IACP Appraisal Methodology & Techniques 5 — Questions and Answers
Question 1: In a market characterized by rapidly rising prices, time adjustments applied to comparable sales should generally be:
- Negative, reducing the sale prices of older comparables
- Positive, increasing the sale prices of older comparables to current market levels (Correct answer)
- Zero, because market conditions are irrelevant in a rising market
- Applied only to sales more than 24 months old
Correct answer: Positive, increasing the sale prices of older comparables to current market levels
In a rising market, older comparable sales are adjusted upward (positive time adjustment) to reflect the appreciation that has occurred between the sale date and the appraisal date.
Question 2: Which of the following BEST describes 'economic life' of an improvement?
- The period over which the improvement is depreciated for tax purposes
- The total period over which the improvement contributes positively to the property's value (Correct answer)
- The number of years until the building requires major renovation
- The holding period assumed in a discounted cash flow analysis
Correct answer: The total period over which the improvement contributes positively to the property's value
Economic life is the total estimated period during which an improvement contributes value to the total property, ending when the land value alone exceeds the improved property value.
Question 3: The 'income residual' technique values land or building by capitalizing the income attributable to one component after satisfying the return requirements of the other. Which statement is correct?
- The land residual technique capitalizes income remaining after satisfying the building's return requirement
- The building residual technique capitalizes income remaining after satisfying the land's return requirement
- Both residual techniques require market-extracted cap rates for each component separately
- All of the above are correct (Correct answer)
Correct answer: All of the above are correct
All three statements accurately describe residual techniques: each residualizes income to one component after satisfying the other's return, and both use component-specific capitalization rates.
Question 4: When a comparable sale includes personal property (e.g., furniture in a motel), the appraiser must:
- Include the personal property value in the adjusted sale price
- Deduct the contributory value of personal property from the sale price before making adjustments (Correct answer)
- Discard the comparable entirely
- Report the personal property value separately in the cost approach
Correct answer: Deduct the contributory value of personal property from the sale price before making adjustments
Personal property must be deducted from the sale price because real property appraisals value real property only, and including personal property would inflate the comparable's indicated value.
Question 5: In appraisal, 'market rent' is defined as:
- The rent currently being paid under an existing lease
- The rental income a property would most probably command in the open market as of the appraisal date (Correct answer)
- The average rent in the subject's zip code according to census data
- The rent set by local rent control ordinances
Correct answer: The rental income a property would most probably command in the open market as of the appraisal date
Market rent is the most probable rent a property would command in a competitive and open market under conditions requisite to a fair transaction, as of the appraisal date.
Question 6: The 'depth factor' adjustment in land valuation is primarily used to account for:
- Differences in topography between comparable land parcels
- The diminishing value contribution of additional lot depth beyond the standard depth (Correct answer)
- Variation in frontage along a commercial street
- Environmental contamination affecting subsurface soils
Correct answer: The diminishing value contribution of additional lot depth beyond the standard depth
Depth factor tables recognize that additional lot depth beyond a standard depth adds value, but at a diminishing rate, so adjustments are made to normalize lots of varying depths.
Question 7: Which condition must be met for a sale to be considered an 'arm's-length transaction' usable as a market comparable?
- The buyer and seller must be related parties negotiating a favorable price
- Both parties act in their own best interest with no undue pressure and adequate market exposure (Correct answer)
- The property must be sold at or above the county assessed value
- Financing must be at prevailing conventional mortgage rates with no seller concessions
Correct answer: Both parties act in their own best interest with no undue pressure and adequate market exposure
An arm's-length transaction requires knowledgeable, willing parties acting in their own interests without compulsion, and adequate market exposure—conditions necessary for a sale to reflect market value.
IACP Appraisal Methodology & Techniques 5
In a market characterized by rapidly rising prices, time adjustments applied to comparable sales should generally be: