COS Property Valuation & Appraisal 3 — Questions and Answers
Question 1: When using the sales comparison approach, an appraiser makes 'adjustments' to comparable sales. What is the direction of adjustment if a comparable sold for more because it has a garage that the subject property lacks?
- Adjust the comparable upward
- Adjust the comparable downward (Correct answer)
- Adjust the subject property upward
- No adjustment is needed
Correct answer: Adjust the comparable downward
When a comparable is superior to the subject in a feature, the comparable's price is adjusted downward to reflect what it would have sold for without that advantage.
Question 2: In HUD-assisted multifamily housing, an 'as-is' appraisal reflects the property's value under which condition?
- After all planned renovations are complete
- At its current state without assumed repairs or improvements (Correct answer)
- After 100% occupancy is achieved
- Following HUD inspection approval
Correct answer: At its current state without assumed repairs or improvements
An 'as-is' appraisal reflects current market value in the property's existing condition without assuming future repairs or improvements.
Question 3: What term describes the difference between a property's gross potential income and effective gross income?
- Net operating income
- Vacancy and collection loss (Correct answer)
- Operating expense ratio
- Debt service coverage
Correct answer: Vacancy and collection loss
Vacancy and collection loss represents the income lost due to unoccupied units and uncollected rents, reducing gross potential income to effective gross income.
Question 4: Which valuation concept is most relevant when a COS specialist is determining whether rents are at, above, or below market rates?
- Assessed value
- Insured value
- Market rent vs. contract rent (Correct answer)
- Replacement cost value
Correct answer: Market rent vs. contract rent
Comparing market rent (what units would rent for in the open market) against contract rent (actual lease amounts) helps identify rent subsidies or above-market rents in HUD properties.
Question 5: The Gross Rent Multiplier (GRM) is calculated by dividing a property's sale price by which figure?
- Net operating income
- Annual gross rent
- Monthly gross rent (Correct answer)
- Effective gross income
Correct answer: Monthly gross rent
GRM = Sale Price ÷ Monthly Gross Rent; it's a quick rule-of-thumb tool used in residential property valuation.
Question 6: Under USPAP, what does the term 'extraordinary assumption' mean in an appraisal report?
- An assumption about future market conditions that is certain to occur
- An assumption, if found false, that could alter the appraisal's conclusions (Correct answer)
- The highest possible value estimate for the property
- A standard market condition assumption required by HUD
Correct answer: An assumption, if found false, that could alter the appraisal's conclusions
An extraordinary assumption is one that presumes uncertain information as fact and, if incorrect, could materially change the appraiser's value conclusion.
Question 7: A property's 'economic life' in appraisal terminology refers to which period?
- The time between construction and the first major renovation
- The period during which improvements contribute positively to property value (Correct answer)
- The legal depreciation schedule set by the IRS
- The term of the HUD use agreement
Correct answer: The period during which improvements contribute positively to property value
Economic life is the estimated period over which improvements to land contribute to property value — after which the improvements may detract from value.
COS Property Valuation & Appraisal 3
When using the sales comparison approach, an appraiser makes 'adjustments' to comparable sales.
What is the direction of adjustment if a comparable sold for more because it has a garage that the subject property lacks?