Chapter 16

Question 1

anticipation

Answer 1

expectation or belief that
future benefits or changes
will affect the value of a
property, influencing the
decisions of buyers, sellers,
and investors.

Question 2

appraisal

Answer 2

unbiased estimate or
opinion of the value of a
property, conducted by a
qualified appraiser using
established methods and
techniques.

Question 3

assemblage

Answer 3

The process of combining
two or more adjacent parcels
of land to create a larger,
more valuable property, often
for redevelopment or
increased utility.

Question 4

broker’s
opinion of
value

Answer 4

An informal estimate of the
value of a property provided
by a real estate broker or
agent, based on their
knowledge of the local
market and recent sales
activity.

Question 5

capitalization
rate

Answer 5

The capitalization rate, or cap
rate, is the rate of return used
to estimate the value of
income-producing properties
based on their expected
income and risk. It is
calculated by dividing the
property’s net operating
income (NOI) by its purchase
price or value

Question 6

comparable

Answer 6

A comparable, also known as
a comp, refers to a property
that is similar to the subject
property being appraised.
Comparables are used by
appraisers to determine the
market value of the subject
property by analyzing recent
sales of similar properties in
the same area

Question 7

comparative
market
analysis

Answer 7

A comparative market
analysis is an evaluation of
similar, recently sold
properties (comparables) in
the same area used to help
determine the market value
of a property. It helps sellers
set a listing price and buyers
make competitive offers.

Question 8

conformity

Answer 8

The principle stating that the
value of a property is
maximized when it is in
harmony with its
surroundings, conforming to
the size, style, and quality of
neighboring properties.

Question 9

contribution

Answer 9

The concept that the value of
a particular improvement or
feature of a property is
determined by its
contribution to the overall
value of the property, rather
than its cost.

Question 10

cost
approach

Answer 10

The cost approach is a
method used by appraisers
to estimate the value of a
property by determining the
cost to replace or reproduce
it, adjusting for depreciation.

Question 11

depreciation

Answer 11

Depreciation is the decrease
in value of a property over
time due to factors such as
wear and tear, age,
obsolescence, or changes in
market conditions.

Question 12

Financial
Institutions
Reform,
Recovery, and
Enforcement
Act (FIRREA)

Answer 12

FIRREA is a federal law
enacted in 1989 in response
to the savings and loan crisis,
which established guidelines
and regulations for the
appraisal industry and
created the Appraisal
Subcommittee (ASC) to
oversee state appraisal
licensing and certification
programs

Question 13

gross income
multiplier

Answer 13

The gross income multiplier
is similar to the gross rent
multiplier but is used to
estimate the value of
properties based on their
gross income from sources
other than rent, such as retail
sales or gross receipts

Question 14

gross rent
multiplier

Answer 14

The gross rent multiplier is a
formula used to estimate the
value of a rental property
based on its gross rental
income. It is calculated by
dividing the property’s
purchase price by its gross
rental income

Question 15

highest and
best use

Answer 15

The most profitable, feasible,
and legal use of a property
that maximizes its value and
generates the highest
returns, considering factors
such as zoning regulations,
market demand, and
physical characteristics.

Question 16

income
capitalization
approach

Answer 16

The income capitalization
approach is a method used
by appraisers to estimate the
value of a property based on
its potential to generate
income, typically used for
income-producing properties
such as rental properties or
commercial buildings

Question 17

market
value

Answer 17

The most probable price that
a property would sell for in an
open and competitive
market, assuming a willing
buyer and seller, with both
parties having reasonable
knowledge of relevant facts
and no undue pressure to
buy or sell

Question 18

net operating
income

Answer 18

Net operating income is the
total income generated by a
property from rents or other
sources, minus operating
expenses such as
maintenance, utilities, and
property taxes

Question 19

progression

Answer 19

The increase in the value of a
lesser-quality property due to
its association with higher-
quality neighboring
properties, leading to an
upward adjustment in its
value

Question 20

reconciliation

Answer 20

The process of reviewing and
analyzing multiple valuation
methods or opinions to arrive
at a final estimate of a
property’s value, considering
their strengths, weaknesses,
and relevance.

Question 21

regression

Answer 21

The decrease in the value of a
higher-quality property due to
its association with lower-
quality neighboring
properties, leading to a
downward adjustment in its
value

Question 22

replacement
value

Answer 22

The cost of replacing a
property with a similar
property of equal utility and
functionality, accounting for
depreciation, obsolescence,
and market conditions.

Question 23

reproduction
value

Answer 23

The cost of replicating a
property exactly as it
currently exists, using the
same materials, design, and
craftsmanship, regardless of
depreciation or market
conditions

Question 24

subdivision

Answer 24

The division of a larger parcel
of land into smaller individual
lots or parcels, typically for
residential or commercial
development.

Question 25

sales
comparison
approach

Answer 25

A method used to estimate
the value of a property by
comparing it to similar
properties that have recently
sold in the same area,
making adjustments for
differences in size, condition,
and amenities.

Question 26

substitution

Answer 26

The principle stating that a
rational buyer will not pay
more for a property than the
cost of acquiring a
comparable substitute
property with similar utility
and benefits

Question 27

transferability

Answer 27

The ease with which a
property or asset can be
bought, sold, or transferred
from one party to another
without significant
restrictions or complications.

Question 28

Uniform
Standards of
Professional
Appraisal
Practice
(USPAP)

Answer 28

USPAP is a set of standards
and guidelines established by
the Appraisal Standards
Board (ASB) of The Appraisal
Foundation for the
performance and reporting of
real estate appraisals in the
United States. It ensures
consistency, competency,
and ethical conduct among
appraisers

Question 29

The principal shortcoming of the gross rent multiplier approach to estimating value is that

Answer 29

numerous expenses are not taken into account

Question 30

The steps in the income capitalization approach are:

Answer 30

estimate net income, and apply a capitalization rate to it

Question 31

A person paid $150,000 for a house with the intention of renting it out for $1,000 per month. The economic principle that led the person to pay this price based on the property’s ability to generate this future income is known as

Answer 31

anticipation

Question 32

A strength of the income capitalization approach is that it

Answer 32

uses a method that is also used by investors to determine how much they should pay for an investment property

Question 32

What is the difference between the appraised value of a property and its mortgage value, if any?

Answer 32

The appraised value is an appraiser’s estimate; mortgage value is the value a lender imputes to the property as collateral

Question 32

A home is located in a neighborhood where homeowners on the block have failed to maintain their properties. This is an example of

Answer 32

incurable economic obsolescence

Question 33

The income capitalization approach to appraising value is most applicable for which of the following property types?

Answer 33

Apartment buildings

Question 34

In the final step of an appraisal, the appraiser reconciles the value estimates derived by the various appraisal approaches by

Answer 34

weighing the applicability of the approaches and considering the quality of data supporting each approach

Question 35

In the sales comparison approach, an adjustment is warranted if

Answer 35

the seller offers below-market seller financing

Question 36

The principal factors for sales comparison and adjustment

Answer 36

sale, location, physical characteristics, and transaction characteristics

Question 37

The steps in the market data approach are

Answer 37

select comparable properties, adjust the comparables, estimate the value

Question 38

The principle underlying depreciation from physical deterioration is that

Answer 38

a property loses the same increment of value each year over the economic life of the property

Question 39

Which of the following statements properly describes the methodology of the cost approach to appraisal?

Answer 39

Add the estimated land value and cost of improvements and subtract the accrued depreciation of the improvements

Question 40

Net operating income is equal to

Answer 40

potential gross income minus vacancy and credit loss minus expenses

Question 41

A certified appraiser is one who has received certification by

Answer 41

the state in which the appraiser operates

Question 42

One of the strengths of the cost approach is that it

Answer 42

is very accurate for a property with new improvements that represent the highest and best use

Question 43

A strength of the income capitalization approach is that it

Answer 43

uses a method that is also used by investors to determine how much they should pay for an investment property

Question 44

If a client suspects improper bias in their appraisal, what action can be taken?

Answer 44

File a complaint with the appraisal complaint National hotline, HUD, CFPB, or local housing or civil rights authorities**