IACP Appraisal Methodology & Techniques 3 — Questions and Answers
Question 1: When a property's highest and best use 'as improved' differs from its highest and best use 'as vacant,' the appraiser should:
- Always demolish the improvement value and appraise as land only
- Apply the income approach exclusively
- Consider whether the existing improvement contributes value or represents a demolition cost (Correct answer)
- Disregard highest and best use analysis for improved properties
Correct answer: Consider whether the existing improvement contributes value or represents a demolition cost
When as-improved and as-vacant HBU differ, the appraiser must determine whether the improvement adds value or whether demolition and redevelopment would yield a higher value.
Question 2: Which approach to value is generally given the most weight when appraising a special-purpose property with no comparable sales?
- Sales comparison approach
- Cost approach (Correct answer)
- Income approach
- Gross rent multiplier method
Correct answer: Cost approach
For special-purpose properties such as churches or schools, where sales and income data are scarce, the cost approach typically receives the greatest weight.
Question 3: What does the term 'excess land' mean in appraisal?
- Land that exceeds the legal lot coverage limit
- Land beyond what is needed to support the property's highest and best use that can be sold separately (Correct answer)
- Land encumbered by an easement
- Land that is below the flood plain elevation
Correct answer: Land beyond what is needed to support the property's highest and best use that can be sold separately
Excess land is the portion of a site beyond what is needed for the existing or planned improvement and may have potential for separate sale or development.
Question 4: In discounted cash flow (DCF) analysis, the 'terminal value' (reversion) is typically estimated by:
- Multiplying the holding period NOI by the discount rate
- Capitalizing the projected NOI at the end of the holding period using a terminal cap rate (Correct answer)
- Adding accumulated depreciation to the original purchase price
- Dividing the loan balance by the remaining amortization period
Correct answer: Capitalizing the projected NOI at the end of the holding period using a terminal cap rate
The reversion (terminal value) in DCF analysis is most commonly estimated by capitalizing the projected NOI in the year following the holding period using a terminal (going-out) capitalization rate.
Question 5: The principle of substitution states that:
- A property's value is determined by its future income potential
- A buyer will pay no more for a property than the cost of acquiring an equally desirable substitute (Correct answer)
- Market value equals assessed value for tax purposes
- Supply and demand forces are always in equilibrium
Correct answer: A buyer will pay no more for a property than the cost of acquiring an equally desirable substitute
The principle of substitution holds that a rational buyer will not pay more for a property than the cost of obtaining a comparable substitute, forming the theoretical basis for all three valuation approaches.
Question 6: When selecting comparable sales, which factor is considered MOST critical by appraisers following USPAP standards?
- Sales that occurred in the same calendar year as the appraisal
- Sales that reflect the same property rights being appraised (Correct answer)
- Sales within one mile of the subject property
- Sales involving the same number of bedrooms as the subject
Correct answer: Sales that reflect the same property rights being appraised
Comparable sales must convey the same property rights (e.g., fee simple vs. leased fee) as those being appraised to ensure a valid comparison.
Question 7: What is 'functional obsolescence caused by a superadequacy'?
- A feature the market values highly but is missing from the subject property
- An over-improvement whose cost exceeds its contribution to market value (Correct answer)
- Deterioration of mechanical systems beyond their useful life
- Loss in value caused by a change in zoning regulations
Correct answer: An over-improvement whose cost exceeds its contribution to market value
A superadequacy occurs when a feature is excessive relative to market demand (e.g., a gold-plated faucet in a modest home), causing a loss in value because its cost exceeds its market contribution.
IACP Appraisal Methodology & Techniques 3
When a property's highest and best use 'as improved' differs from its highest and best use 'as vacant,' the appraiser should: