Real Estate Exam (Appraisal)
An appraisal is: o o o o ""legal value."" a ""scientifically determined value."" an ""opinion of value."" the ""market value.""
The answer is an ""opinion of value."" An appraiser ""estimates"" (gives an informed opinion of) market value. Since market price is what buyers are willing to pay and sellers are willing to accept, an appraiser cannot ""determine"" market price but can give an opinion of market value.
Demand is one of the elements that help determine value. In order for demand to be effective, it must be implemented by: o o o o amenities. location. highest and best use. purchasing power.
The answer is purchasing power. Unless those who want an item can afford to purchase it, their demand will not have any effect on the value of the item.
Reconciliation is best defined as: o o o o the method used to determine a property's most appropriate capitalization rate. the appraiser's weighing of each property and approach to value. the appraiser's determination of a property's highest and best use. an average of the value from each approach to value.
The answer is the appraiser's weighing of each property and approach to value. Reconciliation (correlation) is the final step in the appraisal process, in which the appraiser weighs each approach to value and determines which is most relevant for the type of property being appraised. Averaging is never used in reconciliation.
The fact that the ability to buy and sell land affects its value is the basis for the essential element of value known as: o o o o utility. demand. transferability. scarcity.
The answer is transferability. The essential elements of value are demand, utility, scarcity, and transferability, or DUST.
The fact that land has a number of important uses is the basis for the essential element of value known as: o o o o demand. scarcity. transferability. utility.
The answer is utility. The essential elements of value are demand, utility, scarcity, and transferability, or DUST.
""Physical deterioration"" most closely means: o o o o reversion. wear and tear. obsolescence. recapture.
The answer is wear and tear. Physical deterioration is created when routine maintenance is not done or through normal wear and tear. Typically, it is curable by correcting the problem, e.g., new paint.
There are three main causes of depreciation. Which one of these finds its origin in social sources and is the basis for the old axiom: ""more houses are torn down than fall down""? o o o o Functional obsolescence Straight-line depreciation Physical deterioration Economic obsolescence
The answer is Economic obsolescence. Depreciation may occur from physical deterioration, functional obsolescence, or economic obsolescence. Economic obsolescence, being incurable, would cause buildings to be torn down before they fall down.
The income approach would be used for appraisals of: o o o o heavily insured properties. newly opened subdivisions. heavily mortgaged properties. commercial and investment properties rented to tenants.
The answer is commercial and investment properties rented to tenants. The income approach is based on finding the present worth of the future rights to income derived from the property. The income approach is used for income-producing (rental) properties, such as apartment buildings, office space, warehouse space, shopping centers and retail store space, etc.
To realize the maximum value of property, a reasonable degree of sociological and economic homogeneity is necessary, but it should not become monotonously uniform. In real estate, this concept is called the principle of: o o o o ""conformity."" ""progression."" ""contribution."" ""correlation.""
The answer is conformity. The ""principle of conformity"" states that maximum value is realized if the use of land conforms to existing neighborhood standards (e.g., design, construction, size, and age of buildings, as well as the social and economic status of residents). However, these factors should not be so uniform as to become monotonous.
An appraiser was hired to prepare a feasibility study for adding a swimming pool to a 24-unit apartment building. What basic principle of appraising would be used? o o o o Competition Contribution Regression Substitution
The answer is contribution. The principle of contribution values a component part of a property in proportion to its contribution to the value of the whole. Maximum values result when improvements produce the greatest net return.
A post office of unique design and construction is best appraised by which of the following approaches? o o o o Gross rent multiplier approach Cost approach Sales comparison approach Income approach
The answer is cost approach. Special-purpose and public service buildings (e.g., schools, churches, and post offices) and buildings of unique design and construction would be best appraised using the cost approach, since there would be very few comparable sales for market data analysis, and there is usually no income produced by such properties.
To appraise a special-use building, an appraiser would most likely use the: o o o o market data approach. capitalization approach. comparison approach. cost approach.
The answer is cost approach. Special-purpose and public service buildings (e.g., schools, churches, and post offices) and buildings of unique design and construction would be best appraised using the cost approach, since there would be very few comparable sales for market data analysis, and there is usually no income produced by such properties.
Replacement cost is best described as the: o o o o cost of purchasing an equally desirable property, constructed of the same or similar materials. cost of building an exact replica of the subject. cost of building a property of equivalent utility with the same or similar materials. original cost adjusted for inflation.
The answer is cost of building a property of equivalent utility with the same or similar materials. Replacement cost is the cost of a new building with the same functional utility. Reproduction cost is the cost of an exact replica of the existing structure.
The period over which a property may be profitably utilized is know as: o o o o profit. income. economic life. amortized life.
The answer is economic life. The ""economic life"" is the estimated period over which an improved property may be profitably utilized so that it will produce a yield over and above the economic rent attributable to the land. At the end of the economic life, the building is usually torn down or rehabilitated. The economic life can never be greater than the physical life, but is usually less, as physical life refers to how long the structure can stand, and economic life refers to how long it is profitable to keep it standing.
Using the income approach to valuation, which of the following is NOT a proper deduction from effective gross income to determine net income? o o o o Maintenance expenses Reserves for replacement Interest payments on loans Management costs
The answer is interest payments on loans. Scheduled gross income - vacancy and bad debt = effective gross income - operating expenses (property taxes, maintenance, management, reserves for replacement) = net income. Interest payments on a loan, and income tax, are not items charged against the property. They are personal expenses of the owner and will vary from one investor to another. Therefore, they are not calculated when determining property expenses. Reserve for replacements refers to money needed to be set aside each year to provide for eventual replacement of short-life items, such as carpeting and appliances.
Two appraisers were asked to appraise an apartment property. Both arrived at the same net income, but the first appraiser used a capitalization rate of 6%, while the second appraiser used a capitalization rate of 8%. In this case, the property with the higher cap rate will have a: o o o o higher projected income. lower income. lower value. higher value.
The answer is lower value. The more an investor wants in return on a property, the less he or she can pay to buy it. Therefore, the higher the cap rate, the lower the value. If the property has NOI of $9,600, a 6% rate gives a value of $160,000, while an 8% rate gives a value of $120,000.
The actual amount that a parcel of property sells for is the: o o o o market value. fair market value. assessed value. market price.
The answer is market price. Market price is the actual price paid; market value is the listing price. Assessed value is used by the tax assessor
The listing price of the property is known as: o o o o market value. assessed value. actual price. market price.
The answer is market value. Market price is the actual price paid. Assessed value is used by the tax assessor
What formula would be used to estimate the value of a property using the income approach to appraising? o o o o Net income multiplied by the capitalization rate The value of the land and improvements minus the depreciation Capitalization rate multiplied by gross income Net operating income divided by the capitalization rate
The answer is net operating income divided by the capitalization rate. The formula used in the income approach is; net income ÷ capitalization rate = value. For example, if income is $15,000 and the capitalization rate is 10%, the value is $150,000 (15,000 ÷ 10%) .
Two comparables are identical tract-type homes in the same subdivision, built in the same year, and both sold on resale within 30 days of one another. The lots are of identical value. Comparable #1 was equipped with standard builder's model range and refrigerator, while Comparable #2 had deluxe appliances that cost $1,000 extra when the homes were new. The home with the deluxe appliances was sold for $500 more than the other. The subject property has the standard builder's model appliances. Which of the following is TRUE? o o o o None of the above. No adjustment would be made to Comparable #1 nor would a $500 adjustment be made to Comparable #2. No adjustment would be made to Comparable #1. A $500 adjustment would be made to Comparable #2. No adjustment would be made to Comparable #1, and a $500 adjustment would be made to Comparable #2.
The answer is no adjustment would be made to Comparable #1, and a $500 adjustment would be made to Comparable #2. Adjustments are made only when the comparable differs from the subject property. Therefore, no adjustment is made to Comparable #1. Since Comparable #2 has deluxe appliances, which the subject property does not, a $500 deduction would be made from Comparable #2's sales price. Note: the cost of the item is not a factor; the value the item adds to the property is the factor to consider.
An appraiser seeking to find market value would be concerned with all of the following EXCEPT: o o o o current market sales. reproduction cost. original cost of the property. income value.
The answer is original cost of the property. The original cost of the property is not used in any approach to value. In an appraisal, the appraiser uses market sales, reproduction cost, and income value to determine market value.
A real estate professional is doing a CMA for a residential home. She would use all of the following data to determine value EXCEPT: o o o o location of the property. original cost. financing terms. date of the sale.
The answer is original cost. In the sale comparison approach, properties are compared based on their features, location, conditions of sale (e.g., financing terms) and time of sale. Neither the cost of construction nor the original cost is relevant to determining value.
Which principle of value describes the value produced by adding an improvement or upgrades to a property? o o o o Principle of substitution Principle of contribution Principle of anticipation Highest and best use
The answer is principle of contribution. The principle of contribution determines if an improvement or upgrade adds value to the property. This is determined by what the market will pay for the improvement or upgrade, not the cost of the improvement or upgrade.
The value of the best property in the neighborhood will be adversely affected by the presence of comparatively substandard property in the same neighborhood. This is known as the principle of: o o o o balance. progression. regression. contribution.
The answer is regression. The ""principle of regression"" states that the value of better-quality property is adversely affected by the presence of lesser-quality property. The ""principle of progression"" is the opposite (the value of lesser-quality property is increased by being located among better-quality property).
A buyer is considering buying a lot to build a single-family residence. She hires an appraiser to appraise the lot. Which approach to value would the appraiser choose to complete the task? o o o o Land residual approach Income approach Sales comparison Reproduction cost
The answer is sales comparison. The most used approach to value vacant land is the sales comparison. The reproduction cost approach is used for buildings, not land. The income approach is used when the use of the property is one that will produce rents. The land residual approach is used to find the value of land when the improvements on the land are used to produce income.
An appraiser needing to find the value of a single family home would use which approach to value? o o o o Cost Capitalization Sales comparison Income
The answer is sales comparison. The sales comparison approach is based on comparing sales prices paid for similar properties. This approach requires the gathering, recording, and comparing of sales data for comparable properties.
The fact that the amount of land available affects its value is the basis for the element of value known as: o o o o scarcity. utility. demand. transferability.
The answer is scarcity. The essential elements of value are demand, utility, scarcity, and transferability, or DUST.
Compared to physical life, economic life is usually: o o o o the same. shorter. shorter or longer, depending on the type of improvement. longer.
The answer is shorter. The ""economic life"" is the estimated period over which an improved property may be profitably utilized so that it will produce a yield over and above the economic rent attributable to the land. At the end of the economic life, the building is usually torn down or rehabilitated. The economic life can never be greater than the physical life, but is usually less, as physical life refers to how long the structure can stand, and economic life refers to how long it is profitable to keep it standing.
The sales comparison approach to value would be best used for which of the following: o o o o school. industrial property. single-family dwellings. apartment property.
The answer is single-family dwellings. The sales comparison approach is used when current sales of comparable properties can be found, which is most typical for residential property. An apartment building and industrial property would be valued using the income approach, and the cost approach would be used to value a school.
Certain economic principles are of considerable importance in the valuation of real estate. The principle that ""no buyer will pay more for a product than the price he can pay for a reasonable duplicate"" is known as the principle of: o o o o balance. competition. substitution. conformity.
The answer is substitution. The principle of substitution states no buyer will pay more for something if there is a suitable alternate of equal or lesser price. All valuation approaches are based on the principle of substitution. In the market data approach, the principle states that the maximum value is set by the cost of purchasing an equally desirable and valuable substitute property. In the cost approach, it states that the maximum value is set by the cost of acquiring an equally desirable site and constructing improvements on the site. In the income approach, it states that the maximum value tends to be set based on the rates of return of comparable properties. Therefore, any comparison is actually based on the principle of substitution.
