adjusting an estimate of its worth in the market.)
22) Return of an investor's investment is provided for through: a. sinking funds. b. depreciation. c. a reserve for replacement. d. profit.
b. depreciation. (Depreciation, as an income tax deduction, is the means by which investors have their investment returned.)
35) Which of the following does a property owner not show as an expense? a. management fees. b. depreciation. c. utilities. d. property taxes.
b. depreciation. (Only depreciation is a non-cash factor.)
79) The time period during which a building produces income that can be attributed to the building itself is known as: a. physical life. b. economic life. c. actual age. d. effective age.
b. economic life. (Economic life is the length of time a property produces an income attributable to the building. Physical life refers to how long the physical building is anticipated to exist. The actual age is the chronological age of the building based on when it was build. The effective age is the age of the property based on its physical condition.)
68) The price a reasonable, unpressured buyer would pay for a property on the open market as set by an appraisal is known as the: a. mark-to-management value. b. fair market value (FMV). c. value in use. d. assessed value.
b. fair market value (FMV). (The fair market value (FMV) of a property is the price a reasonable, unpressured buyer would pay for the property on the open market. It represents the amount paid and received with no duress between principals that are an arm's length apart (i.e., they are not related by blood or marriage, or have another affiliation that would influence their behavior).)
2) The vacancy rate of an apartment building under normal competitive conditions is primarily the result of: a. employment fluctuations. b. housing supply and demand in the area. c. the cost of construction and the cost of money. d. taxes and insurance.
b. housing supply and demand in the area. (You are correct. The vacancy level and rental income will fluctuate as supply increases or demand grows or shrinks.)
33) State licensing of contractors protects the public against: a. dishonesty. b. incompetence. c. fraud. d. felonious behavior.
b. incompetence. (State licensing of contractors requires experience and other qualifying requirements to protect the public from incompetence. These skills can be tested to acquire a license. Dishonesty, felonious behavior and fraud are legal concerns dealt with by the district attorney, not the licensing authority.)
55) A capital improvement to real property will always: a. increase the book value of the property by the amount the appraised value is increased. b. increase the book value of the property by the cost of the improvement. c. increase the property's market value by the cost of the improvement. d. be fully depreciated in the year the improvement is made.
b. increase the book value of the property by the cost of the improvement. (This is an ALWAYS question. The book value of a property is based on cost. Therefore, a capital improvement cost is always added to the current book value, though it does not necessarily increase the market value accordingly.)
81) An appraiser defines depreciation as: a. economic obsolescence. b. loss in value from any cause. c. wear and tear of the improvements. d. recapture that has been realized.
b. loss in value from any cause. (A loss in value is the best answer. Economic obsolescence happens off the property. Wear and tear is dealt with through proper maintenance.)
99) The ultimate test to determine the functional utility of a property is the: a. property's maintenance costs. b. property's marketability. c. building codes controlling the property's use. d. zoning laws where the property is located.
b. property's marketability. (Marketability is the ultimate test. Functional utility relates primarily to the usefulness of a property based on the needs of the occupant - elements which are integral to the marketability of a property.)
19) Which of the following is not an example of functional obsolescence: a. a swimming pool in cold climate. b. proximity of obnoxious nuisances. c. an old kitchen. d. a one car garage.
b. proximity of obnoxious nuisances. (Functional obsolescence applies to aspects within the property. External conditions may represent an economic obsolescence.)
100) Under the replacement cost approach of appraisal, an appraiser is least interested in: a. depreciation. b. the original cost to build. c. the effective age of the property. d. the value of the land.
b. the original cost to build. (This is a LEAST question. The original cost to build a property has no bearing on a current appraisal. The alternative answer selections are all necessary to complete a cost approach appraisal.)
34) When an appraiser values a property under the cost approach, they add the value of the site to the depreciated cost new of improvements. If the value of a site is $150,000, the cost to build a new house is $300,000, the cost to build a new garage is$75,000, and the value of site improvements such as landscaping and the driveway are $75,000, what is the final value of the property under the cost approach when a 20% physical depreciation factor is applied? a. $510,000. b. $480,000. c. $525,000. d. $375,000.
c. $525,000. (The cost approach requires the appraiser to adjust the house and garage costs, known as the "cost new" of constructed improvements, by a depreciation factor. Thus: $300,000 (house) + $75,000 (garage) = $375,000 x 0.2 (20% depreciation) = $75,000. Then subtract the depreciation amount from the cost new. $375,000 (cost new) - $75,000 (accrued depreciation) = $300,000 (depreciated cost new). Finally, add the various amounts: $150,000 (site) + $300,000 (depreciated construction costs) + $75,000 (site improvements) = $525,000.)
84) Rental schedules for apartments are realistically established on what basis? a. The cost to build the property. b. The number of occupants a property can house. c. A market comparison of similar apartments. d. Rental data published in the local newspaper.
c. A market comparison of similar apartments. (Apartment rental rates are competitive within a marketplace. Thus, rent schedules for apartments are realistically established under a market comparison of similar properties.)
88) Which of the following is an example of economic obsolescence? a. A leaking roof. b. No off-street parking. c. An oversupply of like-kind properties. d. A deteriorated bearing wall.
c. An oversupply of like-kind properties. (Economic obsolescence is a loss in value of a property due to external factors and not the condition of the property itself. Thus, an oversupply of like-kind properties in the immediate vicinity of the subject property is a type of economic obsolescence.)
69) If homes in an area represent the highest and best use of the land and are similar in architectural design, which of the following principles of appraisal apply? a. Anticipation. b. Contribution. c. Conformity. d. Substitution.
c. Conformity. (There are several principles to real estate value. The principle of conformity holds that the maximum value is realized when a reasonable degree of homogeneity of improvements is present. Use conformity is desirable, creating and maintaining higher values.)
31) Which of the following is not a force that influences value? a. Economic. b. Social. c. Demand. d. Physical.
c. Demand. (The forces are: Physical, Economic, Government, and Social (PEGS). Demand is one of the elements of value, not an influence on value.)
57) Which of the following is the best example of functional obsolescence? a. The close proximity of noxious fumes generated by a neighboring property. b. Adverse zoning within the adjoining neighborhood. c. No air conditioning in a building located in an arid, desert environment. d. Rotted eaves.
c. No air conditioning in a building located in an arid, desert environment. (Functional obsolescence is a loss of value due to adverse factors within the structure which affect the utility of the structure, and thus its value and marketability. Only choice C. no air conditioning in a building located in an arid, desert environment fits this definition. Answer choice D refers to physical deterioration. Answer choices A and B are located off the property and are out of the control of the owner, both being examples of economic obsolescence.)
60) Which of the following statements does not define value? a. A relationship between demand for something and the supply of that same product. b. The ability of one commodity to command other commodities in exchange. c. The price an unreasonable, pressured buyer would offer for a property. d. The present worth of future benefits.
c. The price an unreasonable, pressured buyer would offer for a property. (The price a reasonable, unpressured buyer would agree to for property on the open market refers to fair market value (FMV).)
50) The ethics and standards of practice for appraisers are described in: a. State Real Estate Law. b. Member of the Appraisal Institute (MAI) Reference Manual. c. Uniform Standards of Professional Appraisal Practice (USPAP). d. Fannie Mae (FNMA) Guidelines.
c. Uniform Standards of Professional Appraisal Practice (USPAP). (The Uniform Standards of Professional Appraisal Practice is the code of ethics for appraisers.)
72) The appraised value of a building is $800,000 but costs $1,200,000 to replace. This difference is an example of: a. supply and demand. b. anticipation. c. accrued depreciation. d. remainder depreciation.
c. accrued depreciation. (The difference between cost and value is described as depreciation. Accumulated depreciation over time is called accrued depreciation.)
67) A(n)____________ is an individual's opinion or estimate of a property's value on a specific date. a. termite inspection b. home inspection c. appraisal d. open house
c. appraisal (An appraisal is an individual's opinion of a property's value on a specific date, documented in an appraisal report.)
74) When comparable sales are unavailable or inadequate and a property generates no income, an appraiser would likely use the: a. capitalization approach. b. gross multiplier approach. c. cost approach. d. sales comparison approach.
c. cost approach. (The cost approach is the best answer selection. As the property does not generate income, neither answer selection A or B are applicable as they are both based on the income approach. Further, answer selection D may be eliminated as there is insufficient sales data of comparable properties available to make a comparison.)
98) The first step in the appraisal process is to: a. set the appraisal fee. b. gather data. c. define the problem. d. analyze data.
c. define the problem. (Like in any similar effort, you must first define what the problem is.)
83) Return on investment (ROI) comes in the form of profit, while return of investment comes in the form of: a. rents. b. taxes. c. depreciation. d. appreciation.
c. depreciation. (While the return on investment is profit, the return of investment is the recuperation of the investment through depreciation.)
94) The statement "more buildings are torn down than wear out" is an illustration of: a. physical deterioration. b. functional obsolescence. c. economic obsolescence. d. accelerated depreciation.
c. economic obsolescence. (The fact that buildings are torn down that are not yet physically worn out suggests economic obsolescence. Market expectations will drive many of these decisions.)
45) The principle that housing passes down to lower economic groups would be: a. Crane's Law. b. supply and demand. c. filtering down. d. correlative theorem.
c. filtering down. (Filtering down is the correct answer. Notice the correct answer has the word "down" in it just as in the question, which states, "housing passes down." None of the alternative answer selections appear to relate to the question.)
16) To depreciate real estate, it needs to be: a. free of debt. b. encumbered. c. improved. d. 1,000 square feet or larger.
c. improved. (There must be an improvement to calculate depreciation. Raw land cannot depreciate in value.)
10) Rental income minus operating expenses, debt service and income tax payments equals: a. gross operating income. b. net operating income. c. net spendable income. d. the return of investment.
c. net spendable income. (After all expenses of an income-producing property, including debt service and income tax payments, have been paid, the resulting income from rental properties is called net spendable income.)
15) When changes are made in a residence to correct functional obsolescence, this activity is termed: a. reproduction. b. replacement. c. remodeling. d. repair.
c. remodeling. (Remodeling is done to a property to correct functional obsolescence which limits the practical use of a property. The functionally obsolete element needs to be updated through remodeling, not simply resolved with repairs or the replacement of an item with the same thing.)
53) The premise that no prudent person would pay more for a parcel of real property than the price of a reasonably close alternative which is available without undue delay refers to the principle of: a. balance. b. contribution. c. substitution. d. anticipation.
c. substitution. (Substitution applies.)
32) When conducting an appraisal, an appraiser considers all the following except: a. the definition of value. b. the highest and best use of a property. c. the assessed value of a property. d. the legal description of a property.
c. the assessed value of a property. (The assessed value is the county tax assessor's determination of value for the purposes of calculating property taxes.)
20) When using the replacement cost method of appraisal, the appraiser calculates all of the following, except: a. the land value. b. the cost to build the improvements on the property. c. the capitalization rate (cap rate). d. accrued depreciation.
c. the capitalization rate (cap rate). (This is an EXCEPT question. The capitalization rate (cap rate) is used in the income approach, not the replacement cost method. The replacement cost method of appraisal is one alternative of developing a value under the cost approach.)
38) An appraisal is made as of a given date to indicate: a. when the appraiser inspected the property. b. the loan balance at the time of the appraisal. c. the market condition at the time the appraisal was completed. d. the true age of the property.
c. the market condition at the time the appraisal was completed. (The best answer selection here is C. An appraisal is an objective opinion of value based on the market conditions at a specific time.)
30) The economic life of a frame dwelling is most nearly: a. 100 years. b. 50 1/2 years. c. 39 years. d. 27 1/2 years.
d. 27 1/2 years. (27 ½ years is the basis for depreciation under the IRS tax code, and is thus the general economic life of a frame dwelling.)
23) To calculate a capitalization rate (cap rate), the appraiser uses which of the following methods: a. market comparison. b. band of investment. c. summation. d. Any of the above.
d. Any of the above. (Any of these can be applied.)
86) The unit of comparison when appraising land is: a. cost per square foot. b. cost per front foot. c. cost per acre. d. Any of the above.
d. Any of the above. (The unit of comparison when appraising land depends on the size and use of the subject parcel. Other than rural properties, land is generally priced by the square foot. Parcels with a specific frontage, such as a beach, golf course or property for commercial usage, may have the highest and best value based on the front foot comparison.)
89) If an appraiser uses improper valuation methods or is negligent in completing a government loan assignment, they may be guilty of: a. violating appraisal ethics. b. violating real estate law. c. committing a felony. d. Both a. and c.
d. Both a. and c. (Both ethics violations and possibly fraud have occurred. The key word "may" in this question allows for the possibility of intent. Negligence is an ethics violation. Fraud is a felony. Real estate law does not apply since this is an appraisal issue not related to brokerage activity.)
6) What contributes to the value of a well planned neighborhood versus a poorly planned neighborhood? a. Nonconforming improvements. b. Inconsistent improvements. c. Improper orientation. d. Conformity of size and style.
d. Conformity of size and style. (A well planned neighborhood will contain residences with a high degree of conformity - similar size, quality and amenities. This is a hallmark of modern subdivisions, especially those with recorded conditions, covenants and restrictions (CC&Rs) and a homeowners' association (HOA) to enforce these requirements.)
43) In using the capitalization process, which of the following cannot be deducted to determine the net income? a. Electricity. b. Maintenance expense. c. Management. d. Debt service.
d. Debt service. (Just as finance is not a consideration in appraisal (see Question 15), the debt service would also not apply.)
4) Which of the following statements is least applicable to depreciation? a. Depreciation is defined as the difference between the value of improvements and the cost of replacement as of the appraisal date. b. Depreciation is a loss of value from any cause. c. Depreciation can be computed for the future or from the past. d. Depreciation is always concerned with the intrinsic factors of property, never with the extraneous factors.
d. Depreciation is always concerned with the intrinsic factors of property, never with the extraneous factors. (You are correct. This is a LEAST question. Each answer selection has merit, but to suggest external factors never apply makes this answer selection the LEAST likely to apply.)
70) While building a new home, a developer received several offers to purchase the property. Prior to completion, the city announced it was taking 15 feet from the front of the property for a new bicycle lane. Afterwards, all additional offers to purchase the property were for 20% less. Which of the following types of depreciation apply? a. Physical wear and tear. b. Functional obsolescence. c. Social dissatisfaction. d. Economic obsolescence.
d. Economic obsolescence. (Governmental actions, such as a partial taking, are an example of economic obsolescence.)
65) Which of the following is false regarding the cost method of appraisal? a. It is used in computing real estate values of public buildings. b. It is hard to apply. c. It is used in new residential homes. d. It produces the lowest value results.
d. It produces the lowest value results. (This is a FALSE question. Of the three appraisal approaches to determine a property's value, the cost approach will generally produce the highest value and the income approach will generally produce the lowest. The reason for this is that while the cost approach shows the actual expense to replace the property, the income approach demonstrates the value based on the income it generates which is always less. Note that the alternative answer selections may be useful to remember for other questions.)
54) Which of the following does not describe excess land? a. Land which does not add to the total value of the property. b. Land in excess of that used by comparable properties. c. Land that is not sufficiently utilized by the improvements on it. d. Land that is used to store unused property fixtures.
d. Land that is used to store unused property fixtures. (All of the answer selections correctly describe the condition of excess land except answer selection D, as the land is being used for a practical purpose, i.e., storage.)
39) Which of the following appraisal reports provide the greatest degree of detail about a property? a. Uniform Residential Appraisal Report. b. Appraisal letter. c. Fannie Mae Form 1004. d. Narrative appraisal report.
d. Narrative appraisal report. (A narrative report, also known as a self-contained appraisal report, is the most detailed type of property appraisal report. Unlike the other answer selections, a narrative report contains detailed descriptions. The reports listed in answer selections A and C are different names for the same generic report that only summarizes facts, and an appraisal letter reduces the report to a statement.)
11) Which of the following does not contribute to obsolescence? a. Outdated appliances. b. Changes in flight pattern from local airport. c. Misplaced improvements. d. Physical deterioration.
d. Physical deterioration. (This is a NOT question. Physical deterioration (wear and tear) is not obsolescence. Obsolescence is most often seen as items that are out of style or out of date. In a neighborhood, it is something that reduces value, such as a changed flight pattern.)
56) Gloria is considering an income-producing property to purchase as an investment. In analyzing its suitability for investment, what is Gloria most interested in? a. The net operating income. b. Taxes to be paid on the property. c. The property's operating expenses. d. The capitalization (cap) rate.
d. The capitalization (cap) rate. (The capitalization rate (cap rate) is the annual rate of return on invested capital experienced by an investment property based on net operating income (NOI) produced by the operations of an income property. The cap rate is of critical importance to income property investors. The cap rate is calculated by dividing the NOI by the property's price. )
61) An appraisal is valid for what length of time? a. One year. b. Six months. c. Ninety days. d. The date stated in the report.
d. The date stated in the report. (An appraisal report is a snapshot of property and local market conditions. Therefore, an appraisal is only valid on the date stated in the report. As conditions and the market change, an appraisal becomes invalid.)
97) Which of the following is least important to an appraiser when appraising a property? a. The utility of the land. b. The condition of the improvements. c. The bundle of rights. d. The original cost of the property.
d. The original cost of the property. (The utility of the land, condition of the improvements, and the bundle of rights all have significance and will likely affect an appraiser's final valuation of a property. The original cost of the property has no effect on the current value of the property.)
96) A lot 300 feet deep lost 10 percent of its depth. What is the effect of the loss in depth on the value of the lot? a. A 10% decline in value. b. A decrease of value in excess of 10% due to the change in utility. c. The price per front foot will increase. d. The price per square foot will increase.
d. The price per square foot will increase. (The loss of depth for any reason will most likely increase the price per square foot of the property since, though the value of the lot may decrease, it will not diminish proportionately with the reduction in size. For example, a rectangular residential lot that is 60 feet across the front and 200 feet deep (12,000 square feet total) has a value of $360,000, or $30 per square foot. If the depth loses 50 feet, either through natural causes or eminent domain, the lot would not lose a proportional ¼ of its value. The now smaller lot (9,000 square feet) may still be worth $360,000, with an increase in the price per square foot to $40.)
58) Compared to other appraisal factors, appraisers generally find the __________ the most difficult calculation to measure precisely. a. capitalization rate (cap rate) b. cost to rebuild today with modern methods and materials c. gross rent multiplier (GRM) d. accrued depreciation
d. accrued depreciation (Accrued depreciation can be a difficult number to calculate since it requires estimating the effective age of the property. The alternative answer choices are all numbers that are readily available in the industry.)
77) The appraisal method used most often to value raw land or sites is the: a. land development method. b. land residual method. c. subdivision method. d. comparative method.
d. comparative method. (The comparative method is the most common appraisal method used for valuing raw land or sites. Answer selections C. subdivision method and A. land development method are the same, both of which are used for valuing a large parcel intended for subdivisions. Answer selection B. land residual method is only used when the property is improved by a building.)
48) The simplest method of estimating the replacement cost of an improvement is the: a. quantity survey method. b. index method. c. unit-in-place method. d. comparative method.
d. comparative method. (The replacement cost of a property can most easily be determined under the comparative method, which uses a private costing service that provides generic pricing for property types based on quality and regional differences. Answer selections C. unit-in-place and A. quantity survey are more detailed and precise, while the index method is used for historic appraisals.)
42) John is considering an extensive modernization program for an older apartment building he owns. His decision should give most emphasis to: a. actual cost. b. history of vacancy. c. potential increase in rents. d. effect on the net income.
d. effect on the net income. (Net income is the key. Increased rents may generate even higher costs.)
95) To arrive at a final estimate of value secured under each of the three appraisal approaches, an appraiser: a. averages the estimates. b. uses the lowest value. c. uses the highest value. d. explains why or why not the other approaches were not used, then chooses the approach the appraiser believes to be the most appropriate.
d. explains why or why not the other approaches were not used, then chooses the approach the appraiser believes to be the most appropriate. (Note how long this answer selection is. Such an extreme length disproportionate to the other answer selections indicates this is likely the correct answer. Appraisers never average numbers between appraisal methods to arrive at a conclusion.)
82) When appraising a building which operates as a restaurant, an appraiser likely uses the: a. market data approach. b. replacement cost approach. c. reproduction cost approach. d. income approach.
d. income approach. (Appraising income-generating commercial property generally requires placing the greatest emphasis on the income approach.)
90) If the eventual highest and best use of a parcel of real estate cannot be realized for a period of time, the current use is referred to as the: a. temporary use. b. current use. c. less than highest and best use. d. interim use.
d. interim use. (When the highest and best use of a property will not be available for a period of time, the current use of a property is referred to as its interim use. For help remembering this naming convention, think of an intermission between two acts in the life of the property.)
17) The primary concern of an appraiser when analyzing property is: a. supply and demand. b. functional utility. c. the neighborhood. d. marketability and acceptability.
d. marketability and acceptability. (The best answer is selection D. marketability and acceptability. Each of the alternative answer selections may play a part in the decision of an appraiser analyzing a property.)
64) Obsolescence does not relate to a: a. neighborhood that is deteriorating. b. property that has too few closets. c. property that suffers from a bad architectural design. d. property that needs to be painted.
d. property that needs to be painted. (This is a NOT question. Obsolescence is a loss in value due to reduced desirability and usefulness of a structure because its design and construction become obsolete. Obsolescence is unrelated to the maintenance of a property. Physical wear and tear and the need for paint are not examples of obsolescence.)
1) Demand has no effect on value unless there is also: a. a need for the thing in demand. b. an adequate supply of the thing in demand. c. a scarcity of the thing in demand. d. purchasing power which enables the ability to buy the thing in demand.
d. purchasing power which enables the ability to buy the thing in demand. (Demand requires the ability to pay, called purchasing power.)
52) The cost of a capital improvement and its effect on market value are: a. always the same. b. never the same. c. generally the same. d. rarely the same.
d. rarely the same. (The cost of an improvement and its effect on value are rarely the same. The contribution of the improvement is usually less than the cost. An appraiser is most often concerned with the added value -contribution - of the improvement.)
93) Restoring a property to a satisfactory condition without changing the floor plan, form, or style of the building is known as: a. reproduction. b. replacement. c. remodeling. d. rehabilitation.
d. rehabilitation. (Rehabilitation suggests making necessary repairs without changing any other elements of the property. Remodeling would change things to current style and preference.)
80) The appraisal method most commonly used to value land or sites is the: a. cost approach. b. income approach. c. the land development approach. d. sales comparison approach.
d. sales comparison approach. (The sales comparison approach is the most commonly used appraisal method to value raw land since it has neither an improvement cost nor an income generated.)
73) An analysis of rental income does not determine the income's: a. durability. b. quantity. c. quality. d. suitability for reinvestment.
d. suitability for reinvestment. (As applied to rental income, durability = longevity; quantity = amount of rent; quality = assurance of payment.)
76) In using the market comparison approach in appraising a single family residence (SFR), comparisons should be made based on: a. gross multipliers. b. the total cubic footage of the property. c. the location of the property. d. the entire property.
d. the entire property. (Comparisons need to consider all elements of a property and its neighborhood. Therefore, answer selection C is not the best answer, and answer select B is not a measurement that is considered in residential real estate.)
85) All of the following are included in the laws governing the government power of eminent domain, except: a. the right of the government to take property from the owner for a legitimate public use. b. a condemnation action in court. c. compensation at fair market value (FMV). d. the exercise of zoning authority.
d. the exercise of zoning authority. (Eminent domain has no specific relevance to zoning. The consideration that must be paid to the owner is the fair market value (FMV) of the property which is determined as the price a willing buyer would pay to a willing seller when the property has had adequate exposure on the market and neither party is under any duress.)
63) For a retailer, the most important factor when choosing the site for a commercial property is: a. visibility. b. easy access. c. traffic flow d. the purchasing power of the area.
d. the purchasing power of the area. (Purchasing power is the most critical issue when choosing a site for a commercial retailer. When the neighborhood the business is located in has discretionary income, there is a greater possibility of profit for the business. Hence, purchasing power is inextricably linked to an advantageous location.)
78) The term "highest and best use" can best be defined as: a. the use that produces the biggest building. b. the use that produces the highest building. c. the use that produces the greatest gross income. d. the use that creates the greatest net return.
d. the use that creates the greatest net return. (Once again, net results are the most relevant. The maximum productivity that generates the greatest net return is the highest and best use.)