Real Estate Pricing Flashcards
1
Q
One of the major differences between a certified appraiser and a real estate salesperson is:
Why they value properties, e.g. for sale purposes
The level of education and training needed to become an appraiser
Attitude; appraisers have bad ones
Expertise; appraisers always have more expertise in any market
A
The level of education and training needed to become an appraiser
2
Q
Agent Ann has analyzed the market for one story, 3 bedroom, 2 bath ranch houses for the past year. She has determined that 24 such homes have sold in the past year. This is: Absorption rate Supply and demand Increasing returns Anticipation
A
Absorption Rate
3
Q
Mr. and Mrs. Hunter live in a homogeneous subdivision, where the houses are very similar. They list their house at a time when ten other houses like theirs are also for sale. The three houses listed below their asking price sell first. This illustrates the principle of: Supply and demand Increasing returns Conformity Substitution
A
Substitution
4
Q
A BPO, under Dodd-Frank, can be used for all EXCEPT which of the following reasons?
To make a decision regarding accepting a short sale offer
For portfolio analysis
To originate a federally related loan
To price a property for a relocation company
A
To originate a federally related loan
5
Q
All states allow real estate agents to perform BPOs.
True
False
A
False
6
Q
Anyone who wants to be a Certified Appraiser, going forward from January 1, 2015, needs to have a four year college degree.
True
False
A
True
7
Q
If an appraiser is estimating retrospective value, they are estimating the value of a property at some point in the future.
True
False
A
False
8
Q
An analysis of the absorption rate in the market indicates that 36 homes similar to the subject have sold within the past year. This is a rate of 3 per month. If the current number of listings is 6, that is a seller’s market.
True
False
A
True
9
Q
Agents can price a house the first day they are licensed.
True
False
A
True
10
Q
Appraisers must complete both an education and an experience component before becoming certified.
True
False
A
True
11
Q
Which of the following types of data is specific data, as opposed to general data?
The unemployment rate in the county where the house is located
The overall climate of the region of the country where the house is located
The square footage of the house
The main employment opportunities in the area
A
The square footage of the house
12
Q
Which of the following is correct about flood plain determination?
If the property does not appear on a FEMA map online, it is not in the flood plain
If the property does appear on a FEMA map online, it is in the flood plain
The local municipality is the best source for current flood plain information
Local municipalities do not keep flood plain maps.
A
The local municipality is the best source for current flood plain information
13
Q
In the example used in the text about an agent who priced a property incorrectly because of her failure to analyze highest and best use, what salient fact did she miss?
The lot was big enough to have some of it paved
The house was big enough to be turned into two office
The property had recently been rezoned “Village Commercial”
The rents were high for office space in that area
A
The property had recently been rezoned “Village Commercial”
14
Q
When looking at a house to price it, which answer best describes what you should do?
Walk through the house and listen to what the owners say about their house
Go through the main living areas, and think about how the house should be staged
Go through the entire house, noting things like age, condition, type of heating, plumbing materials, wiring, kitchen, baths, updates, etc.
Get the information you need for MLS and ask the sellers what they want to ask for the house
A
Go through the entire house, noting things like age, condition, type of heating, plumbing materials, wiring, kitchen, baths, updates, etc.
15
Q
While going through a house to price it, you notice that it is a Cape Cod style home, with one bedroom and a full bath on the main level, and two more bedrooms (but no bath) on the second level. This is an example of: Physical deterioration External obsolescence The influence of style on the home Functional obsolescence
A
Functional obsolescence
16
Q
Ideally, the family bathrooms and bedrooms should be: Easily accessible to guests Located in various parts of the house In a private area of the house In the public area of the house
A
In a private area of the house
17
Q
A neighborhood will typically be described in terms of the age, size, style, and price range of the houses in it.
True
False
A
True
18
Q
“The neighborhood is near the University, and many of the multi-family homes in this neighborhood are student housing.” This is an acceptable way to describe a neighborhood.
True
False
A
True
19
Q
None of the work involving the pricing of a house can be done in your office.
True
False
A
False
20
Q
Under Fannie Mae Guidelines, appraisers must characterize locations as one of the following: neutral, beneficial, or adverse.
True
False
A
True
21
Q
The effective age of the home is 10 years, and the economic life is 60 years. What is the depreciation? 16.67% 6% 50% 50 years
A
16.67%
22
Q
The effective age of the home is 30 years, and the economic life is 50 years. What is the depreciation? 15.67% 20% 60% 20 years
A
15.67%
23
Q
A property sells for $275,000 and the land value is $45,000. The replacement cost new of the building is $290,000. How much depreciation is there in percentage? 50% 20.6% 95% 15.67%
A
20.6%
24
Q
A property sells for $750,000, and the land value is $250,000. The replacement cost new of the structure is $950,000. How much depreciation is there in percentage? 47.3% 60% 79.3% 26.67%
A
47.3%
25
Which is correct about the cost approach?
The cost approach is developed; depreciation is added in; land value is subtracted
The cost approach is developed on the building and site improvements; depreciation is taken; land value is added back in
The replacement cost is estimated, the depreciation is deducted, the land value is added back in, as are site improvements
The value as a whole is developed; depreciation is taken, but the land value is subtracted at the end
The replacement cost is estimated, the depreciation is deducted, the land value is added back in, as are site improvements
26
```
The cost approach is often what is the only approach that can be developed for:
A two unit duplex
A single family home
Unimproved land
A special-purpose building
```
A special-purpose building
27
Which of the following is an example of curable physical depreciation?
A worn out roof on an otherwise sound house
An outmoded kitchen in a house
A house located near a sewage treatment plant
A house with major structural damage
A worn out roof on an otherwise sound house
28
Which of the following is an example of economical, or external, depreciation?
A house with a very old furnace, and old wiring
A house with very dated décor
A house with unpleasant neighbors
A house right next to active railroad tracks
A house right next to active railroad tracks
29
The current market for houses like the subject looks like this: in the past 12 months, 36 homes like the subject have sold. Today, there are 12 homes like the subject listed for sale. Which of the following is correct?
The absorption rate is 4 per month, and there is a 3 month supply
The absorption rate is 3 per month, and there is a 4 month supply
The absorption rate is 36 per month, and there is a third of a year supply
The absorption rate is 6 per month, and there is a 2 month supply.
The absorption rate is 3 per month, and there is a 4 month supply
30
One of the elements of the definition of market value includes:
Buyer and seller are both represented by real estate agents
Buyer and seller are typically motivated and well informed
Buyer and seller are under duress
Buyer and seller are strangers
Buyer and seller are typically motivated and well informed
31
Which of the following is the best guidance after selecting a pool of comparables which are as similar to the subject as possible?
Use the comps located as close as possible to the subject, so for example, across the street is better than a block away
Use the comps which show the highest possible price or value
Use the comparables which will require the most adjustments
Use the comparables which will require the least adjustments
Use the comparables which will require the least adjustments
32
Which of these would represent adjusting a property twice for the same thing?
You adjust for condition and location
You adjust for number of baths and square footage
You adjust for garage space and square footage in the house
You adjust for condition and modernization within the house
You adjust for condition and modernization within the house
33
Automated Valuation Models (AVMs) are used by which of the following?
County assessment offices, to establish a value for taxation
Lenders, for removal of PMI
Portfolio management for lenders
All of the above
All of the above
34
The goal of preparing a CMA and presenting it to the seller is to:
Have them see the property from ‘your side of the desk’, e.g. objectively
Have them list the property with you at any price
Be able to refer back to when they ask too much
Show you know how to do this, just like the other agents.
Have them see the property from ‘your side of the desk’, e.g. objectively
35
Cap rates and GRMs are:
Complicated ways to value income property
Formulae which reflect the relationship between the rent (income) the property generates and its value (price)
Formulae which reflect the risk associated with the property
Formulae which calculate the internal rate of return on the property
Formulae which reflect the relationship between the rent (income) the property generates and its value (price)
36
Why might an agent develop a GRM, instead of a cap rate?
A GRM is more reliable than a cap rate
A GRM is more complicated than a cap rate
The information required to develop a GRM is usually readily available
Agents can’t do the math for a cap rate
The information required to develop a GRM is usually readily available
37
```
A property sells for $250,000, and the monthly rent is $3000. What is the GRM?
83.33
12
69.44
None of the above
```
83.33
38
```
An investor buyer wants a cap rate of 6.25%. The property he is looking at has NOI of $27,500. What should he pay for the property?
$220,000
$171,875
$148,958
$440,000
```
$440,000
39
Potential gross income is:
The income left after all of the expenses have been paid
The income left after the vacancy and credit allowance has been deducted
The income left after the reserve for replacements has been deducted
The income that the property could produce with all units rented, and 100% of income from other sources, such as an on-site laundromat
The income that the property could produce with all units rented, and 100% of income from other sources, such as an on-site laundromat
40
Reserve for replacements is:
Money set aside to cover expenses when tenants are in the process of being replaced
Money set aside to cover management fees
Money set aside to cover the replacement of items which will need to be replaced, such as roofs, furnaces, water heaters, appliances, etc.
Money set aside to pay a back-up, or replacement manager
Money set aside to cover the replacement of items which will need to be replaced, such as roofs, furnaces, water heaters, appliances, etc.
41
If you are going to calculate the cost of debt service as a way to price a property, which of the following is correct?
You calculate effective gross income, divide by 12, and this is the amount available to cover a mortgage payment. You then put that figure into a financial calculator as “payment”, enter the interest rate and term of the loan to solve for the amount of mortgage that payment will cover.
You calculate NOI, divide by 12, and this is the amount available to cover a mortgage payment. You then put that figure into a financial calculator as “payment”, enter the interest rate and term of the loan to solve for the amount of mortgage that payment will cover.
You calculate NOI, divide by 12, and this is the amount available to cover a mortgage payment. You then put that figure into a financial calculator as “mortgage amount”, enter the interest rate and term of the loan to solve for the payment
You calculate potential gross income, divide by 12, and this is the amount available to cover a mortgage payment. You then put that figure into a financial calculator as “payment”, enter the interest rate and term of the loan to solve for the amount of mortgage that payment will cover.
You calculate NOI, divide by 12, and this is the amount available to cover a mortgage payment. You then put that figure into a financial calculator as “payment”, enter the interest rate and term of the loan to solve for the amount of mortgage that payment will cover.
42
```
Expenses should generally be no more than what percent of gross income?
70%
20%
65%
40%
```
40%
43
```
If an appraiser develops more than one approach to value, the process of considering all the approaches developed, and deciding which one is most indicative of value is called:
Reconciliation
Averaging
Weighting
Analysis
```
Reconciliation
44
Which of the following is correct about agents, versus appraisers?
Agents must take certain post-licensing courses before pricing real estate
Agents must have a college degree
Agents cannot advocate for their clients
Agents can price a home the first day they are in the real estate business
Agents can price a home the first day they are in the real estate business
45
Agents who are REALTORS® will find specifics of competency for pricing real estate in:
Article 1 of the REALTOR® Code of Ethics
Article 11 of the REALTOR® Code of Ethics
In the Preamble to the Code of Ethics
Article 3 of the REALTOR® Code of Ethics
Article 11 of the REALTOR® Code of Ethics
46
```
Ms. Smith has added a bathroom to her house, which means that her house now has the same number of bathrooms most houses in her neighborhood have. This is an example of:
Change
Decreasing returns
Increasing returns
Balance
```
Increasing returns
47
Agent Barry has analyzed the market for one story, 3 bedroom, 2 bath ranch houses for the past year. He has determined that 24 such homes have sold in the past year, and there are currently 4 houses for sale. This market would be characterized as:
A seller’s market (high demand, low supply)
A buyer’s market (low demand, high supply)
A flat market
A stable market
A seller’s market (high demand, low supply)
48
Real estate agents and appraisers should strive for which of the following?
Outdoing each other
A professional relationship with mutual respect
Agents are not allowed to communication with appraisers
A divisive relationship; they are natural competitors
A professional relationship with mutual respect
49
```
BPO stands for:
Comprehensive Market Analysis
Broker’s Professional Origin
Broker’s Price Opinion
Broker’s Paid Opinion
```
Broker’s Price Opinion
50
```
Geographic competency is:
for appraisers only
for agents only
for both appraisers and agents
None of the above
```
for both appraisers and agents
51
Which of the following types of data is specific data, as opposed to general data?
The current interest rates available for mortgages
The major industries in the region
The parcel number for the property
The climate of the region
The parcel number for the property
52
Highest and best use analysis includes:
Physically possible, legally permissible, extra feasible, maximally profitable
Phonologically possible, lawfully permissible, economically feasible, maximally productive
Physically possible, legally permissible, economically feasible, maximally productive
Psychically possible, locational optional, economically productive, maximally feasible.
Physically possible, legally permissible, economically feasible, maximally productive
53
```
A part of a house which extends out over the foundation, or footprint, is known as:
Clerestory
Cantilever
Garrison
Eave
```
Cantilever
54
Reproduction cost is:
The same as the Unit in place method
The same as reproduction cost
The most commonly used to develop a cost approach
The least likely method used to develop a cost approach
The most commonly used to develop a cost approach
55
Which of the following would be site improvements?
The detached garage
Sidewalks and connections to public water and sewer
The foundation of the house
The land itself
Sidewalks and connections to public water and sewer
56
Effective age ÷ Total Economic Life = Accrued Depreciation is:
The formula to determine age/life depreciation
The formula to determine economic life
The formula to determine the actual cost
The formula to determine functional depreciation
The formula to determine age/life depreciation
57
```
To value a special-purpose building, such as a church, which approach would most likely be developed?
The income approach
The quantity survey method
The cost approach
The market approach
```
The cost approach
58
Which of the following properties is one where you would probably develop a cost approach?
A thirty year old single family home
A three unit property, which is about 30 years old
A brand new, single family home
All of the above
A brand new, single family home
59
Which of the following circumstances would suggest that a cost-based adjustment should be developed?
One comparable has two bathrooms, and the subject has three
One comparable has a 2 car garage, and the subject has no garage
The former owners removed the furnace from the house
The house needs a new roof
The former owners removed the furnace from the house
60
The current market for houses like the subject looks like this: in the past 12 months, 48 homes like the subject have sold. Today, there are 24 homes like the subject listed for sale. Which of the following is correct?
The absorption rate is 4 per month, and there is a 6month supply
The absorption rate is 3 per month, and there is a 4 month supply
The absorption rate is 36 per month, and there is a third of a year supply
The absorption rate is 6 per month, and there is a 2 month supply
The absorption rate is 4 per month, and there is a 6month supply
61
```
Automated valuation models are used by:
Lenders
Agents
Consumers
All of the above
```
All of the above
62
Which of the following would probably disqualify a sale from being used as a comparable?
Buyer and seller are both represented by real estate agents
Buyer and seller are typically motivated and well informed
Buyer or seller was under duress
Buyer and seller are strangers
Buyer or seller was under duress
63
Which of the following pieces of information about a sale would have been verified by an AVM?
The square footage of the house
The fact that the seller paid 6% of the buyer’s closing costs
The fact that the buyer was the seller’s granddaughter
None of the above
None of the above
64
Which is correct?
Cap rates and GRMs both use gross income to estimate value
Cap rates and GRMs both use a capitalization rate
Cap rates and GRMs are equally reliable for valuing income property
Formulae which reflect the relationship between the rent (income) the property generates and its value (price)
Formulae which reflect the relationship between the rent (income) the property generates and its value (price)
65
```
A property sold for $150,000, and the monthly rent was $1600. The GRM is:
1600
160
93.75
106
```
93.75 (150000 / 1600 = 93.75)
66
```
A property has a NOI of $45,000 and sells for $620,700. What is the cap rate?
9.25%
7.25%
5%
11%
```
7.25% (45000 / 620700 = 0.0724 -> 7.25%)
67
```
An investor buyer wants a cap rate of 5%. The property he is looking at has NOI of $27,500. What should he pay for the property?
$220,000
$171,875
$148,958
$550,000
```
$550,000 (27500 / 0.05 = 550000)
68
Expenses such as taxes and insurance are:
Expenses which change with the occupancy of the property
Fixed expenses
Variable expenses
Optional expenses
Fixed expenses
69
```
The income that the property could produce with all units rented, and 100% of income from other sources, such as an on-site laundromat is known as:
Effective gross income
Net operating income
Theoretical income
Potential gross income
```
Potential gross income
70
```
Potential gross income less which of the following gives you effective gross income?
Vacancy and credit allowance
Fixed expenses
Variable expenses
All of the above
```
Vacancy and credit allowance
71
```
An item appraisers use, which investors do not always calculate is:
Fixed expenses
Debt service
Reserves for replacements
Sinking fund
```
Reserves for replacements
72
```
Something appraisers do not put into their calculation, but most investor buyers do consider is:
Reserve for replacements
Debt service
Fixed expenses
Variable expenses
```
Debt service
73
```
A value of what a property would be worth at a particular time in the future is:
Speculative value
Appreciated value
Retrospective value
Prospective value
```
Prospective value
74
```
A value sought by a bankruptcy court would most likely be:
Fair market value
Retrospective value
Liquidation value
Value in use
```
Liquidation value
75
```
The theory that the value of the most modest home in a neighborhood of higher priced properties will be enhanced is:
Progression
Regression
Substitution
Opportunity cost
```
Progression
76
```
An investor chooses from two possible investments, and selects one. The potential for the investment he did not take is known as:
Regression
Opportunity cost
Progression
Externalities
```
Opportunity cost
77
Which of the following is correct about using foreclosures and short sales as comparable sales to determine value?
They should never be used
They should always be used
They should be considered, and if they are numerous enough in the market, they should probably be used
None of the above
They should be considered, and if they are numerous enough in the market, they should probably be used
78
```
When doing a CMA, expired listings are:
Not used, because they did not sell
Included, as an indication of what buyers are unwilling to pay
They have no bearing on the situation
Required by law to be used
```
Included, as an indication of what buyers are unwilling to pay
79
```
Investment value is:
The value to an investor, based on his or her goals for return
The same as fair market value
The same as value-in-use
Replacement cost less depreciation
```
The value to an investor, based on his or her goals for return
80
```
An absorption rate is developed to analyze:
Change in the market
Supply and demand
Conformity
Fair Market Value
```
Supply and demand
81
```
Multiple linear regression is the math used in:
The cost approach
In CMAs and BPOs
In automated valuation models
In the income approach
```
In automated valuation models
82
```
Which of the following approaches would typically be developed for a 30 year old, four unit apartment building?
Cost approach
Income approach
Quantity survey method
Regression analysis
```
Income approach
83
When analyzing income property, which is correct?
Use market rents, unless the current leases have a long time before they expire
Use lease rents, regardless of the length of the lease, or whether or not it is at market rent
Use current rents, regardless of whether or not they are market or no
Use whatever rent rates are necessary to make your numbers work
Use market rents, unless the current leases have a long time before they expire
84
```
A house with one bathroom and five bedrooms has:
External obsolescence
Internal obsolescence
Functional obsolescence
Physical depreciation
```
Functional obsolescence
85
Whether your role is appraiser or agent, you have a responsibility to:
Come in at the highest number possible
Please the client with your results
Get the listing
Be honest and fair, and use the right data
Be honest and fair, and use the right data
86
```
A person paid $150,000 for a house with the intention of renting it out for $1,000 per month. The economic principle that led the person to pay this price based on the property's ability to generate this future income is known as
substitution.
anticipation.
supply and demand.
utility.
```
anticipation.
87
Which of the following situations illustrates the principle of contribution?
A homebuyer makes a down payment of 20% instead of the 10% the lender requires.
A homeowner adds a third bathroom to a house and thereby increases the appraised value by $10,000.
The appraised value of a house goes up by $20,000 over a two-year period because of the prices recently paid for other houses in the neighborhood.
Because of a decline in mortgage interest rates, a homeowner in a certain market is able to list her house at a higher price.
A homeowner adds a third bathroom to a house and thereby increases the appraised value by $10,000.
88
```
A property owner buys an adjacent parcel and combines it with the original parcel to create a property with a higher value than the total of the two separate property values. The operative principle of value in this situation is called
assemblage.
accretion.
progression.
subdivision.
```
assemblage.
89
What is the difference between the appraised value of a property and its mortgage value, if any?
They are the same.
The appraised value is an appraiser's estimate; mortgage value is the amount a lender will lend for the purchase of the property.
The appraised value is an appraiser's estimate; mortgage value is the value a lender imputes to the property as collateral.
Appraised value is mortgage value multiplied by a lender's loan-to-value ratio.
The appraised value is an appraiser's estimate; mortgage value is the value a lender imputes to the property as collateral.
90
What is the difference between market value and market price, if any?
They are the same.
Market value is an estimate; market price is the price at which a property is offered.
Market value is an average price derived from comparable sales; market price is a price based on the cost of creating the property.
Market value is an estimate; market price is the price at which a property sold.
Market value is an estimate; market price is the price at which a property sold.
91
An appraisal is
a professional appraiser's opinion of value, supported by data and following approved methods.
a professional appraiser's estimate of market price.
an estimate of sale price offered by a knowledgeable real estate professional.
a broker's opinion of value, based on comparison with recent comparable sales and current listings in the multiple listing service.
a professional appraiser's opinion of value, supported by data and following approved methods.
92
The first step in the appraisal process, regardless of the appraisal method, is to
identify the highest and best use of the property to be appraised.
collect and analyze property data.
estimate the value of the land as if it were vacant.
define the appraisal problem and the purpose of the appraisal.
define the appraisal problem and the purpose of the appraisal.
93
In the final step of an appraisal, the appraiser reconciles the value estimates derived by the various appraisal approaches by
disregarding the high and low extreme results.
averaging the results of all three approaches.
weighing the applicability of the approaches and considering the quality of data supporting each approach.
choosing the result that is closest to the average for properties in the immediate neighborhood.
weighing the applicability of the approaches and considering the quality of data supporting each approach.
94
Which of the following statements properly describes the central concept of the sales comparison approach?
Find the median price of recently sold comparable properties and add or subtract dollar amounts in the subject property to account for competitive differences.
Make dollar adjustments to the sale prices of comparable properties to account for competitive differences with the subject.
Find at least three comparable properties that are currently for sale and make dollar adjustments to the listing prices to account for competitive differences with the subject.
Apply an appreciation factor to the price at which the subject property most recently sold and make dollar adjustments to account for competitive differences with comparable properties currently for sale.
Find at least three comparable properties that are currently for sale and make dollar adjustments to the listing prices to account for competitive differences with the subject.
95
One of the strengths of the sales comparison approach is that it
takes into account the subject property's investment value.
reveals the profit margin of the builder or developer of the subject property.
discovers the underlying value of the subject property apart from the influence of competing properties.
takes into account the competitive value of specific amenities of the subject property.
takes into account the competitive value of specific amenities of the subject property.
96
In making dollar adjustments in the sales comparison approach, the appraiser
adds value to a comparable that is inferior to the subject property.
adds value to the subject property if it is inferior to a comparable.
subtracts value from a comparable that is inferior to the subject property.
subtracts value from the subject property if it is inferior to a comparable.
adds value to a comparable that is inferior to the subject property.
97
The best comparable property for use in the sales comparison approach is the one that
is located closest to the subject property.
requires the fewest and smallest adjustments.
sold most recently.
was built according to the same plan as the subject and at about the same time.
requires the fewest and smallest adjustments.
98
```
A house is being appraised using the sales comparison approach. The house has three bedrooms, two bathrooms, and a patio. The appraiser selects a comparable house that has three bedrooms, 2.5 bathrooms, and no patio. The comparable house just sold for $100,000. A half-bath is valued at $5,000, and a patio at $1,000. Assuming all else is equal, what is the adjusted value of the comparable?
$100,000.
$104,000.
$96,000.
$106,000.
```
Comparable Sale = $100,000
Subtract value of 1/2 bath ($5,000) and add value of patio ($1,000) = $96,000
99
Which of the following statements properly describes the methodology of the cost approach to appraisal?
Apply a depreciation factor to the reported actual cost of acquiring and improving the subject property.
Estimate the cost of building the improvements on the subject property.
Estimate the land value and add to this the actual cost of the improvements adjusted for competitive differences with similar properties.
Add the estimated land value and cost of improvements and subtract the accrued depreciation of the improvements.
Apply a depreciation factor to the reported actual cost of acquiring and improving the subject property.
100
One of the strengths of the cost approach is that it
takes into account the amount of money required to develop a similar property.
is very accurate for a property with new improvements that represent the highest and best use.
results in an actual price in dollars instead of an estimated value.
reveals the owner's return on money invested in the cost of development.
is very accurate for a property with new improvements that represent the highest and best use.
101
The principle underlying depreciation from physical deterioration is that
eventually, a property loses all of its value.
a property loses a portion of its value each year because of economic obsolescence.
a property loses the same increment of value each year over the economic life of the property.
the value lost to depreciation is incurable.
a property loses the same increment of value each year over the economic life of the property.
102
```
A property is being appraised by the cost approach. The appraiser estimates that the land is worth $10,000 and the replacement cost of the improvements is $75,000. Total depreciation from all causes is $7,000. What is the indicated value of the property?
$68,000.
$92,000.
$82,000.
$78,000.
```
$10,000 + $75,000 - $7,000 = $78,000
103
Which of the following statements properly describes how to apply the income capitalization approach to appraisal?
Apply a desired rate of return to the price paid for an income property.
Divide the income a property generates by a desired rate of return.
Estimate the amount of income a property must generate to return the capital amount invested in it.
Estimate the rate of return a property owner receives from income generated by the property.
Divide the income a property generates by a desired rate of return. The formula is: NOI / Cap rate = Value.
104
A strength of the income capitalization approach is that it
uses a rate of return that is required for all potential purchasers in a market.
yields an accurate projection of investment income.
uses a method that is also used by investors to determine how much they should pay for an investment property.
can be used with any type of property in any market.
uses a method that is also used by investors to determine how much they should pay for an investment property.
105
```
A property is being appraised using the income capitalization approach. Annually, it has an estimated gross income of $30,000, vacancy and credit losses of $1,500, and operating expenses of $10,000. Using a capitalization rate of nine percent, what is the indicated value (to the nearest $1,000)?
$206,000.
$167,000.
$222,000.
$180,000.
```
$30,000 - $1,500 - $10,000 ÷ 0.09 = $205,555.55 ($206,000)
106
```
An apartment building that sold for $450,000 had monthly gross rent receipts of $3,000. What is its monthly gross rent multiplier?
12.5
.01
.08
150
```
($450,000 ÷ $3,000) = 150.
107
```
A rental house has monthly gross income of $1,200. A suitable gross income multiplier derived from market data is 14.1. What estimated sale price (to the nearest $1,000) is indicated?
$169,000.
$102,000.
$203,000.
$173,000.
```
Multiply the monthly gross income times 12 to derive annual income. Multiply annual income times the gross income multiplier to derive the estimate of price. Thus, $1,200 times 12 equals $14,400. This times 14.1 equals $203,040, or $203,000 rounded.
108
A certified appraiser is one who has received certification by
a licensed real estate school.
the Appraisal Institute.
the state in which the appraiser operates.
the Appraisal Review Board.
the state in which the appraiser operates.
109
The act that required federally-related appraisals to be conducted by a certified appraiser is known as
the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).
the Uniform Standards of Professional Appraisal Practice Act (USPAPA).
the Appraisal Foundation Authorization and Reform Act (AFAR).
the Federal Institution for Regulation and Enforcement of Appraisal Act (FIREAA).
the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).
110
```
If the monthly rent of a property is $3,000, and the gross rent multiplier (GRM) is 80, what is the value of the property?
$45,000
$267,000
$240,000
$288,000
```
GRM x Subject monthly rent = estimated value
80 x $3,000 = $240,000
111
The principal shortcoming of the gross rent multiplier approach to estimating value is that
numerous expenses are not taken into account.
the multiplier does not relate to the market.
the method is too complex and cumbersome.
the method only applies to residential properties.
numerous expenses are not taken into account.
112
```
If net income on a property is $20,000 and the cap rate is 5%, the value of the property using the income capitalization method is
$100,000.
$400,000.
$1,000,000.
$4,000,000.
```
Value = Income ÷ Cap rate. Thus, V= $40,000 ÷ .10 = $400,000.
113
Net operating income is equal to
gross income minus potential income minus expenses.
effective gross income minus debt service.
potential gross income minus vacancy and credit loss minus expenses.
effective gross income minus vacancy and credit loss.
potential gross income minus vacancy and credit loss minus expenses.
114
The steps in the income capitalization approach are:
estimate gross income, multiply times the gross income multiplier.
estimate effective income, subtract tax, apply a capitalization rate.
estimate net income, and apply a capitalization rate to it.
estimate potential income, apply a capitalization rate to it.
estimate net income, apply a capitalization rate to it.
115
```
The income capitalization approach to appraising value is most applicable for which of the following property types?
Single family homes
Apartment buildings
Undeveloped land
Churches
```
Apartment buildings
116
Which of the following statements best describes the relationship between price and value in the market system?
Value is based on the interaction of underlying economic factors; price is a quantification of value in a transaction.
Value and price are identical at any given moment.
Value by definition is the price one paid for an item, adjusted for time and costs paid in addition to price.
Value is an estimate of the cost of an item; price is an estimate of what one will pay for the item.
Value is based on the interaction of underlying economic factors; price is a quantification of value in a transaction.
117
If the price of an item is increasing, one can usually assume that
demand for the item is decreasing in relation to supply of the item.
demand for the item is increasing in relation to supply of the item.
supply of the item is increasing.
demand for the item and supply of the item are increasing.
demand for the item is increasing in relation to supply of the item.
118
Which of the following conditions would be true if the market for an item has achieved "market equilibrium?"
New suppliers will enter the market and drive the price down.
Demand will slowly taper off, driving the price down.
Unmet demand for the item is directed toward demand for some other item.
Supply and demand are equal, and price and value are equal.
Supply and demand are equal, and price and value are equal.
119
```
One of the economic characteristics that distinguishes real estate is
its homogeneity.
its variety.
the uniqueness of every parcel.
its ability to appreciate in value.
```
the uniqueness of every parcel.
120
If demand is increasing, what would be the likely effect on real estate prices in an area where the municipality has declared a moratorium on new construction?
Prices would level off.
Prices would continue to follow the trend that preceded the moratorium.
Prices would fall.
Prices would rise.
Prices would rise.
121
If a new company that sells its products worldwide moves into a town and hires 100 employees, it would be reasonable to expect
an immediate rise in the demand for industrial real estate, but no other changes in the real estate market.
an increase in demand for all types of real estate.
a housing boom, but no other changes in the real estate market.
an immediate increase in the prices for industrial and office real estate, but no impact on the residential market.
an increase in demand for all types of real estate.
122
```
During a time of declining vacancy in a real estate market, one would expect
rising prices.
falling prices.
falling construction activity.
rising absorption.
```
rising prices.
123
Two important concerns of retail property users are
trade area population and spending patterns.
quality of life and dwelling amenities.
costs of occupancy and building efficiency.
environmental regulations and access by suppliers.
trade area population and spending patterns.
124
A local government could stimulate the real estate market by
increasing labor costs and curbing the money supply.
increasing taxes and interest rates.
declaring a moratorium on construction.
expanding the sewer system.
expanding the sewer system.
125
What is "absorption?"
The amount of new space that is added to available space over a period of time.
The number of houses that are built over a period of time.
The amount of space that is occupied at any given time.
The number of available units that become occupied over a period of time.
The number of available units that become occupied over a period of time.
126
Mortgage financing is the practice of
buying and selling mortgages as an investment vehicle.
lending money to real estate investors to finance the purchase of mortgages.
using borrowed funds secured by a mortgage or trust deed to purchase real estate.
obtaining equitable title to real estate by buying promissory notes.
using borrowed funds secured by a mortgage or trust deed to purchase real estate.
127
What is a lien-theory state?
A state in which a lienor holds legal title to a secured property.
A state in which a mortgage is considered to be a lien against a secured property.
A state that allows a real estate owner's creditors to record liens against the owner's property.
A state in which a lien is considered as a conveyance.
128
What is the function of a note in a mortgage or trust deed financing arrangement?
It is evidence of the lender's interest in the collateral property.
It is evidence of ownership of the mortgage or trust deed.
It contains the borrower's promise to maintain the value of the property given as collateral for a loan.
It is evidence of the borrower's debt to the lender.
It is evidence of the borrower's debt to the lender.
129
```
The document that provides evidence that a certain property is pledged as collateral for a loan is the
trust deed or mortgage.
promissory note.
loan commitment.
collateral acknowledgment.
```
trust deed or mortgage.
130
```
The borrower in a mortgage loan transaction is known as the
mortgagee.
mortgagor.
lienor.
trustee.
```
mortgagor.
131
```
If a borrower obtains an interest-only loan of $75,000 at an annual interest rate of 8%, what is the monthly interest payment?
$720.
$625.
$42.
$500.
```
$75,000 x 0.08 / 12 = $500
132
```
If a borrower's monthly interest payment on an interest-only loan at an annual interest rate of 9% is $375, how much was the loan amount?
$40,500.
$50,000.
$500,000.
$46,500.
```
$375 x 12 / 0.09 = $50,000
133
```
A borrower of a $95,000 interest-only loan makes annual interest payments of $8,312.50. What interest rate is the borrower paying?
8.75%.
7.29%.
.729 %.
9.125%.
```
$8,312.50 ÷ $95,000 = .0875 = 8.75%
134
```
How much is a discount point?
.1% of the loan amount.
1% of the loan amount.
10% of the loan amount.
It depends on the interest rate and the loan amount.
```
1% of the loan amount.
135
Which of the following is true of an amortizing loan?
The amount of annual interest paid is the same for every year of the loan term.
Part of each periodic payment is applied to repayment of the loan balance in advance and part is applied to payment of interest in arrears.
Except for any points that may be paid, the interest on the loan balance is usually paid in advance.
The interest rate is reduced each year to maintain equal payments even though the outstanding loan balance is smaller.
Part of each periodic payment is applied to repayment of the loan balance in advance and part is applied to payment of interest in arrears.
136
```
For a loan that is not backed by the Federal Housing Administration or Veterans Administration, and for which the borrower is making a down payment of less than 20%, the lender is likely require the borrower to obtain
a subrogation agreement.
private mortgage insurance.
a letter of credit.
a co-signer on the note.
```
private mortgage insurance.
137
What is a loan-to-value ratio?
The percentage of a lender's portfolio that is composed of mortgage loans.
The ratio of borrowed principal plus total interest to the appraised value of the collateral property.
The ratio of a lender's return on a mortgage loan to the value of the collateral property.
The fraction of the appraised value of the property offered as collateral which the lender is willing to lend.
The fraction of the appraised value of the property offered as collateral which the lender is willing to lend.
138
```
The difference between what a borrower has to pay to purchase a property and the amount a lender will lend on the property is the
loan-to-value ratio.
lender's profit margin.
buyer's down payment.
origination fee.
```
buyer's down payment.
139
The Equal Credit Opportunity Act prohibits a lender from
refusing a loan because the property is located in a certain area.
including income from self-employment in the borrower's qualifying income.
requiring both spouses to sign the loan application form.
refusing a loan because a borrower has a defective credit report.
refusing a loan because the property is located in a certain area.
140
```
A loan applicant has an annual gross income of $36,000. How much will a lender allow the applicant to pay for monthly housing expense to qualify for a loan if the lender uses an income ratio of 28%?
$2,160.
$840.
$1,008.
$720.
```
$36,000 x 0.28 / 12 = $840 per month.
141
If a lender discovers that an applicant for a mortgage loan has borrowed the down payment from a relative and has to repay that loan, the lender is likely to
refuse the application.
adjust the applicant's debt ratio calculation and lower the loan amount.
increase the loan amount to enable the borrower to pay off the loan to the relative.
require the borrower to make payments to an escrow account for repayment of the relative's loan.
adjust the applicant's debt ratio calculation and lower the loan amount.
142
```
The Federal Reserve's Regulation Z applies to which loans?
All loans.
All loans secured by real estate.
All loans secured by a residence.
All loans over $25,000.
```
All loans secured by a residence.
143
If a particular loan falls under Regulation Z's right of rescission provision,
the lender has the right to change the terms of the loan within a certain period.
the lender has the right to accelerate repayment of the loan because of a change in the borrower's credit status.
the borrower has the right to pay off the loan ahead of schedule with no penalty.
the borrower has a limited right to cancel the transaction within a certain period.
the borrower has a limited right to cancel the transaction within a certain period.
144
Under the Equal Credit Opportunity Act, a lender, or a real estate agent who assists a seller in qualifying a potential buyer, may not
tell a rejected loan applicant the reasons for the rejection.
ask the buyer/borrower about his/her religion or national origin.
ask the buyer/borrower to explain gaps in his/her employment history.
use a credit report if the loan applicant disputes any information in the report.
ask the buyer/borrower about his/her religion or national origin.
145
A conventional mortgage loan is one that is
backed by the Federal National Mortgage Association.
insured under Section 203(b) of the Federal Housing Administration loan program.
guaranteed by the Government National Mortgage Association.
not FHA-insured or VA-guaranteed.
not FHA-insured or VA-guaranteed.
146
The assumability of an FHA-insured loan is
unrestricted.
limited by when the loan was originated and by the type of property.
limited to owner-occupied properties.
prohibited on all existing loans under current regulations.
limited by when the loan was originated and by the type of property.
147
A VA certificate of eligibility determines
whether an individual is a veteran.
the maximum loan amount an approved lender can give to veterans.
how much of a loan the VA will guarantee.
whether a lender is approved to issue VA-guaranteed loans.
how much of a loan the VA will guarantee.
148
```
A borrower obtains a 30-year, fully amortizing mortgage loan of $30,000 at 8%. What is the principal balance at the end of the loan term?
$1,000.
$30,000.
$220.
Zero.
```
In a fully amortizing mortgage, the principal balance is zero at the end of the term.
149
Which of the following describes a purchase money mortgage financing arrangement?
A bank gives a buyer a senior mortgage loan that fully covers the cost of purchasing the property.
The buyer gives the seller a mortgage and note as part of the purchase price of the property.
A land trust holds title to the property while the buyer makes periodic installment payments to the seller.
The seller uses the purchase money obtained from the buyer's mortgage loan to repay the seller's outstanding loan balance.
The buyer gives the seller a mortgage and note as part of the purchase price of the property.
150
Which of the following is true of a loan with negative amortization?
The loan is an interest-only loan.
Payments are not sufficient to retire the loan
The loan balance is diminishing, or going negative.
Additional interest is being added to the monthly payment.
Payments are not sufficient to retire the loan
151
```
A builder is required to secure a loan with mortgages on three properties. This is an example of
a participation mortgage loan.
a blanket mortgage loan.
a permanent mortgage loan.
a bridge loan.
```
a blanket mortgage loan.
152
One feature of a wraparound mortgage loan is that
the loan is a senior loan.
the seller offering the buyer a wraparound can profit from a difference in interest rates.
the underlying loan must be retired.
the second mortgage borrower may make payments directly to the first mortgage lender.
the loan is a senior loan.
153
The key feature of an adjustable mortgage loan is that
the interest rate may vary.
the monthly payment increases over the life of the loan.
the principal balance does not amortize.
the loan term can be shortened or lengthened.
the interest rate may vary.
154
A buydown is a financing arrangement where
the lender lowers the interest rate on a loan in exchange for a prepayment of principal.
the borrower pays additional interest at the onset in order to obtain a lower interest rate.
the lender requires the borrower to buy down the price of the property by increasing the down payment.
the borrower pays the lender additional funds to buy down the term of the loan.
the borrower pays additional interest at the onset in order to obtain a lower interest rate.
155
A graduated payment loan is a mortgage loan where
loan funds are disbursed to the borrower on a graduated basis.
the interest rate periodically increases in graduated phases.
the loan payments gradually increase.
the loan payments gradually increase and the loan term gradually decreases.
With a graduated payment mortgage, the payments at the beginning of the loan term are not sufficient to amortize the loan fully, and unpaid interest is added to the principal balance. Payments are later adjusted to a level that will fully amortize the loan's increased balance over the remaining loan term.
156
The principal role of the Veteran's Administration in the mortgage lending market is to
guarantee loans made by approved lenders.
insure loans made by approved lenders.
purchase loans made by approved lenders.
originate loans made by approved lenders.
guarantee loans made by approved lenders.
157
The primary role of the Federal Housing Authority in the mortgage lending market is to
guarantee loans made by approved lenders.
insure loans made by approved lenders.
purchase loans made by approved lenders.
originate loans made by approved lenders.
insure loans made by approved lenders.
158
```
When an investment property generates less income than the amount the investor has to pay a lender to finance the investment, the investor suffers from
negative amortization.
negative leverage.
a reverse mortgage.
a debt investment.
```
negative leverage.
159
```
An individual buys a small office building as an investment and participates actively in the management and operation of the building. This is an example of
syndication.
equity investment.
direct investment.
illiquidity.
```
direct investment.
160
Which of the following best describes a Real Estate Investment Trust?
Investors are partners in an entity that sells pools of mortgages secured by real property.
Investors are general partners who pool cash resources to buy, develop and operate a property.
Owners of an income property convey title in the property to a land trust as a tax shield.
Investors own shares in a trust that receives 75% of its income from real estate investments.
Investors own shares in a trust that receives 75% of its income from real estate investments.
161
```
Cost recovery is allowed as a federal tax deduction on
principal residences.
income properties.
land.
land and improvements.
```
income properties.
162
```
A homeowner paid $185,000 for a house three years ago. The house sells today for $239,000. How much has the property appreciated?
23 %.
77 %.
29 %.
123 %.
```
Appreciation as a per cent can be estimated by (1) subtracting the estimated current market value from the price originally paid (239,000 - 185,000 = 54,000) and (2) dividing the result by the original price (54,000 / 185,000 = . 29 or 29%).
163
The primary tax benefit in owning a non-income property such as a residence is
depreciation of improvements.
appreciation of land.
a deduction for costs of operating the property.
a deduction for mortgage interest.
a deduction for mortgage interest.
164
```
A house sold for $150,000. The seller paid a brokerage commission of six percent, legal fees of $600, and had other closing costs of $1,500. What are the net proceeds from the sale?
$150,000.
$141,000.
$140,400.
$138,900.
```
Amount realized. The amount realized, also known as net proceeds from sale, is expressed by the formula:
sale price - cost of sale = amount realize
Sale price: $150,000
Cost of sale: 6% (150,000 x 0.06 = $9,000) + $600 + $1,500
Net proceeds of sale: $138,900
165
```
A homeowner bought a house five years ago for $150,000. Since then, the homeowner has spent $3,000 to pave the driveway and has added a central heating/air conditioning system at a cost of $4,000. What is the homeowner's adjusted basis if the house is sold today?
$156,000.
$157,000.
$144,000.
$145,000.
```
The beginning basis is the cost of acquiring a property. Basis is increased by capital improvements and decreased by depreciation. The basic formula for adjusted basis is Beginning basis ($150,000) + capital improvements ($3,000 + $4,000) - depreciation ($0) = adjusted basis ($157,000).
166
```
A homeowner sold her house and had net proceeds of $191,000. Her adjusted basis in the home was $176,000. She immediately bought another house for $200,000. What was her capital gain?
$191,000.
$9,000.
$15,000.
None.
```
Gain on sale. The gain on sale of a primary residence is represented by the basic formula:
amount realized (net sales proceeds) - adjusted basis = gain on sale
$191,000 - $176,000 = $15,000
167
After three years of owner-occupancy, a young homeowner sells his principal residence for a gain of $150,000, and the next month buys another principal residence that costs more than the adjusted sale price of the old home. Which of the following is true of the treatment of the tax on gain?
There is no taxable gain.
It must be paid in the year of the sale.
The homeowner may choose to pay it or defer it.
Tax is due on the difference between the cost of the new home and adjusted basis of the old one.
There is no taxable gain.
168
Which of the following are limitations on the exclusion of capital gain on the sale of a house?
The seller is 55 years old, the property is used as a principal residence, and the seller's previously claimed exclusions do not exceed $125,000.
The property is owner-occupied and the seller has never claimed an exclusion previously.
The seller must have owned it for two years of the previous five, used it as a principal residence for two years during that period, and not claimed an exclusion in the previous two years.
The seller must have owned and occupied it for five years and not claimed an exclusion in the previous year.
Tax law provides an exclusion of $250,000 for an individual taxpayer and $500,000 for married taxpayers filing jointly. Exclusion of gain from sale of a residence can be claimed every two years, provided the taxpayer
1. owned the property for at least two years during the five years preceding the date of sale;
2. used the property as principal residence for a total of two years during that five-year period;
3. has waited two years since the last use of the exclusion for any sale.
169
```
Bill Holdfast owns a small retail property that he inherited from his father. There are no mortgages or interest expenses connected with the property. Bill takes an annual cost recovery expense of $5,000. The property has a monthly gross income of $1,500 and monthly operating expenses of $500. Bill's taxable income from this property will be taxed at a rate of 30%. What is the tax liability for the year?
$2,100.
$3,600.
$3,900.
$7,000.
```
Annual gross operating income ($1,500 x 12 = $18,000) - annual operating expenses ($500 x 12 = $6,000) = annual net operating income ( $12,000); annual net operating income ($12,000) - cost recovery expense ($5,000) = taxable income ($7,000); taxable income ($7,000) x tax rate (30%) = tax liability ($2,100).
170
One way investors measure the yield of an investment is by
dividing net operating income by cash flow.
multiplying the investor's required yield times after-tax cash flow.
dividing cash flow by the investor's equity.
multiplying cash flow times the price paid for the property.
dividing cash flow by the investor's equity.
171
```
Cash flow is a measure of how much pre-tax or after-tax cash an investment property generates. To derive cash flow it is therefore necessary to exclude
cost recovery expense.
interest expense.
loan principal payments.
net operating income.
```
cost recovery expense.
172
Capital gain tax is figured by multiplying one's tax bracket times
the sum of the beginning basis plus gain.
the difference between net sale proceeds and adjusted basis.
the sum of net sale proceeds and capital gain.
the difference between net sale proceeds and capital gain.
the difference between net sale proceeds and adjusted basis.
173
An investment property seller pays $14,000 in closing costs. These costs
may be deducted from personal income.
may be deducted from the property's income.
may be deducted from the sale price for gains tax purposes.
may be deducted from the adjusted basis for gains tax purposes.
may be deducted from the sale price for gains tax purposes.
174
Which of the following is true of the tax treatment of a principal residence?
The owner may deduct the property's interest and principal from ordinary income.
The owner may depreciate the property and deduct depreciation expenses.
The owner can deduct any capital gain when the property is sold.
The owner may be able to avoid capital gain tax when the property is sold.
The owner may be able to avoid capital gain tax when the property is sold.
