Unit 16

Question 1

pg. 319

Which appraisal method uses a rate of investment
return?

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

Answer 1

income approach

The income
approach uses the rate of investment return, which is
the relationship between the appraised value and the
net annual income.

Question 2

pg. 312

The characteristics of value include which of the
following?

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

Answer 2

scarcity

The characteristics of value are
remembered by the acronym DUST:
Demand
Utility
Scarcity
Transferability

Question 3

pg. 312

There are two vacant adjacent lots in an area
zoned for commercial use, each worth approximately $50,000. If their owner sells them as a
single lot, however, the combined parcel will be
worth $120,000. What principle does this illustrate?

A. Substitution
B. Plottage
C. Regression
D. Progression

Answer 3

plottage

The principal of plottage
is that additional market value can be obtained in
some instances by combining, and selling as a single
parcel, two or more contiguous (i.e., adjacent)
properties. This value exceeds the combined total
that the individual properties would bring if sold
separately.

Question 4

pg. 312

The amount of money a property is likely to command in the marketplace is its

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

Answer 4

market price

Market price is a
property’s asking, offer, or sales price.

Question 5

pg. 314

A homeowner constructs a five-bedroom brick
house with 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. Progression
B. Assemblage
C. Change
D. Regression

Answer 5

regression

The value of larger lavish
homes in a modest neighborhood will be drawn
down by the presence of modest less lavish homes;
regression is the opposite of progression.

Question 6

pg. 314

The owners of a modest ranch house in a neighborhood of larger, more expensive homes may
find that the value of their home is affected by
what principle?

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

Answer 6

progression

The value of modest
homes in an area may increase with the presence of
luxurious homes. This is an example of the principle
of progression.

Question 7

pg. 318

For appraisal purposes, accrued depreciation is
NOT caused by

A. functional obsolescence.
B. physical deterioration.
C. external obsolescence.
D. accelerated depreciation.

Answer 7

accelerated depreciation

Functional
obsolescence, physical deterioration, and external
(economic) obsolescence are all sources of
depreciation as a loss in value. Depreciation also
refers to a deduction for income tax purposes.
Accelerated depreciation falls within this definition
and is not used for appraisal purposes.

Question 8

pg. 321

The term reconciliation refers to which of the following?

A. Loss of value due to any cause
B. Separating the value of the land from the
total value of the property to compute
depreciation
C. Analyzing the results obtained by the
different approaches to value to form an
opinion of value
D. The process by which an appraiser determines
the highest and best use for a parcel of land

Answer 8

Analyzing the results obtained by the
different approaches to value to form an
opinion of value.

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 that will provide
the final opinion of value.

Question 9

pg. 320

If a property’s annual net income is $24,000 and
it is valued at $300,000, what is its capitalization
rate?

A. 8%
B. 10.5%
C. 12%
D. 15%

Answer 9

8%

Net annual income ÷ market
value = capitalization rate ($24,000 ÷ $300,000 =
0.08, or 8%). Given any two elements, the third can
be calculated.

Question 10

pg. 317

Which of the following is NOT used by an appraiser applying the income approach to value?

A. Annual net operating income
B. Capitalization rate
C. Accrued depreciation
D. Annual gross income

Answer 10

accrued depreciation

Depreciation is
one of the calculations used in the replacement (cost)
approach and not in the income approach.

Question 11

pg. 319

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

A. Cost approach
B. Sales comparison approach
C. Income approach
D. Index method

Answer 11

income approach

The income
approach is likely to be given the most weight
in an analysis of income-producing property.
Circumstances may dictate a different approach
when, for instance, the property’s current use is no
longer its highest and best use.

Question 12

pg. 302

The market value of a parcel of real estate is

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

Answer 12

an estimate of the most probable price it
should bring.

An appraisal is the appraiser’s
opinion of a property’s market value—the price a
property would most probably bring.

Question 13

pg. 319

Capitalization is the process by which annual net
operating income is used to

A. determine cost.
B. estimate value.
C. establish depreciation.
D. determine potential tax value.

Answer 13

estimate value

Capitalization (the
income approach) requires the use of the net
operating income, and capitalization rate to find
value. (319)

Question 14

pg. 318

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

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

Answer 14

loss of value due to any reason.

Depreciation is loss of value from any reason. Some
examples of such causes are physical deterioration
(wearing out and/or deferred maintenance), external
(economic) obsolescence, and functional obsolescence
(lack of modernity or good design).

Question 15

pg. 315-321

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

A. differences in dates of sale.
B. differences in financing terms.
C. differences in appearance and condition.
D. differences in original cost.

Answer 15

differences in original cost

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—
sometimes called the market data—approach.
Original cost, however, is used in computations of
book-value depreciation for tax purposes.

Question 16

pg. 303

Which of the following is TRUE about a comparative market analysis?

A. It is made by a professional appraiser.
B. It is the same as an appraisal.
C. It is based on a detailed market analysis of
market conditions, property features, recent
sales and listings, land value, and construction
costs.
D. None of these.

Answer 16

none of these

A comparative market
analysis is based on recently closed properties, those
currently on the market, and expired listings. It is
prepared by a real estate professional and is not as
detailed as an appraisal performed by a licensed or
certified appraiser.

Question 17

pg. 304

What is the key to an accurate appraisal?

A. Methodical collection and analysis of data
B. Years of experience the appraiser has
C. Appraising in a market with high supply
D. Appraising in a market with high demand

Answer 17

methodical collection and analysis
of data

The appraisal process is an orderly set of
procedures used to collect and analyze data to arrive
at a justifiable conclusion of value.

Question 18

pg. 318

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

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

Answer 18

functional obsolescence

Depending
on the other homes in the marketplace, a home
with four bedrooms and only one bathroom may be
undesirable.

Question 19

pg. 313

Which principle of value indicates that a developer’s very profitable real estate project will attract
others to engage in similar activity in the same area
and thus drive down profits?

A. Anticipation
B. Competition
C. Value
D. Progression

Answer 19

competition

A successful project
invites imitators (competitors) to do the same thing
nearby. This drives profits down for a developer and
costs down for a consumer-buyer.

Question 20

pg. 312

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

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

Answer 20

value

They all affect value—the most
probable price a property will bring.

Question 21

An _ _ _ is an opinion of market value on a property given to a lender or client with
detailed market information.

Answer 21

appraisal report

Question 22

An _ _ _ is an independent professional trained to provide
an unbiased opinion of value in an impartial and objective manner, following an identified
appraisal process.

Answer 22

appraiser

Question 23

Fannie Mae initiated _ _ _ that took
effect October 15, 2010

Answer 23

Appraiser Independence Requirements (AIR)

Question 24

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

Answer 24

requires that any appraisal used in connection with a federally related transaction
be performed by a competent individual who is licensed or certified by the state in which the
appraiser practices.

Question 25

Nonresidential properties valued at more than $250,000
(raised to $500,000 in 2018) require a FIRREA certified appraiser. T/F?

Answer 25

True

Question 26

Residential properties valued at less than $250,000
require a FIRREA certified appraiser. T/F?

Answer 26

False

Question 27

A _ _ _ is a less-expensive alternative for evaluating property that
is often used by lenders working with home equity lines, refinancing, portfolio management,
loss mitigation, and collections.

Answer 27

broker’s price opinion (BPO)

Question 28

What is income approach?

Answer 28

The relationship between the appraised value and the
net annual income.

Question 29

What are the characteristics of value?

(hint: DUST)

Answer 29

Demand
Utility
Scarcity
Transferability

Question 30

What is the principal of plottage?

Answer 30

Additional market value can be obtained in
by combining, and selling as a single
parcel, two or more contiguous (i.e., adjacent)
properties. This value exceeds the combined total
that the individual properties would bring if sold
separately.

Question 31

What is the principle of progression?

Answer 31

The value of modest
homes in an area may increase with the presence of
luxurious homes.

Question 32

The value of modest
homes in an area may increase with the presence of
luxurious homes. This is an example of the principal of _____

Answer 32

progression

Question 33

The acronym CMA stands for

A) cost marketing analysis.
B) comparative market analysis.
C) comparable management analysis.
D) competitive management analysis.

Answer 33

comparative market analysis

The analysis, a variation of the sales comparison approach to value, may also be called a competitive market analysis.

Question 34

Once the appraiser has considered the three methods of valuation of real estate, the final step in the appraisal process is

A) adjusting the comparables.
B) reconciliation.
C) adding in the land.
D) averaging the values from each method.

Answer 34

reconciliation

The appraiser reviews the values determined by each method of valuation and reconciles them by placing weight on each method to determine the final value. A simple mathematical averaging is not considered reconciliation.

Question 35

An empty lot is located in a neighborhood of single-family homes. It is the only empty lot in this well-maintained neighborhood. A busy street with many stores is located three blocks away. An industrial area is about two miles away. What is the probable highest and best use of this lot?

A) A factory
B) A store
C) A parking lot
D) A single-family home

Answer 35

A single-family home

The highest and best use is the most profitable or the most likely to be in demand soon. In this neighborhood, the demand is most likely to be for another single-family home. A parking lot is not needed. A store or factory would not be in conformity with the area and might not even be allowed.

Question 36

When appraisers use the expression “most probable price,” they are referring to a property’s

A) supply and demand.
B) progression.
C) market price.
D) market value.

Answer 36

market value

Market value reflects what knowledgeable buyers are willing to pay and realistic sellers are willing to accept.

Question 37

The cost approach to value is based on the principle of

A) substitution.
B) highest and best use.
C) change.
D) conformity.

Answer 37

substitution

What would a reasonable person pay for a similar property with the same improvements and degree of depreciation?

Question 38

Which of these concepts applies to every appraisal?

A) Plottage
B) Diminishing returns
C) Assemblage
D) Highest and best use

Answer 38

Highest and best use

The principal of highest and best use is the most profitable single use to which a property can be put, and is considered in every appraisal.

Question 39

A property use that is physically possible, legally permitted, economically feasible, and maximally productive is

A) anticipated use.
B) the property’s competitive use.
C) nonconforming use.
D) highest and best use.

Answer 39

highest and best use

A property is at its highest and best use when its use is physically possible, legally permitted, economically or financially feasible, and its most profitable or maximally productive use.