Loan Officer Exam Loan Officer Appraisal and Property Valuation 2 — Questions and Answers
Question 1: Which of the three appraisal approaches estimates value by calculating land value plus the cost to replace improvements minus accrued depreciation?
- Sales comparison approach
- Income approach
- Cost approach (Correct answer)
- Residual approach
Correct answer: Cost approach
The cost approach estimates value by adding the land value to the depreciated cost of reproducing or replacing the improvements on the property.
Question 2: The sales comparison approach to value is primarily based on which of the following?
- Projected rental income capitalized at a market rate
- Recent sales prices of comparable properties adjusted for differences (Correct answer)
- The cost to replace the improvements minus physical depreciation
- The property's assessed value as determined by the municipality
Correct answer: Recent sales prices of comparable properties adjusted for differences
The sales comparison approach establishes value by analyzing recent sales of similar properties and making adjustments for differences between the comparables and the subject property.
Question 3: In the income approach to value, the capitalization rate represents:
- The mortgage interest rate applied to the subject property's loan
- The rate of return an investor expects from an income-producing property (Correct answer)
- The percentage of gross income consumed by operating expenses
- The annual rate of property appreciation in the local market
Correct answer: The rate of return an investor expects from an income-producing property
The capitalization rate (cap rate) converts a property's net operating income into a value estimate by reflecting the return investors expect from that type of income-producing property.
Question 4: What type of depreciation is 'external obsolescence' in real estate appraisal?
- Physical wear and tear on the building's interior finishes
- Outdated floor plans or design features that reduce marketability
- A loss in value caused by negative factors located outside the property (Correct answer)
- Structural deterioration of the roof, foundation, or exterior walls
Correct answer: A loss in value caused by negative factors located outside the property
External obsolescence is depreciation caused by adverse factors outside the property boundaries, such as nearby industrial use, heavy traffic, or economic decline in the area, and it is generally incurable.
Question 5: When an appraiser makes a positive adjustment to a comparable sale, it means the comparable is:
- Superior to the subject property in that feature, so value is added
- Inferior to the subject property in that feature, so value is added to the comparable (Correct answer)
- Located in a more desirable neighborhood than the subject property
- A more recent sale that commands a higher market price
Correct answer: Inferior to the subject property in that feature, so value is added to the comparable
A positive adjustment is added to a comparable's sale price when the comparable is inferior to the subject in a particular feature, bringing the comparable's adjusted value up to reflect what it would have sold for if equal to the subject.
Question 6: Which appraisal approach is most commonly used and given the most weight when valuing single-family residential properties?
- Income approach
- Cost approach
- Sales comparison approach (Correct answer)
- Residual approach
Correct answer: Sales comparison approach
The sales comparison approach is given the most weight for single-family residences because abundant comparable sales data exists, and it best reflects how buyers make purchase decisions.
Question 7: What is 'functional obsolescence' in real estate appraisal?
- Physical deterioration resulting from normal age and use over time
- A loss in value due to outdated design, layout, or features that do not meet current buyer standards (Correct answer)
- Economic decline caused by negative forces in the surrounding neighborhood
- Environmental contamination discovered on or near the subject property
Correct answer: A loss in value due to outdated design, layout, or features that do not meet current buyer standards
Functional obsolescence is a loss in value due to design deficiencies or outdated features — such as inadequate electrical capacity or a poor floor plan — that reduce the property's utility compared to modern standards.
Loan Officer Exam Loan Officer Appraisal and Property Valuation 2
Which of the three appraisal approaches estimates value by calculating land value plus the cost to replace improvements minus accrued depreciation?