Chapter 18 – Methods of Property Valuation

Question 1

An outdated feature that cannot be corrected economically, such as a poor floor plan, belongs in which category of depreciation?

Answer 1

Functional incurable depreciation

Question 2

The _________________ is a property valuation method based on the principle that the price paid for a commodity will be equal to the cost of acquiring a substitute under the same market conditions.

Answer 2

direct comparison approach

Question 3

TRUE OF FALSE? In a typical residential property, the frontage of a lot is more important than its depth or the total area.

Answer 3

True. Since most houses are built parallel to the street, the lot frontage is more important than the depth or the total area. Market value usually varies more directly with frontage than with depth or area.

Question 4

When a feature of the comparable property is superior to the subject property, you _______ (add/subtract) to the sale of the comparable property.

Answer 4

subtract

Question 5

When a feature of the subject property is superior to the comparable property, you ______ (add/subtract) to the sale price of the comparable property.

Answer 5

add

Question 6

What is the capitalization rate?

Answer 6

The return an investor requires for investing in a property to receive the annual net operating income flows.

Question 7

Define the meaning of “recent” in real estate appraisal.

Answer 7

The term “recent” refers to the time period just prior to the date of valuation over which demand and supply conditions have remained relatively stable.

Question 8

TRUE OR FALSE? In appraisal, two properties are considered to be similar only if there are no actual differences between the properties or their respective prices.

Answer 8

False. Two properties are similar if the actual differences between the properties do not have a material effect on their selling price.

Question 9

List the major items that are included in financial statements but omitted when calculating net operating income.

Answer 9

• Depreciation
• Income tax
• Capital cost allowance
• Debt service

Question 10

Explain the difference between historic cost and current cost.

Answer 10

Historic cost is the cost incurred when the property was erected. Current cost is the cost of the same construction at the date of valuation.