Arkansas Real Estate License Property Valuation and Financing 5 — Questions and Answers
Question 1: Which economic principle states that adding more improvements to a property will eventually produce diminishing returns in value?
- Principle of increasing and diminishing returns (Correct answer)
- Principle of conformity
- Principle of progression
- Principle of contribution
Correct answer: Principle of increasing and diminishing returns
The principle of increasing and diminishing returns recognizes that beyond a certain point, additional improvements add less value than their cost.
Question 2: A home's assessed value in Arkansas is $120,000 with an assessment ratio of 20%. What is the taxable assessed value?
- $24,000 (Correct answer)
- $120,000
- $100,000
- $96,000
Correct answer: $24,000
Taxable assessed value = $120,000 × 20% = $24,000, which is the base used to calculate property taxes.
Question 3: When a lender requires a borrower to pay both principal and interest in equal monthly installments, this loan structure is known as:
- Fully amortizing loan (Correct answer)
- Interest-only loan
- Negative amortization loan
- Standing loan
Correct answer: Fully amortizing loan
A fully amortizing loan ensures the debt is completely paid off by the final scheduled payment through consistent principal and interest payments.
Question 4: In the income approach, the Gross Rent Multiplier (GRM) is calculated by:
- Dividing the sale price by the gross monthly rent (Correct answer)
- Dividing the net operating income by the capitalization rate
- Multiplying the monthly rent by 12
- Subtracting operating expenses from gross income
Correct answer: Dividing the sale price by the gross monthly rent
GRM = Sale Price ÷ Gross Monthly Rent, providing a quick estimate of value relative to rental income.
Question 5: Which of the following best describes 'economic life' of a building in appraisal terminology?
- The period during which the building contributes positively to the property's value (Correct answer)
- The total physical life before the structure collapses
- The time remaining on the building's original warranty
- The number of years since the building was constructed
Correct answer: The period during which the building contributes positively to the property's value
Economic life is the period over which improvements contribute to value, which may be shorter than the physical life of the structure.
Question 6: A homebuyer in Arkansas obtains a conventional loan requiring 20% down. Which statement about PMI is correct?
- PMI is not required because the LTV is 80% or below (Correct answer)
- PMI is required for all conventional loans regardless of down payment
- PMI must be paid for a minimum of 5 years
- PMI is required until the home is sold
Correct answer: PMI is not required because the LTV is 80% or below
With a 20% down payment the LTV is 80%, so PMI is not required on conventional loans.
Question 7: The 'principle of conformity' in appraisal suggests that property values are maximized when:
- A property is similar in style and use to surrounding properties (Correct answer)
- A property has more amenities than its neighbors
- The highest and best use differs from current use
- The property is unique and stands out in the neighborhood
Correct answer: A property is similar in style and use to surrounding properties
Conformity holds that properties achieve maximum value when they harmonize with the character and use of surrounding properties.
Arkansas Real Estate License Property Valuation and Financing 5
Which economic principle states that adding more improvements to a property will eventually produce diminishing returns in value?