CRM Property Valuation & Appraisal 2 — Questions and Answers
Question 1: Which appraisal principle states that value is created and maintained when a property conforms to the standards of its neighborhood?
- Principle of conformity (Correct answer)
- Principle of substitution
- Principle of progression
- Principle of contribution
Correct answer: Principle of conformity
The principle of conformity holds that maximum value is achieved when a property is compatible with surrounding land uses and neighborhood standards.
Question 2: Under the income approach, what does the term 'effective gross income' represent?
- Potential gross income minus vacancy and credit losses (Correct answer)
- Net operating income minus debt service
- Gross rent multiplied by the cap rate
- Total revenue before any deductions
Correct answer: Potential gross income minus vacancy and credit losses
Effective gross income equals potential gross income minus an allowance for vacancy and collection (credit) losses.
Question 3: A residential property generates a net operating income of $24,000 annually. If the capitalization rate is 8%, what is the estimated value?
- $300,000 (Correct answer)
- $192,000
- $240,000
- $320,000
Correct answer: $300,000
Value = NOI ÷ Cap Rate = $24,000 ÷ 0.08 = $300,000.
Question 4: Which type of depreciation results from factors outside the property itself, such as a nearby industrial plant?
- External obsolescence (Correct answer)
- Functional obsolescence
- Physical deterioration
- Deferred maintenance
Correct answer: External obsolescence
External (economic) obsolescence is caused by negative influences originating outside the property, making it incurable from the owner's perspective.
Question 5: When using the sales comparison approach, what adjustment is made when a comparable property has a feature that the subject property lacks?
- A positive (upward) adjustment to the comparable's sale price
- A negative (downward) adjustment to the comparable's sale price (Correct answer)
- No adjustment is needed
- The comparable is eliminated from analysis
Correct answer: A negative (downward) adjustment to the comparable's sale price
If a comparable has a superior feature the subject lacks, its price is adjusted downward to reflect what it would have sold for without that feature.
Question 6: The gross rent multiplier (GRM) is calculated by dividing a property's sale price by its:
- Gross monthly or annual rent (Correct answer)
- Net operating income
- Effective gross income
- Capitalization rate
Correct answer: Gross monthly or annual rent
GRM = Sale Price ÷ Gross Rent, providing a quick ratio for comparing similar income-producing properties.
Question 7: Which appraisal approach is generally considered most reliable for single-family residential properties in active markets?
- Sales comparison approach (Correct answer)
- Income capitalization approach
- Cost approach
- Gross rent multiplier approach
Correct answer: Sales comparison approach
For owner-occupied single-family homes, the sales comparison approach is most reliable because comparable sales data is abundant in active markets.
CRM Property Valuation & Appraisal 2
Which appraisal principle states that value is created and maintained when a property conforms to the standards of its neighborhood?