Valuation/Market Analysis Flashcards
Which of the following appraisal techniques require a separate estimate for the value of the land?
A) - market data approach
B) - income capitalization approach
C) - cost approach
D) - All of the above
C) - cost approach
Answer: C—The primary steps of the cost approach are to (1) estimate the land value, (2) estimate the replacement cost of the building new, (3) deduct all accrued depreciation from the replacement cost and (4) add the estimated land value to the depreciated replacement cost.
The quantity survey method, unit-in-place method, and square foot/cubic foot methods of real estate appraisal most directly relate to the:
A) - cost approach
B) - income approach
C) - sales comparison approach
D) - All of the above
A) - cost approach
Answer: A—In the cost approach, an appraiser may use all of these methods to determine the cost to build.
Wear and tear to the load bearing members of a building would be classified as:
A) - functional obsolescence-curable.
B) - physical deterioration-curable.
C) - functional obsolescence-incurable.
D) - physical deterioration-incurable.
D) - physical deterioration-incurable.
Answer: D—Physical damage to the load bearing members of a bulding would usually be considered too expensive to repair. If it is too expensive to repair, it is classified as incurable.
Which of the following is the best expression of why real estate has value?
A) - excellent potential for speculative growth
B) - maximum utilization of available resources
C) - closest to affluent neighborhoods
D) - incalculable replacement cost
B) - maximum utilization of available resources
Answer: B—Maximum utilization of available resources relates to highest and best use.
An appraiser was hired by Williams to appraise Henderson’s property. With whom should the appraiser discuss his findings?
A) - Mr. Williams
B) - Mr. Henderson
C) - any interested party
D) - any party willing to pay
A) - Mr. Williams
Answer: A—The results of an appraisal are confidential.
Which of the following approaches to real estate appraisal is concerned with “the present worth of future benefits” of a property?
A) - market data
B) - income
C) - cost
D) - summation
B) - income
Answer: B—The income approach is based on the theory that the present worth or value of an income property is the present worth of future net income.
The principle of “highest and best use” refers to the use:
A) - that produces the greatest net income attributable to the land.
B) - that produces the largest gross income.
C) - of improvements best adapted to the architectural style and design of the neighborhood.
D) - best suited to the environment.
A) - that produces the greatest net income attributable to the land.
Answer: A—Highest and best use refers to use of land. It is that use of the land that will produce the greatest net income designated and credited to the land.
Putting aside money each year for five consecutive years to replace the roof is an example of:
A) - a trust fund.
B) - a depreciation allowance.
C) - a sinking fund.
D) - an emergency plan.
C) - a sinking fund.
Answer: C—A “sinking fund” is established to gradually amass enough money to satisfy a debt or to meet a specific requirement. The sinking fund method of depreciation contemplates periodic investments of equal amounts of money in a compound-interest-bearing account whereby the investment plus the compound interest will be used to replace the improvement at the end of its economic life.
The ultimate test of functional utility is:
A) - marketability.
B) - layout.
C) - location.
D) - desire.
A) - marketability.
Answer: A—Functional utility is defined as the “the ability of a property or building to be useful and to perform the function for which it is intended, according to current market tastes and standards, as well as the efficiency of a building’s use in terms of architectural style, design and layout, traffic patterns, and size and type of rooms.” The ultimate test of functional utility is marketability. If the property can be marketed for the same price as others in the area, there is no functional obsolescence.
Which of the following appraisal reports is the most complete and detailed?
A) - certificate
B) - letter
C) - short form
D) - narrative
D) - narrative
Answer: D—A narrative report is a complete document including all pertinent information about the area and the subject property, as well as the reasons and computations for the value consideration. It includes maps, photographs, charts, and plot plans.
Any loss in value due to placing a building in an incompatible neighborhood would be an example of:
A) - functional obsolescence.
B) - economic obsolescence.
C) - physical wear and tear.
D) - improper design techniques.
B) - economic obsolescence.
Answer: B—The fact that neighboring properties are hurting the value of a building would indicate that it is suffering from economic obsolescence.
All of the following would influence the value of a commercial lot EXCEPT:
A) - fertilization of soil.
B) - drainage.
C) - proximity to transportation.
D) - compaction of soil.
A) - fertilization of soil.
Answer: A—The fertility of the soil applies to agricultural land.
What is a “fee appraiser?”
A) - An appraiser who works for a lending institution.
B) - A certified appraiser who works on salary.
C) - An appraiser who works for a federally insured lender.
D) - An independent appraiser who works on a fee basis.
D) - An independent appraiser who works on a fee basis.
Answer: D—A fee appraiser is a non-salaried professional who furnishes appraisal services for a fee.
Economic obsolescence would be considered:
A) - curable.
B) - incurable.
C) - inherent.
D) - wear and tear.
B) - incurable.
Answer: B—Whether an item of depreciation is curable or incurable depends soley on the cost to cure. Since economic obsolescence is caused by external forces there is usually nothing that can be done to change it.
Two different properties are located side-by-side in the same neighborhood. They were both built by the same contractor, at the same time, for the same cost, are maintained the same, and contain the same square footage. If one property is worth less than the other, it would be due to:
A) - functional obsolescence.
B) - economic obsolescence.
C) - deferred maintenance.
D) - physical deterioration.
A) - functional obsolescence.
Answer: A—The only possible difference is that the properties do not look the same. All forces and factors that could influence value operate on both properties. Possibly the floor plans are different. The difference must be architectural and is considered functional obsolescence.
Evans owns a new personal residence. The transportation agency is widening the street in front of his residence. This will cause Evans to lose 10 feet along the front of his property which borders the street. This is an example of:
A) - functional obsolescence.
B) - economic obsolescence.
C) - physical deterioration.
D) - accrued depreciation.
B) - economic obsolescence.
Answer: B—Any loss in value would be considered economic obsolescence because it is caused by a force which is outside the property lines.
Which of the following has the least to do with market value?
A) - value in exchange
B) - book value
C) - assessed value
D) - loan value
B) - book value
Answer: B—Book value is the adjusted basis of an asset and usually differs from appraised value or market value.
Offers to purchase by prospective buyers will tend to set:
A) - future prices.
B) - the ceiling price.
C) - the floor for prices.
D) - None of the above.
C) - the floor for prices.
Answer: C—Sellers list high and buyers usually offer to pay less than they might agree to pay. In bargaining circumstances, asking prices establish the upper limit for prices in an area while offers to purchase will set the lower limit to which prices might fall.
All of the following are recognized methods of appraisal EXCEPT:
A) - comparative method.
B) - allocation method.
C) - extraction method.
D) - economic method.
D) - economic method.
Answer: D—There is no appraisal method known as the “economic” method. Allocation and extraction are methods of land or site valuation.
The increase of value with the passage of time describes:
A) - appreciation.
B) - “return on” investment.
C) - “return of” investment.
D) - depreciation.
A) - appreciation.
Answer: A—Appreciation is a temporary or permanent increase in the worth or value of property due to economic causes, the opposite of depreciation.
The relationship between a property and a prospective purchaser is known as:
A) - utility.
B) - value.
C) - highest and best use.
D) - progression.
B) - value.
Answer: B—Value can also be described as the relationship between a property and a prospective purchaser. The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale (market value).
An appraiser is appraising a property which is next door to an abandoned gas station. The appraiser should recommend a:
A) - soil engineering study.
B) - toxic waste study.
C) - seismic study
D) - All of the above
B) - toxic waste study.
Answer: B—There is a possibility that the old underground fuel storage tanks used by the gas station were left in the ground and may be leaking. A toxic waste study would require a soil analysis to determine if the tanks have leaked. A soil engineering study is used to test the soil’s ability to support a structure. (See Toxic Substance Control Act)
Which of the following is an example of functional obsolescence?
A) - new zoning laws
B) - encroachment of inharmonious land use
C) - deteriorated driveway
D) - ornate cornices
D) - ornate cornices
Answer: D—An ornate cornice is an outdated architectural design classified as functional obsolescence. A deteriorated driveway would be physical deterioration. New zoning laws and inharmonious land use would be examples of economic obsolescence.
Which of the following is NOT one of the three great forces affecting value?
A) - social ideals and standards
B) - economic adjustments
C) - political governmental regulations
D) - private restrictions
D) - private restrictions
Answer: D—Real estate undergoes constant change from physical, economic, social, and political forces.
A corner lot would most likely add value to:
A) - residential property.
B) - retail property.
C) - industrial property.
D) - agricultural property.
B) - retail property.
Answer: B—Retail property would benefit from the added traffic and visual exposure of a corner lot.
The term “infill” is most closely defined as:
A) - An old building torn down and rebuilt.
B) - A building renovated for recreational facilities.
C) - A commercial building built on an empty lot in a commercially developed area.
D) - Excavation of property for a new housing development.
C) - A commercial building built on an empty lot in a commercially developed area.
Answer: C—Infill: In housing construction, the process of developing open areas within an established area before developing outside the established area. These areas of vacant land may have been bypassed by earlier waves of development and are now largely surrounded by developed land.
What is the best method for appraising a warehouse?
A) - market-data approach
B) - square-footage method
C) - cubic-foot method
D) - income capitalization method
D) - income capitalization method
Answer: D—A warehouse is an income producing property and would be appraised using income capitalization.
Two buildings are located in the same area of comparable size, both under long-term leases. One is leased to the government for a post office and the other for a hardware store. Using the income capitalization approach to appraise the properties, which of the following is correct?
A) - The same capitalization rate for both
B) - A lower capitalization rate for the hardware store
C) - A higher capitalization rate for the hardware store
D) - Proportional capitalization rates based on the different uses
C) - A higher capitalization rate for the hardware store
Answer: C—Part of the capitalization rate measures the risk involved in an investment. Thus, the higher the risk the higher the CAP rate; the lower the the risk the lower the CAP rate. Leasing a building for a hardware store involves higher risk of vacancy than leasing for a post office and results in a higher CAP rate.
Which of the following items is NOT deducted from gross income to determine net income for capitalization purposes?
A) - taxes
B) - interest on money invested
C) - insurance
D) - management costs
B) - interest on money invested
Answer: B—Interest payments are not considered an expense when estimating the value of the property.
In an appraisal, the term “utility value” would most nearly be described as:
A) - insurance value.
B) - liquidation value.
C) - market value.
D) - use value.
D) - use value.
Answer: D—Utility value is the value in use to an owner-user. A property that has no utility has no value.
Which of the following comparables would be the most helpful in appraising a home?
A) - A similar home sold for nonpayment of taxes.
B) - A similar property sold under duress.
C) - A similar home sold by a motivated seller to a motivated buyer.
D) - A similar home sold by an unwilling seller to an unsure buyer.
C) - A similar home sold by a motivated seller to a motivated buyer.
Answer: C—This relates to the “willing seller, willing buyer” concept of value.
Which of the following is true about the replacement cost method?
A) - It works best with new properties.
B) - It tends to set the upper value of a property.
C) - It works best for libraries.
D) - All of the above
D) - All of the above
Answer: D—Since the cost approach looks at the cost of constructing an identical building with current materials and techniques, it tends to set the upper value of the property. The cost approach is ideal for new properties and special purpose properties that have no comparables in the area or which produce no income - examples are museums, schools, churches, and libraries.
An appraiser using the cost approach to appraise property would be least concerned about the economy in the area of the subject property when appraising:
A) - A store in a residential area
B) - An industrial park
C) - An electronic assembly plant
D) - A strip shopping mall in a residential area
C) - An electronic assembly plant
Answer: C—An electronic assembly plant is producing products which will not depend on the local economy. The products will be distributed either nationally or internationally. The value of the other three choices would be directly affected by the local economy.
The immediate surroundings of real estate is important because:
A) - nice neighbors add value.
B) - property in an unattractive neighborhood won’t sell.
C) - real estate is immobile.
D) - None of the above
C) - real estate is immobile.
Answer: C—Real estate is immovable by nature and cannot escape its immediate surroundings.
The effect of depreciation is:
A) - the property is hard to sell.
B) - the value goes up.
C) - the basis goes down.
D) - depreciation continues until the basis is 0.
C) - the basis goes down.
Answer: C—Basis, as it relates to income property goes down each year as the owner deducts depreciation. It may also go up with the addition of capital improvements. Basis or book value will never reach zero because the land does not depreciate.
When using the cost approach, the appraiser may estimate the cost of reconstruction based on its “reproduction” cost or its “replacement” cost. “Reproduction” cost is:
A) - The cost to replace the current improvements with another structure.
B) - An estimate of the actual cost of the building when originally constructed.
C) - The cost to build an exact replica using the actual materials and design of the present building.
D) - The cost to remodel the existing structure so it meets current building codes.
C) - The cost to build an exact replica using the actual materials and design of the present building.
Answer: C—”Reproduction” cost is the cost of reconstructing a replica of the existing structure using the same design and materials.
The economic life of improved property is which of the following in relation to the physical life?
A) - longer
B) - shorter
C) - the same
D) - depends on the type of building
B) - shorter
Answer: B—Economic life is the estimated period over which an improved property may be profitably utilized so it will yield a return. The physical life is the estimated period during which a physical thing is habitable if normally maintained. Typically, physical life is expected to be longer than economic life.
If a building is in exceptionally good condition, its effective age is:
A) - less than its actual age.
B) - more than its actual age.
C) - the same as its actual age.
D) - depends on the type of building.
A) - less than its actual age.
Answer: A—Effective age is the apparent age of a building based on observed condition rather than chronological age. The effective age of improvements to real property at the time of inspection differs from actual age by such variable factors as depreciation, quality of maintenance, and the like.
Market value is determined by:
A) - value offered.
B) - value paid.
C) - appraised value.
D) - All of the above
B) - value paid.
Answer: B—Market Value: The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale. It is assumed that the buyer and seller acted prudently and knowledgeably, and that the price is not affected by undue stimulus.
Which appraisal method values electrical work by number of light fixtures per square yard?
A) - quantity survey method
B) - unit-in-place method
C) - comparison method
D) - construction cost method
B) - unit-in-place method
Answer: B—The unit-in-place method is a method for computing replacement cost which uses prices for various building components as installed, based on specific units of use such as square footage or cubic footage. For example, insulation may cost $.07 per square foot, drywall $1.50 per square yard, painting $.08 per square foot, and so on.
In appraisal, the adjustment process, whereby, comparables are adjusted to the subject property is known as:
A) - averaging.
B) - reconciliation.
C) - weighing.
D) - comparing.
B) - reconciliation.
Answer: B—In appraisal, reconcilation is the process of interpreting the data gathered by bringing the various value estimates into mutual relationship with one another to determine a final estimate of value. With this process, the comparables are always adjusted to the subject property.
Which of the following best identifies the three phases normally involved in a single-family dwelling?
A) - Construction proposal, map approval, and buyer qualification
B) - Land acquisition, development, and construction
C) - Financing, building, and resale
D) - Syndication, subdivision, and recordation
B) - Land acquisition, development, and construction
Answer: B—These are the 3 stages of building a single-family dwelling.
When appraising a commercial property, an appraiser would be least interested in:
A) - changes in use.
B) - physical condition.
C) - past sales of similar property.
D) - original cost.
D) - original cost.
Answer: D—The value of commercial property is more often derived from its income earning potential.
When using the market-data approach to appraise a single-family home, recent sales are compared to the subject property as to:
A) - capitalization rates.
B) - exterior features only.
C) - the entire property.
D) - rental income.
C) - the entire property.
Answer: C—The entire property is examined for comparison purposes.