CMC Property Appraisal and Valuation 2 — Questions and Answers
Question 1: The sales comparison approach to value is MOST appropriate for which type of property?
- Income-producing commercial office buildings
- New construction properties with no comparable sales
- Single-family residential properties in active markets with sufficient comparable sales (Correct answer)
- Special-use properties like churches or schools
Correct answer: Single-family residential properties in active markets with sufficient comparable sales
The sales comparison approach is most reliable for single-family homes in active markets where sufficient recent, comparable sales data is readily available to support the analysis.
Question 2: In the cost approach to appraisal, which of the following correctly describes 'depreciation'?
- The annual decrease in property taxes due to age
- The total loss in value from any cause, including physical deterioration, functional obsolescence, and external obsolescence (Correct answer)
- The reduction in mortgage balance over time through amortization
- The decline in rental income from a property over its useful life
Correct answer: The total loss in value from any cause, including physical deterioration, functional obsolescence, and external obsolescence
In the cost approach, depreciation represents the total loss in value from all causes: physical deterioration (wear and tear), functional obsolescence (outdated features), and external obsolescence (outside factors beyond the owner's control).
Question 3: What is 'functional obsolescence' in property appraisal?
- Loss in value due to external factors like neighborhood decline
- Physical deterioration of the property's structural components
- Loss in value due to outdated, inadequate, or superadequate features within the property itself (Correct answer)
- Decrease in value from environmental contamination on or near the site
Correct answer: Loss in value due to outdated, inadequate, or superadequate features within the property itself
Functional obsolescence is a loss in value resulting from deficiencies or superadequacies within the property, such as outdated floor plans, inadequate electrical capacity, or features no longer desired by the current market.
Question 4: In the income approach to property valuation, what is the capitalization rate (cap rate) used to determine?
- The interest rate used to finance the income property purchase
- The ratio of net operating income to property value, used to convert income into a value estimate (Correct answer)
- The maximum loan-to-value ratio allowed by a lender on investment property
- The percentage of gross income a borrower must allocate to mortgage payments
Correct answer: The ratio of net operating income to property value, used to convert income into a value estimate
The capitalization rate is the ratio of a property's net operating income to its value, and is used in the income approach to directly convert a property's stabilized income stream into an estimate of present value.
Question 5: What is a 'comparable sale' (comp) in the sales comparison approach?
- A property currently listed for sale at a price similar to the subject property
- A recently sold property with characteristics similar to the subject that is used as a value benchmark (Correct answer)
- Any property located within the same zip code as the subject property
- A property that was appraised within the past twelve months by the same appraiser
Correct answer: A recently sold property with characteristics similar to the subject that is used as a value benchmark
Comparable sales are recently sold properties with similar characteristics to the subject property; appraisers adjust for differences between each comp and the subject to support a credible value conclusion.
Question 6: When applying adjustments in the sales comparison approach, which situation requires a POSITIVE (upward) adjustment to the comparable's sale price?
- When the comparable is superior to the subject property in a given feature
- When the comparable is inferior to the subject property in a given feature (Correct answer)
- When the comparable sold more recently than other comps being used
- When the comparable is located in a more desirable neighborhood than the subject
Correct answer: When the comparable is inferior to the subject property in a given feature
A positive adjustment is applied to a comparable's price when the comparable is inferior to the subject in a feature, reflecting what the comp would have sold for had it possessed that feature like the subject does.
Question 7: What is 'external obsolescence' in the cost approach to appraisal?
- Loss in value caused by physical deterioration of the building's exterior walls or roof
- Loss in value caused by factors outside the property's boundaries, such as neighborhood decline or nearby nuisances (Correct answer)
- The depreciation of building materials due to prolonged weather exposure
- Value reduction due to an outdated or undesirable architectural style
Correct answer: Loss in value caused by factors outside the property's boundaries, such as neighborhood decline or nearby nuisances
External obsolescence is a loss in value caused by factors outside the property's boundaries, such as proximity to a landfill, airport noise, economic decline in the area, or other adverse conditions the owner cannot control or cure.
CMC Property Appraisal and Valuation 2
The sales comparison approach to value is MOST appropriate for which type of property?