CRECI Property Valuation Methods 2 — Questions and Answers
Question 1: In the income capitalization approach, what does the overall capitalization rate (cap rate) represent?
- The ratio of net operating income to property value (Correct answer)
- The ratio of gross rent to purchase price
- The ratio of debt service to net operating income
- The ratio of equity dividends to total investment
Correct answer: The ratio of net operating income to property value
The cap rate equals NOI divided by property value, expressing the return on investment as a percentage.
Question 2: Which depreciation type in the cost approach results from factors outside the property boundaries, such as highway noise?
- Physical deterioration
- Functional obsolescence
- External obsolescence (Correct answer)
- Deferred maintenance
Correct answer: External obsolescence
External (economic) obsolescence stems from conditions outside the property, like nearby nuisances or market downturns.
Question 3: When reconciling value indications from multiple appraisal approaches, the appraiser should assign the greatest weight to:
- The approach yielding the highest value
- The approach most applicable given the property type and available data (Correct answer)
- The cost approach whenever land value is uncertain
- The income approach whenever a lease is in place
Correct answer: The approach most applicable given the property type and available data
Reconciliation requires the appraiser to weight each approach based on its reliability and relevance for the specific property and assignment.
Question 4: In direct capitalization, if a commercial property has an NOI of $120,000 and comparable sales indicate a cap rate of 6%, the indicated value is:
- $720,000
- $1,200,000
- $2,000,000 (Correct answer)
- $6,000,000
Correct answer: $2,000,000
$120,000 NOI ÷ 0.06 cap rate = $2,000,000 indicated value.
Question 5: What is the primary purpose of adjusting comparable sales in the sales comparison approach?
- To lower the indicated value below listing prices
- To account for differences between each comparable and the subject property (Correct answer)
- To average all sale prices without modification
- To eliminate comparables with negative adjustments
Correct answer: To account for differences between each comparable and the subject property
Adjustments compensate for differences in features, time, location, and conditions between comparables and the subject.
Question 6: The gross rent multiplier (GRM) is best used for valuing which type of property?
- Large institutional office towers
- Industrial distribution centers
- Single-tenant net-leased retail
- Residential income properties with reliable rental data (Correct answer)
Correct answer: Residential income properties with reliable rental data
GRM is most appropriate for simpler residential income properties where gross rent data is abundant and consistent.
Question 7: Which statement best describes the principle of substitution as it applies to real estate valuation?
- A buyer will pay more for a property with unique features
- A prudent buyer will pay no more than the cost to acquire an equally desirable substitute (Correct answer)
- Property values always increase when similar properties sell nearby
- Appraisers should substitute income data when sales data is unavailable
Correct answer: A prudent buyer will pay no more than the cost to acquire an equally desirable substitute
The principle of substitution holds that value is limited by what a buyer would pay for an equally desirable alternative property or improvement.
CRECI Property Valuation Methods 2
In the income capitalization approach, what does the overall capitalization rate (cap rate) represent?