Unit 16 Quiz Questions Flashcards
A property is listed for sale at $235,000. A buyer’s offer of $220,000 is rejected by the seller. Six months later, the seller reduces the price to $225,000. Another buyer offers $210,000, and the seller accepts because the seller has found another house to buy and needs to close quickly. The property is subsequently appraised at $215,000. Which of these figures MOST accurately represents the property’s market value?
a. $210,000
b. $215,000
c. $225,000
d. $235,000
$215,000
The property’s market price is $210,000, while its appraised value (and most probable market value) is $215,000. The seller accepted the lower price because of the pressure to close on the
new house.
Which appraisal approach would be BEST to appraise a 25-year-old owner-occupied house in a 30-year-old neighborhood?
a. Sales comparison
b. Income approach
c. Cost approach
d. GRM
Sales comparison
The most appropriate method to appraise an older home in an established neighborhood is the sales comparison approach.
When appraising a new home in which no one has ever lived, an appraiser will likely use the
a. sales comparison approach.
b. income approach.
c. cost approach.
d. GRM.
Cost approach
A newly constructed house may be appraised using the cost approach and omitting depreciation.
Assuming that all of the transactions are federally related, which of these properties would have to be appraised by a state licensed or certified appraiser?
a. Commercial property valued at $350,000
b. A condominium unit with a sale price of $167,850
c. Residential property valued at $262,500
d. Commercial property valued over $1 million in a refinance
Commercial property valued over $1 million in a refinance
Appraisals of residential property valued at $400,000or less and commercial property valued at $500,000 or less in federally related transactions need not be performed by licensed or
certified appraisers.
An appraiser’s role is to
a. set price.
b. average value.
c. determine value.
d. form an opinion of value.
From an opinion of value
An appraiser is an independent professional trained to provide an unbiased opinion of value based on recognized standards of appraisal practice.
The principle that maximum value is realized when land use is in harmony with surrounding standards is
a. contribution.
b. conformity.
c. highest and best use.
d. competition
Conformity
Contribution is the principle that evaluates the cost of adding an improvement against the value of the property as a whole. Competition is the interaction of supply and demand, while
highest and best use is the most profitable single use to which the property may be used.
With plans to build a large house in a neighborhood of smaller homes, a buyer purchases three neighboring lots from their three owners. What is the term for this activity?
a. Substitution
b. Plottage
c. Progression
d. Assemblage
Assemblage
The process of merging separately owned lots under one owner is called assemblage. Plottage holds that merging these lots together into a single larger one may produce a greater total
land value than the sum of the individual lots valued separately.
A small house in a highly desirable neighborhood consisting of large homes is purchased for $390,000. A nearly identical house in a neighborhood of similarly sized homes is purchased by
a different buyer for $290,000. What economic principle BEST describes the reason why one buyer paid more than the other?
a. Plottage
b. Substitution
c. Regression
d. Progression
Progression
The first buyer’s house benefits from being a smaller one alongside larger, more prestigious ones (i.e., progression). The second buyer’s house is appropriately valued for its neighborhood.
It cost approximately $350,000 to build a house and its various improvements on a parcel of property. If the property was vacant, undeveloped land, it would be worth about $80,000. As it currently exists, the structure’s physical deterioration equals about $60,000. If an appraiser were to apply the cost approach, what would be the value of this property?
a. $270,000
b. $370,000
c. $430,000
d. $480,000
$370,000
The cost approach subtracts depreciation from the current cost of improvements and then adds the value of the land as if it were vacant: $350,000 – $60,000 + $80,000 = $370,000.
If a property is found in Fannie Mae’s Collateral Underwriter (CU) database, it may qualify for a
a. preliminary appraisal approval.
b. property inspection waiver.
c. Desktop Underwriter appraisal.
d. licensed appraiser review.
Property Inspection Waiver
If a property appraisal has been included in Fannie Mae’s Collateral Underwriter database as part of an earlier transaction, and the same borrower is involved in a new transaction, a
property inspection waiver will be considered.
Air pollution from automobile traffic near a building with ornate exterior decoration has dissolved much of the intricate detail work. The cost of restoring the front of the building is roughly five times the building’s present value. These facts describe
a. curable external obsolescence.
b. incurable functional obsolescence.
c. incurable physical deterioration.
d. curable external deterioration.
Incurable physical deterioration
Air pollution has damaged the old design, and the cost of correcting the defect is not financially feasible. This is an example of incurable physical deterioration
The land on which a house was built is worth $50,000. The house was constructed in 1990 at a cost of $265,000 and was expected to last 50 years. None of the mechanical systems, roofing, or siding has been replaced in that time. Using the straight-line method, determine how much the house has depreciated by 2014.
a. $28,600
b. $96,600
c. $127,200
d. $145,200
$127,200
The value of the land is not relevant to this problem. The cost of the building is divided by the
number of years of its useful life and multiplied to determine the depreciation after 24 years:
$265,000 ÷ 50 = $5,300
$5,300 × 24 = $127,200.
Which of these reports would a sales associate MOST likely research and deliver to a prospective seller?
a. Comparative market analysis
b. Appraisal
c. Letter of intent
d. Cost benefit analysis
Comparative market analysis
A real estate sales associate often prepares a comparative market analysis (CMA), a comparison of the prices of recently sold homes that are similar to a prospective seller’s home in location, style, and amenities. The CMA helps the owner set an appropriate asking price for the property.
What is the GRM for a residential duplex with a selling price of $234,000 if the monthly rent for each unit is $925?
a. l.054
b. 10.54
c. 126.5
d. 252.9
126.5
Because GRM for one-unit and two-unit residential properties is based on gross monthly rent, GRM = sales price ÷ gross rent: $234,000 ÷ (2 × $925) = 126.5 GRM.
Which of these approaches is given the greatest weight in reconciling the values resulting from different appraisal approaches for a two-bedroom, owner-occupied home?
a. Income approach
b. Sales comparison approach
c. Cost approach
d. Market value approach
Sales comparison approach
Most owner-occupied residences are best appraised by comparing them to similar properties—that is, by using the sales comparison approach
The characteristics of value include
a. demand, utility, scarcity, and transferability.
b. demand, utility, price, and transferability.
c. popularity, location, price, and transferability.
d. demand, scarcity, price, and popularity
demand, utility, scarcity, and transferability
Remember the acronym DUST
A house has been on the market for several months because most buyers do not want to walk through the primary bedroom to reach another bedroom. This floor plan is an example of
a. regression.
b. economic obsolescence.
c. functional obsolescence.
d. physical deterioration.
Functional Obsolescence
There is nothing physically wrong with the house, but the design is outdated (functionally obsolescent). Perhaps buyers would be more interested if the room adjacent to the primary
bedroom were marketed as a home office or walk-in closet.
A homeowner is considering installing a below-ground swimming pool, which may cost many thousands of dollars to build. The homeowner should consider the concept of
a. change.
b. competition with the neighbors.
c. conformity within the neighborhood.
d. contribution
Contribution
Before embarking on installing the pool, the owner should consider its overall contribution to the value of the property, especially for the neighborhood. Sometimes an improvement does not add value equal to its cost.
Which of these formulas is correct for the income approach?
a. Income x value = rate
b. Income x rate = value
c. Value x rate = income
d. Value ÷ rate = income
Value x Rate = income
As the capitalization rate goes down, the value increases.
A house is on the corner of a busy intersection. Two of the corners are occupied by gas stations, and directly across from the house is a fast food restaurant. The house’s owners have
been told that the property would be worth more if the lot were vacant. This is an example of
a. progression.
b. highest and best use.
c. regression.
d. conservation.
Highest and best use
Under the principle of highest and best use, the single most profitable use for this property is not residential; more likely, it would be better suited to another commercial use.
A two-unit apartment building is being appraised. In this neighborhood, the typical gross rent multiplier is 144. The annual income for the building is $16,800 (both units rented). The monthly expenses are $300. Based on the income approach, what is the estimated market value of the apartment building?
a. $201,600
b. $224,800
c. $232,500
d. $258,600
$201,600
The monthly rental income is $1,400 ($16,800 ÷ 12 = $1,400). Rental income × GRM = estimated market value: $1,400 × 144 = $201,600. The monthly expenses are not included in
the calculation.
An apartment building has $65,000 in potential gross annual income. The vacancy rate is estimated at 5%, total operating expenses are $29,000, and the capitalization rate is 9%. Using
the income approach, what is the value of the building?
a. $324,773
b. $363,889
c. $372,895
d. $392,367
$363,889
Gross income – vacancy and rent losses – operating expenses = net operating income: $65,000
× 5% = $3,250; $65,000 – $3,250 – $29,000 = $32,750. Net operating income ÷ capitalization
rate = value: $32,750 ÷ 9% = $363,889.
Which of these concepts applies to every appraisal?
a. Diminishing returns
b. Plottage
c. Highest and best use
d. Assemblage
Highest and best use
The highest and best use of a property is the most profitable single use to which it can be put and is considered in every appraisal
The property being appraised is called the
a. lot.
b. parcel.
c. subject property.
d. comparable property.
Subject property
The subject property is the one being appraised. Comparable properties are properties similar to the subject property. Each comparable property is analyzed for differences and
similarities between it and the subject property.
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 store
b. A factory
c. A parking lot
d. A single-family home
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.
What is the process for creating a broker’s price opinion (BPO)?
a. The broker drives by the property, takes a picture, and fills out the BPO form.
b. The broker engages a certified appraiser to perform an appraisal.
c. The broker prepares a report compiled from research of comparable properties.
d. The attorney engages a broker to perform a comparative market analysis.
The broker drives by the property, takes a picture, and fills out the BPO form.
The broker’s price opinion (BPO) is a less-expensive alternative of valuating properties often used by lenders working with home equity lines, refinancing, et cetera. Most are simply drive-
bys that verify the existence of the property along with a listing of comparable sales.
Which of these is an essential assumption in determining market value?
a. The buyer and seller may be related.
b. The payment must be in cash only.
c. The buyer and seller must be acting without excessive pressure.
d. The property must be on the market for at least three months.
The buyer and seller must be acting without excessive pressure.
Market value is the most probable price that a property should bring at a fair sale. The property must be on the market for a reasonable time, but no specific time period must be met
The principle of value that is the interaction of supply and demand is called
a. anticipation.
b. competition.
c. conformity.
d. contribution.
Competition
Anticipation is the expectation that certain events will occur. Conformity states that value is created when a property is in harmony with its surroundings. Contribution means that the
value of any part of a property is measured by its effect on the value of the entire property.
Basic principles of value include
a. anticipation and conformity.
b. depreciation.
c. decor.
d. financing concessions
Anticipation and conformity
The basic principles of value include the concepts of anticipation, change, competition, conformity, contribution, highest and best use, increasing and diminishing returns, plottage, regression and progression, substitution, and supply and demand. Depreciation, décor, and financing concessions do not reflect the basic principles of property value.
Touching-up peeling paint is an example of curing
a. physical deterioration.
b. functional obsolescence.
c. external obsolescence.
d. straight-line depreciation
Physical Deterioration
Touching up peeling paint is an example of curing physical deterioration. External obsolescence is always incurable. Functional obsolescence is a loss in value from the market’s
response to the item.
Which appraisal method uses a rate of investment return?
A. Sales comparison approach
B. Cost approach
C. Income approach
D. Gross income multiplier method
Income Approach
The answer is income approach. The income approach uses the rate of investment return, which is the relationship between the appraised value and the net annual income
The characteristics of value include which of the following?
A. Competition
B. Scarcity
C. Anticipation
D. Balance
Scarcity
The answer is scarcity. The characteristics of value are remembered by the acronym DUST: demand, utility, scarcity, and transferability.
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
Plottage
The answer is 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.
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.
Market value
The answer is market price. Market price is a property’s asking, offer, or sales price
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
Regression
The answer is 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
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
Progression
The answer is 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.
For tax purposes, accrued depreciation may be considered as a result of
A.functional obsolescence.
B.physical deterioration.
C. external obsolescence.
D. accelerated depreciation.
Accelerated depreciation.
The answer is accelerated depreciation. Functional obsolescence, physical deterioration, and external (economic) obsolescence are all sources of depreciation as a loss in value. Accelerated depreciation refers to a deduction for income tax purposes.
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
Analyzing the results obtained by the different approaches to value to form an opinion value
The answer is 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.
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%
8%
The answer is 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.
An appraiser applying the cost approach to value will consider which of the following?
A.Annual net operating income
B. Capitalization rate
C.Accrued depreciation
D.Annual gross income
Accrued Depreciation
The answer is accrued depreciation. Depreciation is one of the calculations used in the replacement (cost) approach
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
Income Approach
The answer is 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.
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.
An estimate of the most probable price it should bring.
The answer is 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
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.
Estimate Value
The answer is estimate value. Capitalization (the income approach) requires the use of the net operating income, and capitalization rate to find value.
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.
Loss of value to any reason.
The answer is 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
Which of the following is an important factor in comparing properties under the sales comparison approach to value?
A. Mortgage balance
B. Potential market rent
C. Differences in appearance and condition
D.Differences in original cost
differences in original cost.
The answer is differences in original cost. None of the approaches to appraisal consider 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.
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.
None of these.
The answer is 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.
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
Methodical collection and analysis of data
The answer is 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.
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.
Functional obsolescence
The answer is functional obsolescence. Depending on the other homes in the marketplace, a home with four bedrooms and only one bathroom may be undesirable.
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
Competition
The answer is 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.
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
Value
The answer is value. They all affect value—the most probable price a property will bring.
