Law & Practice 7
Davis owns a property with a market value of $144,000. The county assessment for the property is 40% of its appraised value. What will a 4.3 mill special assessment tax levy cost Davis annually? a) 268.8 b) 247.68 c) 619.2 d) 113.2
b) 247.68 Explanation: $144,000 market value X 40% assessment ratio = $57,600 assessed value X .0043 mill levy = $247.68 Remember, the mill levy is the "tax rate" that is applied to the assessed value of a property. One mill is one dollar per $1,000 dollars of assessed value. It consists of a local portion which is used to fund area services and a statewide portion which is used to fund public schools.
Which of the following is considered economic obsolescence? a) A leaky roof b) Abandoned buildings in the area c) Outmoded plumbing fixtures d) A cracked foundation
b) Abandoned buildings in the area Explanation: Abandoned buildings in the area are economic obsolescence because they are external to the subject property. Economic obsolescence also referred to as "external obsolescence" is always considered to be incurable. It basically refers to is the loss in value resulting from influences external to the property itself. External conditions causing this may be international, national, industry-based, or local in origin. Various external factors affect potential economic returns, thus having a direct impact on the market value of an asset or property.
The method of appraising property in which net income is converted into value by use of a capitalization rate is: a) Cost Approach b) Income Approach c) Sales Comparison Approach d) Depreciation Approach
b) Income Approach Explanation: Income Approach is one of the three main methods of appraisal in which an estimate of the subject property's value is based on the net income it produces; also called the capitalization method or investor's method of appraisal. The formula for determining the value of a property using this method is: 1) Estimate potential gross income 2) Subtract vacancy rate The result is Effective Gross Income 3) Subtract building operating expenses (note debt service also known as mortgage payments are NOT considered an operating expense for determining value) The result is the Net Operating Income 4) Determine Capitalization Rate - Capitalization Rate is the return on investment based on the income of the property. Find this by looking at the Cap Rate of other like properties in the area. 5) Net Operating Income divided by Capitalization Rate = Value of Property
What would you say is the real basis for value of the average property; i.e. the economic characteristic of value? a) Opportunity for a profit if purchased b) Its relative scarcity and the demand for it c) How it is zoned d) Replacement cost
b) Its relative scarcity and the demand for it Explanation: This is an example of supply and demand. All other matters affecting the property's value revolve around its usefulness and scarcity.
Depreciation caused by deterioration to the physical structure is: a) Functional Obsolesence b) Physical Obsolesence c) External Obsolesence d) Deteriorating Obsolesence
b) Physical Obsolesence Explanation: One of the three forms of obsolesence along with Functional and External. Physical Obsolesence is a loss of value due to wear and tear or deferred maintenance.
When a house that is in poor condition is located within a neighborhood where all the other properties are well kept, on this property this is an example of: a) Principal of Regression b) Principal of Progression c) Principal of Conformity d) Principal of Succession
b) Principal of Progression Explanation: The value of the poor house in the nice neighborhood will benefit by its surrounding, thus progression. Only a few of the nice houses will suffer regression, not the whole neighborhood.
The Principal of Substitution, which states that no one will pay more for one item if an equally substitutable item is available at a lower price, applies to what appraisal methods? a) Market data only b) Sales Comparison, replacement cost, and income c) Income only d) Replacement cost and market data only
b) Sales Comparison, replacement cost, and income Explanation All methods of appraisal are based upon the principal of substitution. An appraisal principle that holds that the maximum value of a property tends to be set by the cost of acquiring an equally desirable and valuable substitute property, assuming no costly delay is encountered in making the substitution. The principle of substitution states that a buyer will not pay more for a property than the cost of an equally desirable alternative property. This is a fundamental of any of the three approaches to valuing a property, but is the backbone of the Sales Comparison Approach (AKA (market data approach.)
An appraiser, who estimates value, looks for what elements to see if an object has value? a) Utility and usefulness only b) Utility, demand, scarcity, and transferability c) Original cost of object and utility d) Price of the object and usefulness in the future
b) Utility, demand, scarcity, and transferability Explanation: These are the 4 elements of market value of concern to an appraiser.
The type of depreciation caused by outside factors, which are external to the property, is known as: a) curable depreciation b) external obsolescence c) functional obsolescence d) physical depreciation
b) external obsolescence Explanation: External obsolescence is usually related to conditions outside of - or EXTERNAL TO - the property itself. Each of the other types of depreciation mentioned involve the property ITSELF.
The accumulation of several contiguous properties under one ownership, thus creating a large parcel of proportionate greater value, involves: a) depreciation b) plottage c) corner influence d) zoning value
b) plottage Explanation: Contiguous means adjoining. The question represents the definition of plottage.
The concept holding that real estate values are constantly in flux in response to various social, economic, governmental and environmental forces is called the: a) principle of substitution b) principle of change c) principle of supply and demand d) principle of competition
b) principle of change Explanation: The principle of change holds that no physical or economic condition remains constant and that change is largely the result of cause and effect and that existence occurs in three states: integration, equilibrium and degeneration.
An appraiser who is using the market data approach to appraise a family residence would never use the selling price of which of the following? a) A similar home that sold over six months ago b) A similar home that sold recently but is located in another neighborhood c) A similar home that was sold by owners who were forced to sell at any price because of financial difficulties d) A home of similar size but situated on a corner lot
c) A similar home that was sold by owners who were forced to sell at any price because of financial difficulties Explanation: The scarcity or supply of property, the transferability and the utility all contribute to the value of property.
The method of appraisal in which the appraiser compares the subject property to recently sold comparable properties is: a) Cost Approach b) Income Approach c) Sales Comparison Approach d) Depreciation Approach
c) Sales Comparison Approach Explanation: Sales Comparison is one of the three main methods of appraisal in which the sales prices of comparable sold properties are used to estimate the value of the subject property. Also called the market data approach
An arm's-length transaction is best represented by: a) a father selling the family ranch to his son b) a tax sale c) a seller and buyer, unknown to each other, both ready, willing, and able to complete a sale d) all of the above
c) a seller and buyer, unknown to each other, both ready, willing, and able to complete a sale Explanation: When parties to a transaction are independent and on an equal footing it is referred to as an "arm's-length transaction". It is used specifically in contract law to describe an equitable agreement that will stand up to legal scrutiny. A simple example of not at arms length is the sale of real property from parents to children. The parents might wish to sell the property to their children at a price below market value, which could have tax and other legal consequences. Appraisers, when determining the market value of a property look for sold properties that are arm's-length transactions to use as valid comparibles. The sold price of non-arm's-length transactions are a poor gauge of true market value.
The market value of a parcel of real estate is: a) the amount of money paid for the property b) an estimate of its future benefits c) an estimate of the most probable price it should sell for d) an estimate of its value without improvements
c) an estimate of the most probable price it should sell for Explanation: Market Value: Market Value is the present worth of one commodity to draw on the open market. The original cost of an item has no relevance to its value. Cost is defined as the actual dollars spent to produce an asset. The market price is the actual selling price of the property. Market value, cost, and the market price could be the same, but they seldom are. For example, using the market data approach, an appraiser has determined that the market value of a property is $175,000. But under the cost approach, it would cost $190,000 to rebuild the property. The property sold for $200,000 which makes the price $200,000, because that is what somebody is willing to pay. The appraiser is hired to determine the market value for the property, not the price of the property.
Pedestrian traffic counts are usually taken to determine: a) urban population b) size of shopping area c) rental value of a retail location d) average age group
c) rental value of a retail location Explanation: Major shopping centers can promise potential tenants a large number of patrons (pedestrian traffic) and, accordingly, can command higher rents for their facilities.
There are three approaches to valuation, and all three should be used. Depending on the type of property being appraised however, one approach will have more weight and should afford greater authority. The comparison approach is given greater weight in the appraisal of: a) apartment property b) service property c) single-family dwellings d) industrial property
c) single-family dwellings Explanation: The comparison approach would be the most reliable method regardless of the type of property being appraised, because recent sales prices of similar type properties reflect the attitudes of buyers and sellers on the open market - an invaluable guide for any appraiser. However, when appraising something other than a residence, the appraiser very often is not able to find enough sales of similar properties to serve as reliable value indicators and he must then apply other techniques.
What forces affect value? a) Social b) Economic c) Government regulations d) All of the above
d) All of the above Explanation: The market is impacted by all those forces, hence they all affect value.
Regarding market value: a) it is the most probable price, not necessarily the highest or average price b) buyer and seller must be unrelated and acting without undue pressure c) the price must represent a normal consideration for the property sold, unaffected by special financing amounts, or terms, services, fees, costs, or credits incurred in the market transaction d) all of the above
d) all of the above Explanation: All are true.
An appraiser wants to determine if it is economically feasible for the owner of an apartment building to put in a swimming pool for his tenants' use. The appraiser would be most concerned with the principal of: a) regression b) substitution c) conformity d) contribution
d) contribution Explanation: Will the proposed improvement, the swimming pool, contribute enough value in the form of higher rents from tenants and ultimately, net income to the owner, to justify the expense of installing it.
An appraiser's work entails: a) finding value b) determining the value c) computing value d) estimating value
d) estimating value Explanation: An appraisal is an estimation of value.
When determining the value of a property using the Sales Comparison Approach (also known as the Market Data Approach) the appraiser looks for similar properties that have been sold to use in comparison. Which of the following factors is NOT important to an appraiser in selecting and analyzing comparable properties using this approach: a) dates of sale b) financing terms c) appearance and condition d) original cost
d) original cost Explanation: Original cost has no bearing on current market value. Sale Date: The sale price of a comparable that sold recently will have greater weight than the older sale price of another comparable. As to Financing Terms, appraisers often analyze the financing terms of a property they are going to use as a comparable. They are looking to see if the terms of financing had an effect on the sale price of the comparable (not the subject property). For example; if the seller agreed to self-finance the property they might have been able to get an above market price from someone who cannot get a bank loan. Or if someone paid all cash on a property they might have been able to negotiate a below market price. The sales comparison approach compares a subject property's characteristics with those of comparable properties which have recently sold in similar transactions.
The highest and best use is the use that: a) contributes to the best interest of the community b) complies with zoning and deed restrictions c) produces the highest gross income d) produces the greatest property value
d) produces the greatest property value Explanation: Highest and best use is a concept in real estate appraisal. It states that the value of a property is directly related to the use of that property; the highest and best use is the reasonably probable use that produces the highest property value. This use, the highest and best use, may or may not be the current use of the property.
Comparable property "A" has central air conditioning worth approximately $2,000. Comparable property "B" does not. The subject property does not have central air conditioning. To adjust, an appraiser should: a) add air conditioning value ($2,000) to property "B" and the subject property to make them all equal b) add air conditioning value ($2,000) to the subject property, but not to comparable "B" because it's on a smaller lot anyway c) subtract air conditioning value ($2,000) from the subject property and comparable "B" because they don't have it d) subtract air conditioning value ($2,000) from comparable "A" to make it more like the subject property
d) subtract air conditioning value ($2,000) from comparable "A" to make it more like the subject property Explanation: Adjust comps to the subject. Never adjust or change the subject property.
Professional appraiser Herman Franks has just been contracted to estimate the market value of a parcel of vacant land. In doing so, he will estimate or determine the: a) most probable price the land will bring b) the market value of the property c) highest and best use d) all of the above
D) All of the above Explanation: Appraisers determine market value by estimating the highest and best use.
Which of the following is not relevant in appraising a home? a) Circumstances of sale b) Original cost to build 12 months previously c) Square footage of improvements d) Recent selling price of comparable properties
a) Circumstances of sale Explanation: Circumstances of the sale do not affect the value of the property, though they may very well affect the sales price. The original cost to build just a year ago will have some relevance since very little depreciation would have taken place in the ensuing 12 months.
Depreciation caused by functional inadequacies or outmoded design is: a) Functional Obsolesence b) Physical Obsolesence c) External Obsolesence d) Outmoded Obsolesence
a) Functional Obsolesence Explanation: One of the three forms of obsolesence along with Physical and External. Functional Obsolesence is a loss of value due to inadequate or outmoded equipment, or as a result of a poor or outmoded design.
What does the term "datum" refer to? a) Level surface from which elevations are measured b) Surveyor's tool c) Computer input d) Freehold estate
a) Level surface from which elevations are measured Explanation: Datum is the level surface from which elevations are measured.
Plans have been announced for a multimillion-dollar shopping center to be built next door to a vacant lot you own. Property values in the area of the proposed site will tend to increase as a result of this announcement. This is an example of the principle of: a) anticipation b) highest and best use c) supply and demand d) substitution
a) anticipation Explanation: This would be an example of the principle of anticipation, which holds that value is created by the expectation of benefits to be derived in the future.
The conditions of sale will affect the: a) price of the subject property b) cost of the subject property c) value of the subject property d) utility of the subject property
a) price of the subject property Explanation: Conditions of the sale, such as a forced sale, may affect the price paid for a property but would have no effect on its cost, value, or utility.
An appraiser in the appraisal of a single-family residential home would use: a) recent sales prices b) exchange prices c) offering prices d) listing prices
a) recent sales prices Explanation: Residential homes are most often valued using the market data approach, sometimes referred to as the sales comparison approach. This approach values real estate by comparing the subject property against recent sales of similar properties. They usually define a recent sale as one that occurred within the previous six months.
