Chapter 3

Question 1

The most significant type of value for

real estate licensees is

Answer 1

Market Value

Question 2

is defined as the price a willing seller will sell for,
and the price a willing buyer will pay, when neither is acting under exceptional pressure. Is also defined as the most probable price.

Answer 2

Market Value

Question 3

There are four basic characteristics of value: (DUST)

Answer 3

• Demand
• Utility
• Scarcity
• Transferability

Question 4

there must be a demand for the item and the purchasing power to acquire it

Answer 4

Demand

Question 5

the item must be needed or wanted

Answer 5

Utiltiy

Question 6

there must be a limited supply

Answer 6

Scarcity

Question 7

the item must be able to be sold – ownership rights must be transferable

Answer 7

Transferability

Question 8

is an opinion. It is an estimate of value.

Answer 8

Appraisal

Question 9

Appraisers use principles of value to help them arrive at their final opinion. These principles of value
include:

Answer 9

1. Highest & Best Use
2. Principle of Substitution
3. Principle of Conformity
4. Principle of Increasing and Decreasing Returns
5. Principle of Contribution
6. Principle of Regression
7. Principle of Competition
8. Principle of Change
9. Principle of Anticipation
10. Principle of Balance

Question 10

the legal use that gives the greatest return in money and/or amenities.
Highest and best use can be considered the most important detail by an appraiser.

Answer 10

Highest and Best Use

Question 11

sets an upper limit on price. Maximum value of a property is
set by the cost of acquiring a similar substitute property. This principle is used to demonstrate
the need to price correctly. An overpriced property will not sell.

Answer 11

Principle of Substitution

Question 12

states that maximum value is found when properties are the

same or have a reasonable degree of similarity. (Price range, amenities, size, etc.)

Answer 12

Principle of Conformity

Question 13

invest in property whenever each dollar
invested will return a dollar or more of increased value and stop when each dollar invested
returns less than a dollar in value. The result of overimproving a property is also referred to
as the Law of Diminishing Returns.

Answer 13

Principle of Increasing and Decreasing Returns

Question 14

The result of overimproving a property is also referred to

as the

Answer 14

Law of Diminishing Returns

Question 15

the value of a part is determined by its contribution to the

total value of the property rather than by its cost.

Answer 15

Principle of Contribution

Question 16

the presence of lower-valued or declining-valued properties
in the neighborhood leads to a decline in the value of your property. Conversely, the presence
of higher-valued properties will increase the value of your property and this is called
the Principle of Progression.

Answer 16

Principle of Regression

Question 17

Conversely, the presence

of higher-valued properties will increase the value of your property and this is called

Answer 17

Principle of Progression

Question 18

an increase in competition will result in decreased profits
for current providers. Competition lowers prices. Success leads to competition. For example:
a very profitable restaurant will usually find a competitor opening nearby.

Answer 18

Principle of Competition

Question 19

change is constant and is reflected in values. Appraisers must
make adjustments for changes in market conditions, and for time. An appraisal is only
considered to be good for six months.

Answer 19

Principle of Change

Question 20

purchase price is affected by the expectation of future

appeal and benefits.

Answer 20

Principle of Anticipation

Question 21

mixed land use should result in maximum value for all properties
involved (master-planned communities demonstrate this principle).

Answer 21

Principle of Balance

Question 22

In addition to the principles of value, an appraiser must be aware of the other factors that can affect
value including:

Answer 22

market cycles, political actions, economic forces -(rising interest rates can lower
prices), physical or environmental forces, and sociological forces.

Question 23

The steps in the appraisal process are:

Answer 23

1. State the purpose of the appraisal.
2. Collect and verify information about the property.
3. Estimate value using all three approaches, or as many approaches as needed to get the best
   result.
4. Reconcile the estimates by determining weighted averages. This step is necessary because
   the third step will result in up to three different values. Reconciliation completes the process
   of determining an exact number rather than a range of value.
5. Prepare the report. It may be oral, in a letter, on a form, or a narrative report.

Question 24

FIRREA

Answer 24

the Financial Institutions Reform, Recovery, and Enforcement Act was passed to regulate
the appraisal industry nationwide. This law requires the use of a state-licensed or state-certified
appraiser to perform any appraisal used in connection with a federally related transaction of property
valued at $400,000 or more.

Question 25

All appraisers must adhere to the

Answer 25

Uniform Standards of Professional Appraisal Practice (USPAP)

outlining how appraisals are developed and communicated.

Question 26

There are three basic approaches to appraisal:

Answer 26

1. Market Data or sales comparison
2. Income or capitalization method
3. Replacement of reproduction cost approach

Question 27

market data approach

Answer 27

is used primarily in residential appraisals. It involves comparisons
with known sales in the same area. An appraiser should have 3-5 sales no more than
six months old. In using this approach, the appraiser will add to the value of comparables
when the subject property has more amenities, and deduct from the comparables when the
subject property has less.

Question 28

The Cost Approach

Answer 28

is used for unique properties, such as churches or government buildings.
It is also used when there are no comparables for a particular property.

Land Value + Building Reproduction Cost - Depreciation = Value
- OR –
Land Value + Replacement Cost - Depreciation = Value

Question 29

The appraiser considers three types of depreciation in the cost approach

Answer 29

1. Physical Deterioration
2. Functional Obsolescence
3. Economic Obsolescence

Question 30

Physical deterioration

Answer 30

is ordinary wear and tear. It is curable. This has the least impact on the
appraisal because all buildings have it (chipped paint, worn flooring).

Question 31

Functional Obsolescence

Answer 31

is brought about by factors in the property. It is often or mostly curable
(inferior materials to cut costs, curb appeal, not enough baths/bedrooms, an unpopular
floorplan, property that lacks updating for modern technology).

Question 32

Economic obsolescence

Answer 32

is a loss of value due to outside factors. This is also called external
obsolescence, and is incurable (zoning, air pollution, noise, traffic, jobs, etc.) It is also called
environmental obsolescence.

Question 33

Income Approach

Answer 33

is used for income-producing properties.
Generally, if a property has rent, then use the income approach.
It involves a math formula using the “T” for the calculations.
Net annual income = capitalization rate (rate of return) x market value.

Question 34

The conversion

of an income stream (rent) into an indication of value is called

Answer 34

Capitalization

Question 35

GRM

Answer 35

is used for residential properties and stands for Gross Rent Multiplier. The GRM is a
factor based on location and rent – a price per rent.
This number, when multiplied by the monthly rent, gives an estimate of value for the property.
(GRM x rent = price)

Question 36

GIM

Answer 36

For commercial properties a GIM is used. The GIM (Gross Income Multiplier) is based on annual
rent rather than monthly rent.

Question 37

Comparative Market Analysis

Answer 37

(CMA) is a tool used by licensees to help sellers determine a realistic
price for their property. A CMA compares a subject property to current listings, recent sales,
and even expired listings of unsold properties. The information from expired listings is the least
important part of the CMA. The result of a CMA is a range of value for a property rather than an
exact price. It is not an appraisal. This is also called a competitive market analysis

A CMA can also be used by a buyer’s agent to help a buyer make a decision about an offering price.
Although a CMA is a useful source of information for both buyers and sellers, remember the list
price is the seller’s responsibility and the offering price is the buyer’s responsibility.

Question 38

BPO or Broker’s Price Opinion

Answer 38

is basically the same as a CMA. It is a broker’s written opinion
of value. It is most often requested by an attorney or a relocation company, rather than by a principal
to the transaction. BPO’s can also be used by a lender involved in a “short sale” of a distressed
property. A broker usually will receive a fee for preparing a BPO. A sales license holder can prepare
a BPO in the broker’s name

Question 39

Assessed Value

Answer 39

is the value of your property for tax purposes. The tax rate times the assessed value
will tell you the yearly taxes. Lists of assessed values for all the properties in a taxing district are
found in the assessment rolls, or online. These can be used for comparison purposes.