section 16 appraising and estimating market value

Question 1

The benefits a buyer expects to derive from a property over a holding period.

Answer 1

Anticipation

Question 2

An appraisal principle that holds that a buyer will pay no more for a property than the buyer would pay for an equally desirable and available substitute property. Forms the foundation for the sales comparison approach to value.

Answer 2

Substitution

Question 3

The increment of market value added to a property through the addition of a component or improvement to the property. Not to be confused with the cost of the component.

Answer 3

Contribution

Question 4

A theoretical use of a property that is legally permissible, physically possible, financially feasible, and maximally productive, usually in terms of net income generation.

Answer 4

Highest and Best Use:

Question 5

This principle holds that a property’s maximal value is attained when its form and use are in tune with surrounding properties and uses.

Answer 5

Conformity

Question 6

If a property is surrounded by properties with higher values, its value will tend to rise.

Answer 6

Progression

Question 7

If a property is surrounded by properties with lower values, its value will tend to fall.

Answer 7

Regression

Question 8

A combining of contiguous parcels of real estate into a single tract, performed with the expectation that increased value will result.

Answer 8

Assemblage

Question 9

The division of a single property into smaller properties can also result in a higher total value. For instance, a one-acre suburban site appraised at $50,000 may be subdivided into four quarter-acre lots worth $30,000 each. This principle contributes significantly to the financial feasibility of subdivision development.

Answer 9

Subdivision

Question 10

The value based on the cost of constructing a precise duplicate of the subject property’s improvements, assuming current construction costs.

Answer 10

Reproduction Value:

Question 11

The value based on the cost of constructing a functional equivalent of the subject property’s improvements, assuming current construction costs.

Answer 11

Replacement Value:

Question 12

An opinion of the price at which a willing seller and buyer would trade a property at a given time, assuming a cash sale, reasonable exposure to the market, informed parties, marketable title, and no abnormal pressure to transact.

Answer 12

Market Value:

Question 13

An opinion of value of a property developed by a professional and disinterested third party and supported by data and evidence.

Answer 13

Appraisal

Question 14

An estimate of a property’s value rendered by a party who is not necessarily licensed, objective, or qualified. The estimate may not be a complete appraisal.

Answer 14

Broker’s Opinion of Value:

Question 15

An appraiser’s weighted blending of the results of different approaches to value into a final value estimate.

Answer 15

Reconciliation

Question 16

A method of appraising property that relies on the principle that a property is generally worth what other, similar properties are worth.

Answer 16

Sales Comparison Approach:

Question 17

A property having similar characteristics to a subject property in an appraisal. The value or sale price of the comparable is used to estimate the value of the subject.

Answer 17

Comparable:

Question 18

(CMA) A method used by brokers and salespeople for estimating the current value of a property using sale price data from similar properties. Not to be confused with a bona fide appraisal performed by a licensed appraiser.

Answer 18

Comparative Market Analysis:

Question 19

A method for determining value that takes into account the cost of the land and the replacement or reproduction cost of the improvements net of estimated depreciation.

Answer 19

Cost Approach:

Question 20

1. A non-cash expense taken against the income of investment property that allows the owner to recover the cost of the investment through tax savings.
2. A loss of value to improved property.

Answer 20

Depreciation

Question 21

A method of appraising the value of a property by applying a rate of return to the property’s net income.

Answer 21

Income Capitalization Approach:

Question 22

The amount of pre-tax revenue generated from an income property after accounting for operating expenses and before accounting for any debt service.

Answer 22

Net Operating Income:

Question 23

The rate of return on capital an investor will demand from the investment property, or the rate of return that the property will actually produce.

Answer 23

Capitalization Rate:

Question 24

A shortcut method for estimating the value of an income property. The procedure involves multiplying the property’s gross monthly rent times a multiplier that reflects the ratio between gross monthly rent and sale price that is typical for similar properties in the area.

Answer 24

Gross Rent Multiplier:

Question 25

In 1989, Congress passed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) in response to the savings and loan crisis. This act included provisions to regulate appraisal.

Answer 25

Financial Institutions Reform, Recovery and Enforcement Act:

Question 26

The Uniform Standards of Professional Appraisal Practice (USPAP) is a set of standards, guidelines and provisions for the appraisal industry. It resulted from the cooperation of nine national appraisal organizations in 1985.

Answer 26

Uniform Standards of Professional Appraisal Practice:

Question 27

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

Answer 27

anticipation

Question 28

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.

Answer 28

A homeowner adds a third bathroom to a house and thereby increases the appraised value by $10,000.

Question 29

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

Answer 29

assemblage.

Question 30

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.

Answer 30

The appraised value is an appraiser’s estimate; mortgage value is the value a lender imputes to the property as collateral.

Question 31

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.

Answer 31

Market value is an estimate; market price is the price at which a property sold.

Question 32

An appraisal is

Answer 32

a professional appraiser’s opinion of value, supported by data and following approved methods.

Question 33

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.

Answer 33

define the appraisal problem and the purpose of the appraisal.

Question 34

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.

Answer 34

weighing the applicability of the approaches and considering the quality of data supporting each approach.

Question 35

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.

Answer 35

Make dollar adjustments to the sale prices of comparable properties to account for competitive differences with the subject.

Question 36

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.

Answer 36

takes into account the competitive value of specific amenities of the subject property.

Question 37

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.

Answer 37

adds value to a comparable that is inferior to the subject property.

Question 38

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.

Answer 38

requires the fewest and smallest adjustments.

Question 39

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.

Answer 39

96,000

Question 40

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.

Answer 40

Add the estimated land value and cost of improvements and subtract the accrued depreciation of the improvements.

Question 41

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.

Answer 41

is very accurate for a property with new improvements that represent the highest and best use.

Question 42

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.

Answer 42

a property loses the same increment of value each year over the economic life of the property.

Question 43

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.

Answer 43

$78,000.

Question 44

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.

Answer 44

Divide the income a property generates by a desired rate of return.

Question 45

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.

Answer 45

uses a method that is also used by investors to determine how much they should pay for an investment property.

Question 46

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.

Answer 46

$206,000.

Question 47

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

Answer 47

150

Question 48

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.

Answer 48

$203,000.

Question 49

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.

Answer 49

the state in which the appraiser operates.

Question 50

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).

Answer 50

the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).

Question 51

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

Answer 51

$240,000

Question 52

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.

Answer 52

numerous expenses are not taken into account.

Question 53

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.

Answer 53

$400,000.

Question 54

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.

Answer 54

potential gross income minus vacancy and credit loss minus expenses.

Question 55

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.

Answer 55

estimate net income, and apply a capitalization rate to it.

Question 56

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

Answer 56

Apartment buildings