CRM Property Valuation & Appraisal 3 — Questions and Answers
Question 1: In the cost approach, what does 'reproduction cost' mean as opposed to 'replacement cost'?
- Reproducing an exact replica using original materials vs. building with modern equivalent materials (Correct answer)
- Replacing the structure with a new building vs. repairing the existing structure
- Estimating current market value vs. insured value
- Computing depreciation vs. computing appreciation
Correct answer: Reproducing an exact replica using original materials vs. building with modern equivalent materials
Reproduction cost estimates the expense to build an exact duplicate; replacement cost estimates the expense to build a functionally equivalent structure with modern materials.
Question 2: What is the primary purpose of a Uniform Residential Appraisal Report (URAR)?
- To provide a standardized format for appraising single-family residential properties for lending purposes (Correct answer)
- To establish the assessed value for property tax purposes
- To document a broker's price opinion for listing purposes
- To set insurance replacement cost for homeowners policies
Correct answer: To provide a standardized format for appraising single-family residential properties for lending purposes
The URAR (Fannie Mae Form 1004) is the standard appraisal form required by most lenders for conventional single-family mortgage transactions.
Question 3: Which economic principle explains why a property's value may rise when it is located near properties of higher value?
- Principle of progression (Correct answer)
- Principle of regression
- Principle of contribution
- Principle of anticipation
Correct answer: Principle of progression
The principle of progression states that the value of a lesser property is enhanced by its proximity to more valuable properties.
Question 4: What is 'functional obsolescence' in the context of property appraisal?
- A loss of value due to deficiencies or superadequacies in the property's design or features (Correct answer)
- A loss of value due to physical wear and tear over time
- A loss of value caused by negative external market conditions
- A gain in value due to modernized mechanical systems
Correct answer: A loss of value due to deficiencies or superadequacies in the property's design or features
Functional obsolescence results from outmoded design elements such as insufficient closet space, outdated floor plans, or features no longer desired by the market.
Question 5: A property's assessed value is $180,000, and the assessment ratio in the jurisdiction is 60%. What is the indicated market value?
- $300,000 (Correct answer)
- $108,000
- $180,000
- $270,000
Correct answer: $300,000
Market Value = Assessed Value ÷ Assessment Ratio = $180,000 ÷ 0.60 = $300,000.
Question 6: Which of the following best describes 'arm's length transaction' in appraisal practice?
- A sale between unrelated parties under no duress, each acting in their own best interest (Correct answer)
- A sale completed without a real estate agent involved
- A transaction involving only cash with no financing contingency
- A sale where both buyer and seller share the same attorney
Correct answer: A sale between unrelated parties under no duress, each acting in their own best interest
An arm's length transaction involves independent parties acting without compulsion, making it a reliable indicator of market value.
Question 7: The age-life method of estimating depreciation requires the appraiser to calculate:
- Effective age divided by total economic life (Correct answer)
- Chronological age divided by remaining economic life
- Physical deterioration divided by functional obsolescence
- Reproduction cost divided by replacement cost
Correct answer: Effective age divided by total economic life
The age-life method computes depreciation as effective age ÷ total economic life, then applies that percentage to the reproduction or replacement cost.
CRM Property Valuation & Appraisal 3
In the cost approach, what does 'reproduction cost' mean as opposed to 'replacement cost'?