CRECI Property Valuation Methods 2

Question 1

In the income capitalization approach, what does the overall capitalization rate (cap rate) represent?

Accepted Answer

The ratio of net operating income to property value

Answer

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?

Accepted Answer

External obsolescence

Answer

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:

Accepted Answer

The approach most applicable given the property type and available data

Answer

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:

Accepted Answer

$2,000,000

Answer

$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?

Accepted Answer

To account for differences between each comparable and the subject property

Answer

Adjustments compensate for differences in features, time, location, and conditions between comparables and the subject.

(CRECI) Commercial Real Estate Certification Institute Practice Test