CHI Market Analysis & Valuation 3

Question 1

What is 'capitalization rate' (cap rate) used for in real estate valuation?

Accepted Answer

Converting a property's net operating income into an estimated value

Answer

The cap rate divides a property's net operating income by its value, helping investors assess return potential and compare income-producing properties.

Question 2

Which type of depreciation in real estate valuation is considered incurable?

Accepted Answer

Functional obsolescence due to poor floor plan that cannot be economically corrected

Answer

Incurable depreciation occurs when the cost to fix a deficiency exceeds the value it would add, making correction economically impractical.

Question 3

In a Comparative Market Analysis (CMA), what is the primary purpose of making 'adjustments' to comparable sales?

Accepted Answer

To align the comparable's price with the subject property's features and condition

Answer

Adjustments compensate for differences between comparables and the subject so the resulting values reflect what the comps would have sold for if identical to the subject.

Question 4

How does economic obsolescence differ from physical deterioration in a property valuation context?

Accepted Answer

Economic obsolescence is a loss in value from external market forces; physical deterioration results from wear and age

Answer

Physical deterioration is wear from use and age within the property, while economic obsolescence is a value loss caused by factors external to the property.

Question 5

A home inspector identifies that a neighborhood has experienced significant commercial encroachment over the past five years. Which valuation concept does this most directly affect?

Accepted Answer

External (economic) obsolescence of residential properties

Answer

Commercial encroachment into a residential neighborhood is a classic example of external obsolescence, reducing the desirability and value of nearby homes.

(CHI) Certified Home Inspector Practice Test

(CHI) Certified Home Inspector Practice Test

CHI Market Analysis & Valuation 3