Unit 16: Real Estate Appraisal

Question 1

True/False A comparative market analysis (CMA) must conform to the Uniform Standards of Professional Appraisal Practice (USPAP).

Answer 1

False. An appraisal report, not a CMA, must conform to the USPAP. A CMA is an informal estimate of market value performed by a real estate licensee for the seller to assist in arriving at an appropriate listing price, or if working with the buyer, an informal estimate of market value to assist the buyer in arriving at an appropriate offering price.

Question 2

True/False If an appraisal report involves a federally related transaction, it must be prepared by a state-certified or licensed appraiser.

Answer 2

True. Appraisal reports involving a federally related transaction must be prepared by a state-certified or licensed appraiser. Federally related transactions include the sale, lease, purchase, exchange, investment, refinancing, or other use of real estate as security for a loan.

Question 3

True/False The definition of market value assumes that the terms of sale are in cash in U.S. dollars or in comparable financial arrangements.

Answer 3

True. The definition of market value assumes that payment is made in terms of cash or in terms of comparable financial arrangements.

Question 4

True/False The value for which improvements can be sold at the end of the structure’s useful life is called liquidation value.

Answer 4

False. Liquidation value is the value associated with a rapid sale. Salvage value is the estimated amount for which improvements can be sold at the end of a structure’s useful life.

Question 5

True/False Cost can be defined as the amount of money for which a good is actually sold.

Answer 5

False. Cost is the total expenditure required to bring a new improvement into existence plus the cost of the land. Price refers to the amount of money (or its equivalent) for which a good is actually sold.

Question 6

True/False The added value of combining properties is called assemblage.

Answer 6

False. The added value of combining properties is called plottage. The process of combining properties is assemblage.

Question 7

True/False A property in a neighborhood of large homes has less square footage but ample lot size to accommodate a future addition. The appraised value of the smaller home is enhanced by the market value of the surrounding neighborhood. This is an example of the principle of progression.

Answer 7

True. Progression is the principle that the value of an inferior property is enhanced by its association with superior properties.

Question 8

True/False An appraiser will give the MOST relevance to the cost approach when estimating the value of an apartment complex.

Answer 8

False. An appraiser will give the most relevance to the income approach when the property is income-producing.

Question 9

True/False An appraiser will give the MOST relevance to the cost approach when estimating the value of a 10-year-old single-family home.

Answer 9

False. An appraiser will give the most relevance to the sales comparison approach when the property is a single-family home.

Question 10

True/False The subject property is a three-bedroom, two-bathroom house with a built-in swimming pool. A comparable property sold for $195,500. The comparable has three bedrooms, two bathrooms, but no pool. The appraiser estimates that in this market area, a built-in pool adds $12,000 in value. The adjusted sale price of the comparable is $207,500.

Answer 10

True. The comparable is inferior to the subject property with regard to a swimming pool. The appraiser always adjusts the comparable. The appraiser adds the estimated market value of the pool to adjust the sale price of the comparable.

Question 11

True/False If a comparable property is superior to the subject property with regard to size, a downward adjustment is made to the sale price of the comparable.

Answer 11

True. If a comparable property is superior on a given feature, a downward adjustment is made to the comparable property. Remember: Comp Better = Subtract (CBS).

Question 12

True/False Adjustments are ALWAYS made to the subject property.

Answer 12

False. All adjustments necessary to achieve the maximum degree of similarity must be made to each comparable property, not to the subject property.

Question 13

True/False The formula for the cost approach is: reproduction cost (or replacement cost, if applicable) of the structure – accrued depreciation = depreciated value of the structure + estimated value of the site = indicated value of the property using the cost method.

Answer 13

True. The formula for the cost approach is: reproduction cost of the structure – accrued depreciation = depreciated value of the structure + estimated value of the site = indicated value of the property using the cost method.

Question 14

True/False The reproduction cost new of a structure is $350,000. The structure is estimated to have an economic life of 60 years and has an effective age of 6 years. The structure’s accrued depreciation is estimated to be $35,000.

Answer 14

True. 6 years effective age ÷ 60 total economic life × $350,000 reproduction cost new = $35,000 accrued depreciation

Question 15

True/False Chronological age is used in the age-life method of calculating accrued depreciation.

Answer 15

False. The age-life method is based on a ratio of a property’s effective age to its economic life. Effective age is the age indicated by a structure’s condition and utility.

Question 16

True/False A home has very small closets and lacks adequate storage space. This is an example of external obsolescence.

Answer 16

False. Anything that is inferior because of operational inadequacies, such as poor design, is an example of functional obsolescence.

Question 17

True/False Utilities are examples of variable expenses.

Answer 17

True. Variable expenses fluctuate based on occupancy level and include utilities, maintenance, management, supplies, and so forth.

Question 18

True/False A property has a net income of $75,000 and sells for $500,000. The capitalization rate for this property is 20%.

Answer 18

False. $75,000 net income ÷ $500,000 sale price = .15 or 15% capitalization rate.

Question 19

True/False A property produces an annual net income of $60,000. A client desires a 12% per year rate of return. To meet the investor’s goals, the investor should invest approximately $500,000 in the property.

Answer 19

True. $60,000 net income ÷ .12 rate = $500,000. An investment of $500,000, with an annual net income of $60,000, will produce a 12% rate of return.

Question 20

True/False Annual income of a rental complex, assuming no vacancies and no unpaid rent losses, is called effective gross income.

Answer 20

False. Potential gross income is the total annual income a property would produce if it is fully rented and there are no collection losses incurred.

Question 21

Using the information in the table, reconcile the three indicated values to estimate the value of the subject property.

Approach
Indicated Value

Weight
Sales comparison $260,000 65%
Cost approach $228,000 25%
Income approach $220,000 10%

A) $236,000
B) $260,000
C) $248,000
D) $258,000

Answer 21

C) $248,000. $260,000 × .65 = $169,000. $228,000 × .25 = $57,000. $220,000 × .10 = $22,000. $169,000 + $57,000 + $22,000 = $248,000.

Question 22

True/False The market value of a subject property using a market area GIM of 13.5 and gross annual income of $38,500 is $519,750.

Answer 22

True. $38,500 gross annual income × 13.5 GIM = $519,750.

Question 23

True/False A house recently sold for $91,800. The house is a rental property and rents for $850 per month. The monthly gross rent multiplier for this property is 110.

Answer 23

False. $91,800 sale price ÷ $850 monthly rent = 108 GRM.

Question 24

True/False The market value of a subject property using a market area GRM of 125.5 and a gross monthly rent of $2,000 is $251,000.

Answer 24

True. $2,000 monthly rent × 125.5 GRM = $251,000 market value.

Question 25

True/False A comparative market analysis employs all three approaches to value.

Answer 25

False

Question 26

True/False When preparing a CMA, the real estate licensee must consider the square footage and number of bedrooms when choosing comparable properties.

Answer 26

True. Adjustments are made for important differences compared with the subject property. Adjustments are made to the comparables using the same procedure as in the sales comparison approach.

Question 27

True/False Automated valuation models are not appraisals. They do not conform to USPAP standards.

Answer 27

True

Question 28

is the total annual income a property would produce if it were fully rented and no collection losses were incurred.

Answer 28

Potential gross income (PGI)

Question 29

is calculated by subtracting vacancy and collection losses from the PGI. Net operating income (NOI) is the income remaining after subtracting operating expenses from EGI. The three categories of operating expenses are (1) fixed, (2) variable, and (3) reserve for replacements.

Answer 29

Effective gross income (EGI)

Question 30

develops an estimated value based on the present worth of future income from the subject property. The approach capitalizes net operating income into value.

Answer 30

The income approach

Question 31

Using income capitalization, what is the result of holding the capitalization rate constant and increasing the net operating income?

A) Present value increases
B) Capitalization rate increases
C) Capitalization rate decreases
D) Present value decreases

Answer 31

A) present value increases. If the net income goes up and the capitalization rate remains constant, the present value will increase.

Question 32

Which type of depreciation is associated with inefficient architectural design?

A) Functional obsolescence
B) External obsolescence
C) Age-life deterioration
D) Physical deterioration

Answer 32

A) functional obsolescence. Functional obsolescence is depreciation associated with operational inadequacies, poor design, or changing tastes and preferences.

Question 33

A limited partnership plans to purchase an apartment building that has a monthly net income of $5,200 and monthly expenses of $1,400. If the partnership is to get a 12% return on its investment, what should it pay for the property?

A) $350,500
B) $520,000
C) $62,400
D) $43,333

Answer 33

B) $520,000. The solution is $5,200 monthly net income × 12 months = $62,400 annual NOI. $62,400 ÷ .12 rate of return = $520,000 target price.

Question 34

An income-producing property has a projected effective gross income of $65,000. Expenses are estimated at 20% of effective gross income. An appraiser has determined that an appropriate capitalization rate is 8%. What is the estimated market value of this property?

A) $485,500
B) $812,500
C) $650,000
D) $325,000

Answer 34

C) $650,000. $65,000 EGI × .20 rate = $13,000 expenses. $65,000 – $13,000 = $52,000 NOI. $52,000 ÷ .08 cap rate = $650,000 value.

Question 35

Which principle states that an informed purchaser will NOT pay more for real estate than the cost of acquiring an equally desirable alternative property?

A) Market value
B) Substitution
C) Conformity
D) Balance

Answer 35

B) substitution. The principle of substitution means that a prudent buyer or investor will pay no more for a property than the cost of acquiring, through purchase or construction, an equally desirable alternative property.

Question 36

An appraiser is calculating the reproduction cost new of a home using the comparative square-foot method. The appraiser measured the exterior dimensions of the home, which were 30 feet by 55 feet, plus a detached garage measuring 22 feet by 24 feet. The appraiser consults an accepted cost manual and estimates the reproduction cost for heated and air-conditioned living area to be $90.50 per square foot and the finished free-standing garage to be $58.00 per square foot. What is the reproduction cost new of the improvements?

A) $149,325
B) $197,109
C) $179,949
D) $185,450

Answer 36

C) $179,949. 30 feet × 55 feet = 1,650 square feet living area × $90.50 = $149,325. 22 feet × 24 feet = 528 square feet garage area × $58.00 = $30,624. $149,325 + $30,624 = $179,949 reproduction cost new.

Question 37

A new car has a sticker amount of $31,000. This figure is the car’s

A) investment value.
B) market value.
C) price.
D) cost.

Answer 37

C) price. Price refers to the amount of money for which a good is actually sold.

Question 38

An income-producing property has a potential annual gross income of $98,500. Vacancy and collection losses are estimated at 10% of potential gross income. Expenses are estimated at $45,000. The estimated value of the property is $350,000. What is the capitalization rate for this property?

A) 11.75%
B) 28.14%
C) 12.47%
D) 16.74%

Answer 38

C) 12.47%. $98,500 PGI × .10 rate = $9,850 vacancy and collection loss. $98,500 – $9,850 = $88,650 EGI. $88,650 – $45,000 expenses = $43,650 NOI. $43,650 ÷ $350,000 value = .1247 or 12.47% cap rate.

Question 39

A home has 2,000 square feet of living area and 485 square feet of garage. The reproduction cost new is $98 per square foot for living area and $55 per square foot for finished garage area. The site measures 75 feet wide by 120 feet deep and is valued at $5 per square foot. The economic life of the structure is estimated to be 60 years. The house is 10 years old. What is the value of the property using the cost-depreciation approach (round figures to the nearest dollar)?

A) $185,562
B) $208,333
C) $222,675
D) $230,562

Answer 39

D) $230,562. 2,000 square feet × $98 = $196,000 living area. 485 square feet × $55 = $26,675 garage area. $196,000 + $26,675 = $222,675 reproduction cost new. $222,675 ÷ 60 years economic life × 10 years = $37,112.50 accrued depreciation (rounded up to $37,113). $222,675 – $37,113 = $185,562 depreciated structure. 75 feet wide × 120 feet deep = 9,000 square feet for lot. 9,000 × $5 per square foot = $45,000 land value. $185,562 + $45,000 = $230,562 property value.

Question 40

Which type of cost is calculated using similar, but NOT identical, building materials, resulting in equal utility as compared with the subject property?

A) Replacement
B) Accounting
C) Reproduction
D) Insurance

Answer 40

A) replacement. Replacement cost is the amount of money required to replace a structure having the same use and functional utility as the subject property but using modern, available, or updated materials.

Question 41

A new airport built in proximity to a residential neighborhood may cause properties to lose value due to

A) functional obsolescence.
B) outmoded design.
C) physical deterioration.
D) external obsolescence.

Answer 41

D) external obsolescence. External obsolescence is loss in value due to influences originating outside the boundaries of the property, such as an expressway adjacent to a residential subdivision.

Question 42

What is the result of multiplying the gross rent multiplier by the monthly rent?

A) Capitalization rate
B) Market value
C) Annual rent
D) Leasable rent

Answer 42

B) market value. Market value equals the gross monthly rent multiplied by the gross rent multiplier.