Real Estate Prelicensing Unit 7
The theory that a buyer will not pay more for one property than he will for a similar property that serves an equal purpose, is known as the Choose only ONE best answer. A principle of conformity. B principle of contribution. C principle of substitution. D principle of demand.
C)principle of substitution. The law or principle of substitution states that a buyer will select a lower priced similar property of one listed a higher price. The principle of contribution refers to amount a component or improvement adds to the value of a particular property. A property's value will rise or fall based upon demand for the unit and overall supply in the local market of similar properties.
A broker wants to calculate the probable sales price for a potential listing, where there are no comparable properties that have recently sold. The property has a commercial building with 10,000 square feet that was built 15 years ago for $1,250,000. The current cost to build new is $200 per square foot. The property has a remaining useful life of 75 years and an effective age of 8 years. A separate analysis has determined that the land is worth $450,000 and has other upgrades of $45,000. What is the indicated probable sales price using the cost approach, rounded to the nearest thousand? Choose only ONE best answer. A $2,282,000 B $2,237,000 C $2,095,000 D $2,050,000
A)$2,282,000 Cost New: 10,000 SQFT X $200 = $2,000,000Depreciation: $2,000,000 ÷ 75 yr useful X 8 yr effective age = $213,333Property Value: $2,000,000 - $213,333 + $450,000 + $45,000 = $2,281,667 then rounded to $2,282,000
When an appraiser estimates the value of a "special-use" property, such as a church or fire station, which of the following approaches would she apply the most weight in determining the final estimate of value? Choose only ONE best answer. A Cost approach B Market data approach C Income approach D Comparable market analysis
A)Cost approach Since a church or fire station does not sell often or generate income, the cost approach to value would be the best approach. The broker will calculate the cost to build new, estimate depreciation by considering the effective age of the building and the estimated economic life for the building, then add in the value of land or improvements. The market data or sales comparison approach is typically used for residential property and requires the agent or appraiser to locate at least 3 recently sold comparable properties. The income approach is typically used to for commercial property or large apartment complexes. A CMA is the work product of a licensed real estate agent, where the agent is estimating the probable sales price of the subject property.
A broker is calculating which of the following if they divide the sales price by monthly rent? Choose only ONE best answer. A Gross Rent Multiplier B Gross Income Multiplier C Effective Gross Income D Total Anticipated Revenue
A)Gross Rent Multiplier The gross rent multiplier is calculated by taking the sales price and dividing by monthly rent. The gross income multiplier is calculated by taking the sales price and dividing by annual rent. Effective gross income and total anticipated revenue are the same thing, and is calculated by taking the gross income and subtracting vacancy and collection losses.
The subject property has 1,800 square feet, 3 bedrooms, 2 baths, a fireplace and 1 car garage. A comparable property recently sold 4 months ago for $179,000 has 1,950 square feet 3 bedrooms, 2.5 baths, no fireplace and 1 car garage. Similar properties in the area have experienced annual appreciate of 5%. Based on an analysis of recently sold properties, square footage is worth $90 per square foot, a full bath $4,000. half bath $1,800, fireplace $7,500 and 1 car garage $9,000. What is the indicated probable sales price for the property? Choose only ONE best answer. A $167,800 B $174,183 C $187,817 D $190,800
B) $174,183 Subject Comparable $179,0001800 SQFT 1,950 SQFT - 13,5003BR 3BR no adj2BA 2.5BA - 1,800FP No FP + 7,500Car Gar 1 Car Gar no adj Appreciation + 2,983 ($179,000 X 5% ÷ 12 X 4 months) $174,183
When an asset has a useful life of 20 years, the rate of depreciation taken each year under the straight-line method is Choose only ONE best answer. A 1/2% B 5% C 20% D 50%
B) 5% A property with a useful live of 20 years will depreciate at 5% per year. This is calculated as follows: 100% ÷ 20 year = 5%. Most problems will provide the useful life, also known as the economic life and the effective age.
Which of the following conditions would disqualify a sale as a fair market value transaction? Choose only ONE best answer. A A seller gave the buyer a second mortgage equal to 20% of the purchase price. B A seller is in a desperate hurry to sell before the bank initiates foreclosure action. C A seller that may recognize a loss on the sale of the property once it closes. D A seller that elected to sell the property following divorce proceedings.
B)A seller is in a desperate hurry to sell before the bank initiates foreclosure action. A seller that is desperate would not be typically motivated an therefore would not be a good comp. The fact that a seller provided some or all of the financing would not necessarily discount the property as a comp so long as it was an open market, under typical market conditions. The fact that a seller may recognize a loss on the sale does not impact the fair market value of the property nor does a seller that has been through a divorce.
A simplified version for estimating the value of income producing properties is with the gross rent multiplier or gross income multiplier. Which of the following statements is TRUE when an appraiser applies this approach? Choose only ONE best answer. A The gross income multiplier is calculated by weighting the annual rents of several comparable properties to calculate a multiplier and then multiplying by the monthly rent of the subject property. B The gross rent multiplier is used to determine the market value of a property by multiplying the subject property's monthly rent by weighting the gross rent multiplier of several comparable properties. C The gross income multiplier is calculated by dividing the sales price by the monthly rent for multiple comparable properties and then weighting the indicated rate. D The gross rent multiplier is calculated by dividing the sales price by annual rent for multiple comparable properties and then weighting the indicated rate.
B)The gross rent multiplier is used to determine the market value of a property by multiplying the subject property's monthly rent by weighting the gross rent multiplier of several comparable properties. The gross income multiplier is calculated by dividing the sales price by the annual gross rent. The gross income multiplier is calculated by dividing the sales price by the monthly gross rent. It is generally used for evaluation purposes than an approach to appraise a property
Which of the following correct regarding the appraisal of a single family residence? Choose only ONE best answer. A The income approach is the most appropriate appraisal method. B The loss in value resulting from function obsolescence is considered. C The appraiser will establish the effective age and economic life to apply the best approach. D The cost approach is the most appropriate appraisal method.
B)The loss in value resulting from function obsolescence is considered. The appraiser will MAY use all 3 approaches to value a property, however will give greatest weight to the sales comparison approach when valuing single family residential property. The condition of the property will impact the valuation, including any design flaws or deferred maintenance. The income approach to value is commonly used for commercial property and large apartment complexes where the amount of rent charged and the net operating income will provide a more reliable estimate of market value. The cost approach is used when a property does not have recent comparable sales or the income generated is not indicative of the estimated value of the building.
Economic obsolescence usually results in a loss of value and may be caused by Choose only ONE best answer. A deferred maintenance. B factors outside the property. C outmoded fixtures, such as a coal furnace or antiquated equipment. D poor design.
B)factors outside the property. Economic obsolescence refers to factors outside of the property that is impacting value. A loss in value due to poor design or outdated floor plan is known as function obsolescence. Dry rot may be a curable or incurable defect to the property and is known as deferred maintenance.
The amount that a property actually sells for is its Choose only ONE best answer. A market value. B market price. C assessed value. D probable sales price.
B)market price. The market price is the actual sales price for the property which is also know as BASIS. The market value is an estimate on a given date determined by an appraiser. The assessed value is determined by the taxing authority in a revaluation year, which in North Carolina can occur every year, but must occur every 8 years. The probable sales price is calculated by a licensed broker, whether provisional or non-provisional, that uses similar approaches to an appraiser, but does not qualify as an appraisal. A full broker (not on provisional status) is permitted to charge a fee for preparing a CMA / BPO.
The most probable price that a property will bring in the open market, assuming typical financing, knowledgeable buyers and sellers, and adequate exposure, which is calculated by an appraiser, is known as: Choose only ONE best answer. A transaction price. B market value. C probable sales price. D market price.
B)market value. A licensed appraiser calculates the estimate of market value. The transaction price, once closed will establish the market price or BASIS - the amount the property actually sold for. The book value is not used as this typically relates to tax value after accounting for depreciation for income producing property.
Suppose that a comparable house has four bedrooms and a subject house has three. An adjustment should be made for this difference by Choose only ONE best answer. A subtracting the value of the bedroom from the subject property's value. B subtracting the value of the bedroom from the comparable's sale price. C adding the value of the bedroom to the subject property's value. D adding the value of the bedroom to the comparable's sale price.
B)subtracting the value of the bedroom from the comparable's sale price. Comp superior subtract - since the comp has more bedrooms, we need to reduce the sales price of the comp. In the event the comp is inferior, we need to increase or add the estimated amount for the particular item. An appraiser or real estate broker would never make an adjustment to the subject property. Adjustments are made to comparable properties, where the goal is to take the known sales price for the comp and make adjustments based on difference between the subject and comp property. An appraiser use this method to provide an estimate of the market value and a broker the probable sales price.
In estimating the market value of a residence by the market date approach, the appraiser verified the $140,000 sale price of a comparable residence and estimated that prices for similar residences had increased by 2% since the date of sale of the comparable. After comparing features of the comparable and subject residences, she made adjustments for four factors as follows: (1) location: subject better by $2,000; (2) site features: subject better by $1,000; (3) size of house: comparable better by $3,200; (4) condition: comparable better by $1,600. The indicated value of the subject residence was accordingly Choose only ONE best answer. A $135,400 B $139,000 C $141,000 D $144,600
C) $141,000 $140,000 Sales Price + 2,800 Appreciation ($140,000 X 2%) + 2,000 Location (Subject superior = comp inferior = increase) + 1,000 Site Features (Subject superior = comp inferior = increase) 3,200 Size of House ( Comp superior = subtract) 1,600 Condition (Comp superior = subtract) $141,000
A comparable house is 75 square feet larger than the subject property. At $100 per square foot, which of the following adjustments should be made? Choose only ONE best answer. A Add $7,500 to the subject property's estimated value B Subtract $7,500 from the subject property's estimated value C Subtract $7,500 from the comparable's sale price D Add $7,500 to the comparable's sale price
C) Subtract $7,500 from the comparable's sale price Comp Superior = Subtract. You only adjust the comparable property - so that eliminates 2 answer choices. Read carefully. Adjustment: 75 X $100 = $7,500
In valuing a large apartment complex, an appraiser would place the most emphasis on which of the following appraisal methods? Choose only ONE best answer. A Market approach B Cost approach C Income approach D Market, cost and income approaches equally
C)Income approach The income approach is used for property that generate rent or income such as office building or large apartment complex. The best indication of value for a single family dwelling is the sales comparison approach or market approach. The cost approach to value is used for property that is not sold often such as a church, school or post office. The appraiser may use one or all of the valuation approaches and will weight the indicated value to the most reliable approach.
The basic formula used in the direct capitalization method to appraisal is Choose only ONE best answer. A annual Income X rate = value. B Rate ÷ income = value C Income ÷ rate = value D Rent X rate = value
C)Income ÷ rate = value The income capitalization approach may also be called the direct capitalization approach. In order to calculate the value of a property using the income capitalization approach, you divide net operating income by the capitalization rate. Another income approach to value is the gross income multiplier or gross rent multiplier - Annual Income X Gross Income Multiplier = Value or Monthly Rent X Gross Rent Multiplier = value. Rate divided by income is not used to determine value.
An appraiser is performing an appraisal of a single-family residence and decides to deduct a certain amount of value due to functional obsolescence. Which of the following is the best example of functional obsolescence? Choose only ONE best answer. A Dry rot B Unsafe neighborhood C One bathroom D Zoning
C)One bathroom A loss in value due to poor design or outdated floor plan is known as function obsolescence. Dry rot may be a curable or incurable defect to the property and is known as deferred maintenance. A poor neighborhood and zoning would be considered economic obsolescence - or a factor outside of the property that is impacting value.
Reconciliation is an appraisal term that is used to describe: Choose only ONE best answer. A an appraiser's estimate of a property's highest values. B an average of real estate values for properties similar to the one being appraised. C an appraiser's analysis and comparison of the results obtained by the various approaches to value. D the method used to estimate a property's most appropriate capitalization rate.
C)an appraiser's analysis and comparison of the results obtained by the various approaches to value. The process of comparing some or all of the 3 methods of appraising a property, weighting the values and calculating the estimate of market value is known as reconciliation. The appraiser decides which approaches to use. The sale comparison approach will be given greater weight with residential sales. The income approach will be given greater weight for large apartment complexes or commercial buildings. The cost approach is used when the property is unique where no comparable sales can be found or the income approach would not be appropriate.
The sales comparison approach to value relies on all of the following, EXCEPT: Choose only ONE best answer. A a property be exposed on the open market for a reasonable length of time. B the seller has the ability to convey marketable title. C an estimate of depreciation can be determined to adjust the cost to build new. D the sold comparable was not a distressed sale or foreclosure.
C)an estimate of depreciation can be determined to adjust the cost to build new. The sales comparison approach is typically used for residential properties. The estimate of fair market value is dependent upon recently sold comparable properties whose sale was on the open market with a typically motivated buyer and seller. Distressed sales, for sale by owner, foreclosure properties would not make the best comps unless it is indicative of a majority of sales in that subdivision or area. The approach to value that requires the calculation of the cost to build new and the estimated deprecation is the cost approach which is used for properties that do not sell often or whose income does not indicate the value of the building.
The economic principle that states the maximum value of an improved property is realized when other properties in the immediate area have compatible uses and harmonious architecture, is known as the principle of Choose only ONE best answer. A supply and demand. B highest and best use. C conformity. D substitution.
C)conformity. Properties that are most similar to other properties in the area will achieve a higher value per square foot is known as conformity. A small home in a larger home community will have a greater value per square foot than comparable size properties. A big home in a smaller home community will have a lower value per square foot. Supply and demand impacts the market dependent upon the number of listings available and number of buyers seeking those properties. Highest and best use can change over time depending on market conditions and changes to the area surrounding the property. Substitution is the basis for the sales comparison approach and states that the property with the lower listing price will get more activity and sell faster than a similar property listed at a higher price.
When an appraiser appraises a parcel of real property using the cost approach, she must consider all of the following, EXCEPT: Choose only ONE best answer. A depreciated value of the improvements on the land. B market value of the land as if it were vacant. C sales price of comparable property and the gross monthly rent. D useful life of the subject property.
C)sales price of comparable property and the gross monthly rent. When using the cost approach to value, an appraiser or broker will calculate the expense to build the improvements at today's cost, subtract out actual depreciation (not book or tax), then add in the value of the land and improvements. The appraiser or broker typically estimates the effective age of the improvements and the useful/economic life. The gross rent multiplier is calculated by taking the sales price and dividing by the gross monthly rent.
An appraiser is calculating the estimated market value for a property that recently went under contract. Based on the following, what is the indicated value of the residential property? Subject Comp. 1 Comp. 2 Comp. 3 SP - $175,000 SP- $175,000 SP - $160,000 SP - $170,000 1,800 SQFT 1,750 SQFT 1,600 SQFT 1,750 SQFT 3 Bedroom 3 Bedroom 3 Bedroom 3 Bedroom 1 Car Garage 1 Car Garage 1 Car Garage 1 Car Garage Deck Deck Deck No Deck Choose only ONE best answer. A $160,000 B $168,333 C $175,000 D $180,000
D) $180,000 When adjustments are not provided in the problem, you must calculate what 2 items are worth by comparing the comps and isolating the difference. Comparable 1 and 3 are very similar except for the fact Comp 1 has a deck, while Comp 3 does not. Since Comp 1 sold for $5,000 higher than Comp 3, we can infer that a deck is worth $5,000. Comp1 and Comp 2 are very similar except for square footage. Comp 1 has 150 more square feet and sold for $15,000 more. Therefore, divide $15,000 by the square footage difference 150 to calculate the value of square footage = $100 / square foot. Now make the adjustments. Subject Comp. 1 Comp. 2 Comp. 3SP - $175,000 SP- $175,000 SP - $160,000 SP - $170,000Square footage + add $5,000 + add $20,000 + add $5,000Deck No Adj No Adj + add $5,000 $180,000 $180,000 $180,000
When the gross rent multiplier decreases in a particular area, the subject property's rental value will tend to Choose only ONE best answer. A remain stable. B remain stable, followed by a short term increase. C rise. D fall.
D) fall. The gross rent multiplier is calculated by taking the sales price and dividing by monthly rent. When the multiplier decreases the value of the property decreases. Try it with some math - GRM 100 vs GRM 80 for when a property rents for $1,000 per month:$1,000 X 100 = $100,000$1,000 X 80 = $80,000
When vacancy and collection losses are subtracted from gross income, a broker calculates: Choose only ONE best answer. A net operating income. B cash flow. C gross income multiplier. D total anticipated revenue.
D) total anticipated revenue. Effective gross income / total anticipated revenue is calculated when you subtract vacancy and collection losses from gross income. Net operating income is calculated when operating expenses are subtracted from effective gross income. Cash flow refers to an analysis of money being received versus money being paid. Investors prefer positive cash flow. The gross income multiplier is calculated by taking the sales price and dividing by annual gross rent.
The subject property has 1,500 square feet, 3 bedrooms, 2 baths, a fireplace and 1 car garage. A broker found 3 comparable properties that recently sold for $160,000, $155,000 and $170,000 respectively. Comparable 1 sold 3 months ago, has 1,550 square feet, 3 bedrooms, 1.5 baths, a fireplace and no garage. Comparable 2 sold 3 months ago, has 1,425 square feet, 3 bedrooms, 2 baths, no fireplace and 1 car garage. Comparable 3 sold 4 months ago, has 1,550 square feet, 3 bedrooms, 2.5 baths, a fireplace, and 1 car garage. An analysis of recently sold comps has determined square footage to be worth $50 per square foot, full bath $2,500, half bath $1,500, fireplace $3,000 and 1 car garage of $7,000. Appreciation for the year is estimated at 6%. Based on the information provided, what is the probable sales price range? Choose only ONE best answ
D)$164,075 - $169,400 The correct answer is 'D' Subject Comp 1 $160,000 Comp 2 $155,000 Comp 3 $170,0001,500 SQFT 1,550 SQFT 1,425 SQFT 1,550 SQFT3 BR 3 BR 3 BR 3 BR2 BA 1.5 BA 2 BA 2.5 BAFP FP No FP FP1 Car Gar No Gar 1 Car Gar 1 Car GarComp 1 Appreciation: $160,000 X 6% ÷ 12 X 3 = $2,500Comp 2 Appreciation: $155,000 X 6% ÷ 12 X 3 = $2,325Comp 3 Appreciation: $170,000 X 6% ÷ 12 X 4 = $3,400Comp 1: $160,000 - 2,500 SQFT + 2,500 BA - 1,500 HBA + 7,000 Gar + 2,400 Appr. = $167,900Comp 2: $155,000 + 3,750 SQFT + 3,000 FP + 2,325 Appr. = $164,075Comp 3: $170,000 - 2,500 SQFT - 1,500 HBA + 3,400 Appr. = $169,400 $164,075 - $169,400
Assume that a subject property has an annual effective gross income of $680,000 with a vacancy and collection loss of 4%, annual operating expenses of $155,000, and a market derived capitalization rate of 10 percent. What is the indicated value of the subject property? Choose only ONE best answer. A $497,800 B $525,000 C $4,978,000 D $5,250,000
D)$5,250,000 Note: Effective Gross Income is calculated by taking the gross income and subtracting the vacancy and collection loss. It is the most used distractor in problems like this. NOI = Effective Gross Income - Operating Expenses NOI = $680,000 - $155,000 = $525,000 Value = NOI ÷ Cap Rate Value = $525,000 ÷ 10% = $5,250,000
The subject property is a two-story home with four bedrooms, three baths, a family room, a dining room and an attached two-car garage. Which of the following would be the best comparable sale? Choose only ONE best answer. A 2-story home with four bedrooms, 1 ½ baths in the same neighborhood that sold 18 months ago. B 1-story home in the same neighborhood with four bedrooms, 2 baths, a detached garage and no family room. C 1-story home listed in the same neighborhood with 4 bedrooms, 2 ½ baths and two-car garage. D 2-story home with four bedrooms, 2 ½ baths, dining room, no family room, in a similar neighborhood that sold 3 months ago.
D)2-story home with four bedrooms, 2 ½ baths, dining room, no family room, in a similar neighborhood that sold 3 months ago. In order for a property to qualify as a comp it must be similar to the subject property and recently sold within the past 12 months. A broker would not compare a one story home to a two story home, nor would they select a property that sold beyond 12 months ago. It is better to select a comparable in a similar neighborhood than a different type of property in the same neighborhood.
When using the sales comparison approach to obtain an indicated value for a subject property, an appraiser should start with the verified sale price of the comparable and make appropriate adjustments for substantial differences between the comparable and subject properties. Which of the following is INCORRECT? Choose only ONE best answer. A If a subject is superior to a comparable, an adjustment should be made by adding an appropriate amount to the comparable. B If a subject is inferior to a comparable, and adjustment should be made by subtracting an appropriate amount from the comparable. C If the number of adjustments is too great, the comparable should be rejected as inadequate. D If less than 3 closed comparables are available, use of an "Under Contract" property is acceptable.
D)If less than 3 closed comparables are available, use of an "Under Contract" property is acceptable. In order for a property to qualify as a comparable property it must be sold. A broker or appraiser would not know the sales price of a property that is "under contract" until that property has closed. When listing a property for sale a prudent broker, after completing a CMA, will evaluate the active competition and review comparable property that has gone under contract to aid in the selection of a list price.
When using three comparables, an appraiser will arrive at three indicated values for a subject property. In order to reconcile the three indicated values into one estimate of market value, the appraiser should reconcile the three indications by which of the following? Choose only ONE best answer. A Add the three values and divide by three to obtain an average price B Average the highest and lowest indicated values C Use the middle indicated value as the appraised value D Use one of a number of accepted systems for weighting each of the three indicated values
D)Use one of a number of accepted systems for weighting each of the three indicated values An appraiser may weigh the values indicated from one or all of the methods: sales comparison, income and cost approach to value, giving greater weight to the approach that provides the best indication of value. The sales comparison approach is considered the best approach for single family residential property, income approach for commercial property (office building, apartment complex, etc.) and cost approach for property that does not sell very often.
When the gross rent multiplier decreases in a particular area, the subject property's rental value will tend to Choose only ONE best answer. A remain stable. B remain stable, followed by a short term increase. C rise. D fall.
D)fall. The gross rent multiplier is calculated by taking the sales price and dividing by monthly rent. When the multiplier decreases the value of the property decreases. Try it with some math - GRM 100 vs GRM 80 for when a property rents for $1,000 per month:$1,000 X 100 = $100,000$1,000 X 80 = $80,000