CFE CFE Market Analysis & Valuation Methods 1 — Questions and Answers
Question 1: In the sales comparison approach to property valuation, what is a 'paired sales analysis' used to determine?
- The gross rent multiplier for income properties
- The dollar or percentage adjustment for a specific property characteristic (Correct answer)
- The capitalization rate for commercial properties
- The depreciation rate for older structures
Correct answer: The dollar or percentage adjustment for a specific property characteristic
Paired sales analysis involves comparing two similar sales that differ in only one characteristic to isolate and quantify the value contribution of that feature.
Question 2: Which valuation approach is most commonly emphasized when assessing residential properties for Florida ad valorem tax purposes?
- Income approach
- Cost approach
- Sales comparison approach (Correct answer)
- Residual approach
Correct answer: Sales comparison approach
The sales comparison approach is most heavily relied upon for residential property assessment because abundant sales data allows direct market comparisons.
Question 3: Under the income approach to valuation, what does the term 'capitalization rate' (cap rate) represent?
- The total gross income generated by the property annually
- The ratio of net operating income to property value (Correct answer)
- The percentage of expenses relative to gross income
- The annual depreciation rate for income-producing improvements
Correct answer: The ratio of net operating income to property value
The capitalization rate is the ratio of a property's net operating income (NOI) to its market value, reflecting the return rate investors expect for that property type.
Question 4: In the cost approach, 'effective age' differs from 'actual age' in that it reflects:
- The number of years since the building permit was issued
- The age indicated by the property's condition and utility relative to new construction (Correct answer)
- The age used for depreciation schedules by the IRS
- The average age of comparable properties in the neighborhood
Correct answer: The age indicated by the property's condition and utility relative to new construction
Effective age represents how old a structure appears based on its actual physical condition and utility, which may be less than or greater than its chronological age depending on maintenance.
Question 5: What is 'economic obsolescence' in the context of property valuation?
- Deterioration of a structure due to deferred maintenance
- Loss in value caused by external factors outside the property itself (Correct answer)
- Reduced functionality due to outdated floor plan design
- Normal wear and tear on building components over time
Correct answer: Loss in value caused by external factors outside the property itself
Economic obsolescence is a loss in value resulting from external forces such as neighborhood decline, adverse zoning changes, or poor economic conditions — factors outside the property boundaries.
Question 6: Which of the following best describes the term 'just value' as used in Florida property assessment?
- The value determined by a certified appraisal firm
- The fair market value of the property as of January 1 of the assessment year (Correct answer)
- The value after applying all exemptions and classifications
- The replacement cost of the structure minus depreciation
Correct answer: The fair market value of the property as of January 1 of the assessment year
Under Florida law, just value is equivalent to fair market value — the most probable price a property would sell for in an arm's-length transaction as of January 1 of the tax year.
CFE CFE Market Analysis & Valuation Methods 1
In the sales comparison approach to property valuation, what is a 'paired sales analysis' used to determine?