Ch 19: Real Estate Appraisal

Question 1

A political factor influencing value WOULD be:

a. Inflation
b. Location
c. Rent control
d. Change in family values

Answer 1

c. Rent control

The only answer choice that is political in nature is rent control. Rent control is not allowed in Arizona, but if it was it would be a political action and it would most likely adversely affect values

Question 2

Depreciation is divided into three types; physical deterioration, functional obsolescence and:

a. Substitution obsolescence
b. Neo-obsolescence
c. Curable obsolescence
d. Economic obsolescence

Answer 2

d. Economic obsolescence

Depreciation is divided into three parts: Physical Deterioration, Functional Obsolescence and Economic Obsolescence.

Question 3

Depreciation is MOST important to an appraiser using the:

a. Cost approach
b. Income approach
c. Development method
d. Market comparison approach

Answer 3

a. Cost approach

When an appraiser determines a value using the cost approach the amount of the depreciation must be estimated and deducted from the reproduction cost. An estimate of the dollar amount of depreciation does not need to be computed for the market comparison approach or the income approach and there is not a development approach to value.

Question 4

Functional obsolescence consists of:

a. Depreciation over a period of time
b. Decline in value due to normal use
c. Loss of value due to defective or outdated building design
d. Relocation of a highway

Answer 4

c. Loss of value due to defective or outdated building design

Functional Obsolescence is a decline in value due to outmoded equipment or outdated architecture or floor plan.

Question 5

Value is BEST described as:

a. Assessed valuation
b. The price paid by the owner
c. The present worth of future benefits
d. The price offered by a prospective buyer

Answer 5

c. The present worth of future benefits

Value is defined as the exchange of present worth for the future benefits to the owner of the property.

Question 6

The existence of a water filtration plant in a residential area, may subject homes in the area to:

a. Accelerated depreciation
b. Physical depreciation
c. Economic obsolescence
d. Functional obsolescence

Answer 6

c. Economic obsolescence

Economic Obsolescence is caused by an influence outside the subject property over which the property owner has not control.

Question 7

An element that does NOT create value is:

a. Transferability
b. Utility
c. Demand
d. Cost

Answer 7

d. Cost

Cost does not determine value. The characteristics of value are Demand, Utility, Scarcity and Transferability. The acronym D-U-S-T helps to remember the characteristics of value.

Question 8

In appraising a building, the appraiser would consider all of the following, EXCEPT:

a. Vacancy factor
b. Tax assessment
c. Replacement cost
d. Location

Answer 8

b. Tax assessment

The assessment for property taxes seldom if ever has any indication of current value.

Question 9

An appraiser would NOT define excess land as land:

a. That produces excess income
b. Not utilized by the improvements
c. In excess of that used for comparable properties
d. That does not add to the total property value

Answer 9

a. That produces excess income

In valuation Excess land is extra land or land that does not contribute to the usefulness of the project. Land that produces excess income is not excess land.

Question 10

The last lot in a subdivision sold for three times the price paid for the first lot. This is MOST likely to be an example of:

a. Progression
b. Conformity
c. Supply and demand
d. Regression

Answer 10

c. Supply and demand

The last lot in the subdivision means there is little supply and if it sold for three times the price of the first lost there was significant demand.

Question 11

The advisability of including a tennis court with a planned apartment building MAY be determined by the principle of:

a. Contribution
b. Change
c. Substitution
d. Progression

Answer 11

a. Contribution

Contribution means there is an increased return on the investment for a particular improvement to a property such as a tennis court.

Question 12

The gradual decay or decline in value of a property from natural causes is called:

a. Percolation
b. Depreciation
c. Alienation
d. Reliction

Answer 12

b. Depreciation

Depreciation is the decrease in value. The type of depreciation that results from the gradual decay or from the normal wear and tear on the property is known as Physical Deterioration.

Question 13

All of the following are CORRECT regarding a Comparative Market Analysis (CMA), EXCEPT:

a. A CMA is considered an appraisal
b. a CMA is prepared by a Real Estate Licensee
c. Agents make adjustments for the differences between the subject property andthe porperties sold and listed
d. Recent sales and listing prices on comparable properties are considered

Answer 13

a. A CMA is considered an appraisal

A comparative market analysis is NOT an appraisal.

Question 14

All of the following are CORRECT regarding a Broker Price Opinion (BPO), EXCEPT:

a. The Arizona Revised Statutes that require the licensing of an appraiser is applicable to BPO’s
b. A licensed real estate professional can be paid a fee for a BPO report.
c. The letter report is based on six comparable properties
d. BPO’s are generally initiated by financial institutions

Answer 14

a. The Arizona Revised Statutes that require the licensing of an appraiser is applicable to BPO’s

The Arizona revised Statutes that require the licensing of an appraiser is not applicable to licensed real estate brokers who are issuing a Broker Price Opinion.

Question 15

In preparing an estimate of value for a twenty-five unit apartment building, an appraiser will MOST likely use the:

a. Market data approach
b. Cost approach
c. FNMA guidelines.
d. Income approach

Answer 15

d. Income approach

For income type properties the appraiser generally places the most reliance on the income approach to value. The cost approach and the market data approach to value would be completed; however, the income approach is the most relevant.

Question 16

An appraisal is valid for:

a. 6 months
b. 3 months
c. 1 month
d. The day the appraisal is completed

Answer 16

d. The day the appraisal is completed

Lenders generally will accept an appraisal for up to six months, but it is only valid for the day it is made.

Question 17

The approach that considers amenity values is the:

a. Cost approach
b. Gross rent multiplier approach
c. Market comparison approach
d. Income approach

Answer 17

c. Market comparison approach

The formula for the Market Data approach to value is Sales Comparison adjusted dup or down for the difference between the sales comparison property and the subject property. The differences in the property can often be referred to as amenities.

Question 18

To estimate effective gross income, one would deduct which of the following from the calculation of gross income potential for the property?

a. Property taxes
b. Income taxes on the net profit
c. A vacancy and collection loss factor
d. Payments of loan principal

Answer 18

c. A vacancy and collection loss factor

Effective gross income is defined as the total potential income less a vacancy and collection loss factor.

Question 19

The appraisal of real estate is based upon three approaches; market data, replacement cost, and:

a. Substitution
b. Capitalization
c. Highest and best use
d. Income

Answer 19

d. Income

The three approaches to value are the Market Data Approach, the Cost Approach (Replacement or Reproduction) and the Income Approach.

Question 20

An appraiser would NOT determine cost of replacement by using:

a. Quantity survey
b. Observed condition method
c. Construction cost index
d. Unit in place

Answer 20

b. Observed condition method

The observed condition of the subject property would aid the appraiser in determining the amount of physical depreciation that must be deducted from the replacement cost. The other answer choices are methods of determining Replacement Cost.

Question 21

The purpose of the income approach is to:

a. Determine the capitalization rate
b. Determine net income
c. Convert operating income to market value
d. Establish the book value

Answer 21

c. Convert operating income to market value

When a valuation of a property is made using the Income Approach to Value the calculation is a conversion of the projected operating income to an indicated market value using a capitalization rate.

Question 22

An appraiser making an appraisal for a lender WOULD be more interested in:

a. The sales price and terms of the sale
b. The amount of the loan
c. Neighborhood forces outside the property itself
d. The date and amount of a previous appraisal on the property

Answer 22

c. Neighborhood forces outside the property itself

The neighborhood forces outside the property can either affect the valuation positively or negatively. Negative forces outside the property itself are known as Economic Obsolescence and are generally considered to be incurable. The other answer choices should NOT be considered when completing a current appraisal.

Question 23

The appraisal of a quality single-family residence would be LEAST influenced by:

a. Projected rental income
b. Its floor plan
c. Its location
d. Recent comparable sales

Answer 23

a. Projected rental income

Rental income would be a consideration if the Income Approach to value was the primary approach to value. For a quality single residence the Market Data approach would be the primary approach to value.

Question 24

A duplex whose total rent is $1,250 per month is in an area of an of a smaller duplex in similar condition that rents for $440 per unit and just sold for $132,000. Using this information, the larger duplex would have a value of:

a. $167,500
b. $150,000
c. $187,500
d. $192,500

Answer 24

c. $187,500

This is a gross rent multiplier application. The rent multiplier is computed by dividing the sales price of $132,000 by the gross rents of the duplex that was sold. The gross rents are $880 because the rent of $440 is per unit. The gross rent multiplier is 150 ($132,000 divided by $880). The larger duplex rents for a total of $1,250, so its value is computed by multiplying the rent times the gross rent multiplier of 150. The indicated value is $187,500 ($1,250 X 150).

Question 25

The reason that the gross rent multiplier is NOT an accurate estimate of value is that it fails to consider:

a. Depreciation
b. Unusual expenses
c. Amenity values.
d. Location

Answer 25

b. Unusual expenses

The gross rent multiplier is not an approach to value because the GRM is determined using the total rent potential of the property and therefore does not take into consideration any unusual expense that is unique to that property. The gross rent multiplier is an effective tool for a real estate agent when taking a listing for an income type property.

Question 26

Ellen’s home recently appraised at $105,000, it has depreciated 30 percent in the three years since it was purchased. What was the original cost?

a. $136,600
b. $80,769
c. $139,650
d. $150,000

Answer 26

d. $150,000

The original cost is the total so the question mark goes in the lower left part of the “T”. Part of the total is the $105,000 so it goes at the top of the “T”. The part of the total represents 70% of the cost since the current valuation has declined by 30% (100% less 30%). The 70% is the rate and it goes in the lower left corner of the “T”. The original cost is $150,00 computed by dividing the item on the top by the rate of 70% ($105,000 divided by 70%).

Question 27

Robert listed his property for sale at $100,000. If his cost was 80% of the listed price, what will be his percent of profit, if he sells for the listed price?

a. 20%
b. 15%
c. 10%
d. 25%

Answer 27

d. 25%

The percent of profit is determined by dividing the profit of $20,000 by the original cost of $80,000 ($100,000 times 80%). The calculation for the percent of profit is $20,000 divided by $80,000 which equals 25%.

Question 28

Paul owns a property free and clear valued at $30,000 on which he plans to build a building and lease it at an annual rent of $65,000. Operating expenses are estimated to be $11,000 per year. If an eight percent net return is expected on the total investment, what will be the cost of the improvements?

a. $435,750
b. $675,000
c. $645,000
d. $595,000

Answer 28

c. $645,000

The projected operating income is $54,000 ($65,000 less $11,000). The capitalization rate of 8% is a given in the problem. The total value of the project is computed by dividing the projected Operating income of $54,000 by the capitalization rate of 8% ($54,000 divided by 8 percent). The answer for the total value of $675,000 needs to be reduced by the $30,000 value of the land to determine the cost of the improvement to the land.