Unit 9 Quiz Ch. 19 and 23
The fact that a still-serviceable building is torn down is an indication of (a) curable physical deterioration. (b) incurable physical deterioration. (c) the enforcement of building codes. (d) functional and external obsolescence.
(d) functional and external obsolescence. P.369 Function obsolescence means a loss in value from the market's response to the item. Outmoded or unacceptable physical or design features that are no longer considered desirable by purchasers are considered curable. External obsolescence (economic or environmental obsolescence) is the loss in value caused by factors outside a property. Zoning, environment, social, economic
The income approach to value would be most important in the appraisal of (a) a condominium. (b) an office building. (c) a single-family residence. (d) a vacant residential lot.
(b) an office building. P.370 te Appraisal The Income Approach The income approach to value is based on the present value of the rights co fueia I sumes that the income generated by a property will determine the property seale.} nome approach is used for valuation of income-producing properties such as aparma suildings, office buildings, and shopping centers.
In the income approach, the appraiser makes use of (a) reproduction cost. (b) capitalization rate. (c) depreciation schedules. (d) replacement cost.
(b) capitalization rate.
At the closing, the real estate broker's commission generally appears as a (a) credit to the seller. (b) debit to the seller. (c) credit to the buyer. (d) debit to the buyer.
(b) debit to the seller. Debit expense
A buyer purchases a property for $285,500. The buyer deposits the purchase price with a third party and the seller deposits a warranty deed for the property with the same third party. The third party is instructed to record the deed in the buyer's favor and pay the purchase price, less some agreed prorations, to the seller when the buyer has received the deed. This transaction is called (a) provisional sale. (b) escrow. (c) installment sale. (d) option.
(b) escrow.
The Real Estate Settlement Procedures Act (RESPA) is a regulation of (a) state government (b) federal government. (c) the Federal Housing Administration. (d) the Department of Veteran Affairs.
(b) federal government.
By today's standards, a 4-bedroom house with one bathroom would be considered to be (a) physically obsolete. (b) functionally obsolete. (c) economically obsolete. (d) diminished.
(b) functionally obsolete.
When appraising a commercial property, the appraiser is most concerned with the (a) accrued depreciation on the property. (b) income generated by the property. (c) sales prices of comparable properties. (d) total debt service on the property.
(b) income generated by the property.
Defined as a loss in value from any cause, depreciation is generally divided into three categories. The loss of value due to the normal wear and tear on a property is called (a) external depreciation. (b) physical depreciation. (c) functional obsolescence. (d) economic deterioration.
(b) physical depreciation. P.369
The process by which expenses are handled at the settlement of a real estate transaction so that both the buyer and the seller pay their respective portions of the debts is called (a) assessment. (b) proration. (c) balancing. (d) reconciliation.
(b) proration
The term depreciation refers to the (a) value of real estate after the expiration of its useful life. (b) real estate's loss of value from any cause. (c) costs incurred to renovate or modernize a building. (d) capitalized value of lost rental income.
(b) real estate's loss of value from any cause. P. 368 Depreciation is real estate's loss of value do any cause compared with today's cost of replacement
When planning a subdivision, the developer should determine the kinds of land uses to be involved and the amounts of land to be allocated to each use by considering (a) the most profitable types of buildings to construct. (b) the application of the economic principle of highest and best use. (c) his or her concepts for what is considered as an ideal development. (d) the customs of the area and what other developers have already done.
(b) the application of the economic principle of highest and best use.
The gross rent multiplier is used as a guideline for estimating value based on (a) the ratio of the gross rents to the net rents after expenses. (b) the proportion of rents due to the actual rents collected. (c) the capitalization of the annual gross rental income. (d) the relationship of the sales prices to the gross rental income.
(d) the relationship of the sales prices to the gross rental income. Sales price + gross annual income = gross income multiplier (GIM) For one to four residential units: Sales price + gross monthly rent = gross rent multiplier (GRM)
The details of a sales transaction are always governed by (a) the wishes of the seller as expressed orally. (b) the wishes of the buyer as expressed orally. (c) the escrow instructions that both the seller and the buyer sign. (d) the terms of the properly executed purchase contract.
(d) the terms of the properly executed purchase contract.
In Illinois, which party usually pays the state and county transfer taxes? (a) Buyer (b) Seller (c) Buyer pays the state taxes; seller pays the county taxes (d) Whichever party is specified in the local ordinance
(a) Buyer
An appraiser has been hired to prepare an appraisal on a property that includes an elegant old mansion that is now used as an insurance company office. Which approach to value would the appraiser rely on most? (a) Income approach (b) Gross rent multiplier approach (c) Sales comparison approach (d) Replacement cost approach
(a) Income approach p. 370 The Income Approach The income approach to value is based on the present value of the rights to future income. It assumes that the income generated by a property will determine the property's value. The income approach is used for valuation of income-producing properties such as apartment buildings, office buildings, and shopping centers. In estimating value using the income approach, an appraiser must take five steps, illustrated in Figure 19.3
Which of the following items is NOT usually prorated between the buyer and seller at closing? (a) Recording charges (b) Real estate taxes (c) Rents (d) Utility bill
(a) Recording charges
The sales comparison approach to value would be MOST important when estimating the value of a(n) (a) an existing residence. (b) an apartment building. (c) a retail location. (d) a new residence.
(a) an existing residence.
Prorated items that represent prepaid expenses of the seller should be shown on the settlement statement as (a) credit to the seller and debit to the buyer. (b) debit to the seller and credit to the buyer. (c) credit to the buyer. (d) debit to the seller
(a) credit to the seller and debit to the buyer.
A house with outdated plumbing is suffering from (a) functional obsolescence. (b) curable physical deterioration. (c) incurable physical deterioration. (d) external depreciation.
(a) functional obsolescence p.369
Under the income approach to estimating the value of real estate, the capitalization rate is the (a) rate of return the property earns on the investment. (b) rate at which the property increases in value. (c) rate of capital required to keep a property operating. (d) maximum rate of return allowed by law on an investment.
(a) rate of return the property earns on the investment.
The market price of real estate is generally the same as (a) the sales price. (b) the market estimate. (c) the highest and best use. (d) the assessed value.
(a) the sales price. P.362 Market value is a reasonable opinion of a property's value. Market price is the actual selling price of a property. Cost may not equal either market value or market price.
The condition of the seller's title is generally determined from a (a) title commitment or title insurance policy. (b) physical inspection of the property by the buyer. (c) closing statement prepared by an escrow agent. (d) escrow report prepared by an attorney.
(a) title commitment or title insurance policy.
The market rent for a duplex is $650 per month per unit. If the GRM is 125, what is the value of the property? (a) $81,250 (b) $162,500 (c) $126,500 (d) $216,500
(b) $162,500 (Duplex)2x650x125=162,500 Rent income x grm=sale price/ estimate market value
A building is valued at $215,000 and contains 4 apartments that rent for $470 each per month. The owner estimates that the net operating income is 65 percent of the gross rental receipts. What is the capitalization rate? (a) 3.7 percent (b) 6.8 percent (c) 10.5 percent (d) 14.2 percent
(b) 6.8 percent P.371 Income ÷ rate = value Income ÷value= rate Value × rate= income
Who among the following CANNOT obtain appraiser licensure or certification in Illinois? (a) An individual who wants to appraise only residential properties (b) A limited liability company engaged in licensed real estate activities (c) A person who wants to appraise all types of property (d) An individual who will sign appraisal reports on behalf of a business entity
(b) A limited liability company engaged in licensed real estate activities
In an old retail building, which of the following would most likely be an example of incurable functional obsolescence? (a) Deficient and inadequate lighting (b) Closely-spaced internal support columns (c) An unattractive storefront (d) A decrease in the area's population P. 369
(b) Closely-spaced internal support columns Incurable obsolescence includes undesirable physical or design features that that cannot be easily remedied because the cost of the cure would be greater than it's resulting increases in value. Incurable obsolescence is a type of obsolescence that is not financially practical to cure. It occurs when it is too costly to fix the problem.
Which would be classified as external depreciation? (a) A leaking roof that needs to be completely replaced (b) Poorly maintained properties in the neighborhood (c) A poorly designed floor plan that could be modified (d) Convenient access to schools and recreational facilities
(b) Poorly maintained properties in the neighborhood External obsolescence (economic or environmental obsolescence) is the loss in value caused by factors outside a property. Zoning, environment, social, economic
Using which of the following would require the value of the land to be calculated separately from the value of the improvements? (a) The income approach (b) The cost approach (c) The sales comparison approach (d) The gross rent multiplier
(b) The cost approach
It is necessary to calculate a dollar value for depreciation when using which of the following? (a) The sales comparison approach to value (b) The cost approach to value (c) The income approach to value (d) Gross rent multipliers
(b) The cost approach to valuep. 365 An estimate of value is obtained by comparing the property being appraised with recently sold comparable properties.
In the valuation of a large apartment complex, the most weight would be given to which approach to value? (a) The cost approach (b) The income approach (c) The sales comparison approach (d) All approaches are equally weighted
(b) The income approach
Which of the following would a lender generally require at the closing? (a) Market value appraisal (b) Title insurance (c) Application (d) Credit Report
(b) Title insurance
The closing statement involves the debits and credits to the parties in the transaction. A debit is (a) a refund. (b) an expense. (c) an adjustment for an expense paid outside of closing. (d) a proration.
(b) an expense
In a closing statement, an accrued item is (a) an item paid in advance. (b) an item that is unpaid but is due. (c) a prepaid expense. (d) a proration.
(b) an item that is unpaid but is due.
In the cost approach to value, the appraiser makes use of (a) the owner's original cost of the building. (b) the estimated replacement cost of the building. (c) the sales prices of similar buildings in the area. (d) the assessed value of the building.
(b) the estimated replacement cost of the building. p.366 The Cost Approach The cost approach to value also is based on the principle of substitution. The cost approach consists of five steps: 1. Estimate the value of the land as though it were vacant and available to be put to its high est and best use. 2. Estimate the current cost of constructing the buildings and improvements. 3. Estimate the amount of accrued depreciation resulting from the property's physical dere- rioration, functional obsolescence, and external obsolescence. 4. Deduct the accrued depreciation (step 3) from the current construction cost (step 2). 5 Add the estimated land value (step 1) to the depreciated cost of the building and site improvements (step 4) to arrive at the total property value.
In the cost approach an appraiser uses which of the following? (a) Sales prices of similar properties (b) The owner's original cost of construction (c) An estimate of the building's replacement cost (d) The property's depreciated value as used for income tax purposes
(c) An estimate of the building's replacement cost
Which is NOT a characteristic of value? (a) Scarcity (b) Transferability (c) Obsolescence (d) Utility
(c) Obsolescence p. 362 To have value in the real estate market--that is, to have monetary worth based on desirability- a property must have the following four characteristics: Demand. The need or desire for possession or ownership backed by the financia satisfy that need Utility. The property's usefulness for its intended purposes Scarcity. A finite supply Transferability. The relative ease with which ownership rights are transferred from one person to another MEMORY TIP For the four characteristics of value, remember DUST: Demand Utility Scarcity Transferability
When arriving at a final estimate of value, an appraiser would consider which of the following? (a) The original price of the property if purchased within three years (b) The average cost of comparable properties, after adjustments are made (c) The reconciliation of values determined by the different appraisal methods (d) The cost of updating the subject property, other than cost of carpet replacement
(c) The reconciliation of values determined by the different appraisal methods
The subject property has three bedrooms and two baths. A comparable property has two bedrooms and one bath. Which of the following is TRUE? (a) The value of the subject property will be adjusted upwards. (b) The value of the subject property will be adjusted downwards. (c) The value of the comparable will be adjusted upwards. (d) The value of the comparable will be adjusted downwards.
(c) The value of the comparable will be adjusted upwards.
To find the value of a property using the income approach to value, if the net operating income and the capitalization rate were known, the appraiser would (a) multiply the net operating income by the capitalization rate. (b) multiply the effective gross income by the capitalization rate. (c) divide the net operating income by the capitalization rate. (d) divide the capitalization rate by the net operating income.
(c) divide the net operating income by the capitalization rate. Income/rate=value Income/value =rate Valuexrate=income
A buyer is considering the purchase of an apartment building in an area where there is limited multi-family zoning. This situation would be BEST described by the economic characteristic of (a) demand. (b) utility. (c) scarcity. (d) transferability.
(c) scarcity
The Real Estate Settlement Procedures Act (RESPA) provides that (a) all real estate purchasers must receive their closing statements. (b) real estate advertisements must include the annual percentage rate, including all charges. (c) the borrower must be given an estimate of the closing costs before the time of the closing. (d) real estate syndicates must comply with the disclosure of "blue sky" laws.
(c) the borrower must be given an estimate of the closing costs before the time of the closing.
Legal title passes from seller to buyer (a) on the date of the execution of the deed. (b) when the closing statement has been signed. (c) when the deed is delivered. (d) when the deed is placed in escrow.
(c) when the deed is delivered.
In the appraisal of an office building, which of the following would be classified as external depreciation? (a) Termite damage to the structural components of the building (b) A poor architectural design resulting in a cluttered floor plan (c) An inadequate number of elevators and antiquated restroom facilities (d) A law requiring the building to be retrofitted with fire sprinklers
(d) A law requiring the building to be retrofitted with fire sprinklers
The income approach as used by an appraiser makes use of which of the following? (a) Equalization (b) Depreciation (c) Appreciation (d) Capitalization
(d) Capitalization p. 370 The Income Approach The income approach to value is based on the present value of the rights to future income. It assumes hat the income generated by a property will determine the properrys value. The income approach is used for valuation of income-producing properties such as apartment buildings, office buildings, and shopping centers. Income ÷ rate = value Income ÷ value = rate Value × rate = income Annual net operating income + capitalization rate = value EXAMPLE $72,000 income + 9% capitalization rate = $800,000
Reconciliation is best described as (a) selecting the highest value given by the three approaches to value. (b) comparing comparable properties and identifying their amenities. (c) determining the final value by selecting one value from those given. (d) analyzing the results obtained from the three approaches to value.
(d) analyzing the results obtained from the three approaches to value.
The period of time over which an improvement to the property will contribute to its value is known as its (a) amortized life. (b) chronological life. (c) actual life. (d) economic life.
(d) economic life. The easiest but least precise way to determine depreciation is the straight-line method also called the economic age-life method). Depreciation is assumed to occur at an even rate over a structure's economic life_-the period during which it is expected to remain useful for its original intended purpose. The property's cost is divided by the number of years of its expected economic life to derive the amount of annual depreciation.
An appraiser is responsible for (a) finding value. (b) computing value. (c) determining value. (d) estimating value.
(d) estimating value.