CAR Risk Management & Mitigation 3 — Questions and Answers
Question 1: In the context of appraisal review, 'market conditions risk' is best described as the risk that:
- The appraiser used too many comparable sales
- Value conclusions may be outdated due to market changes between the effective date and loan closing (Correct answer)
- The subject property is in a flood zone
- The reviewer disagrees with the reconciled value
Correct answer: Value conclusions may be outdated due to market changes between the effective date and loan closing
Market conditions risk arises when time elapses between an appraisal's effective date and the transaction, potentially making the value conclusion stale.
Question 2: A reviewer examining a complex income-producing property appraisal should be most alert to capitalization rate support because:
- Cap rates rarely change in stable markets
- Small changes in cap rate produce large swings in value via the income approach (Correct answer)
- Cap rates are standardized by HUD for all property types
- The cost approach relies on cap rate selection
Correct answer: Small changes in cap rate produce large swings in value via the income approach
Because value = NOI ÷ cap rate, even a 0.5% change in cap rate can shift the value conclusion by hundreds of thousands of dollars on large properties.
Question 3: When reviewing an appraisal of a property in a declining market, which comparable sale characteristic is MOST important to verify?
- The sale price of each comparable
- Whether each comparable sale is within six months of the effective date (Correct answer)
- The number of bedrooms in each comparable
- Whether comparables are from the same tax district
Correct answer: Whether each comparable sale is within six months of the effective date
In a declining market, older sales may overstate value; recent sales are critical to capture the downward trend.
Question 4: A residential appraisal shows no adjustment for time on comparables that are 8–14 months old during a period of 10% annual appreciation. The reviewer should flag this as:
- Acceptable because the sales are within one year
- A potentially understated value due to missing market conditions adjustments
- A potentially overstated value due to missing market conditions adjustments (Correct answer)
- Irrelevant because USPAP does not require time adjustments
Correct answer: A potentially overstated value due to missing market conditions adjustments
Failing to make upward market conditions adjustments on older sales in an appreciating market results in understating value, not overstating.
Question 5: An appraiser's certification states the property was inspected, but the field review reveals the appraiser never entered the structure. This creates primary risk related to:
- The definition of market value used
- Misleading certification and potentially unreliable condition rating (Correct answer)
- The appraiser's selection of the income approach
- Inadequate highest and best use analysis
Correct answer: Misleading certification and potentially unreliable condition rating
A false certification that an inspection occurred undermines the reliability of condition-dependent value conclusions and may constitute misrepresentation.
Question 6: A review appraiser is asked to determine the reliability of a market rent estimate used in a DCF analysis. The most important supporting document to request is:
- The subject's property tax bill
- A rent comparable survey with lease details (Correct answer)
- The original purchase contract for the property
- The appraiser's E&O insurance certificate
Correct answer: A rent comparable survey with lease details
Market rent reliability is established through a rental comparable survey comparing lease terms, size, location, and condition of similar leased properties.
Question 7: Under USPAP Standards Rule 3, a review appraiser who provides their own value opinion must:
- Use only the approaches used by the original appraiser
- Comply with the relevant Standards Rules for developing an appraisal (Correct answer)
- Obtain permission from the original appraiser
- Limit the opinion to a range rather than a point value
Correct answer: Comply with the relevant Standards Rules for developing an appraisal
When a reviewer develops their own value opinion, USPAP SR 3-2(c) requires compliance with Standard 1 (residential) or Standard 2 (commercial) as applicable.
CAR Risk Management & Mitigation 3
In the context of appraisal review, 'market conditions risk' is best described as the risk that: