CHAPTER 7: REAL ESTATE APPRAISAL

An appraiser has been hired to prepare an appraisal on a property that includes an elegant old mansion that is now used as an insurance company office. Which approach to value would the appraiser rely on most? A. Income approach B. Gross rent multiplier approach C. Sales comparison approach D. Replacement cost approach

A. Income approach The income approach to value is based on the present value of the rights to future income. It assumes that the income generated by a property will determine the property's value.

Which of the following would be considered specific data? A. The dimensions of the subject property B. The employment opportunities in the area C. The sales data for comparable properties D. The gross rent multipliers for the area

A. The dimensions of the subject property Specific data, which covers details of the subject property as well as comparative data relating to costs, sales, and income and expenses of properties similar to and competitive with the subject property.

The purpose of an appraisal is to: A. estimate the value of a property. B. set the market price of a property. C. determine the projected income of a property. D. set the amount of consideration the seller should accept from a purchaser.

A. estimate the value of a property.

The sales comparison approach to value would be most important when estimating, the value of a(n): A. existing residence. B. apartment building. C. retail location. D. new residence

A. existing residence.

A house with outmoded plumbing is suffering from: A. functional obsolescence. B. curable physical deterioration. C. incurable physical deterioration. D. external depreciation.

A. functional obsolescence. A. functional obsolescence.

When estimating the value of property using the cost approach, all of the following would be considered by the appraiser EXCEPT the: A. loss of value due to uncollected delinquent rent. B. estimated loss attributable to an outdated heating system. C. quality of materials and workmanship in the original structure. D. excessive amount of traffic noise outside the property.

A. loss of value due to uncollected delinquent rent.

The market price of real estate is generally the same as: A. the sales price. B. the market estimate. C. the highest and best use. D. the assessed value.

A. the sales price. p135 Market price, on the other hand, is what a property actually sells for its sales price

A building is valued at $215,000 and contains 4 apartments that rent for $470 each per month. The owner estimates that the net operating income is 65 percent of the gross rental receipts. What is the capitalization rate? A. 3.7 percent B. 6.8 percent C. 10.5 percent D. 14.2 percent

B. 6.8 percent 470 * 4 = 1880 1880 * 12 = 22560 22560 * 0.65 = 14664 14664 / 215000 = 0.068

When appraising real estate, the first consideration of the appraiser should be the: A. Asking price of the property B. Highest and best use of the property C. Original cost of the property D. Selling prices of similar properties

B. Highest and best use of the property p136 The most profitable single use to which a property may be put, or the use that is most likely to be in demand in the near future, is the property's highest and best use. The use must be: • legally permitted, • economically or financially feasible, • physically possible, and • the most profitable or maximally productive.

The income approach to value would be most important in the appraisal of a(n): A. Condominium B. Office building C. Single-family residence D. Vacant residential lot

B. Office building The income approach to value is based on the present value of the rights to future income. It assumes that the income generated by a property will determine the property's value.

Which of the following would be classified as external depreciation? A. A leaking roof that needs to be completely replaced B. Poorly maintained properties in the neighborhood C. A poorly designed floor plan that could be modified D. Convenient access to schools and recreational facilities

B. Poorly maintained properties in the neighborhood External obsolescence. If caused by negative factors not on the subject property, such as zoning, environmental, social, or economic forces, the depreciation is always incurable. The loss in value cannot be reversed by spending money on the property.

It is necessary to calculate a dollar value for depreciation when using which of the following? A. The sales comparison approach to value B. The cost approach to value C. The income approach to value D. Gross rent multipliers

B. The cost approach to value

Using which of the following would require the value of the land to be calculated separately from the value of the improvements? A. The income approach B. The cost approach; C. The sales comparison approach D. The gross rent multiplier

B. The cost approach;

In the cost approach to value, the appraiser makes use of: A. The owner's original cost of the building B. The estimated replacement cost of the building C. The sales prices similar buildings in the area D. The assessed value of the building

B. The estimated replacement cost of the building

In the valuation of a large apartment complex, the most weight would be given to which of the following approaches to value? A. The cost approach B. The income approach C. The sales comparison approach D. All approaches equally weighted

B. The income approach The income approach is used for valuation of income-producing properties such as apartment buildings, office buildings, and shopping centers. In estimating value using the income approach, an appraiser must take five steps: 1. Estimate annual gross income 2.Deduct an appropriate allowance for vacancy and rent loss 3. Deduct the annual operating expenses, 4.Estimate the price a typical investor would pay 5. Apply the capitalization rate

An appraisal report must contain all of the following EXCEPT: A. a reconciliation of value. B. a copy of the sales contract. C. the date of the appraisal. D. the highest and best use

B. a copy of the sales contract.

By today's standards, a 4-bedroom house with 1 bathroom would be considered to be: A. physically obsolete. B. functionally obsolete. C. economically obsolete. D. diminished.

B. functionally obsolete.

When appraising a commercial property, the appraiser is most concerned with the: A. accrued depreciation on the property. B. income generated by the property. C. sales prices of comparable properties. D. total debt service on the property.

B. income generated by the property.

Defined as a loss in value from any cause, depreciation is generally divided into three categories. The loss of value due to the normal wear and tear on a property is called: A. external depreciation. B. physical depreciation. C. functional obsolescence. D. economic deterioration

B. physical depreciation

The term depreciation refers to the: A. value of real estate after the expiration of its useful life. B. real estate's loss of value from any cause. C. costs incurred to renovate or modernize a building. D. capitalized value of lost rental income.

B. real estate's loss of value from any cause.

An appraiser has been employed to estimate the market value of a parcel of vacant land. The resulting appraisal report would include reference to all of the following EXCEPT: A. the highest and best use of the parcel. B. the listed price of the parcel. C. the most probable price the parcel will bring. D. the physical dimensions of the parcel.

B. the listed price of the parcel

A buyer is considering the purchase of an apartment building in an area where there is limited multi-family zoning. This situation would be BEST described by the economic characteristic of: A. demand. B. utility. C . scarcity. D. transferability.

C . scarcity.

In the cost approach an appraiser uses which of the following? A. Sales prices of similar properties B. The owner's original cost of construction C. An estimate of the building's replacement cost D. The property's depreciated value as used for income tax purposes

C. An estimate of the building's replacement cost

In the income approach, which of the following is NOT considered when calculating the net operating income? A. Real estate taxes B. Management fees C. Debt service D. Utilities

C. Debt service

An appraiser who is using the sales comparison approach to determine value would use all of the following comparable properties EXCEPT a similar home that was: A. Sold over 6 months ago B. Sold recently but is located in another similar neighborhood C. Sold by the owners who were undergoing a foreclosure D. Sold recently but is located on a much larger lot

C. Sold by the owners who were undergoing a foreclosure

The subject property has 3 bedrooms and 2 baths. A comparable property has 2 bedrooms and 1 bath. Which of the following is true? A. The value of the subject property will be adjusted up. B. The value of the subject property will be adjusted down. C. The value of the comparable will be adjusted up. D. The value of the comparable will be adjusted down.

C. The value of the comparable will be adjusted up.

The steps in the appraisal process include all of the following EXCEPT: A. gathering specific data on the subject property. B. gathering general data for the area of the subject property. C. considering the seller's estimate of the property's value. D. applying the three approaches to value to the collected data.

C. considering the seller's estimate of the property's value.

To find the value of a property using the income approach to value, if the net operating income and the capitalization rate were known, the appraiser would: A. multiply the net operating income by the capitalization rate. B. multiply the effective gross income by the capitalization rate. C. divide the net operating income by the capitalization rate. D. divide the capitalization rate by the net operating income

C. divide the net operating income by the capitalization rate. income approach The process of estimating the value of an income-producing property by capitalization of the annual net income expected to be produced by the property during its remaining useful life.

All of the following are characteristics of value EXCEPT: A. scarcity. B. transferability. C. obsolescence. D. utility.

C. obsolescence. obsolescence To be obsolete; as used in appraising the loss of value because it is outdated or less useful

Reconciliation is an appraisal term used to describe: A. the appraiser's determination of a property's highest value. B. an average of real estate values for properties similar to the subject property. C. the appraiser's analysis and comparison of the results of each appraisal approach. D. the method used to determine the most appropriate capitalization rate for a property.

C. the appraiser's analysis and comparison of the results of each appraisal approach.

The effective gross annual income from a property is $112,000. Total expenses for this year are $53,700. What capitalization rate was used to obtain a valuation of $542,325? A. 9.75 percent B. 10.25 percent C. 10.50 percent D. 10.75 percent

D. 10.75 percent 58300 / 0.1075 (10.75%) = 542325

In the appraisal of an office building, which of the following would be classified as external depreciation? A. Termite damage to the structural components of the building B. A poor architectural design resulting in a cluttered floor plan C. An inadequate number of elevators and antiquated restroom facilities D. A law requiring the building to be retrofitted with fire sprinklers

D. A law requiring the building to be retrofitted with fire sprinklers

The income approach as used by an appraiser makes use of which of the following? A. Equalization B. Depreciation C. Appreciation D. Capitalization

D. Capitalization Under the income approach, the estimate of value is arrived at by capitalizing the annual net income. The solution to these problems is based on the following formula: Value X Capitalization rate = Net Operating Income

Reconciliation is best described as: A. selecting the highest value given by the three approaches to value. B. comparing comparable properties and identifying their amenities. C. determining the final value by selecting one value from those given. D. analyzing the results obtained from the three approaches to value.

D. analyzing the results obtained from the three approaches to value

The period of time over which an improvement to the property will contribute to its value is known as its: A. amortized life. B. chronological life. C. actual life. D. economic life.

D. economic life.

An appraiser is responsible for: A. finding value. B. computing value. C. determining value. D. estimating value

D. estimating value An appraiser is an independent person trained to provide an unbiased opinion of value in an impartial and objective manner, according to the appraisal process. Appraising is a professional service performed for a fee.

The gross rent multiplier is used as a guideline for estimating value based on: A. the ratio of the gross rents to the net rents after expenses. B. the proportion of rents due to the actual rents collected. C. the capitalization of the annual gross rental income. D. the relationship of the sales price to the gross monthly income.

D. the relationship of the sales price to the gross monthly income.