Practice Exam One

A property has a gross income multiplier of 9 and a net income ratio of .75. What does this indicate for the overall capitalization rate?

8.33 percent The overall rate is equal to the net income ratio divided by the gross income multiplier. Thus .75/9 = .0833 or 8.33 percent.

What term is used to explain the appraisal principle that states that value is based on the concept that the more a property or its components are in harmony with the surrounding properties or components, the greater the contributory value?

Conformity The principle of conformity states that value is created when a property conforms to the environment due to economic pressures, zoning, similar preferences of neighbors, etc.

What term is used to describe the additional rent paid by retail tenants on a percentage lease that is above the specified minimum rent?

Overage rent The technical term for the amount of rent above the minimum rent is overage rent, which results from a percentage lease. It may or may not be the market rent.

Which of the following statements expresses the difference between valuation and evaluation?

Valuation is the process of finding an estimated value of a property at a given time; evaluation refers to an analysis of the market without necessarily giving an estimate of value.

The term effective rate refers to the:

true rate of return considering all relevant financing expenses. If there are no financing costs, the effective rate equals the interest rate of the loan. Financing costs will cause the effective rate to be higher than the loan's interest rate.

Jones sells land for $20,000 that he bought four years earlier for $10,000. There were no carrying charges or transaction costs. What was Jones's IRR (nearest percent)? Correct

20,000/(1+.19)^4= 19 percent is the annual rate at which compound interest must be paid for $10,000 to become $20,000 in four years.

Which of the following statements applies to a property with a nonconforming use?

A nonconforming use is likely to arise from changes in zoning. A nonconforming use is a use that was formerly legally permissible but is not acceptable under current zoning.

What term is used to describe tangible and intangible factors that enhance the desirability and thus add to the value of real estate?

Amenities The term amenities refers to positive factors that enhance property value. An example would be an excellent view of a golf course from a residence. An amenity might also be referred to as a positive externality.

When a property's highest and best use is in a stage of transition, which of the following actions is required of the appraiser?

Consider interim use The interim use of the property, regardless of its effect on value, should be considered by the appraiser.

The age-life method of computing depreciation uses which of the following periods of time to estimate depreciation?

Effective age and remaining economic life In using the age-life method of computing depreciation, the estimated effective age (based on condition) is added to the remaining economic life. The effective age is then divided by that sum to obtain the total percent of depreciation to date.

An interest rate that incorporates the effects of discount points is referred to as a(n):

Effective rate. The effective rate can be calculated by finding the internal rate of return of the actual cash flows in a loan schedule. Payments are based on the full amount loaned. However, the amount of money received includes the financing costs. The effective rate will be higher than the interest rate on loans with financing costs. If no financing costs are involved, the effective rate will equal the interest rate.

In an office building where there are a number of different tenants, which of the following ratios defines the amount of net rentable area to the total gross area?

Efficiency ratio The efficiency ratio expresses the relationship between leasable space and total space. For example, a 10,000-square-foot building with 25 percent of the space used for halls and elevators has an efficiency ratio of 75 percent.

When using the income approach, what is the initial step the appraiser must take in reconstructing an operating statement?

Estimate gross income. The first step necessary in the income approach to value is to calculate estimated gross income, which is defined as the amount of income generated if all the space is rented all of the time.

You have accepted an appraisal assignment to estimate the value of a square city block that has suffered from total fire damage. Your client is interested in selling the property. Which of the following steps should you take?

Estimate the highest and best use of the land. If you are appraising property that has been totally destroyed by fire, the correct approach would be to estimate the highest and best use of the land.

An appraiser would group the assumptions and limiting conditions in an identified section of the appraisal report. Which of the following statements is an example of an assumption or limiting condition?

I assume there are no hidden defects in the property that would render it more or less valuable. Assumptions and limiting conditions would include such a statement as "I assume there are no hidden defects in the property that would render it more or less valuable." The other statements would be included in the appraiser's certification.

The process of identifying and analyzing sub-markets of a larger market is known as:

Market segmentation Markets can be subdivided into submarkets by price, location and type of purchaser. The process of identifying and analyzing these submarkets is called market segmentation. Allocation and extraction refer to methods of land valuation.

What term is used to describe the value to a typical investor?

Market value Market value is the value to a typical investor, whereas investment value is the value to a specific investor.

When does investment value equal market value?

Only by coincidence Investment value is the value of a property to a particular investor. Because market value is the value of a property to a typical investor, investment value will equal market value only when the investor's preferences equal the market's preferences (i.e., by coincidence).

Building measurements gathered by an appraiser are an example of which of the following types of data?

Primary data Primary data are gathered by the appraiser, whereas secondary data are gathered by another party and available to the appraiser through published sources.

Which of the following calculations is NOT needed to use the band of investment technique?

Reversion The band of investment technique does not explicitly consider the reversion (sale) of the property. It is simply a weighted average of the equity dividend rate and mortgage constant. The loan-to-value ratio is used for the weighting.

The cost approach to value is based primarily on which of the following economic principles?

Substitution The principle of substitution is the basis on which the cost approach to value is formed. This principle states that the value of a parcel is set by the cost of acquiring an equally desirable substitute.

Market rental rates tend to be set at the rate that prevails for equally desirable space. This is a reflection of what appraisal principle?

Substitution The principle of substitution is the best answer. It is one of the appraisal principles cited in most textbooks and expresses the concept that the price of an economic good, in this case space (e.g., rent), depends on the price of substitute goods.

The cost approach to value is based primarily on which of the following economic principles?

Substitution The principle of substitution is the basis on which the cost approach to value is formed. This principle states that the value of a parcel is set by the cost of acquiring an equally desirable substitute.

The term book value refers to which of the following amounts?

The carrying amount of an asset, as shown on the books of a company; generally the amount paid for an asset, less depreciation

The adjustment process used in the sales comparison approach could BEST be described by which of the following actions?

The comparables are adjusted to make them equal to the subject property. When using the sales comparison approach, the appraiser always adjusts the comparables to the subject property. The subject property is never adjusted to the comparables.

Which of the following statements MOST correctly explains the impact of corner lots?

They may have a higher or lower value than other lots depending on the local market. Corner lots may have a higher or lower value than other lots depending on the use of the lot. For instance, in a residential area a corner lot at the intersection of two busy streets may have a lower value if buyers do not want the extra noise near their homes. A restaurant owner, however, may prefer a corner lot to allow easier access for customers.

What does linkage refer to?

Time-distance cost necessary to access a supporting facility Linkage is defined as the proximity of a parcel of land to a supporting land use and refers to the time and distance necessary to reach the supporting facility.

The comparable sales (market) approach to value is generally considered to be the MOST reliable when:

a ready access to current market data exists. The comparable sales approach to value is based primarily on the proper analysis of current market data. Without access to current market data, the appraiser should not try to employ this approach.

An appraiser's final estimate of value of income property should be based on:

a reconciliation of the three approaches to value. When reconciling the final value estimate, inconsistencies between the different approaches should be examined and resolved. When determining a final value estimate, the appraiser should rely most heavily on the approach that is most applicable, significant, and defensible. A weighted average of the different approaches would be more appropriate than a simple average.

As an appraiser you attempt to render an opinion of value of a particular residential property using the listing price of similar properties included in a multiple listing service. Without any adjustments on your part, the derived value based solely on this information would more than likely be:

above market value. Normally the listing price of property placed in a multiple listing service is somewhat higher than the actual selling price. Use of such information without any investigation or adjustment would certainly be unfounded.

Reconciliation is defined as the process of:

analyzing different conclusions to arrive at a final value. The reconciliation process begins with a review of the appraisal; then this analysis is used to arrive at a final value estimate. The final value estimate is not necessarily an average of the different approaches.

Curable physical deterioration is measured by:

calculating the cost of restoring a component to new or reasonably new condition, i.e., the cost to cure. Curable physical deterioration refers to items of deferred maintenance. Therefore the depreciation equals the cost to restore the item to a new or reasonably new condition.

Multifamily, commercial, and industrial areas are generally referred to as:

districts.

The period of time over which an improvement to land, such as a building, earns more income than the cost incurred in generating that income is known as the property's:

economic life. This is simply the definition of economic life, which may be entirely different from the property's physical life.

The ratio of net rentable area to gross area in a multitenant building is normally referred to as:

efficiency ratio. The efficiency ratio shows the relationship between leasable space and total space. A building with 50,000 square feet of total space but only 35,000 square feet of space that can be rented has an efficiency ratio of 70 percent.

The difference between a particular building's actual layout and the building's ideal layout is referred to as:

functional obsolescence. Functional obsolescence can be the result of numerous occurrences including the layout of the building. For example, a house with a poorly designed floor plan suffers from functional obsolescence.

In the analysis of sales data as part of the sales comparison approach, conditions of sales refers to the:

motives, intention, and knowledge of the parties. In the sales comparison approach, the term conditions of sales refers to the motives, intention, and knowledge of the parties. For example, a "hurried" sale due to a job relocation could result in the property actually selling for less than what it would normally bring. This condition would need to be included in the analysis undertaken by the appraiser if the sales comparison approach is used.

An appraisal report can either be:

oral or in writing. An appraisal report can either be oral or in writing. A narrative report is a type of written report. Other types of written reports include letter and form reports. An oral report is no less detailed than a written report and must be based on the same type of data as a written report.

Excess land is land that is:

not needed to support the existing improvement. Excess land is land not needed to support the existing improvement. Excess land should be identified in highest and best use analysis and valued separately if appropriate. In some situations, the site may be too large for the existing improvement but not considered to contain excess land. This situation occurs when the extra land cannot be used separately.

When a mortgage specifies that future advances can be made using the same property as collateral, the mortgage is referred to as a (n):

open-end mortgage. An open-end mortgage provides for future advances. A blanket mortgage covers more than one parcel of property at the same time.

Data obtained from published sources are referred to as:

secondary data. Secondary data are published by other sources whereas primary data are gathered by the appraiser.

A rental concession is defined as a(n)

service or discount offered by the landlord to induce a would-be tenant to sign a lease. A concession is a service or a discount offered by the landlord to a tenant to induce the tenant into signing a lease. Examples of concessions include reduced or "free" rent for specified time period or improvements made by the owner on behalf of the tenant.

In the sales comparison approach to value, physical units of comparison are often used to adjust for which of the following conditions?

size Of these four choices, size of the comparables is the only factor that could be adjusted using physical units of comparison.

The term plottage refers to:

the incremental value that results when two sites are combined. Plottage refers to the incremental value that results when extra utility is gained by combining two or more sites. If extra utility is not gained by combining sites, there is no plottage value.