CIA Property Appraisal Methods & Valuation 2 — Questions and Answers
Question 1: In the income capitalization approach, what does a lower capitalization rate indicate about a property?
- Higher risk and lower value
- Lower risk and higher value (Correct answer)
- Higher risk and higher value
- Lower risk and lower value
Correct answer: Lower risk and higher value
A lower cap rate reflects lower perceived risk, which investors accept for stable income-producing properties, resulting in a higher indicated value.
Question 2: Which depreciation type results from factors outside the property itself, such as a new highway adjacent to a residential neighborhood?
- Physical deterioration
- Functional obsolescence
- External obsolescence (Correct answer)
- Deferred maintenance
Correct answer: External obsolescence
External (economic) obsolescence stems from forces outside the property boundaries and is generally incurable by the property owner.
Question 3: When an appraiser uses the paired-sales analysis technique, what is the primary goal?
- Calculate net operating income
- Isolate the value contribution of a single property feature (Correct answer)
- Determine reproduction cost of improvements
- Estimate economic life of a building
Correct answer: Isolate the value contribution of a single property feature
Paired-sales analysis compares two similar sales that differ in only one characteristic to extract the market value of that specific feature.
Question 4: Gross Rent Multiplier (GRM) is calculated by dividing the property's sale price by which figure?
- Annual net operating income
- Annual effective gross income
- Monthly or annual gross rent (Correct answer)
- Monthly mortgage payment
Correct answer: Monthly or annual gross rent
GRM equals sale price divided by gross rent (monthly or annual), providing a quick relative value indicator without deducting expenses.
Question 5: The 'effective age' of a building in appraisal differs from its actual age because it reflects:
- The year construction permits were issued
- The condition and utility of the structure relative to similar properties (Correct answer)
- The number of years remaining on the mortgage
- The date of the most recent sale
Correct answer: The condition and utility of the structure relative to similar properties
Effective age is based on the apparent condition and usefulness of the structure, which may be less or greater than chronological age depending on maintenance.
Question 6: For insurance appraisal purposes, which cost approach component is most directly relevant to establishing replacement cost new (RCN)?
- Land value estimate
- Sales comparison grid adjustments
- Cost to reproduce or replace the improvements (Correct answer)
- Capitalized income stream
Correct answer: Cost to reproduce or replace the improvements
RCN represents the current cost to construct improvements of equal utility, which is the foundation of insurable value calculations.
Question 7: An appraiser finds that a subject property's finished basement adds no value compared to similar homes without basements in that market. This is an example of:
- Superadequacy
- Contribution principle in action (Correct answer)
- External obsolescence
- Plottage increment
Correct answer: Contribution principle in action
The contribution principle holds that the value of a component is measured by what it adds to the whole, not by its cost — here, the basement contributes zero market value.
CIA Property Appraisal Methods & Valuation 2
In the income capitalization approach, what does a lower capitalization rate indicate about a property?