National Property Valuation

Question 1

An appraiser has been employed to estimate the market value of a parcel of vacant land. The resulting appraisal report would NOT include reference to

A)
the physical dimensions of the parcel.
B)
the most probable price the parcel will bring.
C)
the highest and best use of the parcel.
D)
the listed price of the parcel.

Answer 1

An appraiser has been employed to estimate the market value of a parcel of vacant land. The resulting appraisal report would NOT include reference to

A)
the physical dimensions of the parcel.
Incorrect Answer
B)
the most probable price the parcel will bring.
Incorrect Answer
C)
the highest and best use of the parcel.
Incorrect Answer
D)
the listed price of the parcel.
Correct Answer
Explanation
The listed price of the parcel is the price that the owner wants for the property. It may or may not be a realistic price or reflect the fair market value of the property. Highest and best use, the most probable price the parcel will bring, and the physical dimensions of the parcel are all applicable to the analysis by the appraiser in determining the market value of the parcel.

Reference: Property Valuation > Concepts of Value

Question 2

Which of these would be classified as external depreciation?

A)
Poorly maintained properties in the neighborhood
B)
A poorly designed floor plan that could be modified
C)
A leaking roof that needs to be completely replaced
D)
Convenient access to schools and recreational facilities

Answer 2

Which of these would be classified as external depreciation?

A)
Poorly maintained properties in the neighborhood
Correct Answer
B)
A poorly designed floor plan that could be modified
Incorrect Answer
C)
A leaking roof that needs to be completely replaced
Incorrect Answer
D)
Convenient access to schools and recreational facilities
Incorrect Answer
Explanation
External depreciation is caused by factors not on the subject property, such as poorly maintained properties in the neighborhood. A leaky roof is an example of physical deterioration. A poorly designed floor plan is an example of functional obsolescence. Convenient access to schools and recreational facilities are examples of good features that may add to the desirability of a neighborhood.

Reference: Property Valuation > Concepts of Value

Question 3

The value of a swimming pool or other property amenities is determined by the principle of

A)
progression.
B)
substitution.
C)
conformity.
D)
contribution.

Answer 3

The value of a swimming pool or other property amenities is determined by the principle of

A)
progression.
Incorrect Answer
B)
substitution.
Incorrect Answer
C)
conformity.
Incorrect Answer
D)
contribution.
Correct Answer
Explanation
The principle of contribution is used to determine value of amenities such as a pool. Substitution underlies all approaches to value and states that the market must be used to verify pricing. Conformity is used to determine if property conforms to the area and uses progression and regression.

Reference: Property Valuation > Concepts of Value

Question 4

The owners of the smaller model of houses in the neighborhood may find that the values of their homes are affected by what principle?

A)
Competition
B)
Increasing returns
C)
Regression
D)
Progression

Answer 4

The owners of the smaller model of houses in the neighborhood may find that the values of their homes are affected by what principle?

A)
Competition
Incorrect Answer
B)
Increasing returns
Incorrect Answer
C)
Regression
Incorrect Answer
D)
Progression
Correct Answer
Explanation
Under the principle of progression, the smaller homes in an area with larger homes will have their value increased. The principle of regression is the opposite of progression and states that the owners of larger homes in an area with smaller homes may find the values of their homes decrease. Competition is the interaction of supply and demand causing prices for property to rise or fall. Under the principle of contribution, the law of increasing returns applies when money spent on improvements to a property produce an increase in income or value.

Reference: Property Valuation > Concepts of Value

Question 5

A home with its kitchen next to the master bedroom would be considered

A)
diminished.
B)
functionally obsolete.
C)
economically obsolete.
D)
physically obsolete.

Answer 5

A home with its kitchen next to the master bedroom would be considered

A)
diminished.
Incorrect Answer
B)
functionally obsolete.
Correct Answer
C)
economically obsolete.
Incorrect Answer
D)
physically obsolete.
Incorrect Answer
Explanation
A kitchen adjacent to the master bedroom is considered functionally obsolete. The kitchen could be converted to a family room, provided there was adequate space in the house for the kitchen elsewhere. This conversion would be considered curable obsolescence if the cost did not exceed the increased value of the property. A property may be economically obsolete due to environmental, social, or economic forces outside of the property, such as a deteriorating neighborhood.

Reference: Property Valuation > Concepts of Value

Question 6

When the supply decreases while demand remains the same,

A)
price tends to drop.
B)
demand tends to rise.
C)
demand tends to drop.
D)
price tends to rise.

Answer 6

When the supply decreases while demand remains the same,

A)
price tends to drop.
Incorrect Answer
B)
demand tends to rise.
Incorrect Answer
C)
demand tends to drop.
Incorrect Answer
D)
price tends to rise.
Correct Answer
Explanation
Under the laws of supply and demand, if supply of a commodity decreases with demand remaining the same or increasing, the price of a commodity increases. Prices tend to drop if the demand for the commodity decreases while the supply remains the same or increases.

Reference: Property Valuation > Concepts of Value

Question 7

An example of functional obsolescence is

A)
a five-bedroom home with one bathroom.
B)
a decrease in the area’s population.
C)
an unattractive curb appeal.
D)
chipping paint and other deferred maintenance.

Answer 7

An example of functional obsolescence is

A)
a five-bedroom home with one bathroom.
Correct Answer
B)
a decrease in the area’s population.
Incorrect Answer
C)
an unattractive curb appeal.
Incorrect Answer
D)
chipping paint and other deferred maintenance.
Incorrect Answer
Explanation
Obsolescence is a loss of value. Functional obsolescence results from outmoded or unacceptable physical features in a property. A five-bedroom home with only one bath is an example of functional obsolescence. Chipping paint and other deferred maintenance are examples of physical deterioration, which may be repaired or cured by repainting or other maintenance. Unattractive curb appeal and a decrease in the area’s population are examples of external obsolescence, items that will not be easily cured by spending more on the property itself.

Reference: Property Valuation > Concepts of Value

Question 8

An appraiser determines that the cost approach is the most reliable approach in determining the value of an older government building. In estimating the value, the appraiser will MOST likely start by determining

A)
the gross rent multiplier.
B)
the gross effective income.
C)
the replacement cost.
D)
the reproduction cost.

Answer 8

An appraiser determines that the cost approach is the most reliable approach in determining the value of an older government building. In estimating the value, the appraiser will MOST likely start by determining

A)
the gross rent multiplier.
Incorrect Answer
B)
the gross effective income.
Incorrect Answer
C)
the replacement cost.
Correct Answer
D)
the reproduction cost.
Incorrect Answer
Explanation
Replacement cost new is the cost to construct an improvement similar to the subject property, using current construction methods and materials, but not necessarily an exact duplicate. Replacement cost new is more frequently used in appraising older structures because it eliminates obsolete features and takes advantage of current construction materials and techniques. Reproduction cost is the construction cost at current prices of an exact duplicate of the improvement, including both the benefits and the drawbacks of the property. The gross rent multiplier and gross effective income are used in the income approach to value.

Reference: Property Valuation > Valuation Methods

Question 9

The market price of a parcel of real estate is

A)
the price it sells for.
B)
based on its assessed value.
C)
the price listed in the MLS.
D)
the price it should sell for.

Answer 9

The market price of a parcel of real estate is

A)
the price it sells for.
Correct Answer
B)
based on its assessed value.
Incorrect Answer
C)
the price listed in the MLS.
Incorrect Answer
D)
the price it should sell for.
Incorrect Answer
Explanation
Market price of a parcel of real estate is the price that it actually sells for, the sales price. The market value is the property’s listing price. The assessed value is the value set by a taxing authority, usually a county, to determine the taxes on the property.

Reference: Property Valuation > Concepts of Value

Question 10

It is necessary to calculate a dollar value for depreciation when using which of these?

A)
The income approach to value
B)
The cost approach to value
C)
Gross rent multipliers
D)
The sales comparison approach to value

Answer 10

It is necessary to calculate a dollar value for depreciation when using which of these?

A)
The income approach to value
Incorrect Answer
B)
The cost approach to value
Correct Answer
C)
Gross rent multipliers
Incorrect Answer
D)
The sales comparison approach to value
Incorrect Answer
Explanation
One of the components of the cost approach is the calculation of depreciation caused by wear and tear, functionality of items, or outside influences. The calculation is not used in the sales comparison or income approaches to value. A gross rent multiplier is used in the income approach to value for one-to-four residential rental properties.

Reference: Property Valuation > Valuation Methods

Question 11

When estimating the value of property using the cost approach, all of these are considered by an appraiser EXCEPT

A)
quality of materials and workmanship in the original structure.
B)
estimated loss attributable to an outdated heating system.
C)
excessive amount of traffic noise outside the property.
D)
loss of value due to uncollected delinquent rent.

Answer 11

When estimating the value of property using the cost approach, all of these are considered by an appraiser EXCEPT

A)
quality of materials and workmanship in the original structure.
Incorrect Answer
B)
estimated loss attributable to an outdated heating system.
Incorrect Answer
C)
excessive amount of traffic noise outside the property.
Incorrect Answer
D)
loss of value due to uncollected delinquent rent.
Correct Answer
Explanation
Loss of value due to uncollected delinquent rent is a factor in determining a property’s effective gross income (EGI) in the income approach to value. An outdated heating system, the quality of original materials and workmanship, and traffic noise are considered in the cost approach in determining the depreciation of a property due to deterioration or obsolescence.

Reference: Property Valuation > Valuation Methods

Question 12

A comparative market analysis (CMA) or a broker’s price opinion (BPO) would be acceptable for all of these EXCEPT

A)
using to determine what to offer for a property.
B)
setting the estimated rent values.
C)
setting the selling price of a home.
D)
determining conventional loan value.

Answer 12

A comparative market analysis (CMA) or a broker’s price opinion (BPO) would be acceptable for all of these EXCEPT

A)
using to determine what to offer for a property.
Incorrect Answer
B)
setting the estimated rent values.
Incorrect Answer
C)
setting the selling price of a home.
Incorrect Answer
D)
determining conventional loan value.
Correct Answer
Explanation
A CMA or a BPO may not be used for any federal loan.

Reference: Property Valuation > Appraisals

Question 13

The physical characteristic of real estate that means that every parcel of land is different is known as

A)
immobility.
B)
indestructibility.
C)
uniqueness.
D)
scarcity.

Answer 13

The physical characteristic of real estate that means that every parcel of land is different is known as

A)
immobility.
Incorrect Answer
B)
indestructibility.
Incorrect Answer
C)
uniqueness.
Correct Answer
D)
scarcity.
Incorrect Answer
Explanation
Uniqueness is the concept that no two parcels of property are exactly the same or in the same location. An individual parcel has no substitute because each is unique. Immobility means that the geographic location of a parcel of land can never be changed. Indestructibility means that land is durable and cannot be destroyed. Scarcity is an economic characteristic of land, meaning that when the supply of land is limited, the price of the land increases.

Reference: Property Valuation > Concepts of Value

Question 14

The ability of a community to attract income and business is known as the community’s

A)
zoning plan.
B)
market value.
C)
economic base.
D)
life cycle.

Answer 14

The ability of a community to attract income and business is known as the community’s

A)
zoning plan.
Incorrect Answer
B)
market value.
Incorrect Answer
C)
economic base.
Correct Answer
D)
life cycle.
Incorrect Answer
Explanation
The economic base measures the ability of a community to attract business and income. Life cycle refers to the expected useful lifetime of equipment or property. Market value is the most probable price a property would bring in an arm’s-length transaction under normal conditions on the open market. A zoning plan determines the types of improvements permitted on specific properties in a community.

Reference: Property Valuation > Concepts of Value

Question 15

Rising mortgage rates are an example of

A)
external obsolescence.
B)
incurable depreciation.
C)
functional obsolescence.
D)
curable depreciation.

Answer 15

Rising mortgage rates are an example of

A)
external obsolescence.
Correct Answer
B)
incurable depreciation.
Incorrect Answer
C)
functional obsolescence.
Incorrect Answer
D)
curable depreciation.
Incorrect Answer
Explanation
Factors outside the property boundary lines that affect a property’s value are examples of external obsolescence. Rising mortgage interest rates is an example of external obsolescence. Functional obsolescence occurs when a property has outmoded or unacceptable physical or design features that are no longer considered desirable by purchasers. Physical deterioration of a property may be curable or incurable; a curable item is economically feasible and would result in value equal to or exceeding the cost of repairs. An item is incurable if its correction would not be economically feasible or create a comparable value to the building.

Reference: Property Valuation > Concepts of Value

Question 16

To find the value of a property, if the net operating income (NOI) and the capitalization rate are known, an appraiser using the income approach to value would

A)
divide the NOI by the capitalization rate.
B)
multiply the effective gross income (EGI) by the capitalization rate.
C)
multiply the NOI by the capitalization rate.
D)
divide the capitalization rate by the NOI.

Answer 16

To find the value of a property, if the net operating income (NOI) and the capitalization rate are known, an appraiser using the income approach to value would

A)
divide the NOI by the capitalization rate.
Correct Answer
B)
multiply the effective gross income (EGI) by the capitalization rate.
Incorrect Answer
C)
multiply the NOI by the capitalization rate.
Incorrect Answer
D)
divide the capitalization rate by the NOI.
Incorrect Answer
Explanation
To find the value, the NOI is divided by the capitalization rate. Remember the IRV formula: income divided by rate or value. In the income approach, I (NOI) ÷ R (capitalization rate) = value. If an appraiser knows the NOI and the value of the property, the capitalization rate may be found: NOI ÷ value = capitalization rate. If the appraiser knows the capitalization rate and the value of the property, the NOI can be calculated: value × rate = NOI.

Reference: Property Valuation > Valuation Methods

Question 17

A homeowner constructs an eight-bedroom brick house with a tennis court, a greenhouse, and an indoor pool in a neighborhood of modest two-bedroom and three-bedroom frame houses on narrow lots. The value of this house is MOST likely to be affected by what principle?

A)
Contribution
B)
Substitution
C)
Regression
D)
Progression

Answer 17

A homeowner constructs an eight-bedroom brick house with a tennis court, a greenhouse, and an indoor pool in a neighborhood of modest two-bedroom and three-bedroom frame houses on narrow lots. The value of this house is MOST likely to be affected by what principle?

A)
Contribution
Incorrect Answer
B)
Substitution
Incorrect Answer
C)
Regression
Correct Answer
D)
Progression
Incorrect Answer
Explanation
Larger lavish homes in a modest neighborhood will be drawn down in value by the modest, less lavish homes. Regression is the opposite of progression. Under progression, the value of a modest home would be higher if it were located among larger, fancier homes. The principle of substitution states that value is determined by what the buyer can find to buy that is similar or equal to the property under consideration. The principle of contribution is used to determine the value of adding improvement to the property.

Reference: Property Valuation > Concepts of Value

Question 18

All of these factors would be important in comparing properties under the sales comparison approach to value EXCEPT

A)
differences in appearance and condition.
B)
differences in dates of sale.
C)
differences in size of the improvements and land.
D)
differences in original cost.

Answer 18

All of these factors would be important in comparing properties under the sales comparison approach to value EXCEPT

A)
differences in appearance and condition.
Incorrect Answer
B)
differences in dates of sale.
Incorrect Answer
C)
differences in size of the improvements and land.
Incorrect Answer
D)
differences in original cost.
Correct Answer
Explanation
None of the approaches to appraisal considers the original (historical) cost of a property. The other three factors would be relevant to the sales comparison approach—sometimes called the market data approach.

Reference: Property Valuation > Valuation Methods

Question 19

In the cost approach, an appraiser uses which of these?

A)
An estimate of the building’s replacement cost
B)
The owner’s original cost of construction
C)
The property’s assessed value as used for tax purposes
D)
Sales prices of similar properties

Answer 19

In the cost approach, an appraiser uses which of these?

A)
An estimate of the building’s replacement cost
Correct Answer
B)
The owner’s original cost of construction
Incorrect Answer
C)
The property’s assessed value as used for tax purposes
Incorrect Answer
D)
Sales prices of similar properties
Incorrect Answer
Explanation
The building’s replacement cost is an essential component of the cost approach, along with depreciation and land value. The owner’s original cost of construction is not considered in the cost approach. The sales prices of similar properties are considered in the sales comparison approach. The property’s assessed value is not used to determine its fair market value.

Reference: Property Valuation > Valuation Methods

Question 20

A smaller home is surrounded by larger, more expensive homes. The value of the smaller home will MOST likely

A)
decrease because of the larger surrounding properties.
B)
increase because of the larger, more expensive properties.
C)
not be affected by surrounding properties.
D)
be anticipated to increase for the first five years.

Answer 20

A smaller home is surrounded by larger, more expensive homes. The value of the smaller home will MOST likely

A)
decrease because of the larger surrounding properties.
Incorrect Answer
B)
increase because of the larger, more expensive properties.
Correct Answer
C)
not be affected by surrounding properties.
Incorrect Answer
D)
be anticipated to increase for the first five years.
Incorrect Answer
Explanation
Under the principle of conformity, progression shows that the value of a modest, less expensive home will increase if it is located among larger, fancier, more expensive properties. Under regression, a structure that is larger or more luxurious would tend to be valued in the same range as less lavish homes in a neighborhood of modest homes.

Reference: Property Valuation > Concepts of Value

Question 21

An appraiser asked to estimate the value of an existing strip shopping center would probably give the MOST weight to which approach to value?

A)
Sales comparison approach
B)
Gross rent multiplier method
C)
Cost approach
D)
Income approach

Answer 21

An appraiser asked to estimate the value of an existing strip shopping center would probably give the MOST weight to which approach to value?

A)
Sales comparison approach
Incorrect Answer
B)
Gross rent multiplier method
Incorrect Answer
C)
Cost approach
Incorrect Answer
D)
Income approach
Correct Answer
Explanation
The income approach will have the most weight in the analysis of income-producing property. The sales comparison approach will have the most weight in the analysis of single-family residential property. The cost approach may be used as one approach to appraising income property, but the income approach will be given the most weight by the appraiser. The gross rent multiplier method is used in the income approach but to determine value of residential income property.

Reference: Property Valuation > Valuation Methods

Question 22

In an apartment building, usable square footage includes the unit’s

A)
common areas.
B)
garage space.
C)
interior hallway.
D)
shared hallway.

Answer 22

In an apartment building, usable square footage includes the unit’s

A)
common areas.
Incorrect Answer
B)
garage space.
Incorrect Answer
C)
interior hallway.
Correct Answer
D)
shared hallway.
Incorrect Answer
Explanation
The interior hallway in a unit is considered in the calculations of usable square footage. The shared hallway, garage space, and common areas are not used to calculate a unit’s usable square footage.

Reference: Property Valuation > Appraisals

Question 23

All of these are steps in the appraisal process EXCEPT

A)
gathering specific data on the subject property.
B)
considering the seller’s estimate of the property’s value.
C)
reconciling the data collected by the approaches used for the subject property.
D)
gathering general data for the area of the subject property.

Answer 23

All of these are steps in the appraisal process EXCEPT

A)
gathering specific data on the subject property.
Incorrect Answer
B)
considering the seller’s estimate of the property’s value.
Correct Answer
C)
reconciling the data collected by the approaches used for the subject property.
Incorrect Answer
D)
gathering general data for the area of the subject property.
Incorrect Answer
Explanation
The opinions of a seller as to the value of the property are often not an accurate estimate of value because the seller’s opinion might be based on emotion rather than objective reasoning. In estimating the property’s value, the appraiser will gather data on the area of the property and data on the subject property. The appraiser will apply the approach or approaches to value appropriate for the type of property being appraised and will reconcile the data from the approaches to find a final estimate of value.

Reference: Property Valuation > Appraisals

Question 24

In computing the square footage of a single-family home, an appraiser measures the external dimensions of the gross living area, which includes all of these EXCEPT

A)
an extra bedroom.
B)
a laundry room.
C)
a patio.
D)
a finished basement

Answer 24

In computing the square footage of a single-family home, an appraiser measures the external dimensions of the gross living area, which includes all of these EXCEPT

A)
an extra bedroom.
Incorrect Answer
B)
a laundry room.
Incorrect Answer
C)
a patio.
Correct Answer
D)
a finished basement
Incorrect Answer
Explanation
To compute the square footage of a single-family home, the external dimensions of the building are measured. A garage, porch, patio, or unfinished areas are not used when computing the square footage of a property. Unfinished areas are included in another section of an appraisal report.

Reference: Property Valuation > Concepts of Value

Question 25

A homeowner constructs a five-bedroom brick house with a tennis court and a pool in a neighborhood of modest two-bedroom and three-bedroom frame houses on narrow lots. The value of the five-bedroom house is MOST likely to be affected by the principle of

A)
conformity.
B)
substitution.
C)
contribution.
D)
progression.

Answer 25

A homeowner constructs a five-bedroom brick house with a tennis court and a pool in a neighborhood of modest two-bedroom and three-bedroom frame houses on narrow lots. The value of the five-bedroom house is MOST likely to be affected by the principle of

A)
conformity.
Correct Answer
B)
substitution.
Incorrect Answer
C)
contribution.
Incorrect Answer
D)
progression.
Incorrect Answer
Explanation
Under the principle of conformity, regression states that the larger, more lavish home with a pool would tend to be valued in the same range as the modest homes on narrow lots existing in the same neighborhood. Under the principle of progression, the value of a modest, less expensive home will increase if it is located among larger, fancier, more expensive properties. Substitution states that a property offering the same attributes for the least amount will sell first. Contribution determines the value that improvements bring to a property.

Reference: Property Valuation > Concepts of Value

Question 26

The appraised value of a residence with four bedrooms and one bathroom would probably be reduced because of

A)
functional obsolescence.
B)
external obsolescence.
C)
incurable physical deterioration.
D)
curable physical deterioration.

Answer 26

The appraised value of a residence with four bedrooms and one bathroom would probably be reduced because of

A)
functional obsolescence.
Correct Answer
B)
external obsolescence.
Incorrect Answer
C)
incurable physical deterioration.
Incorrect Answer
D)
curable physical deterioration.
Incorrect Answer
Explanation
Functional obsolescence exists when a property has outmoded or unacceptable physical or design features. A four-bedroom home with one bath is not desirable for buyers. External obsolescence exists due to economic, environmental, or social forces outside a property. Physical deterioration refers to a loss of value because a property has not been maintained property (deferred maintenance).

Reference: Property Valuation > Concepts of Value

Question 27

All of these would require an appraisal EXCEPT

A)
a Federal Housing Administration (FHA) loan.
B)
a new conventional loan.
C)
a U.S. Department of Veterans Affairs (VA) loan.
D)
a seller-carry loan.

Answer 27

All of these would require an appraisal EXCEPT

A)
a Federal Housing Administration (FHA) loan.
Incorrect Answer
B)
a new conventional loan.
Incorrect Answer
C)
a U.S. Department of Veterans Affairs (VA) loan.
Incorrect Answer
D)
a seller-carry loan.
Correct Answer
Explanation
Appraisals are required for all loans that involve federal funding; only a seller-carry loan would not meet this requirement.

Reference: Property Valuation > Appraisals

Question 28

The sales comparison approach to value is MOST important when estimating the value of

A)
an existing residence.
B)
an apartment building.
C)
a retail location.
D)
a hotel.

Answer 28

The sales comparison approach to value is MOST important when estimating the value of

A)
an existing residence.
Correct Answer
B)
an apartment building.
Incorrect Answer
C)
a retail location.
Incorrect Answer
D)
a hotel.
Incorrect Answer
Explanation
The sales comparison approach arrives at an estimate of value by comparing the existing residence with recently sold comparable properties. This approach is normally considered the most reliable in appraising single-family homes to the large number of current sales. To find an estimate of value for an apartment building, retail location, or hotel, an appraiser would normally rely on the income approach to value for each of these income-producing properties.

Reference: Property Valuation > Valuation Methods

Question 29

A developer experiences success and good profits in a recent real estate project. What principle of value indicates that her experience will attract others to engage in similar projects in the same area?

A)
Competition
B)
Highest and best use
C)
Anticipation
D)
Conformity

Answer 29

A developer experiences success and good profits in a recent real estate project. What principle of value indicates that her experience will attract others to engage in similar projects in the same area?

A)
Competition
Correct Answer
B)
Highest and best use
Incorrect Answer
C)
Anticipation
Incorrect Answer
D)
Conformity
Incorrect Answer
Explanation
Competition is the interaction of supply and demand, meaning that good profits tend to attract new activity and competition from other developers or investors. According to the principle of anticipation, a property’s value is affected by the expectation that certain events will occur; for example, the value of a house may be negatively affected if rumors circulate that an adjacent property may be converted to commercial use in the near future. The principle of conformity means that the maximum value of a property is created when the property is in harmony with its neighborhood and surroundings. The highest and best use of a property is the use that will give the property its greatest current value.

Reference: Property Valuation > Concepts of Value

Question 30

A vacant lot that measures 125 feet by 200 feet is listed at $325 per front foot. What is the listing price of the property?

A)
$65,000
B)
$50,000
C)
$40,625
D)
$40,800

Answer 30

A vacant lot that measures 125 feet by 200 feet is listed at $325 per front foot. What is the listing price of the property?

A)
$65,000
Incorrect Answer
B)
$50,000
Incorrect Answer
C)
$40,625
Correct Answer
D)
$40,800
Incorrect Answer
Explanation
The front foot refers to the measurement along the frontage of a lot. The frontage is usually the street frontage, but it might be the water footage for lots bordering on water. When two dimensions are given for a tract of land and they are not labeled, the first dimension is the frontage. The word width also means frontage, as the length of a parcel is called the depth. To solve this problem, multiply 125 feet by the cost per front foot, $325. 125 × $325 = $40,625.

Reference: Property Valuation > Concepts of Value

Question 31

In the income approach, all of these are considered when calculating net operating income (NOI) EXCEPT

A)
real estate taxes.
B)
management fees.
C)
utilities.
D)
debt service.

Answer 31

In the income approach, all of these are considered when calculating net operating income (NOI) EXCEPT

A)
real estate taxes.
Incorrect Answer
B)
management fees.
Incorrect Answer
C)
utilities.
Incorrect Answer
D)
debt service.
Correct Answer
Explanation
Debt service (mortgage payments of principal and interest) is not included in calculating NOI. Management fees, real estate taxes, cost of utilities, insurance, and other costs to maintain the property are all considered in determining a property’s operating expenses.

Reference: Property Valuation > Valuation Methods

Question 32

From the reproduction or replacement cost of a building, the appraiser deducts depreciation, which represents

A)
the loss of value due to any cause.
B)
the remaining economic life of the building.
C)
the remodeling costs to increase rentals.
D)
the costs to modernize the building.

Answer 32

From the reproduction or replacement cost of a building, the appraiser deducts depreciation, which represents

A)
the loss of value due to any cause.
Correct Answer
B)
the remaining economic life of the building.
Incorrect Answer
C)
the remodeling costs to increase rentals.
Incorrect Answer
D)
the costs to modernize the building.
Incorrect Answer
Explanation
Depreciation is loss of value from any cause. Some examples of such causes are physical deterioration (wearing out and/or deferred maintenance), economic (external) obsolescence, and functional obsolescence (lack of modernity). Remodeling and modernization costs may increase value by reducing the effects of deterioration and obsolescence, making a property more desirable and acceptable to buyers. Depreciation occurs over the economic life of a structure, the period during which it is expected to remain useful for its original intended purpose.

Reference: Property Valuation > Valuation Methods

Question 33

The general rule of thumb when an agent or an appraiser measures a building to compute the gross living area (GLA) is

A)
only the area below the ground is used.
B)
only the exterior area is used.
C)
the area above and below the ground is used.
D)
only the area above the ground is used.

Answer 33

The general rule of thumb when an agent or an appraiser measures a building to compute the gross living area (GLA) is

A)
only the area below the ground is used.
Incorrect Answer
B)
only the exterior area is used.
Incorrect Answer
C)
the area above and below the ground is used.
Incorrect Answer
D)
only the area above the ground is used.
Correct Answer
Explanation
Only the area above the ground is used to compute the GLA of a building. The area above the ground and the exterior areas are not used to compute the GLA of a building.

Reference: Property Valuation > Appraisals

Question 34

Which external area can be included in the calculation of the gross living area (GLA) of a property?

A)
Garage
B)
Closets
C)
Porch
D)
Patio

Answer 34

Which external area can be included in the calculation of the gross living area (GLA) of a property?

A)
Garage
Incorrect Answer
B)
Closets
Correct Answer
C)
Porch
Incorrect Answer
D)
Patio
Incorrect Answer
Explanation
Closets are included in the calculation of the GLA of a property. A garage, porch or patio would not be included in the calculation of the GLA.

Reference: Property Valuation > Appraisals

Question 35

An appraisal differs from a comparative market analysis (CMA) conducted by a broker in that an appraisal is based on an analysis of properties

A)
currently on the market.
B)
whose listings have expired.
C)
that have actually sold.
D)
within a broader geographic area.

Answer 35

An appraisal differs from a comparative market analysis (CMA) conducted by a broker in that an appraisal is based on an analysis of properties

A)
currently on the market.
Incorrect Answer
B)
whose listings have expired.
Incorrect Answer
C)
that have actually sold.
Correct Answer
D)
within a broader geographic area.
Incorrect Answer
Explanation
An appraisal is based on the analysis of properties that have actually sold. A CMA features properties similar to the subject property in location, size, and amenities. A CMA includes analysis of properties currently on the market; those properties currently listed that compete for buyers with the subject property; properties that have actually sold (recently closed properties); and properties whose listings have expired.

Reference: Property Valuation > Valuation Methods

Question 36

The income approach as used by an appraiser makes use of which of these?

A)
Capitalization
B)
Depreciation
C)
Equalization
D)
Appreciation

Answer 36

The income approach as used by an appraiser makes use of which of these?

A)
Capitalization
Correct Answer
B)
Depreciation
Incorrect Answer
C)
Equalization
Incorrect Answer
D)
Appreciation
Incorrect Answer
Explanation
Capitalization is a method of estimating today the future value of an income stream. Depreciation is the loss of value for any reason. Appreciation is an increase of value. Equalization is used by tax assessors and is a process of adjusting the assessed rate in a taxing district to achieve more conformity with other tax districts.

Reference: Property Valuation > Valuation Methods

Question 37

Defined as a loss in value from any cause, depreciation is generally divided into three categories. The loss of value due to the normal wear and tear on a property is called

A)
economic obsolescence.
B)
physical deterioration.
C)
functional obsolescence.
D)
external obsolescence.

Answer 37

Defined as a loss in value from any cause, depreciation is generally divided into three categories. The loss of value due to the normal wear and tear on a property is called

A)
economic obsolescence.
Incorrect Answer
B)
physical deterioration.
Correct Answer
C)
functional obsolescence.
Incorrect Answer
D)
external obsolescence.
Incorrect Answer
Explanation
Physical deterioration is the loss of value based on the physical wear and tear on the property. It can be either curable or incurable deterioration. External and economic obsolescence are a reduction in a property’s value caused by factors of the property itself. Functional obsolescence is a loss in value due to such factors as outmoded or unacceptable features of the property itself.

Reference: Property Valuation > Concepts of Value

Question 38

An appraiser conducting an appraisal of a single-family home discovers that the subject home has one more bedroom than any of the three comparable properties the appraiser wants to use in the appraisal. To account for the extra bedroom, the appraiser will

A)
subtract the value of the bedroom from the sales price of each comparable.
B)
add the value of the bedroom to the sales price of each comparable.
C)
add the value of the bedroom to the subject property.
D)
subtract the value of the bedroom from the subject property.

Answer 38

An appraiser conducting an appraisal of a single-family home discovers that the subject home has one more bedroom than any of the three comparable properties the appraiser wants to use in the appraisal. To account for the extra bedroom, the appraiser will

A)
subtract the value of the bedroom from the sales price of each comparable.
Incorrect Answer
B)
add the value of the bedroom to the sales price of each comparable.
Correct Answer
C)
add the value of the bedroom to the subject property.
Incorrect Answer
D)
subtract the value of the bedroom from the subject property.
Incorrect Answer
Explanation
Adjustments are made only to comparable properties, never to the subject. If the comparable is better than the subject or has a feature that is present in a comparable but not in the subject, the value of the amenity is subtracted from the sales price of the comparable. If the subject is better than, the value of the amenity is added.

Reference: Property Valuation > Valuation Methods

Question 39

Which of these is NOT considered by an appraiser using the income approach to value?

A)
Depreciation
B)
Annual net operating income (NOI)
C)
Annual gross income
D)
Capitalization rate

Answer 39

Which of these is NOT considered by an appraiser using the income approach to value?

A)
Depreciation
Correct Answer
B)
Annual net operating income (NOI)
Incorrect Answer
C)
Annual gross income
Incorrect Answer
D)
Capitalization rate
Incorrect Answer
Explanation
Depreciation is one of the calculations used in the cost approach and not in the income approach. The capitalization rate and the annual NOI are factors used in the income approach to determine a property’s value (NOI ÷ rate = value). Estimating the annual gross income of a property is the first step in the income approach to value.

Reference: Property Valuation > Valuation Methods

Question 40

The principle of appraising, which states that the maximum value is achieved when the property is in harmony with its surroundings, is the principle of

A)
competition.
B)
highest and best use.
C)
contribution.
D)
conformity.

Answer 40

The principle of appraising, which states that the maximum value is achieved when the property is in harmony with its surroundings, is the principle of

A)
competition.
Incorrect Answer
B)
highest and best use.
Incorrect Answer
C)
contribution.
Incorrect Answer
D)
conformity.
Correct Answer
Explanation
The principle of conformity means that maximum value is realized if the use of land conforms to existing neighborhood standards. The principle of competition is the interaction of supply and demand, because excess profits tend to attract competition. The principle of contribution states that the value of any part of a property is measured by the effect of that part on the value of the entire property. The highest and best use of a property is the use that will give the property its greatest current value.

Reference: Property Valuation > Concepts of Value

Question 41

A certified appraiser is required for which of these real estate transactions?

A)
To determine list price
B)
Comparable market analysis (CMA)
C)
Federally related financial transaction
D)
Broker price opinion (BPO)

Answer 41

A certified appraiser is required for which of these real estate transactions?

A)
To determine list price
Incorrect Answer
B)
Comparable market analysis (CMA)
Incorrect Answer
C)
Federally related financial transaction
Correct Answer
D)
Broker price opinion (BPO)
Incorrect Answer
Explanation
A certified appraiser is required for all federally related financial transactions. A certified appraiser is not required to perform a BPO or a CMA, which are often done by real estate licensees to help a seller determine list price.

Reference: Property Valuation > Appraisals

Question 42

The term reconciliation refers to which of these?

A)
Separating the value of the land from the total value of the property to compute depreciation
B)
Analyzing and weighing the findings obtained by the different approaches to value to arrive at a final estimate of value
C)
Loss of value due to any cause
D)
The process by which an appraiser determines the highest and best use for a parcel of land

Answer 42

The term reconciliation refers to which of these?

A)
Separating the value of the land from the total value of the property to compute depreciation
Incorrect Answer
B)
Analyzing and weighing the findings obtained by the different approaches to value to arrive at a final estimate of value
Correct Answer
C)
Loss of value due to any cause
Incorrect Answer
D)
The process by which an appraiser determines the highest and best use for a parcel of land
Incorrect Answer
Explanation
The three approaches to value typically produce three different values. An in-depth analysis of these values is required to determine the most valid, logical, and reliable approach to be used to provide the final value estimate. Determining depreciation, a loss of value due to any cause, is part of the process of the cost approach. The highest and best use of a property is the single most profitable use for that property. Determining highest and best use is only one of the factors considered in an appraisal prior to choosing an approach to value and reconciliation.

Reference: Property Valuation > Valuation Methods

Question 43

The term depreciation refers to

A)
the costs incurred to renovate or modernize a building.
B)
the value of real estate after the expiration of its useful life.
C)
the loss of value in real estate from any cause.
D)
the capitalized value of lost rental income.

Answer 43

The term depreciation refers to

A)
the costs incurred to renovate or modernize a building.
Incorrect Answer
B)
the value of real estate after the expiration of its useful life.
Incorrect Answer
C)
the loss of value in real estate from any cause.
Correct Answer
D)
the capitalized value of lost rental income.
Incorrect Answer
Explanation
The term depreciation refers to the loss of value in real estate from any cause either on the property or off the property, or a combination of the two.

Reference: Property Valuation > Concepts of Value

Question 44

All of these terms are associated with the economic characterizes of real estate EXCEPT

A)
permanence of the investment.
B)
license.
C)
improvements.
D)
area preference.

Answer 44

All of these terms are associated with the economic characterizes of real estate EXCEPT

A)
permanence of the investment.
Incorrect Answer
B)
license.
Correct Answer
C)
improvements.
Incorrect Answer
D)
area preference.
Incorrect Answer
Explanation
A license is the permission to use another’s property and is not an economic characteristic of property. Permanence of the investment refers to the labor and capital used for an investment. Area preference refers to the location of the property. Improvements are additions to a property to enhance its value.

Reference: Property Valuation > Concepts of Value

Question 45

The purpose of an appraisal is to

A)
set the market price of a property.
B)
set the amount of earnest money the seller should accept from a purchaser.
C)
estimate the market value of a property.
D)
determine the projected income of a property.

Answer 45

The purpose of an appraisal is to

A)
set the market price of a property.
Incorrect Answer
B)
set the amount of earnest money the seller should accept from a purchaser.
Incorrect Answer
C)
estimate the market value of a property.
Correct Answer
D)
determine the projected income of a property.
Incorrect Answer
Explanation
In an appraisal, the appraiser estimates the market value of the property. They do not determine the market price, which is the price for which the property actually sells, which may be higher or lower than the appraised value or estimated market value. An appraiser may determine the projected income of a property as part of the income approach. Earnest money and other contract considerations do not have an impact on the market value.

Reference: Property Valuation > Appraisals

Question 46

In computing the square footage of a single-family home, an appraiser measures the external dimensions of the gross living area, which includes all of these EXCEPT

A)
a patio.
B)
a finished basement.
C)
a laundry room.
D)
an extra bedroom.

Answer 46

In computing the square footage of a single-family home, an appraiser measures the external dimensions of the gross living area, which includes all of these EXCEPT

A)
a patio.
Correct Answer
B)
a finished basement.
Incorrect Answer
C)
a laundry room.
Incorrect Answer
D)
an extra bedroom.
Incorrect Answer
Explanation
To compute the square footage of a single-family home, the external dimensions of the building are measured. A garage, porch, patio, or unfinished areas are not used when computing the square footage of a property. Unfinished areas are included in another section of an appraisal report.

Reference: Property Valuation > Concepts of Value

Question 47

The market value of a parcel of real estate is

A)
its value without improvements.
B)
the most probable price it should bring.
C)
the amount of money paid for the property.
D)
an estimate of its future benefits.

Answer 47

The market value of a parcel of real estate is

A)
its value without improvements.
Incorrect Answer
B)
the most probable price it should bring.
Correct Answer
C)
the amount of money paid for the property.
Incorrect Answer
D)
an estimate of its future benefits.
Incorrect Answer
Explanation
An appraisal estimates the market value—the price a property would most probably bring. The amount of money actually paid for a property is the market price, which may or may not equal the market value. An estimate of a property’s future benefits may be used by an appraiser as part of the income approach to value. The value of a property without improvements consists of the value of the land itself.

Reference: Property Valuation > Concepts of Value

Question 48

Reconciliation is an appraisal term used to describe

A)
the appraiser’s determination of a property’s highest value.
B)
the appraiser’s analysis and weighing of the findings of all three appraisal approaches.
C)
an average of real estate values for properties similar to the subject property.
D)
the method used to determine the most appropriate capitalization rate for a property.

Answer 48

Reconciliation is an appraisal term used to describe

A)
the appraiser’s determination of a property’s highest value.
Incorrect Answer
B)
the appraiser’s analysis and weighing of the findings of all three appraisal approaches.
Correct Answer
C)
an average of real estate values for properties similar to the subject property.
Incorrect Answer
D)
the method used to determine the most appropriate capitalization rate for a property.
Incorrect Answer
Explanation
Reconciliation is the process used by the appraiser in determining how much weight should be given to each of the three approaches to value, if any. After considering all the data, the appraiser will estimate a final indication of value. Reconciliation does not mean taking the average of the estimates of value from the approaches; averaging is not used in any part of the appraisal process. It does not determine a highest value, but the fair market value of the property. Determining the capitalization rate is involved in the income approach to value.

Reference: Property Valuation > Valuation Methods

Question 49

An appraiser is assigned to appraise a house in an area with very few sales over the past year. One of the comparable properties she chooses is a home similar to the subject property. The house recently sold as a foreclosure property. When writing her appraisal report, what action will the appraiser take as a result of the foreclosed sale?

A)
Make a positive adjustment to the sales price of the foreclosed home
B)
Make a positive adjustment to the value of the subject property
C)
Make a negative adjustment to the sales price of the foreclosed home
D)
Make a negative adjustment to the value of the subject property

Answer 49

An appraiser is assigned to appraise a house in an area with very few sales over the past year. One of the comparable properties she chooses is a home similar to the subject property. The house recently sold as a foreclosure property. When writing her appraisal report, what action will the appraiser take as a result of the foreclosed sale?

A)
Make a positive adjustment to the sales price of the foreclosed home
Correct Answer
B)
Make a positive adjustment to the value of the subject property
Incorrect Answer
C)
Make a negative adjustment to the sales price of the foreclosed home
Incorrect Answer
D)
Make a negative adjustment to the value of the subject property
Incorrect Answer
Explanation
A foreclosed home usually will sell for less than fair market value. The appraiser will make a positive, upward adjustment to the sales price of the foreclosed home to compensate for the sale at less than market value. In the sales comparison approach, adjustments are made to the sales prices of comparable properties, never to the subject property.

Reference: Property Valuation > Valuation Methods

Question 50

An appraiser has been hired to prepare an appraisal on a property that includes an elegant old mansion that is now used entirely as an insurance company office. Which approach to value would the appraiser MOST rely on?

A)
Gross rent multiplier approach
B)
Sales comparison approach
C)
Income approach
D)
Replacement cost approach

Answer 50

An appraiser has been hired to prepare an appraisal on a property that includes an elegant old mansion that is now used entirely as an insurance company office. Which approach to value would the appraiser MOST rely on?

A)
Gross rent multiplier approach
Incorrect Answer
B)
Sales comparison approach
Incorrect Answer
C)
Income approach
Correct Answer
D)
Replacement cost approach
Incorrect Answer
Explanation
The income approach is the most appropriate approach for income-producing properties such as an office building, even if the building was once a residence. The gross rent multiplier is not an approach to value. It is a process of estimating the market value of income-producing residential property. The sales comparison approach and the replacement cost approach may be used by an appraiser to assist in determining an estimate of value, but these approaches are not as useful or precise as the income approach to that property. Their findings will be weighed less than those of the income approach in the appraiser’s final reconciliation.

Reference: Property Valuation > Valuation Methods

Question 51

All of these are characteristics of value EXCEPT

A)
scarcity.
B)
obsolescence.
C)
transferability.
D)
utility.

Answer 51

All of these are characteristics of value EXCEPT

A)
scarcity.
Incorrect Answer
B)
obsolescence.
Correct Answer
C)
transferability.
Incorrect Answer
D)
utility.
Incorrect Answer
Explanation
To have value, a property must have monetary worth based on the desirability of the property. Obsolescence is not a desirable trait and, therefore, takes away from the desirability of the property and the demand for the property. Demand, utility, scarcity, and transferability are all characteristics of a property’s value (DUST). Demand is the need or desire for ownership supported by the financial means to satisfy the need. Utility refers to the property’s usefulness for its intended purposes. Scarcity means that there is a limited supply of property. Transferability refers to the relative ease with which ownership rights are transferred from one owner to another.

Reference: Property Valuation > Concepts of Value

Question 52

When appraising a commercial property, the appraiser is MOST concerned with

A)
the total debt service on the property.
B)
the accrued depreciation on the property.
C)
the income generated by the property.
D)
the sales prices of comparable properties.

Answer 52

When appraising a commercial property, the appraiser is MOST concerned with

A)
the total debt service on the property.
Incorrect Answer
B)
the accrued depreciation on the property.
Incorrect Answer
C)
the income generated by the property.
Correct Answer
D)
the sales prices of comparable properties.
Incorrect Answer
Explanation
The appraiser is most concerned with the income generated by the property in estimating the value of the property. Accrued depreciation is a factor used in the cost approach. The sales prices of comparable properties are used in the sales comparison approach, but finding comparable properties for commercial properties is often difficult. Debt service (mortgage payments) is not considered an operating expense deducted from annual operating expenses to determine the net operating income (NOI) of a commercial property.

Reference: Property Valuation > Valuation Methods

Question 53

A house with outmoded plumbing is suffering from

A)
external depreciation.
B)
incurable physical deterioration.
C)
functional obsolescence.
D)
curable physical deterioration.

Answer 53

A house with outmoded plumbing is suffering from

A)
external depreciation.
Incorrect Answer
B)
incurable physical deterioration.
Incorrect Answer
C)
functional obsolescence.
Correct Answer
D)
curable physical deterioration.
Incorrect Answer
Explanation
Outmoded plumbing is an example of an outdated design feature that lessens the value of a property. The loss of value may be curable if the cost of replacing the plumbing would be offset by the anticipated increased value of the property. The plumbing is not a physical deterioration resulting from deferred maintenance. External depreciation refers to a condition that is not part of the property itself.

Reference: Property Valuation > Concepts of Value

Question 54

In the valuation of a large apartment complex, the MOST weight would be given to which approach to value?

A)
Sales comparison approach
B)
Income approach
C)
Cost approach
D)
All approaches equally weighted

Answer 54

In the valuation of a large apartment complex, the MOST weight would be given to which approach to value?

A)
Sales comparison approach
Incorrect Answer
B)
Income approach
Correct Answer
C)
Cost approach
Incorrect Answer
D)
All approaches equally weighted
Incorrect Answer
Explanation
The income approach is the primary approach used for income-producing properties such as an apartment complex. The cost approach would most likely not be used due to the difficulty of determining a replacement or reproduction cost for the property. The sales comparison approach is most commonly used in the appraisal of single family residences. The process of reconciliation requires the appraiser to weigh which of the three approaches is most appropriate because they do not have equal weight and may not be averaged together to determine a value.

Reference: Property Valuation > Valuation Methods

Question 55

A step used in the income approach to determine value is to

A)
apply the capitalization rate.
B)
apply a depreciation schedule.
C)
estimate reproduction cost.
D)
calculate the replacement cost.

Answer 55

A step used in the income approach to determine value is to

A)
apply the capitalization rate.
Correct Answer
B)
apply a depreciation schedule.
Incorrect Answer
C)
estimate reproduction cost.
Incorrect Answer
D)
calculate the replacement cost.
Incorrect Answer
Explanation
In the income approach to value, the capitalization rate is applied to the property’s annual net operating income (NOI) to arrive at the estimate of the property’s value. Calculating reproduction costs, replacement costs, and depreciation are procedures used in the cost approach to value.

Reference: Property Valuation > Valuation Methods

Question 56

A divorce attorney hires a broker to determine the value of the property the couple owns. The broker will MOST likely prepare

A)
a sales comparison approach.
B)
a broker’s price opinion (BPO).
C)
a real estate appraisal.
D)
a cost approach to value.

Answer 56

A divorce attorney hires a broker to determine the value of the property the couple owns. The broker will MOST likely prepare

A)
a sales comparison approach.
Incorrect Answer
B)
a broker’s price opinion (BPO).
Correct Answer
C)
a real estate appraisal.
Incorrect Answer
D)
a cost approach to value.
Incorrect Answer
Explanation
A BPO is a broker’s opinion of the value of a particular property, often in the form of a comparative market analysis (CMA). The BPO may not be labeled an appraisal, which may only be conducted by a state licensed or certified appraiser. The sales comparison approach is used in both the BPO and an appraisal. The cost approach is used when conducting an appraisal.

Reference: Property Valuation > Appraisals

Question 57

The income approach to value would be MOST important in the appraisal of

A)
a single-family residence.
B)
a residential condominium.
C)
a shopping center.
D)
a vacant residential lot.

Answer 57

The income approach to value would be MOST important in the appraisal of

A)
a single-family residence.
Incorrect Answer
B)
a residential condominium.
Incorrect Answer
C)
a shopping center.
Correct Answer
D)
a vacant residential lot.
Incorrect Answer
Explanation
The income approach would be used to estimate the value of income-producing properties, such as shopping centers and office buildings. The sales comparison approach or the cost approach may be used to determine the value of other types of properties.

Reference: Property Valuation > Valuation Methods

Question 58

Which approach to value would require the value of the land to be calculated separately from the value of the improvements?

A)
Income approach
B)
None of the approaches
C)
Sales comparison approach
D)
Cost approach

Answer 58

Which approach to value would require the value of the land to be calculated separately from the value of the improvements?

A)
Income approach
Incorrect Answer
B)
None of the approaches
Incorrect Answer
C)
Sales comparison approach
Incorrect Answer
D)
Cost approach
Correct Answer
Explanation
The cost approach requires a separate estimated value for the land. Estimated replacement or reproduction cost less accrued depreciation plus estimated land value equals the estimated value by the cost approach. Neither the income approach nor the sales comparison approach calculates the value of land separately from the value of a property’s improvements.

Reference: Property Valuation > Valuation Methods

Question 59

The listing or asking price of a property in the marketplace is its

A)
intrinsic value.
B)
subjective value.
C)
market value.
D)
book value.

Answer 59

The listing or asking price of a property in the marketplace is its

A)
intrinsic value.
Incorrect Answer
B)
subjective value.
Incorrect Answer
C)
market value.
Correct Answer
D)
book value.
Incorrect Answer
Explanation
Market value is what a property should sell for in an arm’s-length transaction between informed parties, neither of which is under undue pressure, and the property has been exposed to the market for a reasonable length of time. The intrinsic value of a property is the result of a person’s individual preferences for a given geographic area over other less desirable areas. The subjective value is what a person perceives the value to be based on the benefits to that person. The book value, used for income tax purposes, refers to the value of the property after factoring in the depreciation on the property.

Reference: Property Valuation > Concepts of Value

Question 60

The prices of homes currently on the market included in a comparative market analysis (CMA) assist a seller’s agent in

A)
knowing what buyers have not been willing to pay for properties similar to the subject property.
B)
establishing what other buyers were willing to pay for properties similar to the subject property.
C)
setting a listing price with the seller in competition with similar properties currently on the market.
D)
advising buyers on what to offer for the subject property.

Answer 60

The prices of homes currently on the market included in a comparative market analysis (CMA) assist a seller’s agent in

A)
knowing what buyers have not been willing to pay for properties similar to the subject property.
Incorrect Answer
B)
establishing what other buyers were willing to pay for properties similar to the subject property.
Incorrect Answer
C)
setting a listing price with the seller in competition with similar properties currently on the market.
Correct Answer
D)
advising buyers on what to offer for the subject property.
Incorrect Answer
Explanation
A CMA consists of information about three types of properties similar to the subject property: prices of homes recently sold, the current listing prices of homes on the market, and the prices of homes in expired listings. The prices of currently listed homes assist the agent in setting, with the seller, a listing price in competition with similar properties currently on the market. An analysis of properties already closed would establish what other buyers were willing to pay for similar properties, and a review of expired listings would help the agent know what buyers have not been willing to pay for similar properties. A seller’s agent representing only the seller would not advise a buyer on what to offer for the property. A buyer’s agent could use the prices of currently listed homes and the prices of homes recently sold to reassure buyers that their offers are in line with the prices of similar properties in the neighborhood.

Reference: Property Valuation > Valuation Methods

Question 61

A state-certified appraiser is conducting an appraisal of a library building surrounded by several acres of land belonging to the property. In determining the value of the land itself, the appraiser will MOST likely use

A)
the cost approach.
B)
the reproduction cost.
C)
the sales comparison approach.
D)
the income approach.

Answer 61

A state-certified appraiser is conducting an appraisal of a library building surrounded by several acres of land belonging to the property. In determining the value of the land itself, the appraiser will MOST likely use

A)
the cost approach.
Incorrect Answer
B)
the reproduction cost.
Incorrect Answer
C)
the sales comparison approach.
Correct Answer
D)
the income approach.
Incorrect Answer
Explanation
An appraiser will most likely use the sales comparison approach to determine the value of the land. They may use the cost approach to arrive at an opinion of value for the library building itself. The reproduction cost and the replacement cost are incorporated within the cost approach to value. An appraiser uses the income approach to value for income-producing properties, such as a multiunit apartment building.

Reference: Property Valuation > Valuation Methods

Question 62

Change, contribution, and substitution are some of the basic principles that affect what aspect of real estate?

A)
Supply
B)
Demand
C)
Depreciation
D)
Value

Answer 62

Change, contribution, and substitution are some of the basic principles that affect what aspect of real estate?

A)
Supply
Incorrect Answer
B)
Demand
Incorrect Answer
C)
Depreciation
Incorrect Answer
D)
Value
Correct Answer
Explanation
Change, contribution, and substitution all affect value—the most probable price a property will bring. Change relates to the reality that nothing is constant and variations in various aspects of a property will affect its value. Contribution means that the value of any part of property is measured by how it affects the value of the whole property. Substitution says that the maximum value of a property tends to be determined by how much it would cost to purchase an equally desirable substitute property. Depreciation is a loss of value for any reason. Under the principle of supply and demand, when supply increases, the value decreases, and when demand increases, the value increases.

Reference: Property Valuation > Concepts of Value

Question 63

Rents have gone up in the area. The principle that BEST describes this increase is

A)
substitution.
B)
conformity.
C)
contribution.
D)
supply and demand.

Answer 63

Rents have gone up in the area. The principle that BEST describes this increase is

A)
substitution.
Incorrect Answer
B)
conformity.
Incorrect Answer
C)
contribution.
Incorrect Answer
D)
supply and demand.
Correct Answer
Explanation
Under the concept of supply and demand, if demand decreases and supply remains the same, the supply becomes more valuable. Fewer rental properties will produce higher rents. The principle of substitution says that the maximum value of a property tends to be how much it would cost to purchase an equally desirable substitute property. The principle of contribution is used to determine if improvements will increase or decrease the value of the real property. Conformity is the appraisal principle that holds that the greater the similarity among properties in an area, the better the properties will hold their value.

Reference: Property Valuation > Concepts of Value

Question 64

An appraiser using the gross rent multiplier (GRM) would consider which of following?

A)
Rental income and market price
B)
Market value and potential rent income
C)
Capitalization and net operating income (NOI)
D)
Market price of comparables and adjustments to the subject

Answer 64

An appraiser using the gross rent multiplier (GRM) would consider which of following?

A)
Rental income and market price
Correct Answer
B)
Market value and potential rent income
Incorrect Answer
C)
Capitalization and net operating income (NOI)
Incorrect Answer
D)
Market price of comparables and adjustments to the subject
Incorrect Answer
Explanation
The GRM times the rental income will determine the properties market value or anticipated sales price. Comparables and adjustments are used in the sales comparison approach. Market value is what the GRM is determining, not market price, which is the actual sale price. Capitalization and NOI are used in the income approach.

Reference: Property Valuation > Valuation Methods

Question 65

An appraiser conducting an appraisal of a single-family residence notes that the subject home does not have an attached garage. Three of the comparables the appraiser chooses include attached, finished garages. To account for the garage that is present in each comparable, but not in the subject property, the appraiser will

A)
subtract the value of an attached garage from the subject property.
B)
add the value of an attached garage to the sales price for each comparable.
C)
add the value of an attached garage to the subject property.
D)
subtract the value of an attached garage from the sales price for each comparable.

Answer 65

An appraiser conducting an appraisal of a single-family residence notes that the subject home does not have an attached garage. Three of the comparables the appraiser chooses include attached, finished garages. To account for the garage that is present in each comparable, but not in the subject property, the appraiser will

A)
subtract the value of an attached garage from the subject property.
Incorrect Answer
B)
add the value of an attached garage to the sales price for each comparable.
Incorrect Answer
C)
add the value of an attached garage to the subject property.
Incorrect Answer
D)
subtract the value of an attached garage from the sales price for each comparable.
Correct Answer
Explanation
Adjustments are made only to comparable properties never the subject. If the comparable is better than the subject or has a feature that is present in a comparable but not in the subject, the value of the amenity is subtracted from the sales price of the comparable. If the subject is better than, the value of the amenity is added.

Reference: Property Valuation > Valuation Methods

Question 66

In MOST market areas, rents are determined by

A)
Housing and Urban Development (HUD).

B)
The local apartment owners association.

C)
a tenants union.

D)
supply and demand factors.

Answer 66

In MOST market areas, rents are determined by

A)
Housing and Urban Development (HUD).

Incorrect Answer
B)
The local apartment owners association.

Incorrect Answer
C)
a tenants union.

Incorrect Answer
D)
supply and demand factors.
Correct Answer
Explanation
The amount of properties and vacancy determine rent values. If the supply is low and demand is high, rents go up. If the supply is high and demand is low, rents go down. HUD, tenants unions, and apartment owner associations do not play a major factor in determining rents.

Reference: Property Valuation > Concepts of Value

Question 67

An owner who is interested in selling his house is usually concerned about how much money he can get when it sells. A comparative market analysis (CMA) may help the seller determine a realistic listing price. Which of these statements is TRUE?

A)
A CMA is what is prepared by a certified real estate appraiser.
B)
A CMA contains a compilation of facts about similar properties that have recently sold.
C)
A broker, but not a salesperson, is permitted to prepare a CMA.
D)
A CMA is the same as an appraisal.

Answer 67

An owner who is interested in selling his house is usually concerned about how much money he can get when it sells. A comparative market analysis (CMA) may help the seller determine a realistic listing price. Which of these statements is TRUE?

A)
A CMA is what is prepared by a certified real estate appraiser.
Incorrect Answer
B)
A CMA contains a compilation of facts about similar properties that have recently sold.
Correct Answer
C)
A broker, but not a salesperson, is permitted to prepare a CMA.
Incorrect Answer
D)
A CMA is the same as an appraisal.
Incorrect Answer
Explanation
A CMA is a comparison of the prices of properties recently sold, properties currently on the market, and properties that did not sell. It is an analysis of the market activity among comparable properties designed to arrive at a fair market value for a subject property. Any competent real estate broker or salesperson may prepare a CMA. The CMA is not an appraisal, which may only be prepared by a state-licensed or certified real estate appraiser.

Reference: Property Valuation > Valuation Methods

Question 68

In general, when the supply of a certain commodity increases,

A)
demand for it tends to rise.
B)
demand for it tends to drop.
C)
price tends to rise.
D)
price tends to drop.

Answer 68

In general, when the supply of a certain commodity increases,

A)
demand for it tends to rise.
Incorrect Answer
B)
demand for it tends to drop.
Incorrect Answer
C)
price tends to rise.
Incorrect Answer
D)
price tends to drop.
Correct Answer
Explanation
According to the principle of supply and demand, if demand is constant and supply increases, sellers of the commodity compete with each other by lowering prices. Prices tend to rise if the demand for the commodity increases while the supply remains the same.

Reference: Property Valuation > Concepts of Value

Question 69

Which appraisal method uses a rate of investment return in estimating a property’s value?

A)
Sales comparison approach
B)
Income approach
C)
Cost approach
D)
Gross income multiplier

Answer 69

Which appraisal method uses a rate of investment return in estimating a property’s value?

A)
Sales comparison approach
Incorrect Answer
B)
Income approach
Correct Answer
C)
Cost approach
Incorrect Answer
D)
Gross income multiplier
Incorrect Answer
Explanation
The income approach uses the rate of investment return, also known as the capitalization rate, to estimate a property’s value. The value is determined by dividing the annual net income by the capitalization rate (NOI ÷ rate = value). The capitalization rate is not used in the cost approach or the income approach. The gross rent multiplier is a factor used in the income approach to estimate the value of five or more residential units, commercial, or industrial properties.

Reference: Property Valuation > Valuation Methods

Question 70

Economic, environmental, and external obsolescence refer to

A)
outdated items and changes in technology.
B)
factors outside of the property lines that affect the property’s value.
C)
obsolescence that is reasonable and economically feasible to correct.
D)
lack of maintenance and ordinary wear and tear.

Answer 70

Economic, environmental, and external obsolescence refer to

A)
outdated items and changes in technology.
Incorrect Answer
B)
factors outside of the property lines that affect the property’s value.
Correct Answer
C)
obsolescence that is reasonable and economically feasible to correct.
Incorrect Answer
D)
lack of maintenance and ordinary wear and tear.
Incorrect Answer
Explanation
Lack of maintenance and ordinary wear and tear are marks of physical deterioration. Outdated items and outdated technology indicate functional obsolescence in a property. Obsolescence that is economically feasible to correct is curable obsolescence.

Reference: Property Valuation > Concepts of Value

Question 71

A formal estimate of a property’s market value, based on established methods and using a licensed professional, is performed by

A)
a real estate counselor.
B)
a real estate broker.
C)
a real estate appraiser.
D)
a home inspector.

Answer 71

A formal estimate of a property’s market value, based on established methods and using a licensed professional, is performed by

A)
a real estate counselor.
Incorrect Answer
B)
a real estate broker.
Incorrect Answer
C)
a real estate appraiser.
Correct Answer
D)
a home inspector.
Incorrect Answer
Explanation
Although brokers, counselors, and inspectors also look closely at a specific property, only a licensed appraiser is qualified to produce a formal opinion of value—an appraisal. State and federal laws require licensure and classification of real property appraisers based on their education and experience.

Reference: Property Valuation > Appraisals

Question 72

Reconciliation is BEST described as

A)
determining the final estimate of value by selecting the best value from the three approaches.
B)
selecting the highest value given by the three approaches to value.
C)
analyzing the findings obtained from the three approaches to value.
D)
comparing similar properties and identifying their amenities.

Answer 72

Reconciliation is BEST described as

A)
determining the final estimate of value by selecting the best value from the three approaches.
Incorrect Answer
B)
selecting the highest value given by the three approaches to value.
Incorrect Answer
C)
analyzing the findings obtained from the three approaches to value.
Correct Answer
D)
comparing similar properties and identifying their amenities.
Incorrect Answer
Explanation
Reconciliation is analyzing the findings obtained from the three approaches to value and deciding how much weight to give to each approach. A final value is estimated from the results of the analysis and the judgment of the appraiser. Comparable properties are used to estimate a value in the sales comparison approach. Reconciliation is a process of weighing the findings from the approaches to value and the reliability of the data each approach offers for the type of property appraised. Averaging is never used in any step of the appraisal process.

Reference: Property Valuation > Valuation Methods

Question 73

The characteristics of value include which of these?

A)
Competition
B)
Anticipation
C)
Balance
D)
Scarcity

Answer 73

The characteristics of value include which of these?

A)
Competition
Incorrect Answer
B)
Anticipation
Incorrect Answer
C)
Balance
Incorrect Answer
D)
Scarcity
Correct Answer
Explanation
The characteristics of value are demand, utility, scarcity, and transferability (DUST). Scarcity means that there is a limited supply of similar properties. Competition is the interaction of supply and demand, causing prices for property to rise or fall. The economic principle of anticipation states that value is created by the expectation that certain events will occur, affecting the value of a property. Balance refers to the amount remaining after certain mathematical calculations have been completed.

Reference: Property Valuation > Concepts of Value

Question 74

In the cost approach to value, the appraiser makes use of

A)
the owner’s original cost of the building.
B)
the assessed value of the building.
C)
the sales prices of similar buildings in the area.
D)
the estimated replacement cost of the building.

Answer 74

In the cost approach to value, the appraiser makes use of

A)
the owner’s original cost of the building.
Incorrect Answer
B)
the assessed value of the building.
Incorrect Answer
C)
the sales prices of similar buildings in the area.
Incorrect Answer
D)
the estimated replacement cost of the building.
Correct Answer
Explanation
The cost approach is used to estimate the replacement or reproduction cost of the building. Estimated replacement or reproduction cost less accrued depreciation plus estimated land value equals the estimated value by the cost approach. The owner’s original purchase cost is not used in any approach to value because the process is determining current value. The sale of similar buildings is used in the sales comparison approach. Assessed value is used only by taxing authorities, never in determining market value.

Reference: Property Valuation > Valuation Methods

Question 75

An appraiser is responsible for

A)
estimating value.
B)
determining value.
C)
finding value.
D)
computing value.

Answer 75

An appraiser is responsible for

A)
estimating value.
Correct Answer
B)
determining value.
Incorrect Answer
C)
finding value.
Incorrect Answer
D)
computing value.
Incorrect Answer
Explanation
The appraiser does not make or determine value. After the appraiser completes the analysis and considers all the data, an estimate of value will be provided. An appraisal is an official estimate of value.

Reference: Property Valuation > Appraisals

Question 76

Title XI of the Financial Instructions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) regulates

A)
attorneys.
B)
real estate licensees.
C)
home inspection companies.
D)
appraisers.

Answer 76

Title XI of the Financial Instructions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) regulates

A)
attorneys.
Incorrect Answer
B)
real estate licensees.
Incorrect Answer
C)
home inspection companies.
Incorrect Answer
D)
appraisers.
Correct Answer
Explanation
Title XI of the FIRREA regulates appraisers. The FIRREA does not regulate real estate licensees, lenders, or attorneys.

Reference: Property Valuation > Appraisals

Question 77

Capitalization is a mathematical process by which annual net operating income (NOI) is used to

A)
establish effective gross income (EGI)
B)
determine replacement cost
C)
establish depreciation
D)
estimate present value

Answer 77

Capitalization is a mathematical process by which annual net operating income (NOI) is used to

A)
establish effective gross income (EGI)
Incorrect Answer
B)
determine replacement cost
Incorrect Answer
C)
establish depreciation
Incorrect Answer
D)
estimate present value
Correct Answer
Explanation
Capitalization converts the NOI into an indication of value in the income approach to determine the current or present market value. An appraiser estimates the return on investment an investor would demand for the property being appraised. An appraiser will determine replacement costs, reproduction costs, and depreciation for a property when using the cost approach to value. The EGI is estimated by deducting an appropriate amount for vacancy and rent loss in an income-producing property.

Reference: Property Valuation > Valuation Methods