NAR Property Valuation & Market Analysis 3 — Questions and Answers
Question 1: Which economic characteristic of land makes it necessary to consider location as the primary value influence?
- Scarcity
- Immobility (Correct answer)
- Indestructibility
- Modification
Correct answer: Immobility
Because land is immobile (fixed in location), its value is inherently tied to its specific geographic position and surrounding environment.
Question 2: The gross rent multiplier (GRM) is calculated by dividing the:
- Net operating income by the monthly rent
- Sale price by the annual gross rent (Correct answer)
- Sale price by the net operating income
- Monthly rent by the vacancy rate
Correct answer: Sale price by the annual gross rent
GRM = Sale Price ÷ Annual Gross Rent (or monthly rent if using monthly GRM), providing a quick income-based valuation metric.
Question 3: A property appraised using the cost approach shows a land value of $80,000 and improvements valued at $220,000 after depreciation. What is the indicated value?
- $140,000
- $220,000
- $300,000 (Correct answer)
- $80,000
Correct answer: $300,000
In the cost approach, indicated value equals land value plus depreciated cost of improvements: $80,000 + $220,000 = $300,000.
Question 4: Which market condition is indicated when the months of supply falls below 4–5 months?
- Buyer's market
- Balanced market
- Seller's market (Correct answer)
- Declining market
Correct answer: Seller's market
Low months of supply (typically under 4–5 months) means limited inventory relative to demand, creating a seller's market with upward price pressure.
Question 5: In the income approach to value, vacancy and collection loss is subtracted from potential gross income to arrive at:
- Net operating income
- Effective gross income (Correct answer)
- Cash flow before taxes
- Debt service coverage
Correct answer: Effective gross income
Effective Gross Income (EGI) = Potential Gross Income minus Vacancy & Collection Loss, representing realistic achievable income.
Question 6: A property that generates $36,000 NOI annually sells for $450,000. What is the cap rate?
- 6%
- 8% (Correct answer)
- 10%
- 12%
Correct answer: 8%
$36,000 ÷ $450,000 = 0.08, or an 8% capitalization rate.
Question 7: Functional obsolescence caused by an over-improvement (super-adequacy) is best described as:
- External factors reducing the property's market appeal
- Features that exceed market standards and cannot be recovered in resale (Correct answer)
- Physical wear that requires immediate repair
- A zoning change that reduces permitted uses
Correct answer: Features that exceed market standards and cannot be recovered in resale
Super-adequacy occurs when improvements exceed what the market will pay for, such as a $100,000 pool in a neighborhood where pools add only $20,000 in value.
NAR Property Valuation & Market Analysis 3
Which economic characteristic of land makes it necessary to consider location as the primary value influence?