CH 11

Fee appraiser

A self-employed appraiser. A fee appraiser is someone who performs appraisals for a fee, as opposed to an appraiser who works for an institutional lender or a government agency.

Which of the following would be an example of functional obsolescence? Select your answer below: A.A one-car garage B.Adverse rezoning C.A deteriorated driveway D.Nearby land uses that are incompatible with local uses

A.A one-car garage A one-car garage is due to outmoded design or poor planning, so it is an example of functional obsolescence. A deteriorated driveway would be an example of physical deterioration, while adverse rezoning and incompatible nearby land uses are examples of external obsolescence.

What type of appraiser is qualified to appraise a commercial development valued at over $500,000? Select your answer below: A.Certified general appraiser B.Master appraiser C.Residential appraiser D.Trainee appraiser

A.Certified general appraiser A certified general appraiser may appraise any category of property. Residential appraisers may appraise nonresidential properties of up to $250,000 in value. "Master appraiser" is not a level of licensure.

In determining the net income of a large income property, what item(s) should be deducted from the effective gross income? Select your answer below: A.Cleaning and landscaping expenses B.Depreciation C.Mortgage payments D.Interest payments

A.Cleaning and landscaping expenses Cleaning and landscaping expenses are operating expenses that should be deducted from the effective gross income to determine the net income.

What principle states that homogeneity in a neighborhood increases the value of an individual house? Select your answer below: A.Conformity B.Substitution C.Regression D.Progression

A.Conformity According to the principle of conformity, a reasonable degree of homogeneity within a neighborhood has a positive effect on property values.

The present worth of a property's future benefits is most important to what approach to value? Select your answer below: A.Income approach B.Cost approach C.Market data approach D.Sales comparison approach

A.Income approach The income approach (capitalization approach) bases the present market value of a property on the future benefits of ownership.

What is the ultimate test of a property's functional utility? Select your answer below: A.Marketability B.Layout C.Adequacy D.Maintenance costs

A.Marketability A property's functional utility is best shown by its marketability. If a property suffers from functional obsolescence to such an extent that it is unable to fulfill the desires of its users, it won't be marketable.

What principle states that a prudent buyer will not pay more for a property than the price of a reasonably close alternative? Select your answer below: A.Substitution B.Supply and demand C.Conformity D.Competition

A.Substitution According to the principle of substitution, if two reasonably similar properties are available, a prudent buyer will choose the less expensive one.

Which of the following statements is correct? Select your answer below: A.Value in use is subjective; value in exchange is objective B.Value in use is objective, value in exchange is subjective C.Value in use and value in exchange are both objective D.Value in use and value in exchange are both subjective

A.Value in use is subjective; value in exchange is objective Value in use, or utility value, is a measure of how useful something is to its user. This is a subjective measure of value. Value in exchange, or market value, is a measure of what a property's price should be under ideal market conditions. This is an objective measure of value.

Which of the following issues would have the largest impact on economic obsolescence? Select your answer below: A.Whether the other tenants in the neighborhood are prospering B.When the elevator was last serviced C.Whether the rents that were being charged for individual units were fair D.Whether appliances were properly maintained

A.Whether the other tenants in the neighborhood are prospering Economic obsolescence (also called external obsolescence) reflects a loss in value because of changes that are external to the property itself. If the economic conditions of the surrounding neighborhood are poor, then the value of the property might be hurt; this would be an example of economic obsolescence.

The most difficult step in the capitalization process is: Select your answer below: A.determining net income B.determining effective gross income C.selecting a capitalization rate D.calculating operating expenses

A.determining net income To calculate a property's net income, an appraiser must project numerous future variables, including rental rates, vacancy rates, and operating expenses. Because of this, establishing the net income is typically the most difficult step in the capitalization process. Although selecting a capitalization rate is also somewhat subjective, there are several methods for quantifying the process and making it more objective.

To an appraiser, the broadest definition of depreciation is: Select your answer below: A.loss in utility and value from any cause B.loss in land value C.physical deterioration of the property D.functional obsolescence

A.loss in utility and value from any cause Depreciation is a loss in property utility and value from any cause. Physical deterioration and functional obsolescence are two causes of depreciation.

The cost approach to value is best suited for appraising: Select your answer below: A.new homes B.middle-aged homes C.old homes D.multifamily structures

A.new homes The cost approach is best suited for appraising new construction, since new structures have not had time to depreciate. Estimating depreciation can be the most difficult part of the cost approach.

The cost approach to value is best suited for appraising: Select your answer below: A.new homes B.middle-aged homes C.old homes D.multifamily structures

A.new homes The cost approach is best suited for appraising new construction, since new structures have not had time to depreciate. Estimating depreciation can be the most difficult part of the cost approach. Click Here to Close

All of the following would be taken into account in calculating net income, EXCEPT: Select your answer below: A.personal income taxes B.reserves for replacement C.maintenance expenses D.administrative expenses

A.personal income taxes Personal income taxes for the owner of the property are not deducted from effective gross income to calculate net income. Operating expenses (including reserves for replacement, maintenance expenses, and administrative expenses) are deducted.

For an appraiser, the easiest way to determine the present value of an improvement is to use: Select your answer below: A.the comparative unit/square foot approach B.a quantity survey C.the unit-in-place method D.the land residual method

A.the comparative unit/square foot approach The comparative unit method (also called the square foot method) is the simplest technique for estimating the replacement cost of an improvement. The appraiser considers the cost per square foot of comparable properties.

Replacement cost, as opposed to reproduction cost, is: Select your answer below: A.the present cost of replacing a building with another of the same utility B.the present cost of replacing a building with an exact replica C.the cost of a building when originally built D.the present cost of replacing a building with the structure consistent with the property's highest and best use

A.the present cost of replacing a building with another of the same utility Replacement cost refers to the cost of replacing a building with another of equal utility. Reproduction cost refers to the cost of replacing a building with an exact replica.

Market value

Also referred to as exchange value. Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale. It is also known as exchange value.

appraisal

An opinion or estimate of value. An appraisal is an opinion or estimate of value, not a determination of value. Buyers and sellers determine value.

federally related loan

Appraisals prepared by licensed or certified appraisers are required in federally related loan transactions.A federally related loan is a loan made by any bank or savings and loan association that is regulated or insured by the federal government.Loans for $250,000 or less are exempt from the certified or licensed appraiser requirement, however.

In an attempt to influence an FDIC-insured lender, Appraiser Alison does not adhere to generally accepted appraisal standards. She could be guilty of: Select your answer below: A.a misdemeanor B.a felony C.violating the Bureau of Real Estate's (formerly Department of Real Estate) rules and regulations for brokers D.None of the above

B. A felony In federally related loan transactions, appraisers are required to follow the Uniform Standards of Professional Appraisal Practice (USPAP). Failure to fulfill that requirement in order to improperly influence or defraud a federally insured lender is a felony. In addition to facing criminal prosecution, Alison could also lose her appraiser's license.

In appraisal, considerations such as economy of use and floor plan apply to: Select your answer below: A.economic obsolescence B.functional utility C.overall capitalization rate

B. Functional utility Functional obsolescence occurs when a building lacks functional utility, which is the ability to fulfill the desires of its occupants and users. A building with a poor floor plan, for instance, would lack functional utility.

The replacement cost of a 14-year-old building is $89,000. The value of the improvements has depreciated 1.5% per year. The value of the land is $22,000. What is the property's current value? Select your answer below: A.$101,000 B.$94,027 C.$92,310 D.$67,000

B.$94,027 Start by subtracting 1.5% annual depreciation from $89,000 over 14 years. For the first year, subtract 1.5% of $89,000 from $89,000 to get $87,665. Then for the second year, subtract 1.5% of $87,665 from $87,665 to get $86,350. For the third year, subtract 1.5% of $86,350 from $86,350 to get $85,054, and so on. After 14 years, the building would be worth roughly $72,027. Add the value of the land to find that the value of the property is $94,027 ($72,027 + $22,000 = $94,027).

An apartment building owner is contemplating adding a swimming pool to the property. He consults an appraiser. The appraiser's opinion should be based on what principle? Select your answer below: A.Substitution B.Contribution C.Integration D.Progression

B.Contribution would add to the property is greater than the cost of construction

Of the following characteristics, which is not an essential element of value? Select your answer below: A.Scarcity B.Expectation C.Utility D.Demand

B.Expectation The four essential elements of value are utility, scarcity, demand, and transfer-ability (not expectation).

Of the following, which would not be deducted when determining net operating income? Select your answer below: A.Maintenance expenses B.Mortgage interest C.Uncollected rents D.Replacement reserves

B.Mortgage interest Deducting mortgage principal and interest payments and other financing costs is not one of the steps involved in calculating net income. Uncollected rents are taken into account when a vacancy factor is deducted from the potential gross income to find the effective gross income, and then operating expenses (including maintenance costs and reserves for replacement) are deducted from the effective gross income to arrive at net income.

Which of the following causes the greatest loss of property value? Select your answer below: A.Wear and tear B.Obsolescence C.Lack of proper maintenance D.Physical deterioration

B.Obsolescence Functional and economic obsolescence cause much greater losses in property value than any type of physical deterioration.

Which is usually longer, a property's economic life or physical life? Select your answer below: A.Economic life B.Physical life C.They are usually the same D.It depends on the type of property

B.Physical life he physical life of a property is usually longer than the economic life. A building will continue to exist even after it is no longer profitable.

The term "fee appraiser" refers to: Select your answer below: A.an appraiser employed by the state government B.a self-employed appraiser who charges a fee for appraisal services C.an appraiser employed full-time by a broker D.an appraiser employed full-time by a lender

B.a self-employed appraiser who charges a fee for appraisal services A fee appraiser is a self-employed appraiser who appraises properties for a fee.

An appraisal is: Select your answer below: A.an objective determination of a property's value B.an opinion of value of a property C.the market value of a property D.the sales price of a property

B.an opinion of value of a property

Economic rent is best defined as the rent: Select your answer below: A.currently received under a lease B.currently being paid for comparable space C.that would be negotiated in a perfect market D.necessary to make a profit

B.currently being paid for comparable space Economic rent is the rent that could be expected if the property was available on the open market.

An appraisal is considered accurate: Select your answer below: A.for the year in which it was prepared B.for the date for which it was prepared C.until a newer appraisal is completed D.until the beginning of the next tax year

B.for the date for which it was prepared

Two homes were built at the same time on adjoining lots of equal size and value. The construction and maintenance costs associated with each were the same. One home is worth substantially more than the other. This is likely due to: Select your answer below: A.economic obsolescence in one property B.functional obsolescence in one property C.physical deterioration in one property D.wear and tear in one property

B.functional obsolescence in one property Since the properties are in the same location, are the same age, cost the same amount to build, and have been maintained equally well, it is unlikely that the value difference is due to physical deterioration or economic (external) obsolescence. It is more likely that one home suffers from functional obsolescence.

Dmerjian is appraising two parcels of property. One is leased to the government for use as a post office; the other is leased to a private owner for use as a hardware store. Both parcels have recently started long-term leases. The capitalization rate of the post office property as compared to the capitalization rate of the hardware store property will be: Select your answer below: A.higher B.lower C.the same D.proportionate

B.lower The post office will use a lower capitalization rate because it is a less risky investment and a real estate investor will not expect as great a return on the investment. A hardware store is more likely than a post office to go out of business, so the store will need a higher capitalization rate.

The calculation of effective gross income reflects: Select your answer below: A.depreciation B.vacancies and collection losses C.repairs and operating costs D.taxes

B.vacancies and collection losses Effective gross income is calculated by subtracting a vacancy factor from the gross rental income, taking into account the probability that the property will not always be fully rented and all rents owed will not always be collected.

Which of the following would be an example of external obsolescence? Select your answer below: A.Unattractive floor plan B.Outdated architectural style C.Adverse rezoning D.Lack of proper maintenance

C.Adverse rezoning Adverse zoning changes would be an example of external obsolescence (also called economic obsolescence), which is caused by factors external to the property. An unattractive floor plan or an outdated architectural style would be functional obsolescence. Lack of proper maintenance would be physical deterioration.

Which of the following would not be a cause of economic obsolescence? Select your answer below: A.Location in the flight path of planes from a nearby airport B.Low fixed income of neighborhood residents C.Broken air conditioning system

C.Broken air conditioning system A nonfunctioning air conditioning system is an example of physical deterioration. The other problems are all external to the property, and therefore are examples of economic (external) obsolescence.

Of the following, which is an indirect method of estimating depreciation? Select your answer below: A.Straight-line B.Engineering C.Capitalized income D.Breakdown

C.Capitalized income Capitalized income is an indirect method of determining depreciation. The other choices refer to direct methods.

Which is most likely to have an impact on the economic life of a property? Select your answer below: A.Its age and condition at the time of acquisition B.The owner's maintenance of the property C.Changes in the character of the surrounding neighborhood D.The quality of the building's construction

C.Changes in the character of the surrounding neighborhood Economic life is most likely to be affected by changes in neighborhood composition, rather than changes to the property itself. For instance, if a neighborhood changes so that the intended use of a building is no longer profitable, the property's economic life has ended even if its physical life is still ongoing.

Which of the following would not contribute to functional obsolescence? Select your answer below: A.Eccentric floor plan B.Outdated fixtures C.Nearby nuisances D.Insufficient number of bathrooms

C.Nearby nuisances Nuisances external to the property are causes of external (economic) obsolescence. Problems caused by design inadequacies or outmoded appliances are causes of functional obsolescence.

Which of the following terms is included in the definition of "highest and best use"? Select your answer below: A.Gross income B.Community interest C.Net return D.None of the above

C.Net return A property's highest and best use is the use that produces the greatest net return on the investment over a period of time

Which of the four appraisal terms below does not relate to the other terms? Select your answer below: A.Comparative B.Sales C.Summation D.Comparable

C.Summation "Sales," "comparative," and "comparable" are terms relating to the sales comparison approach (market data method). The summation approach is another name for the cost approach.

Which of the following characteristics are referred to as the essential elements of value? Select your answer below: A.Scarcity, cost, transferability, and demand B.Utility, demand, scarcity, and cost C.Transferability, scarcity, demand, and utility D.Cost, utility, demand, and transferability

C.Transferability, scarcity, demand, and utility

When using the income approach appraisal method, any capital invested in improvements is recaptured through: Select your answer below: A.deducting the cost of replacement from the estimated value at the time of appraisal B.the cost to cure method C.accruals for depreciation D.the observed condition method

C.accruals for depreciation "Accruals for depreciation" refers to the accumulated depreciation of the improvements. In anticipation of future depreciation, recapture is factored into the overall capitalization rate.

An increase in property value due to an increase in population is referred to as: Select your answer below: A.depreciation B.economic obsolescence C.an unearned increment D.a capital improvement

C.an unearned increment An increase in a property's value through no effort of the property owner (as a result of a population increase, for example) is referred to as an unearned increment.

"Capitalization" refers to a process used by an appraiser to: Select your answer below: A.find the market value B.determine the appropriate interest rate C.convert income into value D.establish tax rates

C.convert income into value Capitalization is a process used to translate a property's income into an estimate of its value.

A 20-year-old residence has been well maintained. An appraiser determines its age to be nine years. This illustrates: Select your answer below: A.physical age B.actual age C.effective age D.economic age

C.effective age The effective age of a structure may be more or less than its actual age, depending on construction quality and maintenance.

When appraising residential property, an appraiser's primary concern(s) is/are: Select your answer below: A.total and living square footage B.assessed value C.marketability and acceptability D.functional utility

C.marketability and acceptability Marketability and acceptability are considered to be the fundamental basis of a residential property's value.

In-fill development" is a term for: Select your answer below: A.cleaning up old industrial sites and converting them to recreational areas B.new commercial growth in suburban fringes C.replacing low-density residences with higher-density properties D.replacing vacant or dilapidated buildings with newer properties

C.replacing low-density residences with higher-density properties In-fill development refers to increasing the density in close-in neighborhoods where the current improvements may not match the neighborhood's highest and best use. For instance, it might mean tearing down single-family residences and replacing them with multi-unit condominiums.

Market price is defined as: Select your answer below: A.the listing price of a property B.the price offered for a property C.the price actually paid for a property D.the price that a property might bring on the open market

C.the price actually paid for a property Market price is the amount of money actually paid for a property.

To an appraiser, the present worth of future benefits is equivalent to: Select your answer below: A.price B.cost C.value D.utility

C.value One definition of value is the present cost of all future benefits of ownership.

Which approach to value typically sets the ceiling on value? Select your answer below: A.Income B.Market data C.Sales comparison D.Cost

D. Cost Because buyers are generally unwilling to pay more for a used property than it would cost to replace it with a new one that's essentially just like it, the cost approach tends to establish the upper limit for the property's value.

When performing an appraisal, an appraiser takes into account: Select your answer below: A.the bundle of rights associated with the property B.the land and its improvements C.utility D.All of the above

D.All of the above

When determining value using the income approach, when would the management expenses of the property be deducted from the gross income? Select your answer below: A.When the owner is managing the property B.When a tenant is managing the property C.When a tenant living in another building owned by the same owner is managing the property D.All of the above

D.All of the above It doesn't matter whether the owner, a tenant, or a third party is managing a property; management expenses will always be deducted from effective gross income in order to calculate net income.

The principle of substitution applies to what property characteristics? Select your answer below: A.Use B.Income C.Structural design D.All of the above

D.All of the above The principle of substitution refers to substituting one property for another that is equivalent in terms of use, income, or structural design.

The method used by an appraiser to select a capitalization rate is called: Select your answer below: A.summation B.market data C.band of investment D.Any of the above

D.Any of the above Summation, market data (comparison), and band of investment are three methods used to determine a capitalization rate.

Which of the following would be considered ethical behavior for an appraiser? Select your answer below: A.Setting her compensation as a percentage of a property's appraised value B.Paying referral fees or kickbacks C.Accepting a job that is contingent on reporting a minimum property value D.Appraising a property in which the appraiser has an interest but disclosing that interest to the principal before beginning work

D.Appraising a property in which the appraiser has an interest but disclosing that interest to the principal before beginning work It is ethical for an appraiser to appraise a property in which she has an interest, as long as she first discloses this interest to the principal. (There's an exception, however, in transactions where the loan will be secured by the borrower's home; in that case, it's illegal for the appraiser to have an interest in the subject property.)

A rental property is located on a street that the city decides to widen. As a result of the street construction, the property's rental income is lowered by 10%. What type of depreciation has occurred? Select your answer below: A.Physical deterioration B.Deferred maintenance C.Functional obsolescence D.External obsolescence

D.External obsolescence External obsolescence is caused by factors external to the property, such as city action. Functional obsolescence and physical deterioration (including deferred maintenance) are problems specific to the property.

Which of the following is not a true statement regarding the cost approach to appraisal? Select your answer below: A.It requires extensive knowledge of economic factors B.It is appropriate for new construction C.It is appropriate for special-use properties D.It tends to set the lower limit for property values

D.It tends to set the lower limit for property values The cost approach generally sets the upper limit (not the lower limit) for a property's value, since buyers generally will not pay more for a property than it would cost to replace it with a new one that's essentially just like it. The cost approach requires knowledge of economic factors, mainly materials and labor costs. It is particularly suited to appraising new construction that has not yet depreciated significantly, and it is the only method suitable for appraising properties such as public buildings that are not regularly sold on the open market.

Which of the following can a home inspector NOT do? Select your answer below: A.Assess whether an added room conforms with building codes B.Estimate the life span of the roof C.Provide a report detailing necessary repairs D.Provide an estimate of the property's value as of the inspection date

D.Provide an estimate of the property's value as of the inspection date A home inspector may provide a detailed description of a property's condition. However, only an appraiser may estimate a property's value as of a given date--in other words, perform an appraisal.

What principle states that the value of the best property in a neighborhood will be lowered by the existence of less expensive homes? Select your answer below: A.Substitution B.Competition C.Progression D.Regression

D.Regression The principle of regression states that a property's value is lowered if it is surrounded by less valuable homes.

Which of the following is based on the cost of creating an exact replica of a building? Select your answer below: A.Depreciated cost B.Quantity survey cost C.Replacement cost D.Reproduction cost

D.Reproduction cost Reproduction cost is the cost of constructing an exact duplicate of the subject property. Replacement cost, by contrast, is the cost of constructing a building with the same utility.

The quantity survey method, the comparative unit method, and the unit-in-place method are all used in what appraisal method? Select your answer below: A.The market data approach B.The sales comparison approach C.The income approach D.The cost approach

D.The cost approach These three methods of estimating replacement cost are all used in the cost approach.

A large, expensive home is constructed in an area consisting entirely of much smaller and less valuable homes. Even before the larger home is sold by the developer, it has probably suffered a loss in value due to: Select your answer below: A.deferred maintenance B.physical deterioration C.functional obsolescence D.economic (or external) obsolescence

D.economic (or external) obsolescence The home's value is probably going to be lowered as a result of regression. This value loss, due to location, is an example of economic obsolescence (also called external obsolescence).

An appraiser adjusts a rental property's gross income by deducting a vacancy factor. The resulting figure is the property's: Select your answer below: A.net income B.taxable income C.gross income D.effective gross income

D.effective gross income Effective gross income is calculated by making a deduction from the property's gross income for vacancies and collection losses.

When interest rates increase, property values will most likely: Select your answer below: A.decrease B.increase C.fluctuate unpredictably D.not experience an immediate short-term effect

D.not experience an immediate short-term effect Property values, for the most part, respond to supply of and demand for properties within a particular market. Significantly higher interest rates, as happened in the early 1980s, can reduce potential buyers' buying power and thus reduce demand, but in most periods in time, the effect of interest rates has not been that great.

The basic principle underlying the market data approach to appraisal is: Select your answer below: A.anticipation B.conformity C.supply and demand D.substitution

D.substitution According to the principle of substitution, a property's value is equivalent to the cost of obtaining an equally desirable property. This principle is the basis for all three of the main methods of real property appraisal, including the market data approach (also called the sales comparison approach).

Under normal market conditions, an apartment building's vacancy rate is determined by: Select your answer below: A.the building's operation costs B.building size and total number of units C.rent schedule D.the area's housing availability

D.the area's housing availability The supply of and demand for housing in that particular area will have a significant effect on the apartment building's vacancy rate

Arm's Length Transaction

Occurs between willing buyer and willing seller with each party completely knowledgeable about the market. A purchaser of property between relatives (father & son) would not be an "arms length transaction". A sale between unrelated parties

Which of the three main causes of depreciation is associated with the saying "more buildings are torn down than fall down"? Select your answer below: A.Physical deterioration B.Incurable functional obsolescence C.Curable functional obsolescence D.Economic obsolescence

Over time, neighborhoods change, and structurally sound buildings are often torn down to make way for newer ones. This is an example of economic obsolescence, also called external obsolescence.

Market Price

The price actually paid for a property. Market price is the price actually paid for a property, regardless of whether the parties to the transaction were well informed and acting free of unusual pressure.

Utility owner

The value of property to its owner or user.