Highest and Best Use Quiz questions

Question 1

The principle of substitution is associated with which approach(es) to value?

A. Both the sales comparison and cost approaches
B. Cost approach
C. Sales comparison approach
D. None of these

Answer 1

A. Both the sales comparison and cost approaches

Rationale:
“Substitution” :The principle of Substitution is associated with the cost approach and also the sales comparison approach to value.

Question 2

The value of a single-family home is decreased when a large industrial plant is constructed directly across the street. What economic principle does this best demonstrate?

A. Balance
B. Contribution
C. Externalities
D. Anticipation

Answer 2

C. Externalities

Rationale:
“Externalities”: The principle of externalities takes into consideration the external factors that relate to a given property. The value
of a given property is influenced by factors beyond the actual boundaries of the subject property.

Question 3

Which statement is TRUE about real property value?

A. Value is not created; it is inherent.
B. Appraisers create value.
C. Market participants create value.
D. Real property is worth more than personal property.

Answer 3

C. Market participants create value.

Rationale:
“Forces That Create Value”: Appraisers do not create value. Rather, people create value by their wants, needs, desires, etc. We say that value is created by people who are motivated by four basic forces that realistically drive the market.

Question 4

What does ownership in severalty mean?

A. several people own the property
B. no one knows who owns the property
C. a husband and wife own the property together
D. one person owns the property

Answer 4

D. one person owns the property

Rationale:
“Forms of Ownership”: Ownership in Severalty indicates that one person owns and holds title to the property.

Question 5

Which stage of the life cycle does not happen in every neighborhood or property?

A. Decline
B. Renewal
C. Growth
D. Static

Answer 5

B. Renewal (Gentrification)

Rationale:
“Progression and Regression”: All properties, neighborhoods, communities, and market areas proceed through the three phases of the life cycle. If and when there is an incentive to return this neighborhood to one for which there will be demand, the process of renewal (gentrification) will cause the life cycle to begin anew.

Question 6

When appraising a property for market value, an appraiser must determine:

A. how long it will take to market the property
B. how much the client thinks the property may be worth
C. the cost of any repairs needed
D. the highest and best use

Answer 6

D. the highest and best use

Rationale:
“Highest and Best Use Theory”: The appraisal process requires an appraiser’s determination of the highest and best use for the property site when developing an appraisal for market value.

Question 7

What is another name for the principle of inclining and declining periods?

A. Ups and downs
B. Externalities
C. Anticipation
D. Integration and Disintegration

Answer 7

D. Integration and Disintegration

Rationale:
“Progression and Regression”: The principle of Inclining and Declining Periods is sometimes referred to as the principle of Integration and Disintegration.

Question 8

In a typical subdivision, who is responsible for enforcing the deed covenants?

A. the municipal code enforcement officer
B. the homeowners association
C. a designated state government agency
D. local zoning officials

Answer 8

B. the homeowners association

Rationale:
“Private Restrictions for Land Use”: The responsibility for enforcement of covenants rests with the homeowners association (HOA). The homeowners association can seek enforcement action through the court system.

Question 9

What type of data would pertain to a specific property being appraised?

A. general data
B. specific data
C. sales data
D. preliminary data

Answer 9

B. specific data

Rationale:
“Specific Type Data”: Data has been separated into two distinct types for analysis by the appraiser. There are the General types of data which have an effect on the local market area or neighborhood of the subject property. There are also the Specific types of data which pertain to the subject itself and also exercise an effect on individual property values.

Question 10

When writing an appraisal report, charts and graphs may be used to replace parts of the narrative explanation.

True
False

Answer 10

True

Rationale:
“Data Analysis”: Pie charts and bar graphs are easily read by the intended users and/or clients. When the charts and/or graphs are included in the summation of the analyses, much of the narrative explanation may be able to be curtailed or eliminated.

Question 11

Market analysis in appraisals can be divided into ___ distinct categories.

A. two
B. Three
C. Four
D. Many

Answer 11

A. two

Rationale:
“Data Analysis”: Market analysis can be divided into two distinct categories for the appraisal process. One is a broad based analysis, involving the study of the supply and/or demand for a particular type of property within a particular area. The second type introduces market segmentation and involves the supply and/or demand for a specific type of property or unit in a market area.

Question 12

In a market area, there were 168 single-family sales last year, and there are currently 98 properties on the market. What is the monthly absorption rate?

A. 12 per month
B. 8 per month
C. 14 per month
D. 24 per month

Answer 12

C. 14 per month

Rationale:
“Absorption Rates and Periods”: 168 / 12 = 14 per month.

Question 13

Which of these would NOT be an example of general data?

A. streets and roads
B. municipal services
C. site size
D. shopping

Answer 13

C. site size

Rationale:
“General Type Data”: A property’s site size pertains to the specific property, and as such, would be specific data. The other three choices would all be considered general data.

Question 14

In analyzing the segmented market area, an appraiser might utilize:

A. list-to-sale ratios
B. absorption rates
C. expiration ratios
D. all of these

Answer 14

D. all of these

Rationale:
“Segmentation of the Market”: Exposure time, absorption rates, expiration ratios, normal ratios between the offered price for similar properties and the actual selling price for properties, are all considerations in the segmented analysis of the market area.

Question 15

When analyzing a market for a high-value home, what is the MOST important consideration?

A. the number of residents in the local community
B. the number of potential buyers in the market place
C. the number of acceptable and qualified buyers in the market for this type of property
D. these are all equally important

Answer 15

C. the number of acceptable and qualified buyers in the market for this type of property

Rationale:
“Analysis Restrictions”: The number of potential buyers in the market place is not as important as the number of acceptable and qualified buyers in the market for this type of property.

Question 16

What would be an appraiser’s concern in analyzing the market for a high-value residential property?

A. How far away am I going to have to go in order to find comparable sales?
B. How many buyers can afford to purchase this property in this location?
C. Why did the owner build a home of this type in this location?
D. How long is this analysis going to take?

Answer 16

B. How many buyers can afford to purchase this property in this location?

Rationale:
“Segmentation of the Market”: If the individual property is one classified as a high-value property, the appraiser will identify the limited market for this type of property on the basis of the disposable income availability within the defined market area. Specifically, the question to be asked is: “How many buyers can afford to purchase this type of property in this location?” The issue of how far away comparable sales are to be found is considered later in the appraisal analysis.

Question 17

Market identification involves:

A. gathering general data
B. finding sales data
C. subdividing the larger market into a workable study area
D. preliminary analysis of anticipated conclusions
C. subdividing the larger market into a workable study area

Answer 17

C. subdividing the larger market into a workable study area

Rationale:
“Market Identification”: Defining the market segment is the first step in the market analysis process. To define the market segment is to allow the appraiser to concentrate on the individual data required for the analysis of the submarket of concern for the assignment. Market identification involves subdividing the larger market into a workable study area.

Question 18

There is a significant oversupply of high-value homes on the market in Community A, and demand for these homes has not increased. Which statement is FALSE?

A. The value of high-value homes will decline.
B. The value of all homes in the area will decline.
C. This will likely create a buyer’s market for high-value homes.
D. None of the above

Answer 18

B. The value of all homes in the area will decline.

Rationale:
“Segmentation of the Market”: It is conceivable that the over-supply of high-value homes in a particular market area will cause the values of those homes to decline without an increase in the demand from the market. This decline in high-value home values could occur without a corresponding decline in the values of more modestly-priced homes located in the same geographic area.

Question 19

A community’s total employment is 52,220. The number of total core industry employees is 37,300. If the core industry adds 920 more jobs, how many additional jobs will be generated in the community?

A. 153
B. 328
C. 404
D. 368

Answer 19

D. 368

Rationale:
“Steps in the Analysis Process”: 52,220 / 37,300 = 1.4. 920 x 0.4 = 368

Question 20

What type of new home is MOST likely to have a pier and beam foundation?
A. a high-value home
B. a log home
C. a manufactured home
D. a home located in a sub-arctic region

Answer 20

C. a manufactured home

Rationale:
“Analyzing the Improvements”: In today’s market, the pier and beam type of foundation is usually reserved for the placement of manufactured homes on their own site.

Question 21

An appraiser’s exterior measurement of a single story residential property indicates a GLA of 1,300 square feet. An interior inspection reveals an entry foyer of 370 square feet and an eight foot by ten foot unfinished storage area not accessible from the interior of the house. The GLA of the home is:
A. 1,800 square feet
B. 1,380 square feet
C. 350 square feet
D. 1,220 square feet

Answer 21

D. 1,220 square feet

Rationale:
“Analyzing the Improvements”: This is a single story home, so there is no second floor from which we would subtract the 370 foot foyer. We would subtract the 8’ x 10’ storage inaccessible storage area, so 1,300 less 80 equals 1220 square feet.

Question 22

Generally, an air conditioning system should be able to maintain an interior temperature of ______ degrees Fahrenheit.
A. 65
B. 78
C. 98
D. 62

Answer 22

B. 78

Rationale:
“Analyzing the Improvements”: Generally, an air conditioning system should maintain a temperature of 78 degrees (Fahrenheit) as measured in the center of each room at a height of 5 feet.

Question 23

A vacant site is zoned for use as a single-family homesite, and it is unlikely to be changed. As a single-family homesite, the site is worth $75,000. As a commercial site, it would be worth $150,000. What is the highest and best use of this property?
A. commercial use
B. single-family homesite
C. neither of these

Answer 23

B. single-family homesite

Rationale:
“Maximum Productivity - as Vacant”: Commercial use would result in maximum site value, however, it is not legally permissible. Therefore, the use as a single-family homesite is the highest and best use, because it is legally permissible.

Question 24

Which highest and best use criterion would require an appraiser to consider the need for the land use, or how many similarly-used land areas are in the market area?

A. physically possible
B. legally permissible
C. financially feasible
D. maximally possible

Answer 24

C. financially feasible

Rationale:
“Financial Feasibility - as Vacant”: Considerations to be made in “physically possible” would include the availability of public utilities to the site. Other considerations would include the soil type and bearing capacity, and whether the property is situated in a flood-prone area. When considering financial feasibility, the first analysis is the inferred analysis of the relationship between the supply and the demand for a site’s particular highest and best use. Is there a need or demand for this use of the land? How many other similarly used land areas are there in the market area? Can the market support another land use of this type?

Question 25

Which highest and best use criterion would require an appraiser to consider the availability of public utilities to a site?

A. physically possible
B. legally permissible
C. financially feasible
D. maximally productive

Answer 25

A. physically possible

Rationale:
“Physical Possibility - as Vacant”: Considerations to be made in “physically possible” would include the availability of public utilities to the site. Other considerations would include the soil type and bearing capacity, and whether the property is situated in a flood-prone area.

Question 25

A property is currently zoned for agricultural use, but its highest and best use is expected to change to commercial use within the next 3-5 years. The subject property’s current use is considered:

A. special purpose
B. interim use
C. illegal use
D. legal, non-conforming use

Answer 25

B. interim use

Rationale:
“Special Situations”: Today, the temporary use of the land area is the continued use as an agricultural property. Today’s use can be termed to be an interim use for the land area – interim in that the highest and best use of the land is expected to change in the not too distant future.

Question 26

What is the value of the subject’s site as if vacant?

A. $60,000
B. $65,000
C. $325,000
D. $55,000

Answer 26

B. $65,000

Rationale:
“Case Study #2”: The subject site is 6,500 square feet and the site value is $10 per square foot. 6,500 x $10 = $65,000.

Question 27

What would be the residual value of the subject’s site, based on construction of a 2,600 square foot new home?

A. $65,000 - $104,000
B. $52,500 - $65,000
C. $40,000 - $64,000
D. $104,000 - $124,000

Answer 27

A. $65,000 - $104,000

Rationale:
“Case Study #2”: The market indicates sale prices of $125 to $140 per square foot, including site. 2,600 x $125 = $325,000. 2,600 x 140 = $364,000. The value of the new home would be between $325,000 and $364,000 and would probably tend toward the high end of the range because it is new. Subtracting cost new of $260,000 from the value indicates a residual site value of $65,000 to $104,000.

Question 28

What would be the percentage return to an investor who purchased the property, razed and removed the improvements, and sold the lot?

A. 4.5%
B. 5.3%
C. 6.67%
D. There would be no profit

Answer 28

B. 5.3%

Rationale:
“Case Study #5”: Purchasing the property for $170,000, and demolishing the improvements at a cost of $20,000, and selling the property for $200,000 would produce a $10,000 profit. $10,000 divided by the cash outlay of $190,000 equals a return of 5.3%.

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