RAA RAA Income Approach & Valuation Methods 2 — Questions and Answers
Question 1: Which income approach method is most commonly applied to single-family residential properties by RAA appraisers?
- Discounted Cash Flow Analysis
- Direct Capitalization using GRM (Correct answer)
- Yield Capitalization
- Band of Investment
Correct answer: Direct Capitalization using GRM
Direct capitalization using the Gross Rent Multiplier is the most practical income method for single-family homes.
Question 2: What is 'economic rent' in the context of residential appraisal?
- The rent actually paid by the current tenant
- The rent a property would command in the open market (Correct answer)
- The rent established by local rent control laws
- The rent needed to cover operating expenses
Correct answer: The rent a property would command in the open market
Economic rent (market rent) is the rent a willing tenant would pay a willing landlord in the open market under typical conditions.
Question 3: When contract rent differs significantly from market rent, the RAA appraiser should:
- Use only contract rent for the income approach
- Ignore the income approach entirely
- Note the difference and use market rent for the income approach valuation (Correct answer)
- Average the contract and market rent figures
Correct answer: Note the difference and use market rent for the income approach valuation
Appraisers use market rent for the income approach to reflect value to a typical investor, while disclosing the contract rent discrepancy.
Question 4: In a rent survey, the appraiser finds three comparable rentals with monthly rents of $1,800, $1,950, and $2,100. What conclusion would be most appropriate?
- The subject's market rent is $1,800
- The subject's market rent falls in the range of $1,800–$2,100 and must be adjusted to subject features (Correct answer)
- All three rents should be averaged to get $1,950
- Only the highest rent should be used
Correct answer: The subject's market rent falls in the range of $1,800–$2,100 and must be adjusted to subject features
The appraiser adjusts comparable rents for differences in features, location, and condition to bracket the subject's market rent.
Question 5: Which statement best describes the relationship between cap rates and property value?
- Higher cap rates indicate higher property values
- Lower cap rates indicate higher property values (Correct answer)
- Cap rates have no direct relationship to value
- Cap rates only apply to commercial properties
Correct answer: Lower cap rates indicate higher property values
Since Value = NOI ÷ Cap Rate, a lower cap rate results in a higher calculated value for the same NOI.
Question 6: Operating expense ratios (OER) for residential rental properties in the US typically range from:
- 5% to 15%
- 20% to 35%
- 40% to 60% (Correct answer)
- 65% to 80%
Correct answer: 40% to 60%
Residential rental properties in the US typically have operating expense ratios between 40% and 60% of effective gross income.
RAA RAA Income Approach & Valuation Methods 2
Which income approach method is most commonly applied to single-family residential properties by RAA appraisers?