Chapter 16

Question 1

A property is listed for sale at $235,000. A buyer’s offer of $220,000 is rejected by the seller. Six months later, the seller reduces the price to $225,000. Another buyer offers $210,000, and the seller accepts because the seller has found another house to buy and needs to close quickly. The property is subsequently appraised at $215,000. Which of these figures MOST accurately represents the property’s market value?

a. $210,000
b. $215,000
c. $225,000
d. $235,000

Answer 1

b. $215,000

Feedback
The property’s market price is $210,000, while its appraised value (and most probable market value) is $215,000. The seller accepted the lower price because of the pressure to close on the new house.

Question 2

Which appraisal approach would be BEST to appraise a 25-year-old owner-occupied house in a 30-year-old neighborhood?

a. Sales comparison
b. Income approach
c. Cost approach
d. GRM

Answer 2

a. Sales comparison

Feedback
The most appropriate method to appraise an older home in an established neighborhood is the sales comparison approach.

Question 3

When appraising a new home in which no one has ever lived, an appraiser will likely use the

a. sales comparison approach.
b. income approach.
c. cost approach.
d. GRM.

Answer 3

c. cost approach.

Feedback
A newly constructed house may be appraised using the cost approach and omitting depreciation.

Question 4

4. Assuming that all of the transactions are federally related, which of these properties would NOT have to be appraised by a state licensed or certified appraiser?
   a. Commercial property valued at $350,000
   b. A condominium unit with a sale price of $67,850
   c. Residential property valued at $262,500
   d. Commercial property valued over $1 million in a refinance

Answer 4

b. A condominium unit with a sale price of $67,850

Feedback
b. Appraisals of residential property and commercial property valued at $250,000 or less in federally related transactions need not be performed by licensed or certified appraisers.

Question 5

An appraiser’s role is to

a. set price.
b. average value.
c. determine value.
d. form an opinion of value.

Answer 5

d. form an opinion of value.

Feedback
An appraiser is an independent professional trained to provide an unbiased opinion of value based on recognized standards of appraisal practice.

Question 6

The principle that maximum value is realized when land use is in harmony with surrounding standards is

a. contribution.
b. conformity.
c. highest and best use.
d. competition.

Answer 6

b. conformity.

Feedback
b. Contribution is the principle that evaluates the cost of adding an improvement against the value of the property as a whole. Competition is the interaction of supply and demand, while highest and best use is the most profitable single use to which the property may be used.

Question 7

With plans to build a large house in a neighborhood of smaller homes, a buyer purchases three neighboring lots from their three owners. What is the term for this activity?

a. Substitution
b. Plottage
c. Progression
d. Assemblage

Answer 7

d. Assemblage

Feedback
The process of merging separately owned lots under one owner is called assemblage. Plottage holds that merging these lots together into a single larger one may produce a greater total land value than the sum of the individual lots valued separately.

Question 8

A small house in a highly desirable neighborhood consisting of large homes is purchased for $390,000. A nearly identical house in a neighborhood of similarly sized homes is purchased by a different buyer for $290,000. What economic principle BEST describes the reason why one buyer paid more than the other?

a. Plottage
b. Substitution
c. Regression
d. Progression

Answer 8

d. Progression

Feedback
The first buyer’s house benefits from being a smaller one alongside larger, more prestigious ones (i.e., progression). The second buyer’s house is appropriately valued for its neighborhood.

Question 9

It cost approximately $350,000 to build a house and its various improvements on a parcel of property. If the property was vacant, undeveloped land, it would be worth about $80,000. As it currently exists, the property’s physical deterioration equals about $60,000. If an appraiser were to apply the cost approach, what would be the value of this property?

a. $270,000
b. $370,000
c. $430,000
d. $480,000

Answer 9

b. $370,000

Feedback
The cost approach subtracts depreciation from the current cost of improvements and then adds the value of the land as if it were vacant: $350,000 – $60,000 + $80,000 = $370,000.

Question 10

If a property is found in Fannie Mae’s Collateral Underwriter (CU) database, it may qualify for a

a. preliminary appraisal approval.
b. property inspection waiver.
c. Desktop Underwriter appraisal.
d. licensed appraiser review.

Answer 10

b. property inspection waiver.

Feedback
If a property appraisal has been included in Fannie Mae’s Collateral Underwriter database as part of an earlier transaction, and the same borrower is involved in a new transaction, a property inspection waiver will be considered.

Question 11

Air pollution from automobile traffic near a building with ornate exterior decoration has dissolved much of the intricate detail work. The cost of restoring the front of the building is roughly five times the building’s present value. These facts describe

a. curable external obsolescence.
b. incurable functional obsolescence.
c. incurable physical deterioration.
d. curable external deterioration.

Answer 11

c. incurable physical deterioration.

Feedback
Air pollution has damaged the old design, and the cost of correcting the defect is not financially feasible. This is an example of incurable physical deterioration.

Question 12

The land on which a house was built is worth $50,000. The house was constructed in 1990 at a cost of $265,000 and was expected to last 50 years. None of the mechanical systems, roofing, or siding has been replaced in that time. Using the straight-line method, determine how much the house has depreciated by 2014.

a. $28,600
b. $96,600
c. $127,200
d. $145,200

Answer 12

c. $127,200

Feedback
The value of the land is not relevant to this problem. The cost of the building is divided by the number of years of its useful life and multiplied to determine the depreciation after 24 years:

$265,000 ÷ 50 = $5,300

$5,300 × 24 = $127,200.

Question 13

Which of these reports would a sales associate MOST likely research and deliver to a prospective seller?

a. Comparative market analysis
b. Appraisal
c. Letter of intent
d. Cost benefit analysis

Answer 13

a. Comparative market analysis

Feedback
A real estate sales associate often prepares a comparative market analysis (CMA), a comparison of the prices of recently sold homes that are similar to a prospective seller’s home in location, style, and amenities. The CMA helps the owner set an appropriate asking price for the property.

Question 14

What is the GRM for a residential duplex with a selling price of $234,000 if the monthly rent for each unit is $925?

a. l.054
b. 10.54
c. 126.5
d. 252.9

Answer 14

c. 126.5

Feedback
c. Because GRM for one-unit and two-unit residential properties is based on gross monthly rent, GRM = sales price ÷ gross rent: $234,000 ÷ (2 × $925) = 126.5 GRM.

Question 15

Which of these approaches is given the greatest weight in reconciling the values resulting from different appraisal approaches for a two-bedroom, owner-occupied home?

a. Income approach
b. Sales comparison approach
c. Cost approach
d. Market value approach

Answer 15

b. Sales comparison approach

Feedback
Most owner-occupied residences are best appraised by comparing them to similar properties—that is, by using the sales comparison approach.

Question 16

The characteristics of value include

a. demand, utility, scarcity, and transferability.
b. demand, utility, price, and transferability.
c. popularity, location, price, and transferability.
d. demand, scarcity, price, and popularity.

Answer 16

a. demand, utility, scarcity, and transferability.

Feedback
Remember the acronym DUST.

Question 17

A house has been on the market for several months because most buyers do not want to walk through the master bedroom to reach another bedroom. This floor plan is an example of

a. regression.
b. economic obsolescence.
c. functional obsolescence.
d. physical deterioration.

Answer 17

c. functional obsolescence.

Feedback
There is nothing physically wrong with the house, but the design is outdated (functionally obsolescent). Perhaps buyers would be more interested if the room were marketed as a home office or walk-in closet.

Question 18

A homeowner is considering installing a below-ground swimming pool, which may cost many thousands of dollars to build. The homeowner should consider the concept of

a. change.
b. competition with the neighbors.
c. conformity within the neighborhood.
d. contribution.

Answer 18

d. contribution.

Feedback
Before embarking on installing the pool, the owner should consider its overall contribution to the value of the property, especially for the neighborhood. Sometimes an improvement does not add value equal to its cost.

Question 19

Which of these formulas is incorrect for the income approach?

a. Income ÷ value = rate
b. Income ÷ rate = value
c. Value ÷ rate = income
d. Value × rate = income

Answer 19

c. Value ÷ rate = income

Feedback
As the capitalization rate goes down, the value increases.

Question 20

A house is on the corner of a busy intersection. Two of the corners are occupied by gas stations, and directly across from the house is a fast food restaurant. The house’s owners have been told that the property would be worth more if the lot were vacant. This is an example of

a. progression.
b. highest and best use.
c. regression.
d. conservation.

Answer 20

b. highest and best use.

Feedback
b. Under the principle of highest and best use, the single most profitable use for this property is not residential; more likely, it would be better suited to another commercial use.

Question 21

A two-unit apartment building is being appraised. In this neighborhood, the typical gross rent multiplier is 144. The annual income for the building is $16,800 (both units rented). The monthly expenses are $300. Based on the income approach, what is the estimated market value of the apartment building?

a. $201,600
b. $224,800
c. $232,500
d. $258,600

Answer 21

a. $201,600

Feedback
a. The monthly rental income is $1,400 ($16,800 ÷ 12 = $1,400). Rental income × GRM = estimated market value: $1,400 × 144 = $201,600. The monthly expenses are not included in the calculation.

Question 22

An apartment building has $65,000 in potential gross annual income. The vacancy rate is estimated at 5%, total operating expenses are $29,000, and the capitalization rate is 9%. Using the income approach, what is the value of the building?

a. $324,773
b. $363,889
c. $372,895
d. $392,367

Answer 22

b. $363,889

Feedback
b. Gross income – vacancy and rent losses – operating expenses = net operating income: $65,000 × 5% = $3,250; $65,000 – $3,250 – $29,000 = $32,750. Net operating income ÷ capitalization rate = value: $32,750 ÷ 9% = $363,889.

Question 23

Which of these concepts applies to every appraisal?

a. Diminishing returns
b. Plottage
c. Highest and best use
d. Assemblage

Answer 23

c. Highest and best use

Feedback
The highest and best use of a property is the most profitable single use to which it can be put and is considered in every appraisal.

Question 24

The property being appraised is called the

a. lot.
b. parcel.
c. subject property.
d. comparable property.

Answer 24

c. subject property.

Feedback
The subject property is the one being appraised. Comparable properties are properties similar to the subject property. Each comparable property is analyzed for differences and similarities between it and the subject property.

Question 25

An empty lot is located in a neighborhood of single-family homes. It is the only empty lot in this well-maintained neighborhood. A busy street with many stores is located three blocks away. An industrial area is about two miles away. What is the probable highest and best use of this lot?

a. A store
b. A factory
c. A parking lot
d. A single-family home

Answer 25

d. A single-family home

Feedback
The highest and best use is the most profitable or the most likely to be in demand soon. In this neighborhood, the demand is most likely to be for another single-family home. A parking lot is not needed. A store or factory would not be in conformity with the area and might not even be allowed.

Question 26

What is the process for creating a broker’s price opinion (BPO)?

a. The broker drives by the property, takes a picture, and fills out the BPO form.
b. The broker engages a certified appraiser to perform an appraisal.
c. The broker prepares a report compiled from research of comparable properties.
d. The attorney engages a broker to perform a comparative market analysis.

Answer 26

a. The broker drives by the property, takes a picture, and fills out the BPO form.

Feedback
a. The broker’s price opinion (BPO) is a less-expensive alternative of valuating properties often used by lenders working with home equity lines, refinancing, et cetera. Most are simply drive-bys that verify the existence of the property along with a listing of comparable sales.

Question 27

Which of these is NOT an essential assumption in determining market value?

a. The buyer and seller must be unrelated.
b. The payment must be in cash or its equivalent.
c. The buyer and seller must be acting without excessive pressure.
d. The property must be on the market for at least three months.

Answer 27

d. The property must be on the market for at least three months.

Feedback
Market value is the most probable price that a property should bring at a fair sale. The property must be on the market for a reasonable time, but no specific time period must be met.

Question 28

The principle of value that is the interaction of supply and demand is called

a. anticipation.
b. competition.
c. conformity.
d. contribution.

Answer 28

b. competition.

d. contribution.
Feedback
Anticipation is the expectation that certain events will occur. Conformity states that value is created when a property is in harmony with its surroundings. Contribution means that the value of any part of a property is measured by its effect on the value of the entire property.

Question 29

All of these reflect basic principles of value EXCEPT

a. anticipation and conformity.
b. competition and plottage.
c. change.
d. financing concessions.

Answer 29

d. financing concessions.

Feedback
The basic principles of value include the concepts of anticipation, change, competition, conformity, contribution, highest and best use, increasing and diminishing returns, plottage, regression and progression, substitution, and supply and demand. Financing concessions do not reflect the basic principles of property value.

Question 30

Touching-up peeling paint is an example of curing

a. physical deterioration.
b. functional obsolescence.
c. external obsolescence.
d. straight-line depreciation.

Answer 30

a. physical deterioration.

Feedback
Touching up peeling paint is an example of curing physical deterioration. External obsolescence is always incurable. Functional obsolescence is a loss in value from the market’s response to the item.