CIA Property Appraisal Methods & Valuation 3 — Questions and Answers
Question 1: Under the Marshall & Swift cost estimating method, what does the 'local multiplier' adjustment account for?
- Depreciation due to age
- Regional differences in labor and material costs (Correct answer)
- Functional obsolescence of floor plan
- Variation in land values by ZIP code
Correct answer: Regional differences in labor and material costs
Local multipliers adjust national base costs to reflect the actual cost environment in a specific geographic market.
Question 2: In a direct capitalization analysis, net operating income (NOI) is calculated by subtracting which items from effective gross income?
- Mortgage payments and depreciation
- Operating expenses (excluding debt service and income taxes) (Correct answer)
- Capital expenditures and tenant improvements only
- Vacancy losses and gross income
Correct answer: Operating expenses (excluding debt service and income taxes)
NOI equals effective gross income minus all operating expenses, but excludes debt service and income taxes, which are financing and tax decisions.
Question 3: Which appraisal approach is generally considered most reliable for valuing a special-purpose property like a church or fire station?
- Sales comparison approach
- Income capitalization approach
- Cost approach (Correct answer)
- Gross rent multiplier method
Correct answer: Cost approach
Special-purpose properties rarely sell, making comparable sales scarce, and they don't produce rental income, so the cost approach is typically most applicable.
Question 4: The 'square foot method' of cost estimating applies a cost per square foot to the gross living area. What is a key limitation of this method?
- It cannot be applied to residential properties
- It ignores quality and shape differences between buildings (Correct answer)
- It requires detailed quantity takeoffs
- It only works for new construction
Correct answer: It ignores quality and shape differences between buildings
The square foot method is a quick estimate that may overlook variations in construction quality, shape efficiency, and unique features that affect actual costs.
Question 5: When adjusting comparable sales in the sales comparison approach, adjustments are made to the comparables, not the subject, because:
- The subject property value is already known
- The comparable's price is the known quantity being adjusted to reflect the subject (Correct answer)
- Adjustments to the subject would require court approval
- Appraisers are not allowed to modify subject property data
Correct answer: The comparable's price is the known quantity being adjusted to reflect the subject
The comparable's sale price is the known data point; adjustments modify it to simulate what it would have sold for if it were identical to the subject.
Question 6: In appraisal, 'market rent' differs from 'contract rent' in that market rent represents:
- The rent currently being paid under an existing lease
- The rent a property would command in the open market at the date of appraisal (Correct answer)
- The rent established by local rent control ordinances
- The rent agreed upon at the time the building was constructed
Correct answer: The rent a property would command in the open market at the date of appraisal
Market rent reflects current competitive rental rates, while contract rent is the actual amount stipulated in an existing lease agreement.
Question 7: Which of the following best describes 'insurable value' as used in property insurance appraisal?
- The market value of land and improvements combined
- The cost to replace or reproduce the insurable improvements, excluding land (Correct answer)
- The present value of future income streams from the property
- The assessed value as determined by local taxing authorities
Correct answer: The cost to replace or reproduce the insurable improvements, excluding land
Insurable value covers only the improvements because land is not subject to destruction and therefore not insurable.
CIA Property Appraisal Methods & Valuation 3
Under the Marshall & Swift cost estimating method, what does the 'local multiplier' adjustment account for?