CAR Advanced Techniques & Methods 3 — Questions and Answers
Question 1: In a discounted cash flow analysis review, which error would cause the present value of cash flows to be overstated while leaving the reversion value unaffected?
- Using a discount rate that is too high
- Using a discount rate that is too low (Correct answer)
- Overstating the terminal capitalization rate
- Understating the vacancy and collection loss rate
Correct answer: Using a discount rate that is too low
A discount rate that is too low increases the present value factor applied to each periodic cash flow, inflating the PV of NOI without directly affecting the projected reversion.
Question 2: When reviewing an appraisal using the extraction method to develop a land-to-value ratio, the reviewer should be most concerned if:
- Sales of vacant land are unavailable in the market area
- The ratio varies significantly across the comparable improved sales used (Correct answer)
- The ratio is applied to a property with above-average site improvements
- The ratio differs from county assessment ratios by more than 10%
Correct answer: The ratio varies significantly across the comparable improved sales used
Significant variation in the land-to-value ratios extracted from improved sales suggests the comparable properties are not sufficiently similar to produce a reliable ratio for the subject.
Question 3: A reviewer assesses an appraisal of a special-purpose property (e.g., a church). Which limitation is most important to flag if only the cost approach was used?
- Special-purpose properties always require the income approach
- The cost approach may not capture economic obsolescence from limited alternative uses (Correct answer)
- Reproduction cost data is unavailable for unique structures
- Depreciation tables are inapplicable to special-purpose buildings
Correct answer: The cost approach may not capture economic obsolescence from limited alternative uses
Special-purpose properties often suffer from external obsolescence due to limited demand and few alternative uses, which cost approach depreciation schedules may fail to fully capture.
Question 4: Under USPAP's jurisdictional exception rule, an appraiser omits a specific required disclosure. In reviewing the report, the reviewer must:
- Accept the omission if the appraiser cited a valid law or regulation overriding USPAP (Correct answer)
- Reject the report as non-compliant regardless of jurisdiction
- Report the deficiency to the state appraisal board
- Require the appraiser to add the disclosure in an addendum
Correct answer: Accept the omission if the appraiser cited a valid law or regulation overriding USPAP
USPAP's jurisdictional exception allows non-compliance with a specific requirement when law or regulation precludes it, provided the appraiser clearly identifies the law or regulation.
Question 5: A reviewer finds that an appraiser supported time adjustments using list price trends rather than closed sale trends. The primary concern is:
- List prices reflect seller aspirations, not confirmed market transactions (Correct answer)
- Closed sales always lag the market by 90 days or more
- Time adjustments derived from closed sales are prohibited by USPAP
- List price data is not publicly available and therefore unreliable
Correct answer: List prices reflect seller aspirations, not confirmed market transactions
List prices represent asking prices and may not reflect actual transaction prices; time adjustments should be grounded in closed sale data to capture real market movement.
Question 6: Which technique is most appropriate when reviewing an appraisal where the subject property has an easement that impairs value, and no direct paired sales exist?
- Apply a standard 10% easement discount from appraisal tables
- Use regression analysis on properties with and without easements (Correct answer)
- Accept the cost approach as the most reliable indicator
- Require a separate appraiser specialization in easement valuation
Correct answer: Use regression analysis on properties with and without easements
Regression analysis can quantify the market's response to easements by controlling for other variables when no direct paired sales are available.
Question 7: When reviewing a narrative appraisal report for a federally related transaction, a reviewer discovers the effective date differs from the date of inspection by six months. The reviewer should:
- Reject the report as automatically non-compliant under FIRREA
- Assess whether market conditions changed materially between inspection and the effective date (Correct answer)
- Require a new inspection to align with the effective date
- Accept the report if the appraiser noted the discrepancy in limiting conditions
Correct answer: Assess whether market conditions changed materially between inspection and the effective date
A material change in market conditions between inspection and effective date could render the appraisal unreliable, so the reviewer must assess whether the gap affected credibility.
CAR Advanced Techniques & Methods 3
In a discounted cash flow analysis review, which error would cause the present value of cash flows to be overstated while leaving the reversion value unaffected?