FHA Property Valuation Methods & Techniques 3 — Questions and Answers
Question 1: A property's estimated reproduction cost new is $320,000 and total accrued depreciation is $64,000. The site value is $45,000. What is the indicated value via the cost approach?
- $256,000
- $275,000
- $301,000 (Correct answer)
- $320,000
Correct answer: $301,000
Cost approach value = (Reproduction cost new − Accrued depreciation) + Site value = ($320,000 − $64,000) + $45,000 = $301,000.
Question 2: External obsolescence caused by proximity to a busy highway is best described as:
- Curable functional obsolescence
- Incurable physical deterioration
- Locational obsolescence — incurable (Correct answer)
- Curable external obsolescence
Correct answer: Locational obsolescence — incurable
Proximity to a negative external influence such as a highway is locational (external) obsolescence and is virtually always incurable because the appraiser cannot move the property.
Question 3: Which adjustment in the sales comparison approach accounts for the fact that a comparable sale occurred 18 months ago in a rising market?
- Conditions of sale adjustment
- Market conditions (time) adjustment (Correct answer)
- Location adjustment
- Physical characteristic adjustment
Correct answer: Market conditions (time) adjustment
A market conditions (time) adjustment is applied to account for price changes between the date of a comparable sale and the effective date of the appraisal.
Question 4: The gross rent multiplier for a property is calculated as:
- Net operating income ÷ sale price
- Sale price ÷ monthly gross rent (Correct answer)
- Annual gross rent ÷ capitalization rate
- Sale price ÷ net operating income
Correct answer: Sale price ÷ monthly gross rent
GRM = Sale price ÷ Monthly gross rent; it expresses how many months of gross rent equal the property's sale price.
Question 5: Under the income approach, if a property generates an annual NOI of $18,000 and the market capitalization rate is 6%, what is the indicated value?
- $108,000
- $200,000
- $300,000 (Correct answer)
- $540,000
Correct answer: $300,000
Value = NOI ÷ Cap rate = $18,000 ÷ 0.06 = $300,000.
Question 6: When selecting comparable sales for an FHA appraisal, the MOST important criterion is that the comparables reflect:
- Sales within the past 6 months only
- Arm's-length transactions in the subject's competitive market (Correct answer)
- Sales of properties identical to the subject
- Distressed or foreclosure sales for conservative estimates
Correct answer: Arm's-length transactions in the subject's competitive market
Comparables must be arm's-length transactions (not distressed, related-party, or forced sales) within the same competitive market area as the subject.
Question 7: Which term describes the loss in value due to an oversized floor plan that does not meet current market preferences?
- Physical deterioration — curable
- Functional obsolescence — superadequacy (Correct answer)
- External obsolescence
- Functional obsolescence — deficiency
Correct answer: Functional obsolescence — superadequacy
A superadequacy is a feature that exceeds what the market demands, such as an oversized floor plan, and results in functional obsolescence because the excess cost is not recovered in market value.
FHA Property Valuation Methods & Techniques 3
A property's estimated reproduction cost new is $320,000 and total accrued depreciation is $64,000.
The site value is $45,000.
What is the indicated value via the cost approach?