IACP Appraisal Methodology & Techniques 4 — Questions and Answers
Question 1: Which method of estimating site value assumes that the land can be valued by deducting the depreciated cost of improvements from a known total property sale price?
- Allocation method
- Extraction method (Correct answer)
- Ground rent capitalization
- Land residual technique
Correct answer: Extraction method
The extraction method derives land value by subtracting the estimated depreciated cost of improvements from the total sale price of a comparable property.
Question 2: In the sales comparison approach, a 'gross adjustment percentage' exceeding industry norms may indicate:
- The comparable is an arm's-length transaction
- The comparable may not be truly comparable and should be reconsidered (Correct answer)
- Market conditions are stable
- The subject property is in excellent condition
Correct answer: The comparable may not be truly comparable and should be reconsidered
Large gross adjustments suggest significant differences between the comparable and subject, weakening the reliability of that comparable and warranting further scrutiny.
Question 3: The 'band of investment' technique is used to estimate:
- The gross rent multiplier for residential properties
- An overall capitalization rate by weighting mortgage and equity components (Correct answer)
- Physical depreciation of the building structure
- Replacement cost new of mechanical systems
Correct answer: An overall capitalization rate by weighting mortgage and equity components
The band of investment technique develops an overall capitalization rate by weighting the mortgage constant and equity dividend rate according to their respective shares of total capital.
Question 4: Under the cost approach, 'replacement cost new' differs from 'reproduction cost new' in that replacement cost:
- Uses the same materials and design as the original structure
- Estimates the cost of a functionally equivalent modern building using current materials and standards (Correct answer)
- Includes all accrued depreciation since original construction
- Reflects the land value component of total property cost
Correct answer: Estimates the cost of a functionally equivalent modern building using current materials and standards
Replacement cost new estimates the cost to construct a functionally equivalent structure using current materials and design standards, whereas reproduction cost replicates the exact original.
Question 5: When appraising a property 'as stabilized,' the appraiser assumes:
- The property is currently at market vacancy and achieves market rents (Correct answer)
- The property is vacant and requires immediate renovation
- The property will be demolished within one year
- The property's lease terms are above-market and will be renegotiated
Correct answer: The property is currently at market vacancy and achieves market rents
An 'as stabilized' appraisal assumes the property has reached a typical occupancy level with market rents, reflecting its value once lease-up or renovation is complete.
Question 6: Which statistical measure is MOST useful when testing the reliability of regression-derived adjustments in mass appraisal?
- Median sale price
- Coefficient of determination (R²) (Correct answer)
- Gross rent multiplier
- Overall capitalization rate
Correct answer: Coefficient of determination (R²)
R² (coefficient of determination) measures how much of the variation in sale prices is explained by the regression model, indicating reliability of the derived adjustments.
Question 7: The 'mortgage-equity' (Ellwood) technique in income capitalization is primarily used when:
- Properties are owned free and clear with no financing
- Typical buyers use leverage and equity build-up over a holding period is significant (Correct answer)
- The property is a single-family residence with stable rental income
- Market cap rates are extracted directly from comparable sales
Correct answer: Typical buyers use leverage and equity build-up over a holding period is significant
The Ellwood mortgage-equity technique accounts for leverage, equity build-up through amortization, and projected appreciation or depreciation over a typical holding period.
IACP Appraisal Methodology & Techniques 4
Which method of estimating site value assumes that the land can be valued by deducting the depreciated cost of improvements from a known total property sale price?