REA Property Valuation & Appraisal Methods 2 — Questions and Answers
Question 1: Which depreciation type results from factors outside the property itself, such as a nearby industrial plant?
- Physical deterioration
- Functional obsolescence
- External obsolescence (Correct answer)
- Deferred maintenance
Correct answer: External obsolescence
External obsolescence arises from conditions outside the property's boundaries, like neighborhood decline or proximity to nuisances.
Question 2: In the income capitalization approach, what does a lower capitalization rate indicate about property value?
- Lower property value
- Higher property value (Correct answer)
- No change in property value
- Higher vacancy rates
Correct answer: Higher property value
A lower cap rate applied to the same NOI produces a higher value, reflecting investor willingness to accept lower returns for less risk.
Question 3: The 'effective age' of a building differs from its actual age because it reflects:
- The year of original construction
- The building's condition relative to typical buildings of similar age (Correct answer)
- The remaining economic life only
- The date of the most recent sale
Correct answer: The building's condition relative to typical buildings of similar age
Effective age reflects the building's condition and utility compared to similar structures, which may be less or more than its chronological age.
Question 4: Which approach to value is most commonly relied upon for the appraisal of special-purpose properties like churches or schools?
- Sales comparison approach
- Income capitalization approach
- Cost approach (Correct answer)
- Gross rent multiplier method
Correct answer: Cost approach
Special-purpose properties rarely sell or generate measurable income, so the cost approach is typically most applicable.
Question 5: What is 'functional obsolescence' in the context of real estate appraisal?
- Depreciation caused by poor maintenance
- Loss in value due to outdated design or features within the property (Correct answer)
- Decline in value from external neighborhood factors
- Increase in value from modernized systems
Correct answer: Loss in value due to outdated design or features within the property
Functional obsolescence is a loss in value caused by outmoded features, poor design, or inadequate utilities within the property itself.
Question 6: In the sales comparison approach, a 'negative adjustment' to a comparable sale means:
- The comparable is inferior to the subject and its price is adjusted upward
- The comparable is superior to the subject and its price is adjusted downward (Correct answer)
- The subject property's value is reduced
- The comparable sale was distressed
Correct answer: The comparable is superior to the subject and its price is adjusted downward
When the comparable has a feature superior to the subject, a negative adjustment lowers the comparable's price to reflect the subject's lesser value.
Question 7: Which term describes the total potential rental income if a property were 100% occupied at market rates?
- Effective Gross Income (EGI)
- Net Operating Income (NOI)
- Potential Gross Income (PGI) (Correct answer)
- Cash Flow Before Taxes
Correct answer: Potential Gross Income (PGI)
Potential Gross Income is the maximum income achievable assuming full occupancy at prevailing market rents.
REA Property Valuation & Appraisal Methods 2
Which depreciation type results from factors outside the property itself, such as a nearby industrial plant?