Quiz Questions from Basic Appraisal Procedures

Quiz Questions from Basic Appraisal Procedures Which of the following is NOT an accurate statement regarding the reconciliation process? - ANS a. Reconciliation occurs throughout the valuation process. b .Reconciliation is achieved through the application of a precise mathematical formula. c. Reconciliation is a disciplined process using reason and judgment. (b) When does reconciliation take place? - ANS throughout the valuation process What is the final step of the valuation process? - ANS report the defined value The allocation method of site valuation is based on which of the following? - ANS a ratio of the value of the land to the value of the property There are six procedures for developing an opinion of vacant land. Which of the following are included? - ANS sales comparison, land residual, allocation, and extraction Which of the following statements is true regarding the terms "land" and "site"? - ANS Site is land that has all infrastructure installed and is ready for construction of building improvements. What are the three traditional approaches to value? - ANS cost, sales comparison, and income capitalization If the comparable sale is superior to the subject property, the adjustment to the comparable for that factor should be in what direction? - ANS negative In the subject property's neighborhood, improved properties are selling for prices ranging from $100,000 to $150,000. Research reveals a typical land value to total property value ratio of 15%. What is the range of value for a similar site in this neighborhood? - ANS $15,000 to $22,500 When would the extraction method of land valuation be most applicable? - ANS when the value of the improvements can be reliably estimated In an appraiser's data collection process for a market value assignment, which of the following is an example of specific data? - ANS subject property description The appraiser's initial collection of comparable property data is best categorized as - ANS both general data and specific data. Which of the following best defines the valuation process that appraisers use to perform appraisal assignments? - ANS a systematic procedure used to solve a client's real property valuation problem Physically possible, legally permissible, financially feasible and maximally productive are the four tests related to what type of data analysis? - ANS highest and best use In a market value assignment, when must an appraiser identify the intended users of the appraisal? - ANS prior to accepting the assignment At the start of the valuation process, an appraiser considers and analyzes the various elements in the identification of the problem in order to determine what issue(s) in the scope of work? - ANS the type and extent of research and analysis required in the assignment In the highest and best use analysis, when an appraiser is evaluating the land as though vacant, what is one of the four criteria the appraiser will evaluate? - ANS the physical possibility of an intended use An appraiser is analyzing a multi-family apartment complex for lending purposes. While collecting data for the appraisal, what information listed below would the appraiser identify as general data? - ANS regional demographics Which of the following is effective gross income less operating expenses and reserves (if applicable)? - ANS net operating income What characteristics based on investment value are identifiable in an income producing property? - ANS has value to a particular investor and also has personal, subjective parameters When an appraiser analyzes the income-producing property, using the income capitalization approach, what is actually being measured? - ANS the present value of the future benefits derived from property ownership Which of the following best describes the term, "capitalization"? - ANS the conversion of income into value Which of the following best describes the term, "investment value"? - ANS value to a particular investor, based on personal, subjective parameters Which of the following is the correct manner in which a GRM (gross rent multiplier) would be calculated? - ANS divide sale price by monthly gross income Which of the following is true of an equity capitalization rate? - ANS it is an income rate that reflects the relationship between a single year's pre-tax cash flow expectancy and the equity investment Which of the following descriptions provides a simple explanation of the process used in direct capitalization? - ANS dividing the net operating income by a capitalization rate Which of the following would you need to solve for income (I)? - ANS overall rate (R) and sales price Which of the following would you need to solve for value (V)? - ANS net income and overall rate What is the capitalization rate (R) for a property that has a net operating income of $45,000 and that just sold for $500,000? - ANS 9% ($45,000 / $500,000 = 0.09 or 9% capitalization rate) A property sold for $555,000. The buyer anticipated that the potential gross income would be $93,000, the vacancy would be 5%, and expenses would be 35% of EGI in the year after the purchase. What is the overall capitalization rate (RO)? - ANS 10.35% ($93,000 x 0.95 x 0.65 = $57,427.50.RO = $57,427.50 / $555,000 = 0.1035, or 10.35%) A property sold for $500,000. The buyer anticipated that the potential gross income would be $100,000, the vacancy would be 10%, and expenses would be 45% of EGI in the year after the purchase. What is the overall capitalization rate (RO)? Round your answer to the nearest 0.5%. - ANS 10.0% ($100,000 x 0.90 x 0.55 = $49,500 NOI / $500,000 = 0.099 or 10.0%) What is the capitalization rate (R) for a property that has a net operating income of $40,000 and a net income multiplier (NIM) of 12.5? Note: A NIM is based on the same concepts as a gross income multiplier (GIM). - ANS 8% $40,000 X 12.5 = $500,000.$40,000/$500,000 = 0.08 or 8% capitalization rate.You may have also used the reciprocal to solve this problem What situation would give an appraiser the least amount of concern when comparing sales to derive an indicated gross rent? - ANS comparing rentals sales located in the same high-rise condominium building Concerning factors and multipliers, which of the following is correct? - ANS A factor is the same as a multiplier. What is the value of a property that has an appropriate capitalization rate (R) of 12.5%, an operating expense ratio of 40%, gross potential income of $45,000, and vacancy and collection loss of 10%? - ANS $194,400 Solve for net income PGI - V&C loss = EGI - Expenses = Net Income, then apply the I / R = V formula. $45,000 x (1 - 0.10) = $40,500 x (1 - 0.40) = $24,300 / 0.125 = $194,400. Which of the following best describes a gross lease? - ANS the landlord pays all operating expenses What is the most probable rent that the property should bring? - ANS market rent When is rent called excess rent? - ANS when it is greater than market rent Which of the following best describes a net lease? - ANS the tenant pays all operating expenses Which of the following would be considered a fixed expense? - ANS an operating expense that does not change with occupancy There are various data sources an appraiser considers in analyzing the operating expense for a property. Which source is likely to provide the best expense information? - ANS the actual operating history of the subject property Which type of lease may adjust due to changes in market rent, and may be facilitated through the use of an appraisal or arbitration? - ANS revaluation lease Which of the following would be considered a variable expense? - ANS an operating expense that changes with occupancy Which of the following expenses that may be found on a property owner's financial statements, should be excluded in the appraiser's reconstructed operating statement? - ANS corporate franchise tax An appraiser's analysis of a property indicates that the potential gross income (PGI) is $675,000, and has tenant occupancy of 95%. Operating expense ratio (OER) is 38%. If the market indicates an overall capitalization rate of 8.5%, what is the value of the property by income capitalization? - ANS $4,677,353 Value = $675,000 x 0.95 = $641,250 x 0.62 = $397,575 / 0.085 = $4,677,353. A bed and breakfast lodging facility has an effective gross income of $255,000 and collection loss of 2%. If the market-derived PGIM is 7.2, what is the indicated value of the property? - ANS $1,873,469 $255,000 / 0.98 = $260,204 $184,210 x 7.2 = $1,873,469 The subject property has a potential gross income (PGI) of $100,000, vacancy and collection losses of 7%, fixed expenses of $35,000, and variable expenses of $25,000. Recent sales of very similar properties in this market suggest that a capitalization rate of 12.0% is appropriate. The capitalization rates were extracted from sales in which the price was divided into the estimate of net operating income from the broker. What is the market value of the subject property? - ANS $275,000 = $100,000Vacancy/collection loss = $7,000$100,000 - $7,000 = $93,000 (EGI)$93,000 - $60,000 (expenses) = $33,000 (NOI)$33,000 / 0.12 = $275,000 Using the following data, what is the value?Potential gross income (PGI) = $175,000Vacancy = 5%Operating expense ratio (OER) = 35%Overall capitalization rate = 8.5% - ANS $1,271,323 Value = $175,000 x 0.95 = $166,250 x 0.65 = $108,063 / 0.085 = $1,271,323. Using the following data, what is the pre-tax cash flow (PTCF)?Net operating income = $30,000Overall rate (RO) = 9.5%Value = $350,000Mortgage Constant = 0.076Loan-to-value ratio = 75% - ANS $10,050 $350,000 x 0.75 = $262,500$262,500 x 0.076 = $19,950$30,000 - $19,950 = $10,050. Using the following information, what is the pre-tax cash flow (PTCF) for this property?PGI = $170,000OER = 35%Vacancy = 10%Mortgage debt service = $45,000 - ANS $54,450 $170,000 x 0.90 = $153,000 (EGI)$153,000 x 0.65 = $99,450 (net operating income)$99,450 - $45,000 = $54,450 (PTCF) Using the following information, what is the effective gross income multiplier?PGI = $75,000Value = $550,000Vacancy = 5%Operating expense ratio = 45% - ANS 7.72 $75,000 x 0.95 = $71,250$550,000 / $71,250 = 7.72 EGIM Which of the following is NOT one of the six major components of a building? - ANS home theatre system During an exterior inspection, an appraiser observes a foundation that is exposed to the environment. Which foundation type is this? - ANS pier Which of the following is NOT one of the six major components of a building? - ANS window system Which of the following is NOT one of the three common types of foundations? - ANS platform A wood stud home in which each floor is framed and erected separately is referred to as what type of construction? - ANS platform framing Which of the following is considered a type of framing? - ANS wood studs and joists An appraiser observes a bathroom with a sink, a bathtub with shower, and toilet. What would this be called? - ANS full bath When measuring a commercial office structure, an appraiser identifies the amount of space on which the rent is based. Which measurement is the appraiser using? - ANS net rentable area The federal government increases interest rates by a 1/4 point, causing a newly constructed building to be worth less than its cost. What principle does this illustrate? - ANS externalities What method is being used when an appraiser estimates the cost of construction by considering the quantity and quality of all materials, as well as all categories of required labor, and unit costs are applied? - ANS quantity survey Chandra is appraising a residential property. The house was built in 1981 and is in average condition. The appraiser is using a cost service provider to develop the cost approach. What type of cost will she be using in this appraisal? - ANS replacement cost An appraiser asks a local building contractor for cost data. The contractor gives his best estimate to build an exact replica of the property being appraised. What could this data be called? - ANS reproduction cost Entrepreneurial profit is best described by which of the following statements? - ANS the amount of money entrepreneurs receive as a reward for their efforts If an appraiser estimates the current cost of individual units of construction and adds them up, what method is the appraiser using? - ANS unit-in-place The second step of the cost approach is to estimate direct (hard) and indirect (soft) costs as of - ANS the effective date of the appraisal When performing a cost analysis, where can an appraiser obtain information about the entrepreneurial incentive? - ANS derive it from the local market If an appraiser estimates the current cost of individual units of construction and adds them up, what method is the appraiser using? - ANS unit-in-place The first step of the cost approach is to estimate - ANS the value of the site as if vacant and available to be put to its highest and best use. When an appraiser estimates cost using a cost manual, which method is being used? - ANS comparative unit In terms of cost, what type of cost are appraisal fees? - ANS indirect costs only The total construction cost of a structure requires consideration of which of the following? - ANS direct and indirect costs along with entrepreneurial incentive Which of the following best describes direct costs? - ANS expenditures for the labor and material used in the construction of the improvements To which kind of cost should an appraiser attribute labor and materials to? - ANS direct cost Assume that forced air heating is the base cost. The subject has warm and cooled air heating (more desirable) which has a cost of $1.61 per square foot more than the base cost. In estimating the cost for the subject, what would be the adjustment to the base cost? - ANS upward $1.61 per sq. ft. Marshall and Swift has three classifications for climate. The three classifications are - ANS mild, moderate and extreme. What area is included in the gross living area? - ANS finished floor areas above grade When making a CCM adjustment using a cost manual, you are adjusting the cost for which of the following? - ANS current cost multiplier Which of the following is considered a plumbing fixture? - ANS all of these answers A one-story residence has a main section that is 45 x 55, a full basement that is 20 x 35, a back porch that is 10 x 12, and a 15 x 22 detached garage. What is the GLA of this residence? - ANS 2,475 45 x 55 = 2,475 When making wall height adjustment of 1.03, you're adjusting for the fact that - ANS taller ceilings cost more to construct than lower ones Assume that wood subfloor is included in the base cost. The subject has a concrete slab (less desirable) which has a cost of $2.04 per square foot less than the base cost. In estimating the cost for the subject, what would be the adjustment to the base cost? - ANS downward $2.04 per sq. ft A one-story residence has a main section that is 1,100 square feet, with a full basement, and a 20 x 22 detached garage. If the replacement cost is estimated at $49.00 per square foot for the residence section and $18.00 per square foot for the garage, what is the total replacement cost new of the improvements? (rounded) - ANS $62,000 This question is seeking the total cost of the improvements.1,100 sq. ft. x $49.00 = $53,900440 sq. ft x $18.00 = $7,920$53,900 + $7,920 = $61,820 (rounded to $62,000). What is the total gross living area (GLA) for the following structure? 1,500 sq. ft. one-story area, 750 sq. ft. two-story area, 650 sq. ft. finished basement area, and 400 sq. ft. garage area. - ANS 2,250 sq. ft. When is an item of depreciation curable? - ANS when the cost to cure is less than the expected increase in value Which statement best describes the term "depreciation"? - ANS the difference between the reproduction or replacement cost and the market value of the improvements as of the effective date of the appraisal The older a building becomes, the greater is the likelihood of it having - ANS physical deterioration external obsolescence functional obsolescence Which of the following describes the age of a property that is based on the amount of observed deterioration and obsolescence it has sustained? - ANS effective age Assume that an improvement has an actual age of 50 years, but has been renovated, remodeled, rehabbed, or has had a high level of maintenance over the years. If it can compete in the market with much newer properties that have actual ages of 15 to 20 years, then the 50-year-old improvement has an effective age of 15 to 20 years. You have a 20,000 square feet retail store with a concrete slab floor, stucco on masonry block exterior walls, and metal trusses as a roof structure partially supported by open steel framing members. What class of construction is this building? - ANS Class C The primary features of Class C buildings are masonry or reinforced concrete exterior walls, and wood or steel roof and floor structures that have not been made fire-resistant, except for concrete slab on grade Suppose you are appraising a high-rise apartment building with fireproofed structural steel frames, concrete floors and roof, and metal and glass paneled walls. What class of construction is this building? - ANS Class A The primary feature of Class A buildings is the fireproofed, protected structural steel frame and metal deck flooring and roof with a concrete topping. The period of time over which the improvements will contribute to property value is described by which of the following terms? - ANS economic life The economic life of improvements can be affected by physical, economic, social, and geographic forces, and can be extended by renovations and remodeling. The number of years that have elapsed since the construction of the improvements was completed is described by which of the following terms? - ANS chronological age actual age historical age The actual age of improvements is also known as historical age and chronological age. It can be significantly different from effective age depending on renovation, remodeling, and level of maintenance. A building has been designed for maximum economic potential and to comply with standard construction codes, but extras in ornamentation and finishes are not evident. What quality rank should be chosen for this building? - ANS average Average quality buildings constitute the largest group of buildings constructed, approximately 50% of all buildings. An incurable functional problem is best defined as - ANS an item that will not return as much in value as it costs to fix. Which of the following types of depreciation would a three-story office building without an elevator suffer? - ANS functional obsolescence Which statement best describes the term "depreciation"? - ANS the difference between the reproduction or replacement cost and the market value of the improvements as of the effective date of the appraisal The major employer in a small city just went out of business. This resulted in a loss of jobs and a subsequent decline in real estate values. Which of the following terms best describes this loss? - ANS external obsolescence Which of the following statements describes the loss in value due to changes in market tastes and standards? - ANS functional obsolescence Depreciation is a loss in value. Which of the following categories can these losses be attributed to? - ANS physical, functional, or economic What does the accuracy of the market extraction method of depreciation depend upon? - ANS the availability of both comparable improved property and vacant site sales If a window has an effective age of 10 years and a remaining economic life of 25 years, what would the percentage of depreciation be (rounded)? - ANS 30% 10 / 35 (total economic life) = 0.28 or 30% rounded A property has a site value of $30,000. The reproduction cost of the building improvements is $102,350. The economic life is estimated at 50 years, and the remaining economic life is at 20 years. What is the value of the property? - ANS $70,940 $102,350 x (30/50) = $61,410.$102,350 - $61,410 = $40,940.$40,940 + $30,000 = $70,940 Which of the following can define the term "useful life"? - ANS the period of time that the components of the improvement may reasonably be expected to perform the functions for which they were designed Which of the following should an appraiser consider when appraising a property that is located adjacent to an operating sewer plant? - ANS a landfill may not be affected by this location a heavy industrial property may not be affected by this location a single-family residence may suffer from this location A property sold recently for $87,000. The site value is $14,000. The building has an effective age estimate of 21 years, and the estimated replacement cost is $95,000. What is the indicated average annual depreciation rate? - ANS 1.1% per year $87,000 - $14,000 = $73,000$95,000 - $73,000 = $22,000$22,000 / $95,000 = 0.23160.2316 / 21 years = 0.0110 or 1.1% per year A warehouse recently sold for $1,950,000. The land value was estimated to be $750,000, and the replacement cost was estimated at $1,500,000. What percent depreciation was present in the improvements? - ANS 20% $1,950,000 - $750,000 = $1,200,000 (value of improvements). Now, $1,500,000 (cost new) - $1,200,000 = $300,000 (depreciation). $300,000 depreciation / $1,500,000 cost new = 20% depreciation rate Remaining economic life is 40 years, and total economic life is 60 years. Site value of $550,000. If the replacement cost of the improvements was estimated at $1,800,000, what is the indicated value of the property? - ANS $1,750,000 60 (economic life) - 40 (remaining life) = 20 (effective age)20 (effective age) / 60 (economic life) = 0.3333 (depreciation)$1,800,000 cost x 0.3333 = $600,000 (depreciation rounded)$1,800,000 - $600,000 = $1,200,000 + $550,000 = $1,750,000 (value) Which of the following units of comparison would be appropriate in the valuation of a waterfront property? - ANS sale price per front foot Which of the following is always considered when valuing land? - ANS its highest and best use as though vacant Which of the following is the most reliable source of data? - ANS closed sale Which of the following best defines elements of comparison? - ANS the characteristics that cause the prices paid for real estate to vary Which of the following terms best describes the increment in value when two or more parcels are combined to produce greater utility? - ANS plottage An appraiser is developing a separate estimate of land value as part of an appraisal assignment. Which approach to value is the appraiser using? - ANS cost approach Only the cost approach requires a separate estimate of land value. If the land has improvements on it, the land must be valued under which of the following conditions? - ANS as if the improvements were not there An appraiser has an assignment for a commercial lot located on a busy road. The appraiser has determined that in this market, lots on a busy street are approximately $10,000 superior. How should the appraiser apply the adjustment to a comparable sale, NOT on a busy street? - ANS The adjustment must be added to the comparable sale price. A legal nonconforming use is a use that was - ANS legally established and maintained but no longer conforms to existing zoning. How should an appraiser identify utilities? - ANS availability to the site whether typical of the area or not public, private, or community services Which of the following considerations are included in an analysis of zoning? - ANS general use permitted greenbelt requirements density (number of units permitted) For an appraiser to appraise manufactured housing, it must - ANS have the towing hitch, wheels, and axles removed. be legally classified as real estate (not personal property) assume the characteristics of site-built housing. Which of the following statements about manufactured housing is false? - ANS The wheels and axles may remain on the dwelling. How is the amount of basement finish normally expressed? - ANS percentage What is the percentage of depreciation present in a building that has an effective age of 15 years and a remaining economic life of 65 years? - ANS 18.75% Which of the following economic principles affirms that buyers constitute market demand and that the properties offered for sale make up the supply? - ANS supply and demand Which of the following group are more concerned with an opinion of market value derived from the sales comparison approach? - ANS well-informed purchasers What are units of comparison? - ANS items that represent a breakdown of the price based on a significant variable Which of the following should an appraiser characterize as NOT being an arm's length transaction? - ANS An elderly woman sells her longtime residence to her grandson. You are analyzing a sale in which the mathematical calculation of cash equivalency calls for a $10,000 downward adjustment. However, by use of several paired data sets, you find that the market only recognizes a $4,000 downward adjustment. What is the adjustment for financing? - ANS $4,000 The adjustment of $4,000 reflects the actions of buyers and sellers, and is perhaps a better indication of value for the difference in financing terms than a mathematical calculation. A potential axiom for the sales comparison approach may be stated as; the more market data available, the - ANS more reliable the value indication becomes. Expenditures made immediately after purchase reflect - ANS that both the buyer and seller knew they would have to be corrected and probably factored the cost of repair into the price paid. Which of the following is used for conditions of sale adjustments? - ANS the motivations of buyers and sellers Quiz Questions through module 15 done - ANS doneeeeeee What are dollar or percentage adjustments for elements of comparison made to? - ANS the sale price of a comparable property At the conclusion of the adjustment process, an appraiser should conduct a review. During the review, consideration of which of the following should be included? - ANS gross adjustments net adjustments the number of adjustments Which of the following is a useful adage to remember about making adjustments? - ANS When the comparable sale is superior - subtract, when the comparable sale is inferior - increase. Which statement best describes "comparative analysis"? - ANS a generic term used to describe the process where qualitative or quantitative techniques are used to derive a value opinion in the sales comparison approach Why would an appraiser NOT want to use the figure $154,245 as the final value conclusion in a market value assignment? - ANS because the amount gives an illusion of precision that does not exist Which of the following statements about adjustments is true? - ANS Adjustments should be equal to the differences in value as reflected in the actions of market participants. Which of the following is NOT an example of a quantitative technique? - ANS ranking analysis Ranking analysis is simply an array of data without a mathematical process A comparable sale included the seller taking back a purchase-money mortgage at 3% under the market rate for 10 years. The appraisal was based on the cash-equivalent market value. Which of the following describes this adjustment? - ANS financing terms adjustment What is the process by which an appraiser evaluates, chooses, and selects a final value opinion called? - ANS reconciliation What is the definition of an appraisal report? - ANS the written or oral communication of an appraisal A residence has been listed for sale in the MLS for the last six months at a price of $224,900 and has not sold. In this market, the average marketing period is 45 days for this type of property. What can you conclude? - ANS The subject property's market value is most likely lower than the list price Resolving the differences between various value indications is called? - ANS reconciliation If the three approaches to value provide three different value indications, what should an appraiser do? - ANS choose a value opinion that best represents the market for the subject based on all data available as of the effective date of the appraisal The subject property has a 12 x 10 wood deck valued at $10 per square foot. A comparable sale has a 15 x 20 screened porch valued at $25 per square foot. What is the proper adjustment for this difference? - ANS subtract $6,300 from the comparable sale The market value of the screened porch is $7,500 and the subject's deck is $1,200. The difference of $6,300 is subtracted from the comparable sale because the feature is superior. Alan used four comparable sales with value indications of $199,000, $201,000, $202,000, and $204,000. What should Alan's final opinion of value for the sales comparison approach be if the appraiser believes all the comps are reasonably similar to the subject property? - ANS whatever value Alan reconciles into his value conclusion Of course the appraiser believes all the comps are reasonably similar, otherwise they would not be comps. Reconciliation is the appraiser's reasoned analysis of the data and is reserved only for the appraiser A workfile must be retained for which of the following periods? - ANS five years, or two years after final disposition of judicial proceedings in which the appraiser provided testimony In an appraisal of a property using all three approaches to value, each approach resulted in a different value indication. The indicated value by the cost approach was $200,000, the indicated value by the sales comparison approach was $193,500, and the indicated value by the income approach was $195,000. Is the appraiser forced to choose just one of these value indications? - ANS No, the appraiser can choose any one of the numbers or any number between. The appraiser is not forced to choose just one of the value indications. In fact, the appraiser may choose any one of the numbers, or any number between, and, in some cases, any number slightly above or below the range.