Chapter 13: Property Valuation

Question 1

The combining of two or more adjoining lots into one larger tract to increase their value is:
A. annexation
B. accretion
C. assemblage
D. avulsion

Answer 1

C. assemblage
(Combining lots to gain an increase in value is called assemblage. It usually occurs with commercial properties and larger tracts. In residential properties, value is usually maximized by breaking up a larger tract into smaller lots or parcels, this is called plottage)

Question 2

A building has depreciated for the past 7 years at a rate of 3% per year. It is valued today at $74,000. Find the original value of the building.
A. $93,670.89
B. $15,540
C. $58,460
D. $103,220.55

Answer 2

A. $93,670.89
(The depreciation was 3% per year x 7 years = 21% depreciation. The current value of $74,000 represents 79% of the original value (100%-21% = 79%). $74,000 divided by .79 = $93,670.89)

Question 3

Which of the following is generally considered to be an incurable form of depreciation?
A. physical deterioration
B. functional obsolescence
C. economic obsolescence
D. interior obsolescence

Answer 3

C. economic obsolescence
(Economic obsolescence is always outside the property and is caused by surrounding neighborhood conditions. Because it is outside the property it is considered incurable (incapable of being remedied))

Question 4

When appraising real estate, the appraiser would consider all of the following in making a determination of value, EXCEPT:
A. contractual agreement between the seller and the buyer
B. highest and best use of the property
C. seller’s original purchase price of the property
D. selling prices of similar properties

Answer 4

C. seller’s original purchase price of the property
(The seller’s original acquisition price or purchase price is not a factor utilized by appraisers)

Question 5

It is necessary to calculate a dollar value for depreciation when using which of the following approaches to value?
A. the sales comparison approach
B. the cost approach
C. the income approach to value
D. gross rent multipliers

Answer 5

B. the cost approach
(Only the cost approach uses a depreciation calculation. In the sales approach the depreciation is built into the selection of the comps and depreciation is not used in the income approach)

Question 6

In the cost approach to value, the appraiser makes use of the:
A. owner’s original cost of the building
B. estimated replacement cost of the building
C. sales prices of similar buildings in the area
D. assessed value of the building

Answer 6

B. estimated replacement cost of the building
(The “cost” in the cost approach means that the appraiser must determine the value of building a reasonably similar substitute)

Question 7

When using the sales comparison approach to value, an appraiser might consider all of the following highly similar properties to be legitimate comparables, EXCEPT:
A. a home that was sold between one and three months ago
B. a home that was sold recently but is located in a similar nearby neighborhood
C. a home that was sold by the owners who were undergoing a foreclosure
D. a home that was sold recently but is located on a much larger lot

Answer 7

C. a home that was sold by the owners who were undergoing a foreclosure
(Appraisers in selecting comps are looking for arms-length transactions. An arms-length transaction is a transaction which does not involve undue duress or influence. A foreclosure sale would likely be disregarded by the appraiser as not being an arms-length transaction)

Question 8

Using which of the following approaches 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 method

Answer 8

B. the cost approach
(The cost approach requires the appraiser to determine the cost of improvements (the building or structures) and then separately calculate the value of the land)

Question 9

A building is valued at $215,000 and contains four apartments that rent for $470 each per month. The owner estimates that the net operating income is 65% of the gross rental receipts. What is the capitalization rate?
A. 3.7%
B. 6.8%
C. 10.5%
D. 14.2%

Answer 9

B. 6.8%
(The total gross income of the property is $470 x 4 = $1,880 per month or $22,560 annually ($1,880 x 12). The net operating income is $14,664 ($22,560 x 65%). The NOI ($14,664) divided by the value of the building ($215,000) = .0682, which is a 6.8% capitalization rate)

Question 10

To find the value of a property using the income approach to value, if the net operating income and the capitalization rate are 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

Answer 10

C. divide the net operating income by the capitalization rate
(The capitalization or income approach formula is to divide the NOI (net operating income) by the capitalization rate in order to determine the value of the property)

Question 11

In the sales comparison approach, what is the indication of value for the subject property with the information given? The subject property is a 2,000 square foot home with 3 bedrooms, 2.5 baths and a 1- car garage. The comparable property is a 2,150 square foot home in the same neighborhood with 3 bedrooms, 2 full baths and a 2-car garage. The comparable property sold for $215,000 last week. The market values additional square footage at $80 per square foot; full baths are valued at $4,000 and half baths at $2,500; 2-car garages are worth an additional $10,000 over a 1-car garage.
A. $195,500
B. $200,500
C. $203,000
D. $229,500

Answer 11

A. $195,500
(The following adjustments are made to the comparable property. The square footage is-$12,000 (150 x $80 per square foot). No adjustments to the bedrooms. The bathroom adjustment is + $2,500 (1 half bathroom). The garage adjustment is-$10,000. The comparable sold for $215,000-$12,000 + $2,500-$10,000 = $195,500)

Question 12

All of the following are elements of value utilized by appraisers, EXCEPT:
A. demand
B. transferability
C. utility
D. original cost

Answer 12

D. original cost
(Appraisers use the elements of DUST (demand, utility, scarcity and transferability) to determine value. Original cost is not part of their analysis)

Question 13

The economic principle that states the value of items of similar quality is determined by the lowest price is:
A. competitiveness
B. substitution
C. anticipation
D. regression

Answer 13

B. substitution
(The principal of substitution is the only appraisal principal used in all three approaches to value. It states that when items of similar quality exist the value will be determined by the lower cost item)

Question 14

The fact that lesser valued properties will be given greater value by the presence of higher priced ones and that higher priced properties will have values decreased by the presence of lesser valued ones is an application of the principles of:
A. progression and regression
B. substitution and anticipation
C. competition and contribution
D. supply and demand

Answer 14

A. progression and regression
(Progression and regression account for the impact on properties created by surrounding properties and areas)

Question 15

The amount that component parts add or detract from the value of a property is the principle of:
A. substitution
B. competition
C. contribution
D. anticipation

Answer 15

C. contribution
(Each component part of a home either adds or subtracts from it’s value. This principle is the cornerstone of the comparable sales approach and adjustments)