Arkansas Real Estate License Property Valuation and Appraisal 4 — Questions and Answers
Question 1: What does a capitalization rate primarily reflect in property valuation?
- The property's mortgage interest rate
- The relationship between a property's net operating income and its market value (Correct answer)
- The ratio of gross rent to purchase price
- The annual appreciation rate of the property
Correct answer: The relationship between a property's net operating income and its market value
The cap rate (NOI ÷ Value) reflects the rate of return an investor expects and is used to convert income into a value estimate.
Question 2: Physical deterioration that is considered 'curable' means:
- The cost to repair exceeds the value added by the repair
- It would be economically feasible to correct the deficiency because the repair cost is less than or equal to the value added (Correct answer)
- It requires a licensed contractor to fix
- It is covered by homeowner's insurance
Correct answer: It would be economically feasible to correct the deficiency because the repair cost is less than or equal to the value added
Curable physical deterioration means the cost to cure is less than or equal to the increase in value resulting from the cure, making it economically worthwhile.
Question 3: When a neighborhood is experiencing 'transition' in an appraisal context, this refers to:
- An area undergoing a change in land use or socioeconomic characteristics (Correct answer)
- A neighborhood where all homes are the same age
- A district that has recently been rezoned for commercial use
- A subdivision completing its final phase of construction
Correct answer: An area undergoing a change in land use or socioeconomic characteristics
A transitional neighborhood is one undergoing change in use, character, or economic makeup, which can significantly affect property values.
Question 4: The 'depth table' method in land valuation is used to:
- Calculate the square footage of irregularly shaped lots
- Adjust lot value based on the depth of the parcel relative to a standard depth (Correct answer)
- Determine frontage value along a commercial street
- Measure the usable building area after setbacks
Correct answer: Adjust lot value based on the depth of the parcel relative to a standard depth
Depth tables provide percentage adjustments to account for the fact that lots deeper or shallower than a standard depth contribute different values per front foot.
Question 5: In Arkansas, an appraisal report for a federally related transaction must comply with:
- Only Arkansas Real Estate Commission (AREC) guidelines
- The Uniform Standards of Professional Appraisal Practice (USPAP) (Correct answer)
- The Federal Reserve appraisal standards only
- Standards set solely by the lender ordering the appraisal
Correct answer: The Uniform Standards of Professional Appraisal Practice (USPAP)
USPAP, established by the Appraisal Standards Board, is the required standard for appraisals in federally related transactions in all states including Arkansas.
Question 6: An 'as-is' appraisal value differs from a 'prospective' value in that:
- As-is reflects current condition; prospective reflects value upon completion of proposed improvements (Correct answer)
- As-is is always lower than prospective value
- Prospective value is used only for vacant land
- As-is value ignores physical depreciation
Correct answer: As-is reflects current condition; prospective reflects value upon completion of proposed improvements
An as-is value reflects the property in its present condition, while a prospective value projects value as of a future date, such as after construction or renovation is complete.
Question 7: Which best describes the 'plottage' value concept?
- The value loss when a large parcel is subdivided into smaller lots
- The increment of value resulting from combining two or more adjacent parcels into one larger site (Correct answer)
- The value of land based on its frontage on a major road
- The extra value attributed to a corner lot location
Correct answer: The increment of value resulting from combining two or more adjacent parcels into one larger site
Plottage is the increase in value that results from combining adjacent parcels into a single, larger, more valuable site.
Arkansas Real Estate License Property Valuation and Appraisal 4
What does a capitalization rate primarily reflect in property valuation?