Unit 16 Real Estate Appraisal

If a property's annual net income is $24,000 and it is valued at $300,000, what is its capitalization rate? A) 8% B) 15% C) 10.5% D) 12%

The answer is 8%. Net annual income ÷ Market value = Capitalization rate ($24,000 ÷ $300,000 = 0.08, or 8%). Given any two elements, the third can be easily computed.

Appraisals are required for A) FHA and all federally related loans. B) private loans over $600,000. C) rural loans with seller financing. D) installment land contracts.

The answer is FHA and all federally related loans. Appraisals are required for all federal loan programs.

An appraisal used in connection with a federally related transaction must be performed by a competent individual whose professional conduct is subject to supervision and regulation by the state as mandated by the A) Equal Credit Opportunity Act (ECOA). B) Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). C) Fair Housing Act. D) regulations established by the Department of Housing and Urban Development.

The answer is Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). An appraisal used in connection with a federally related transaction must be performed by a competent individual whose professional conduct is subject to supervision and regulation by the state as mandated by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).

An appraisal used in connection with a federally related transaction must be performed by a competent individual whose professional conduct is subject to supervision and regulation by the state as mandated by the A) Fair Housing Act. B) Equal Credit Opportunity Act (ECOA). C) regulations established by the Department of Housing and Urban Development. D) Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).

The answer is Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). An appraisal used in connection with a federally related transaction must be performed by a competent individual whose professional conduct is subject to supervision and regulation by the state as mandated by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).

The work of an appraiser should comply with the A) NAR code of appraiser conduct. B) real estate licensing law. C) Uniform Standards of Professional Appraisal Practice. D) FIRREA state licensing criteria

The answer is Uniform Standards of Professional Appraisal Practice. USPAP was established and is continually reviewed by the Appraisal Standards Board of the Appraisal foundation.

Which of the following is NOT used by an appraiser applying the income approach to value? A) Annual gross income B) Capitalization rate C) Accrued depreciation D) Annual net operating income

The answer is accrued depreciation. Depreciation is one of the calculations used in the replacement (cost) approach and not in the income approach.

The market value of a parcel of real estate is A) an estimate of the most probable price it should bring. B) its value without improvements. C) an estimate of its future benefits. D) the amount of money paid for the property.

The answer is an estimate of the most probable price it should bring. An appraisal is the appraiser's opinion of a property's market value—the price a property would most probably bring.

An appraisal is A) an opinion of value based on supportable evidence and approved methods. B) an idea of the price a buyer would be willing to pay for a property based on current market conditions. C) the actual value based on supportable evidence and approved methods. D) the best "educated guess" based on market research.

The answer is an opinion of value based on supportable evidence and approved methods. An appraisal is an estimate or opinion of value based on supportable evidence and approved methods.

The term reconciliation refers to which of the following? A) Analyzing the results obtained by the different approaches to value to form an opinion of value B) The process by which an appraiser determines the highest and best use for a parcel of land C) Separating the value of the land from the total value of the property to compute depreciation D) Loss of value due to any cause

The answer is analyzing the results obtained by the different approaches to value to form an opinion of value. The three approaches to value typically produce three different values. An in-depth analysis of these values is required to determine the most valid, logical, and reliable approach that will provide the final opinion of value.

Value is created by the expectation that certain events will occur according to the principle of A) change. B) highest and best use. C) competition. D) anticipation.

The answer is anticipation. The income approach to value is based on the principle of anticipation.

Which principle of value indicates that a developer's very profitable real estate project will attract others to engage in similar activity in the same area and thus drive down profits? A) Competition B) Progression C) Value D) Anticipation

The answer is competition. A successful project invites imitators (competitors) to do the same thing nearby. This drives profits down for a developer and costs down for a consumer-buyer.

The sellers are not sure whether to renovate the kitchen before selling their home. The principle of value that will determine whether the renovation is financially feasible is A) consideration. B) contribution. C) cost. D) conformity.

The answer is contribution. The principle of contribution states that if the increase in the value of the real estate is more than the cost to renovate, the sellers would financially benefit by doing the renovation.

An appraiser would need to determine depreciation when using the A) cost approach. B) gross rent multiplier method. C) sales comparison approach. D) income approach.

The answer is cost approach. Depreciation always relates to the cost approach.

Which would be found in an appraisal but NOT in a CMA? A) Listing of current properties B) Description of the subject's amenities C) Description of highest and best use D) Adjustment of comparable sales

The answer is description of highest and best use. A CMA does not go to an appraisal's depth in describing highest and best use.

All of the following factors would be important in comparing properties under the sales comparison approach to value EXCEPT A) differences in financing terms. B) differences in appearance and condition. C) differences in original cost. D) differences in dates of sale.

The answer is differences in original cost. None of the approaches to appraisal considers the original (historical) cost of a property. The other three factors would be relevant to the sales comparison—sometimes called the market data—approach. Original cost, however, is used in computations of book-value depreciation.

Capitalization is the process by which annual net operating income is used to A) determine potential tax value. B) establish depreciation. C) determine cost. D) estimate value.

The answer is estimate value. Capitalization (the income approach) requires the use of the net operating income, value, and capitalization rate.

An appraiser is responsible for A) finding value. B) computing value. C) forming an opinion of value. D) determining a definitive value.

The answer is forming an opinion of value. The appraiser does not make or determine a definitive value. After the appraiser completes the analysis of the market and property and considers all the relevant data, an opinion of value can be provided.

A loss in value as the result of the market's response to an item, rather than a deterioration of the item's physical condition, is A) deferred maintenance. B) functional obsolescence. C) external obsolescence. D) environmental destruction.

The answer is functional obsolescence. The design features that were most desirable in the 1970s may make a home seem outmoded, and undesirable features may not be economical to correct.

The data collected by the appraiser for the appraisal process includes A) specific data and variable data. B) general data and specific data. C) general data and selective data. D) selective data and variable data.

The answer is general data and specific data. The data collected by the appraiser for the appraisal process includes general data and specific data.

An appraiser who is estimating operating expenses is using what method of valuation? A) Cost B) Income C) Gross rent multiplier D) Sale comparison

The answer is income. Appraisers using the income approach must determine NOI (net operating income), which is done by subtracting the operating expenses from the gross income.

The methodical collection and analysis of data is A) a mechanical function that can be performed by anyone. B) key to an accurate appraisal. C) of less importance to an appraisal than the licensing or certification of the appraiser. D) an appraisal task that can be accomplished by means of data collection software.

The answer is key to an accurate appraisal. The appraisal process is an orderly set of procedures used to collect and analyze data to arrive at a justifiable conclusion of value.

All of the following can result in a loss of value resulting from depreciation EXCEPT A) treatment of amount invested in real estate for tax purposes. B) land value. C) a negative condition that affects real property. D) lack of maintenance of structures.

The answer is land value. Land is not considered a depreciating asset.

From the reproduction or replacement cost of a building, the appraiser deducts depreciation, which represents A) costs to modernize the building. B) the remaining economic life of the building. C) remodeling costs to increase rentals. D) loss of value due to any reason.

The answer is loss of value due to any reason. Depreciation is loss of value from any reason. Some examples of such causes are physical deterioration (wearing out and/or deferred maintenance), external (economic) obsolescence, and functional obsolescence (lack of modernity or good design).

The amount of money a property is likely to command in the marketplace is its A) market value. B) book value. C) intrinsic value. D) subjective value.

The answer is market value. Market value is the most probable price that property should bring in a fair sale.

When appraisers use the expression "most probable price," they are referring to a property's A) progression. B) supply and demand. C) market value. D) market price.

The answer is market value. Market value reflects what buyers and sellers feel is a fair price.

What is the key to an accurate appraisal? A) Years of experience the appraiser has B) Appraising in a market with high supply C) Methodical collection and analysis of data D) Appraising in a market with high demand

The answer is methodical collection and analysis of data. The appraisal process is an orderly set of procedures used to collect and analyze data to arrive at a justifiable conclusion of value.

Which of the following is TRUE about a comparative market analysis? A) It is made by a professional appraiser. B) None of these. C) It is the same as an appraisal. D) It is based on a detailed market analysis of market conditions, property features, recent sales and listings, land value, and construction costs.

The answer is none of these. A comparative market analysis is based on recently closed properties, those currently on the market, and expired listings. It is prepared by a real estate professional and is not as detailed as an appraisal performed by a licensed or certified appraiser.

All of the following are characteristics that contribute to value EXCEPT A) obsolescence. B) utility. C) scarcity. D) transferability.

The answer is obsolescence. To have value, there must be monetary worth. Obsolescence is not a desirable trait and therefore, is part of the lack of desirability of the property.

A successful assemblage of properties may increase the value of the combined parcel in a demonstration of the principle of A) increasing and diminishing returns. B) supply and demand. C) competition. D) plottage.

The answer is plottage. The consolidation of adjacent lots into a single larger parcel produces a greater total land value than the sum of the two sites valued separately.

There are two vacant adjacent lots, each worth approximately $50,000. If their owner sells them as a single lot, however, the combined parcel will be worth $120,000. What principle does this illustrate? A) Regression B) Progression C) Substitution D) Plottage

The answer is plottage. The principal of plottage is that additional market value can be obtained in some instances by combining, and selling as a single parcel, two or more contiguous (i.e., adjacent) properties. This value exceeds the combined total that the individual properties would bring if sold separately.

A salesperson or appraiser trying to determine the market value of a property would be seeking the A) assessed value minus current value. B) probable price the property will bring. C) subjective value using the cost approach. D) utility value after income has been determined.

The answer is probable price the property will bring. Market value is the value that would be paid in an arm's-length transaction between knowledgeable parties.

Which of the following BEST describes a capitalization rate? A) Mathematical value determined by a sales price B) Rate at which the amount of depreciation in a property is measured C) Rate of return an income property will produce D) Amount determined by the gross rent multiplier

The answer is rate of return an income property will produce. In the income approach to appraisal, the capitalization rate is the relationship of the net annual income to the appraised value. Net annual income ÷ appraised value = capitalization rate. Therefore, it expresses the return an income property will produce.

Once the appraiser has considered the three methods of valuation of real estate, the final step in the appraisal process is A) averaging the values from each method. B) adding in the land. C) reconciliation. D) adjusting the comparables.

The answer is reconciliation. The appraiser reviews the values determined by each method of valuation and reconciles them by placing weight on each method to determine the final value. A simple mathematical averaging is not considered reconciliation.

A homeowner constructs a five-bedroom brick house with an indoor pool in a neighborhood of modest two-bedroom and three-bedroom frame houses on narrow lots. The value of this house is MOST likely to be affected by what principle? A) Assemblage B) Regression C) Progression D) Change

The answer is regression. The value of larger lavish homes in a modest neighborhood will be drawn down by the presence of modest less lavish homes; regression is the opposite of progression.

A six-bedroom home with a tennis court in a neighborhood where there are no other similar-sized homes and no homes with tennis courts would MOST likely be subject to what principle? A) Assemblage B) Change C) Progression D) Regression

The answer is regression. The value of larger lavish homes in a modest neighborhood will be drawn down by the presence of modest, less lavish homes; regression is the opposite of progression.

A homeowner constructs an eight-bedroom brick house with a tennis court, a greenhouse, and an indoor pool in a neighborhood of modest two-bedroom and three-bedroom frame houses on narrow lots. The value of this house is MOST likely to be affected by what principle? A) Regression B) Change C) Assemblage D) Progression

The answer is regression. The value of larger lavish homes in a modest neighborhood will be drawn down by the presence of modest, less-lavish homes. Regression is the opposite of progression.

Another name for the market data approach to appraising is the A) competitive market analysis. B) income capitalization approach. C) sales comparison approach. D) cost approach.

The answer is sales comparison approach. Value is obtained by comparing the property being appraised with recently sold comparable properties. A competitive market analysis is the informal method of valuation performed by a real estate analysis to assist buyers and sellers.

The characteristics of value include which of the following? A) Anticipation B) Scarcity C) Competition D) Balance

The answer is scarcity. The characteristics of value are remembered by the acronym DUST: demand, utility, scarcity, and transferability.

The essential elements of value are A) title, demand, supply, and utility. B) desire, supply, usefulness, and title. C) demand, supply, utility, and transferability. D) transferability, demand, scarcity, and utility.

The answer is transferability, demand, scarcity, and utility. Remember the memory aid DUST: demand, utility, scarcity, and transferability.

Change, contribution, plottage, and substitution are some of the basic principles that affect what aspect of real estate? A) Demand B) Value C) Supply D) Depreciation

The answer is value. They all affect value—the most probable price a property will bring.