CGA Market Analysis & Valuation 3 — Questions and Answers
Question 1: The absorption rate in a real estate market is calculated as:
- Total active listings divided by months of supply
- Number of units sold per period divided by total available units (Correct answer)
- Average days on market for sold properties
- List price divided by sale price ratio
Correct answer: Number of units sold per period divided by total available units
Absorption rate measures how quickly available inventory is being sold, calculated as units sold per time period divided by units available.
Question 2: Under the income capitalization approach, a capitalization rate is best described as:
- The mortgage interest rate applied to the loan balance
- The ratio of net operating income to property value (Correct answer)
- The percentage of gross income paid as operating expenses
- The discount rate used in a discounted cash flow analysis
Correct answer: The ratio of net operating income to property value
The capitalization rate (cap rate) is derived by dividing net operating income (NOI) by property value, reflecting the expected rate of return on a real estate investment.
Question 3: Which type of depreciation is considered incurable when the cost to cure exceeds the resulting increase in property value?
- External obsolescence
- Curable functional obsolescence
- Incurable physical deterioration (Correct answer)
- Curable physical deterioration
Correct answer: Incurable physical deterioration
Incurable physical deterioration refers to physical wear that is economically unreasonable to fix because the repair cost would exceed the value added.
Question 4: In the cost approach, the term 'reproduction cost' differs from 'replacement cost' in that reproduction cost refers to:
- Building an exact replica using modern materials and techniques
- Building an exact replica using original materials and methods (Correct answer)
- Replacing the structure with one of equal utility using current standards
- The cost adjusted for inflation since the date of original construction
Correct answer: Building an exact replica using original materials and methods
Reproduction cost is the cost to build an exact duplicate of the subject using the same materials and construction methods, while replacement cost uses modern equivalents.
Question 5: A market with fewer than 6 months of supply is generally characterized as:
- A buyer's market with declining prices
- A seller's market with upward price pressure (Correct answer)
- A balanced market with stable pricing
- An oversupplied market requiring price reductions
Correct answer: A seller's market with upward price pressure
Less than 6 months of supply indicates demand exceeds supply, creating a seller's market where prices typically trend upward.
Question 6: Which valuation method is MOST appropriate for appraising a special-purpose property such as a church or school that rarely sells?
- Sales comparison approach using nearby residential sales
- Cost approach relying on depreciated replacement cost (Correct answer)
- Income approach using market rent estimates
- Gross rent multiplier method
Correct answer: Cost approach relying on depreciated replacement cost
For special-purpose properties with few comparable sales and no income stream, the cost approach provides the most credible indication of value.
Question 7: The concept of 'highest and best use as improved' asks the appraiser to determine:
- The best use of the site as if it were vacant land
- Whether the existing improvements should be retained, modified, or demolished (Correct answer)
- The maximum density allowed under current zoning
- The use that generates the highest assessed tax value
Correct answer: Whether the existing improvements should be retained, modified, or demolished
Highest and best use as improved evaluates whether the existing improvements contribute positively to value or whether an alternative use would be more productive.
CGA Market Analysis & Valuation 3
The absorption rate in a real estate market is calculated as: