PSI Real Estate Appraisal 1 — Questions and Answers
Question 1: Which of the following best describes the three traditional approaches to real estate value used by appraisers?
- Sales comparison, cost, and income approaches (Correct answer)
- Market, assessed, and replacement approaches
- Comparable, depreciation, and capitalization approaches
- Gross rent, net income, and cost-basis approaches
Correct answer: Sales comparison, cost, and income approaches
Appraisers use the sales comparison approach (comparable sales), cost approach (land plus depreciated improvements), and income approach (capitalized income stream) to estimate market value.
Question 2: Market value in real estate appraisal is best defined as:
- The price a seller demands for the property regardless of market conditions
- The most probable price a property would bring in a competitive and open market under fair sale conditions (Correct answer)
- The assessed value assigned by the county tax assessor
- The replacement cost of the improvements minus accrued depreciation
Correct answer: The most probable price a property would bring in a competitive and open market under fair sale conditions
Market value is the most probable price a property would sell for in a competitive, open market where both buyer and seller are knowledgeable, acting in their own interest, and not under undue duress.
Question 3: The principle of highest and best use requires that use to be:
- Legally permissible, physically possible, financially feasible, and maximally productive (Correct answer)
- Currently used, zoned for residential, income-producing, and owner-occupied
- Approved by the municipality, historically consistent, and commercially viable
- Permitted under current zoning, profitable, and environmentally sustainable
Correct answer: Legally permissible, physically possible, financially feasible, and maximally productive
Highest and best use is the use that is legally permissible, physically possible, financially feasible, and maximally productive — all four criteria must be met.
Question 4: In the sales comparison approach, an upward adjustment is made to a comparable sale when:
- The comparable is superior to the subject property in that feature
- The comparable is inferior to the subject property in that feature (Correct answer)
- The comparable sold more recently than the subject's effective date
- The comparable is located closer to amenities than the subject
Correct answer: The comparable is inferior to the subject property in that feature
When a comparable is inferior to the subject in a given feature, you add value to the comparable to make it equal the subject — an upward (positive) adjustment.
Question 5: The gross rent multiplier (GRM) is calculated by dividing:
- Net operating income by the capitalization rate
- Sale price by gross monthly rental income (Correct answer)
- Effective gross income by operating expenses
- Gross scheduled income by vacancy rate
Correct answer: Sale price by gross monthly rental income
GRM equals the sale price divided by the gross monthly (or annual) rental income, providing a quick ratio to compare income-producing properties.
Question 6: Which type of depreciation is caused by factors outside the property itself, such as a nearby industrial facility?
- Physical deterioration
- Functional obsolescence
- Economic (external) obsolescence (Correct answer)
- Structural depreciation
Correct answer: Economic (external) obsolescence
Economic (external) obsolescence results from negative influences outside the property boundaries, such as nearby nuisances, declining neighborhoods, or adverse zoning changes.
Question 7: The principle of substitution states that:
- A property's value is set by the government based on public benefit
- A buyer will pay no more for a property than the cost to obtain an equally desirable substitute (Correct answer)
- Sellers must accept a fair market offer once their property is listed
- Appraisers must use at least two comparable sales to establish value
Correct answer: A buyer will pay no more for a property than the cost to obtain an equally desirable substitute
The principle of substitution holds that a prudent buyer will pay no more for a property than the cost to acquire an equally desirable and functional substitute in the open market.
PSI Real Estate Appraisal 1
Which of the following best describes the three traditional approaches to real estate value used by appraisers?