Free Arkansas Real Estate License Property Valuation and Appraisal Questions and Answers — Questions and Answers
Question 1: An Arkansas real estate agent is preparing a Comparative Market Analysis (CMA) for a residential property. Which of the following principles of value is the primary basis for the Sales Comparison Approach used in the CMA?
- Principle of Contribution
- Principle of Highest and Best Use
- Principle of Substitution (Correct answer)
- Principle of Conformity
Correct answer: Principle of Substitution
The Principle of Substitution is the foundation of the sales comparison approach. It states that a knowledgeable buyer will not pay more for a property than the cost of acquiring a similar substitute property with the same utility and desirability. A CMA relies on this by analyzing what similar properties have recently sold for.
Question 2: A property in a well-kept residential neighborhood loses value because a large, noisy factory is built on an adjacent lot. This loss of value is an example of which type of depreciation?
- Physical Deterioration
- Functional Obsolescence
- Economic Obsolescence (Correct answer)
- Curable Depreciation
Correct answer: Economic Obsolescence
Economic Obsolescence (also called external obsolescence) is a loss in value due to factors outside the subject property's boundaries, such as changes in zoning, construction of a nearby factory, or a general economic downturn in the area. The problem is external to the property itself.
Question 3: When an appraiser is determining the value of a special-purpose property, such as a public school or a church in Arkansas, which valuation approach is likely to be given the most weight?
- Sales Comparison Approach
- Income Approach
- Gross Rent Multiplier Analysis
- Cost Approach (Correct answer)
Correct answer: Cost Approach
The Cost Approach is most reliable for unique, special-purpose properties that do not produce income and have few, if any, comparable sales. This approach determines value by calculating the cost to build a similar structure from new, subtracting depreciation, and adding the value of the land.
Question 4: A residential investment property in Arkansas generates a gross annual rental income of $60,000. If it sells for $750,000, what is the Gross Rent Multiplier (GRM) for the property?
- 10.5
- 12.5 (Correct answer)
- 125
- 8
Correct answer: 12.5
The Gross Rent Multiplier (GRM) is calculated by dividing the property's sale price by its gross annual rental income. The formula is: Sale Price / Gross Annual Income = GRM. In this case, $750,000 / $60,000 = 12.5.
Question 5: Which of the following BEST describes the role of a Comparative Market Analysis (CMA) in an Arkansas real estate transaction?
- It is a formal appraisal used by a lender to determine the maximum loan amount.
- It is a tool used by a real estate licensee to estimate a probable selling price for a client. (Correct answer)
- It is a legally binding document that establishes the property's value for tax purposes.
- It is an analysis of the cost to replace the property's improvements, minus depreciation.
Correct answer: It is a tool used by a real estate licensee to estimate a probable selling price for a client.
A Comparative Market Analysis (CMA) is an informal estimate of a property's market value, prepared by a real estate agent to help sellers set a list price or buyers make an offer. It is not a formal appraisal, which must be performed by a licensed appraiser and is typically required by lenders.
Question 6: An appraiser is valuing a house using the Cost Approach. They discover that the house has a poor floor plan, with a bedroom only accessible by walking through another bedroom. This an example of:
- Physical deterioration - incurable
- External obsolescence
- Functional obsolescence - curable (Correct answer)
- Physical deterioration - curable
Correct answer: Functional obsolescence - curable
Functional obsolescence is a loss of value due to a flaw in the design or layout of the property, such as a poor floor plan or outdated features. Since a floor plan can often be changed (e.g., by adding a hallway), it is typically considered curable, meaning the cost to fix it is less than the resulting increase in value.
Free Arkansas Real Estate License Property Valuation and Appraisal Questions and Answers
An Arkansas real estate agent is preparing a Comparative Market Analysis (CMA) for a residential property.
Which of the following principles of value is the primary basis for the Sales Comparison Approach used in the CMA?