Ch 3 Pearson VUE

36. Each unit in a fourplex rents for $225 per month. With a sales price of $81,000, what is the gross rent multiplier? (page 73) A. 7.5 B. 30 c. 90 D. 360

A ($225 x4 = $900 per month $900 X 12 = $10,800 per year $81,000 $10,800 = 7.5GRM)

51. The federal government does not require a licensed or certified appraiser in a federally related transaction of less than (page 76) A. $250,000. B. $500,000. C. $1,000,000. D. $5,000,000.

A (A licensed or certified appraiser is not required.)

70. In a 1031 tax-deferred exchange, which of the following would be like-for-like? (page 82) A. A lot for an apartment building B. A personal residence for a commercial property C. Jewels for land D. A mortgage for a duplex

A (A real property for real property qualifies for a 1031 exchange if held for business or investment.)

76. Which date is most important to an appraiser? (page 78) A. Date of appraisal B. Date of purchase agreement C. Date of loan commitment D. Date of loan closing

A (An appraisal is valid as of the day it is made.)

58. A lot increased in value because a nearby site was purchased for a university. This is an example of the principle of (page 66) A. anticipation. B. change. C. progression. D. balance.

A (Based on planned university's effect on value.)

49. Which appraisal method would be used to determine the present value of future income? (pages 72-73) A. Income approach B. Cost approach C. Quantity survey method D. Sales comparison approach

A (Capitalizing the net determines the present value of future income.)

64. Licensing and certification of appraisers is required by (page 76) A. FIRREA. B. RESPA. C. USPAP. D. Regulation Z.

A (Federal Financial Institutions Reform Recovery and Enforcement Act.)

11. A new, expensive home in a mixed area of commercial property and older, less expensive homes could have a market value less than the cost of the new home because of (pages 66, 75) A. regression. B. the gross multiplier effect. C. progression. D. physical deterioration.

A (It is regression, which is economic obsolescence. The value of the new home will be lowered because the homes in the neighborhood are older and less expensive.)

66. If L hires appraiser M to appraise land owned by N then M can discuss the appraisal with (page 78) A. L only. B. L or N. C. no one. D. anyone.

A (Only with the principal.)

15. According to the principle of integration and disintegration, (page 66) A. the value of a property will eventually decline. B. property value is best maintained in homogeneous areas. C. extraordinary profits will disappear with competition. D. the maximum value would be based on cost of a comparable property.

A (Property goes through three phases-integration, equilibrium, and disintegration.)

45. R traded a lot to S for an apartment building. R assumed S's $86,000 mortgage, and S assumed R's $115,000 mortgage. No other consideration passed between the parties in this trade. How would this trade be taxed? (page 82) A. R has a $29,000 taxable gain. B. S has a $29,000 taxable gain. C. S will be taxed as if he received fair market value for the lot. D. Neither R nor S bas any taxable gain.

A (R's debt relief is boot and is taxable as a capital gain. Note: the property would be regarded as like-for-like.)

38. An investor has total cash obligations of $187,000 on a property with an income of $225,000. The $38,000 difference is known as (page 81) A. cash flow. B. equity. C. arbitrage. D. liquidity.

A (Spendable cash.)

18. Several $250,000 homes were built in an area where the existing homes had been valued at $800,000 to $900,000. The effect was that the value of the existing homes declined. Which real estate principle applies to this situation? (page 66) A. Regression B. Competition C. Substitution D. Integration and disintegration

A (The new lower-value homes negatively affected the value of the more expensive homes.)

46. The first step in appraising an apartment building using the income approach would be to determine the (page 72) A. scheduled gross income. B. effective gross income. C. net income. D. vacancy factor.

A (The scheduled gross then must be adjusted for a vacancy factor.)

10. The advisability of including a tennis court with a planned apartment building may be determined by the principle of (page 66) A. contribution. B. progression. C. substitution. D. change.

A (What will the tennis court contribute to the anticipated net income? (Capitalize the anticipated increase in net income to determine the value of the tennis court.)

20. The time period during which a structure shows income that is attributable to the structure itself is known as its (page 71) A. economic life. B. effective age. C. diminishing returns. D. increasing returns.

A (When the property no longer returns an income attributable to the structure itself, it has exceeded its economic life.)

16. The reason the gross rent multiplier is an inaccurate measurement of value is that it fails to consider (page 73) A. depreciation. B. unusual expenses. C. location. D. amenity values.

B (Because of unusual expenses, the gross may bear little relationship to the net.)

80. Which appraisal method would balance out amenities? (page 69) A. Cost approach B. Sales comparison approach C. Income approach D. Gross multiplier

B (Comparables are adjusted for amenities.)

65. The cost approach is to be used to appraise two homes, one of which is new and the other is 50 years old. The cost approach (page 70) A. has no validity for either appraisal. B. would be less effective for the 50-year-old house. C. would be less effective for the new houses D. would be equally effective for both houses.

B (Cost approach works well on new structures as depreciation need not be considered.)

29. An appraiser wanted to know the capitalization rate applicable for a recent sale. The net income was reported at $21,000 and the property sold for $300,000. What capitalization rate applied to the sale? (page 72) A. 6% B. 7% C. 8% D. 9%

B (Divide the net income by the price paid to determine the capitalization rate used.)

13. An owner has a passive loss of $25,000 on an investment property. If the owner has an adjusted gross income of $125,000, how much of this loss can be used to shelter other than real estate income? (pages 72-73) A. $0 B. $12,500 c. $25,000 D. $50,000

B (Each $2 of adjusted gross income over $100,000 reduces the nonproperty income tax shelter by $1.)

75. Imputed interest refers to (page 82) A. interest charged but uncollectible. B. interest charged by the IRS as received when it was not received. C. usury rate. D. index rate.

B (Interest is imputed when seller financing has unreasonably low interest rate.)

5. An appraiser would need to determine accrued depreciation when using the (page 70) A. gross rent multiplier method. B. cost approach. C. income approach. D. sales comparison approach.

B (It is the cost to build today less accrued depreciation, plus the value of the land.)

77. A depth table would be used by (page 74) A. surveyors. B. appraisers. C. water district. D. lenders.

B (It shows the effect of additional or lesser depth.)

50. L, who lived in her home for six years, got married last month and deeded one-half interest in the home to her new husband. Since they will move to his home, she has placed her home up for sale. What would be the maximum exclusion for capital gains tax? (pages 79-80) A. $25,000 B. $250,000 C. $500,000 D. $1,000,000

B (L's husband does not meet the residency rule of two out of five years.)

39. Q intends to borrow $80,000 on her home at 7 percent interest to pay off credit card loans. As to this home equity loan, Q should realize that the (page 80) A. loan will increase her tax liability in the event of sale. B. interest payments on the home equity loan may be tax-deductible expenses. C. cost basis of the home will be increased by $80,000. D. $80,000 in proceeds is subject to regular income taxation.

B (Q can deduct interest on equity loans up to $100,000 provided all combined loans do not exceed fair market value of the home.)

30. The appraiser gave greatest weight to the value arrived at by the market comparison approach, double-checked that value with the value arrived at by the cost approach, and did not consider the value arrived at using the income approach. The process the appraiser was engaged in is known as (page 73) A. the sum of the values. B. reconciliation. C. the abstractive method. D. the index method.

B (Reconciliation {correlation} involves use of applicable methods with the appraiser giving greatest weight to the approach that has the greatest relevance to the property being appraised.)

78. The best appraisal method for appraising a church would be the (page 70) A. sales comparison approach. B. replacement cost approach. C. capitalization of income approach. D. gross multiplier.

B (Since it is a service-type building.)

69. Surplus utility is an example of (page 75) A. progression. B. functional obsolescence. C. physical deterioration. D. economic obsolescence.

B (Such as a two-bedroom home with five baths. Extra baths would not contribute to value.)

47. "The whole is worth more than the sum of its parts" refers to (page 67) A. progression. B. assemblage. C. land residual. D. depreciation.

B (The added value due to assemblage is plottage value.)

67. How would you measure the quality of income? (page 72) A. By the net spendable B. By the capitalization rate C. By the pro forma statement D. By the cost approach

B (The capitalization rate is adjusted to reflect the quality of income.)

32. J, who paid $47,000 for a vacant parcel of land property, has since refinanced the property. The present balance on the mortgage is $128,000. If J sold the property for $95,000, what would be the tax consequence of the sale? (page 81) A. J would have a loss of $33,000. B. J would have a gain of $48,000. C. J would have a gain of $81,000. D. J would have a gain of $128,000.

B (The gain is determined by the difference between cost basis and sales price.)

79. Raising the capitalization rate from that used on similar property would imply a (page 72) A. greater value. B. greater risk. C. higher income. D. stable income.

B (The greater the risk the higher the capitalization rate.)

1. What percent of a capital gain would be the tax if an investor who is in the 25 percent tax bracket held the property for 12 1/2 months? A. 12 % B. 15% C. 25% D. 28%

B (The holding period is over 12 months. (page 82)

40. With fixed rents and a capitalization rate of 8 percent, an increase in taxes of $4,000 would result in the value of a property (page 73) A. decreasing by $5,000. B. decreasing by $50,000. C. remaining unchanged. D. increasing.

B (The increase in expenses of $4,000 wit: fixed rents will mean a $4,000 reduction in net. Capitalizing $4,000 {divided by 0.08} equals $50,000.)

14. To avoid capital gains liability, J traded her commercial lot to K for raw acreage. K gave J $10,000 to balance out the trade. Based on the above, (page 82) A. both parties will pay tax because the trade was not like for like. B. J will be taxed on $10,000. C. K will be taxed $10,000. D. the trade defers all taxes.

B (The party who receives boot is taxed on the boot received.)

52. What type of appraiser is required for an appraisal where there will be a federally related loan in excess of $1,000,000? (page 76) A. Licensed appraiser B. State certified appraiser C. Federally certified appraiser D. MAl

B (The state, not the federal government, certifies appraisers.)

17. L and M, a married couple, sold their principal residence for $2,400,000. When they purchased the home seven years previously, they paid $1,200,000. Assuming no improvements were made, what would be their taxable gain? (pages 79-80) A. $0 B. $700,000 C. $1,200,000 D. $1,900,000

B (Their gain was $1,200,000. They have a $500,000 exclusion, so $700,000 would be taxed.)

44. For tax purposes, residential property is depreciated based on a life of (page 83) A. 15 years. B. 27 1/2 years. C. 31 years. D. 39 years.

B (Thirty-nine years is used for nonresidestial property.)

24. After determining the value of the improvements of an existing structure, the appraiser deducted this amount from the market value to determine the value attributed to the land. This appraisal method is known as (page 74) A. surplus productivity. B. the abstractive method. C. the development method. D. the land residual method.

B (To determine land value, the value of the improvements is deducted from the market value of the property.)

63. An appraiser wanted to know the cost for building permits, construction supervision, and other construction costs. The appraiser was using the (page 70) A. building residual method. B. quantity survey method. C. index method. D. unit in place method.

B (To determine replacement cost for cost approach)

27. An investor making extraordinary profits from the first mini warehouse in the area would be concerned with the principle of (page 66) A. substitution. B. competition. C. surplus productivity. D. conformity.

B (Whenever extraordinary profits are being made, competition produces additional units that reduce profits.)

23. A good definition of market value would be the (page 65) A. price paid by the owner. B. present worth of future benefits. C. assessed valuation. D. price offered by a prospective buyer.

B (Whereas an appraiser estimates the value, {B} is its definition. What one buyer paid does not determine a property's value.)

21. A developer decided to increase the size of apartments he was building from 1,800 square feet to 2,800 square feet. While the cost of each unit increased by $180,000, the developer discovered that the market value of the larger units was only $120,000 more than for the smaller units. This is an example of the principle of (page 66) A. change. B. anticipation. C. diminishing returns. D. conformity.

C (A point was reached where the cost for additional size was less than additional value.)

54. Your adjusted cost basis when selling your residence would be influenced by (page 79) A. sales price. B. depreciation. C. a room addition. D. maintenance expense.

C (Adjusted cost basis is price paid plus improvements minus depreciation, but personal residences cannot be depreciated.)

41. The purchaser's down payment is considered what type of funds? (page 80) A. Borrowed B. Leveraged C. Equity D. Capital

C (An owner's equity is the difference between value and indebtedness.)

33. A property owner would have the greatest difficulty in correcting depreciation caused by (page 75) A. chronological age. B. the built-in nature of the structure. C. forces outside the property boundaries. D. wear and tear due to use.

C (Because external obsolescence is caused by forces outside the property, it is extremely difficult for a property owner to correct it alone. {A} and {D} refer to physical deterioration and {B} to functional obsolescence.)

9. Which appraisal method would tend to set the upper limit of value on a new structure? (page 70) A. Gross multiplier B. Income approach C. Cost approach D. Sales comparison approach

C (Cost approach tends to set upper limits on value.)

26. Demand is not effective in determining the value of real property unless it is combined with (page 67) A. scarcity. B. a use. C. purchasing power. D. access.

C (Demand without purchasing power is only a wish.)

19. With an annual net income of $40,000 and a capitalization rate of 8 percent, what is the value of the property using the income approach? (page 72) A. $400,000 B. $440,000 C. $500,000 D. $520,000

C (Divide the net by the capitalization rate to determine value: $40,000/.08 = $500 000)

74. In determining external obsolescence, an appraiser would be interested in (page 75) A. the management of the property. B. deferred maintenance of the property. C. development of nearby farmland for a shopping center. D. the floor plan of the property.

C (External obsolescence deals with matters outside the property that can affect value)

55. A house has been maintained like new, yet its value has gone down more than 50 percent The loss in value is due to (pages 69, 75) A. physical deterioration. B. plottage. C. external obsolescence. D. progression.

C (Forces outside the property.)

12. A property has a net income of $30,000. One appraiser decides to use a 12 percent capitalization rate, while a second appraiser uses a 10 percent rate. Use of the higher rate results in (pages 72-73) A. a 2% increase in appraised value. B. a $50,000 increase in appraised value. C. a $50,000 decrease in appraised value. D. no change in appraised value.

C (Increasing the rate decreases the value. Value moves inversely to the capitalization rate: Net/Rate = Value, $30,000/0.10 = $300,000, $30,000/0.12 = $250,000)

25. The highest and best use is the use that provides the greatest (page 67) A. benefit to the community. B. gross. C. value. D. capitalization rate.

C (It is that use that will provide the greatest value attributable to the property.)

73. The reason that replacement cost is a better appraisal approach for new buildings than for old buildings is A. neighborhood influence. B. difficulty in determining cost when built. C. difficulty in ascertaining depreciation. D. the difference in construction methods.

C (It tends to be subjective.)

48. Two adjacent residences in the center of a large development had similar values when they were built 60 years ago. They both have been maintained in similar condition and the site values are identical. but one is now worth far more than the other. The reason for the difference in value relates to (pages 69, 75) A. physical deterioration. B. economic obsolescence. C. functional obsolescence. D. the principle of integration and disintegration.

C (It would be built-in obsolescence by design {outmoded or less desirable floor plan or design.} Other choices are ruled out by the facts.)

72. The most expensive method of appraisal would likely be (page 70-71) A. gross multiplier. B. market comparison. C. replacement cost approach. D. capitalization of income.

C (Must ascertain both cost to build today and accrued depreciation.)

57. Which of these appraisal activities would occur last? (page 73) A. Define the problem B. Determine the purpose of the appraisal C. Reconciliation D. Gather the facts

C (Reconciliation determines value using all appraisal methods. Final action is to report value.)

34. An appraiser sets a replacement cost of a structure at $120,000 and appraises the land value separately at $80,000. The appraiser places an economic life on the structure at 50 years and states that it has an effective age of 10 years. Using the cost approach, at what amount would the appraiser value this property? (page 71) A. $140,000. B. $160,000. C. $176,000. D. $200,000.

C (Replacement cost less depreciation plus land equals value. A 50-year life means 2 percent depreciation per year; 2 percent times 10 equals 20 percent; 0.20 times $120,000 equals $24,000: $120,000-$24,000 + $80,000 = $176,000)

71. Expenses on income property rise $1,000 while income remains constant. With a 10 percent capitalization rate, the value would (page 73) A. remain constant. B. fall $1,000. C. fall $10,000. D. increase $1,000.

C (Since the capitalization rate is divided into net to determine value.)

61. Capital gains resulting from depreciation that was taken would be taxed at a (page 82) A. 15% rate. B. 20% rate. C. 25% rate. D. 30%rate.

C (The 15 percent capital gains rule does not apply to the portion of the gain resulting from depreciation.)

22. A property being appraised has a two-car garage, while a comparable has a three-car garage. In making adjustments, the appraiser would (page 69) A. raise the value of the comparable. B. lower the value of the home being appraised. C. lower the value of the comparable. D. raise the value of the home being appraised.

C (The sales price of the comparable is adjusted to the property being appraised.)

7. Which of the following actions by an appraiser would be unethical? (page 78) A. Refusal to make an appraisal that the appraiser feels is beyond his or her expertise B. Appraising a property in which the appraiser has a disclosed interest C. Accepting an appraisal where the fee will be a percentage of the value derived D. Requesting payment in advance

C (This could create the appearance of a conflict of interest. It is all right to have an interest in the property being appraised so long as there is open and full disclosure.)

28. The principle of supply and demand predicts (page 67) A. increasing price when supply increases. B. decreasing demand when supply increases. C. increasing demand when price decreases. D. decreasing price when demand increases.

C (When supply exceeds demand, prices drop. When demand exceeds supply, prices rise. As prices drop, there are more buyers {demand}; as prices rise, there are fewer buyers.)

42. A property being appraised had 2,400 square feet, but a comparable used by the appraiser had only 2,250 square feet. The appraiser should (page 69) A. disregard the comparable because of dissimilar size. B. use the comparable but ignore the slight size difference. C. adjust the sales price of the comparable upward because of size difference. D. adjust the sales price of the comparable downward because of the size difference.

C (When the comparable has a lesser features {or lacks a feature} raise the sales price of the comparable. If the comparable is better, lower the sales price of comparable)

35. In using the sales comparison approach to value to appraise a single-family residence, an appraiser might have to make adjustments for (page 69) A. assessed valuation differences. B. a difference in possible rental income. C. date of sale. D. difference in the capitalization rate.

C (When the market has changed since a comparable sale, an adjustment is necessary.)

31. The appraiser could calculate the annual gross rent multiplier that applied to a recent sale by (page 73) A. capitalizing the annual gross income. B. dividing the annual gross income by the price paid. C. dividing the price paid by the annual gross income. D. multiplying the monthly gross income by 12.

C (You also can get the monthly gross rent multiplier by dividing the price paid by the monthly gross income.)

4. J paid $190,000 for her home in 1994. She spent $41,000 on improvements to the home. She sold the home in 2007 for $184,000 and incurred closing costs of $11,900. J has (page 82) A. a tax loss of$17,900. B. a tax loss of$35,100. C. a tax loss of $47,900. D. no loss for tax purposes.

D (A homeowner cannot take a loss on the sale of a residence.)

62. An appraiser using the capitalization of income approach would have to know (page 72) A. the original construction costs. B. the replacement costs. C. accrued depreciation. D. property taxes.

D (Appraiser must determine net income.)

59. The value based on price paid would be (page 65) A. replacement value. B. market value. C. loan value. D. book value.

D (Cost plus improvements less depreciation.)

3. An example of external obsolescence would be (page 75) A. numerous pillars supporting the ceiling in a store. B. roof leaks, making the premises unrentable. C. an older building with very small rooms. D. vacant and abandoned structures in the area.

D (External obsolescence deals with forces outside the property itself. {A} and {C} are functional obsolescence, whereas {B} is physical deterioration.)

37. Federal law requires that an appraiser be certified for (page 76) A. any appraisal. B. any residential appraisals. C. any federally related appraisal. D. federally related residential appraisals of property valued at more than $250,000.

D (In addition, licensed appraisers must be used for federally related residential appraisals of property valued at $250,000 or less.)

53. How many days after the transfer of a seller's property does the seller have to complete acquisition of another property to qualify as a tax-deferred exchange? (pages 82-83) A. 24hours B. 30 days C. 45 days D. 180 days

D (Must be designated within 45 days.)

8. An appraiser, in using the expression a "willing, informed buyer and a willing, informed seller," is referencing (page 65) A. progression. B. supply and demand. C. the principle of highest and best use. D. market value.

D (See the definition of market value.)

68. In setting a capitalization rate, an appraiser could add a risk factor to the (page 72) A. prime rate. B. federal reserve discount rate. C. ARM. D. no-risk investment rate.

D (Such as the rate paid on government bonds.)

56. A property had net income of $71,800. One appraiser uses a 10 percent capitalization rate and another used an 11 percent rate. The higher rate resulted in a (page 73) A. $7,180 decrease in value. B. 10% decrease in value. C. $65,273 increase in value. D. $65,273 decrease in value.

D (The 10 percent rate gives value of $718,000 while the 11 percent rate gives value of $652,727 or $65,273 less)

6. A high rate of inflation would be of greatest value to investors who have (page 81) A. invested in long-term, fixed-income investments. B. purchased property without the use of leverage. C. purchased property using moderate leverage. D. purchased property using a high degree of leverage.

D (The investors get the appreciation benefits of inflation but pay back loan with cheaper dollars.)

2. In appraising a home for a lender who wishes to make a purchase loan, the appraiser would be concerned with (page 89) A. the amount of the loan requested. B. property tax assessment. C. the price the seller has agreed to pay. D. zoning changes in the area.

D (This could indicate external obsolescence as well as progression or regression. The others don't affect the property's value. )

43. Which appraisal principle indicates the economic effect an improvement has on property? (page 66) A. Progression B. Substitution C. Surplus D. Contribution

D (This is used to determine the economic viability of an improvement.)

60. The cost approach combines the replacement cost less depreciation with the (page 70) A. gross multiplier. B. abstractive method. C. income approach. D. sales comparison approach.

D (Used to add land value.)