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.
