FHA Property Valuation Methods & Techniques 2 — Questions and Answers
Question 1: When using the income capitalization approach for a single-family residence, what is the most common method FHA appraisers use to estimate market rent?
- Gross rent multiplier analysis (Correct answer)
- Direct capitalization of NOI
- Discounted cash flow analysis
- Potential gross income method
Correct answer: Gross rent multiplier analysis
The gross rent multiplier (GRM) is the standard method for single-family residences because it is simple, market-derived, and appropriate for properties where investors typically think in terms of rent multiples rather than cap rates.
Question 2: In the sales comparison approach, a comparable sale requires a negative dollar adjustment for a feature it has that the subject property lacks. This means the comparable is:
- Inferior to the subject in that feature
- Superior to the subject in that feature (Correct answer)
- Equal to the subject in that feature
- Requires no further adjustment for that feature
Correct answer: Superior to the subject in that feature
When a comparable is superior to the subject, it sold for more because of that feature, so you subtract value from the comparable to make it equal to the subject.
Question 3: Under FHA guidelines, which cost approach method typically yields the most reliable replacement cost estimate for a standard residential property?
- Unit-in-place method
- Quantity survey method
- Comparative unit method (square-foot method) (Correct answer)
- Index method
Correct answer: Comparative unit method (square-foot method)
The comparative unit (square-foot) method is most commonly used for residential appraisals because it is practical, market-derived, and supported by published cost services such as Marshall & Swift.
Question 4: An appraiser estimates accrued depreciation using the age-life method. The effective age is 10 years and the total economic life is 50 years. What percentage of depreciation has accrued?
- 10%
- 15%
- 20% (Correct answer)
- 25%
Correct answer: 20%
Accrued depreciation under the age-life method = effective age ÷ total economic life = 10 ÷ 50 = 20%.
Question 5: Which type of depreciation is considered incurable when the cost to cure exceeds the value added by curing the item?
- External obsolescence
- Functional obsolescence
- Physical deterioration — incurable long-lived (Correct answer)
- Physical deterioration — curable
Correct answer: Physical deterioration — incurable long-lived
Incurable physical deterioration refers to long-lived structural components where the cost to cure exceeds the contributory value gained, making repair economically unsound.
Question 6: In paired sales analysis, an appraiser isolates the value contribution of a garage by comparing two otherwise identical sales. Sale A (no garage) sold for $280,000 and Sale B (one-car garage) sold for $295,000. What is the indicated garage adjustment?
- +$10,000
- +$15,000 (Correct answer)
- +$20,000
- +$25,000
Correct answer: +$15,000
The indicated value contribution of the garage is the difference between the two paired sales: $295,000 − $280,000 = $15,000.
Question 7: When reconciling value indications in an FHA appraisal, which approach typically receives the greatest weight for owner-occupied single-family properties?
- Cost approach
- Income approach
- Sales comparison approach (Correct answer)
- All three approaches equally
Correct answer: Sales comparison approach
The sales comparison approach receives the greatest weight for owner-occupied residences because buyers and sellers in that market segment primarily rely on comparable sale prices.
FHA Property Valuation Methods & Techniques 2
When using the income capitalization approach for a single-family residence, what is the most common method FHA appraisers use to estimate market rent?