Chapter 18—Real Estate Appraisal
MULTIPLE CHOICE
1. The most commonly used methods of real estate appraisal are
a.
market approach, income, and cost.
b.
income, reproduction, and cost.
c.
residual, cost, and market data.
d.
comparison, income, and capitalization.
2. When the appraiser has decided to use the market approach, which of the following conditions would
disqualify a sale as a fair market value transaction?
a.
Low down payment followed by below-average interest rates on the balance due
b.
Seller who was not in a hurry to sell
c.
VA sale
d.
Neighbor’s house sold for a higher amount
3. The definition of fair market value requires, among other things, that the
a.
property is exposed to the open market for a reasonable time.
b.
seller can convey a fee simple title.
c.
buyer is qualified for reasonable financing.
d.
sale was free of high-pressure listing and sales agents.
4. The best definition of fair market value is the
a.
value as determined by a fee appraisal.
b.
highest price a seller can get for his property.
c.
tax assessed value.
d.
price a willing buyer will pay and a willing seller will accept, given a reasonable amount
of time to effect the sale.
5. If an appraiser felt some comparable sales were better indicators of value than other comparables, he
would assign more weight to them in the
a.
adjusted sales price.
b.
correlation process.
c.
4-3-2-1- rule.
d.
replacement cost approach.
6. In making an appraisal by the market comparison approach, an appraiser should
a.
consider the physical and economic features of the subject property.
b.
consider the yield of the subject’s property with competitive rates of return.
c.
make adjustments to the value of the subject property with competitive rates of return.
d.
utilize comparable listings withdrawn from the market.
7. A residential lot purchased 3 years ago for $10,000 has doubled in value. The house on the lot cost
$40,000 and it increased $20,000 in value. If the house and lot are sold at market value today, how
much profit will be realized?
a.
$30,000
b.
$40,000
c.
33 1/3%
d.
100%
8. The amount of money required to duplicate a property as of a certain date is called
a.
reproduction cost.
b.
depreciation cost.
c.
duplication approach.
d.
capital improvement.
9. In valuing a fire station, an appraiser would most likely emphasize the
a.
market approach.
b.
cost approach.
c.
income approach.
d.
capitalization approach.
10. Which appraisal method would be most useful in appraising an unusual building which has a very
limited and specific use?
a.
Cost approach
b.
Net income
c.
Capitalization
d.
Market comparison
11. Depreciation resulting from outmoded design is classed as
a.
functional obsolescence.
b.
physical deterioration.
c.
economic obsolescence.
d.
social obsolescence.
12. Which of the following in an old commercial building would most likely be a cause of incurable
obsolescence?
a.
Lack of computer wiring
b.
Widely spaced support walls
c.
Lack of intercom system
d.
Unattractive décor
13. Depreciation resulting from the closing of a large business in a small town is classed as
a.
functional obsolescence.
b.
physical deterioration.
c.
economic obsolescence.
d.
political obsolescence..
14. When real property loses value due to social or economic changes, this loss is called
a.
obsolescence.
b.
depreciation.
c.
chattel loss.
d.
recapture.
15. Net operating income on rental property is computed by deducting expenses from
a.
net cash flow.
b.
adjusted gross income.
c.
net gross income.
d.
rate of return.
16. An office building is on a lot valued at $40,000. It would cost $150,000 to replace the building
structure today, but the improvements have depreciated 20%. Using the cost approach, what is the
value of the property?
a.
$40,000
b.
$120,000
c.
$160,000
d.
$152,000
17. The method used to compute a gross rent multiplier is
a.
averaging the net operating income of the subject property.
b.
the sale price of the subject property divided by its original cost.
c.
the sale price of similar properties divided by their rental income.
d.
the maximum rent times twelve months.
18. An apartment building sells for $600,000 and has a gross rent multiplier of 6.0. how much annual rent
does the building produce?
a.
$60,000
b.
$100,000
c.
$10,000
d.
$36,000
19. An office building is on a lot valued at $50,000. It would cost $150,000 to replace the building
structure today, but the improvements have depreciated 10%. Using the cost approach, what is the
value of the property?
a.
$50,000
b.
$152,000
c.
$160,000
d.
$185,000
20. Which of the following operating expense ratios indicate one dollar of total operating expenses for
every two dollars of effective gross income?
a.
33.3%
b.
50%
c.
200%
d.
25%
21. The operating expense ratio is
a.
operating expenses divided by effective gross income.
b.
operating expenses divided by scheduled gross income.
c.
operating expenses plus scheduled gross income divided by effective gross income.
d.
reserves plus collection loss divided by effective gross income.
22. When an appraiser has a property to evaluate, which of the following would he need to know first?
a.
Comparable properties
b.
Amount of his fees
c.
Assessed valuation
d.
Highest and best use
23. That a dollar should be invested only when it will return more than a dollar’s worth of benefits is
called the principle of
a.
conformity.
b.
supply and demand.
c.
contribution.
d.
highest and best use.
24. The added value resulting from the combination of two or more parcels of land is called
a.
replacement value.
b.
liquidation value.
c.
plottage value.
d.
subjective value.
25. The American Institute of Real Estate Appraisers issues the
a.
GRI designation.
b.
MAI designation.
c.
CPM designation.
d.
MIA designation.
26. Which of the following is NOT one of the three standard approaches to value?
a.
Income approach
b.
Cost approach
c.
Price approach
d.
Market approach
27. To apply the market data approach, a real estate appraiser must collect all the following data on each
comparable sale EXCEPT
a.
date of sale.
b.
marketability of title.
c.
financing terms.
d.
sale price.
28. Adjustments for advantageous financing would be made in the
a.
market comparison approach to appraisal.
b.
cost approach to appraisal.
c.
income approach to appraisal.
d.
revised market price.
29. After all adjustments are made to a comparable property, its comparative value for appraisal purposes
is known as its
a.
adjusted market price.
b.
indicated market value.
c.
amended market value.
d.
revised market price.
30. The value of vacant land is commonly stated in any of the following terms EXCEPT value per
a.
square foot.
b.
acre.
c.
front foot.
d.
square yard.
TRUE/FALSE
1. The basic support for validity of the market data approach to appraisal is willing buyers and willing
sellers acting without undue pressure.
2. In using the market approach, the appraiser assumes that the cost to rebuild is related to the present
value.
3. The average assessed value of three comparable homes is likely to be the highest in value.
4. The best way for an appraiser to find the actual age of a residence is to check the tax assessor’s
records.
5. Social obsolescence would be an example of physical deterioration.
6. The phrase “more houses are torn down than fall down” is referring to the basic theory of
obsolescence.
7. Loss of value of a structure because it is in a deteriorating neighborhood would be called economic
obsolescence.
8. A gross rent multiplier is most used by owners in self-evaluating owner-occupied dwellings.
9. The term “scheduled gross” refers to projected gross income if fully leased.
10. The concept of the market approach to valuation rests on the principle of highest and best use.
11. The owner of a beautiful old house was told that because of the location of the property, bordered by
two very busy streets, that it would have more value if the house was torn down and the empty lot put
on the market. This is an example of highest and best use.
12. The Society of Real Estate Appraisers offers the CREI designation.
13. Seller motivation is considered most in the income approach.
14. The appraisal method most likely to provide only a rough estimate of the value of a rental property is
the cost approach.
15. In appraising an historically significant Victorian era residence using the cost approach, the will
probably appraise it on the basis of its reproduction cost.
16. Functional obsolescence results from factors outside the property.
17. The conversion of future income into present value is known as hypothecation.
18. The rents that a property can be expected to produce on an annual basis may be referred to as the
projected gross income.
19. The operating expense ratio of a building is determined by dividing the total operating expenses by the
effective gross income.
20. From the viewpoint of a qualified appraiser, the value of the subject property is most affected by its
highest and best use.
COMPLETION
1. The relationship between added cost and the value it returns is known as the principle of
____________________.
2. The principle that holds that maximum value realized when a reasonable degree of homogeneity is
present in a neighborhood is known as the principle of ____________________.
3. The process of combining two or more parcels of land into one larger parcel is called
____________________.
4. A market where there is an excess of supply over demand is known as a ____________________
market.
5. The property to be appraised is known as the ____________________ property.
6. In the market approach, houses with similar physical features and amenities that have sold recently
under market value conditions are called ____________________.
7. ____________________ are made for price changes since each comparable was sold, as well as for
differences in physical features, amenities, and financial terms.
8. A popular market comparison method that is used when a property produces income is the gross rent
____________________, or GRM.
9. ____________________ cost is the cost at today’s prices of constructing an exact replica of the
subject improvements using the same or very similar materials.
10. ____________________ obsolescence is he loss of value due to external forces or events.
MATCHING
Choose the one most appropriate answer for each.
a.
adjustments
k.
highest and best use
b.
appraisal
l.
income approach
c.
buyer’s market
m.
incurable depreciation
d.
capitalize
n.
market approach
e.
comparables
o.
net operating income (NOI)
f.
cost approach
p.
operating expenses
g.
curable depreciation
q.
physical deterioration
h.
depreciation
r.
reproduction cost
i.
functional obsolescence
s.
scheduled gross income
j.
gross rent multiplier (GRM)
t.
subject property
1. properties similar to the subject property that have sold recently
2. cost at today’s prices of constructing an exact replica of the subject improvements using the same or
similar methods
3. a method of valuing property based on the prices of recent sales of similar properties
4. land value plus construction costs less depreciation
5. the property that is being appraised
6. corrections made to comparable properties to account for differences between them and the subject
property
7. depreciation resulting from wear and tear of the improvements
8. depreciation resulting from improvements that are inadequate, overly adequate, or improperly
designed for today’s needs
9. the estimated rent a fully occupied property can be expected to produce on an annual basis
10. to convert future income to current value
11. gross income less operating expenses, vacancies, and credit losses
12. expenditures necessary to maintain the production of income
13. to estimate the value of something
14. a method of valuing property based on the monetary return it is expected to produce
15. a number that is multiplied by a property’s gross rents to produce an estimate of its worth
16. depreciation that can be remedied at a reasonable cost
17. depreciation that cannot be remedied at a reasonable cost
18. a market where there are few buyers and many sellers
19. that use of a parcel of land that will produce the greatest current value for the parcel
20. loss in value due to deterioration and obsolescence
