REA Property Valuation & Appraisal Methods 3 — Questions and Answers
Question 1: The 'band of investment' technique is used in appraisal to determine the:
- Overall capitalization rate based on debt and equity components (Correct answer)
- Gross rent multiplier for multi-family properties
- Replacement cost of improvements
- Market value of vacant land
Correct answer: Overall capitalization rate based on debt and equity components
The band of investment method derives a cap rate by weighting mortgage and equity return requirements by their respective proportions of total investment.
Question 2: When appraising a property using the discounted cash flow (DCF) method, the 'terminal value' represents:
- The original purchase price of the property
- The estimated sale proceeds at the end of the holding period (Correct answer)
- The total depreciation taken over the holding period
- The sum of all annual cash flows
Correct answer: The estimated sale proceeds at the end of the holding period
Terminal (reversion) value is the projected net proceeds from selling the property at the conclusion of the investment horizon.
Question 3: Which appraisal principle states that value is created and sustained when property use is consistent with surrounding land uses?
- Principle of substitution
- Principle of conformity (Correct answer)
- Principle of contribution
- Principle of progression
Correct answer: Principle of conformity
The principle of conformity holds that maximum value is achieved when a property's use is in harmony with the uses of neighboring properties.
Question 4: What is the purpose of a 'reconciliation' step in the appraisal process?
- To average the three approach values mathematically
- To select and weight the most reliable value indicators into a final value estimate (Correct answer)
- To recalculate the cost approach using updated figures
- To verify the property's legal description
Correct answer: To select and weight the most reliable value indicators into a final value estimate
Reconciliation involves weighing the reliability and applicability of each approach to arrive at a credible final value opinion.
Question 5: In income property analysis, 'vacancy and collection loss' is typically subtracted from:
- Net Operating Income
- Effective Gross Income
- Potential Gross Income (Correct answer)
- Cash Flow After Taxes
Correct answer: Potential Gross Income
Vacancy and collection loss is deducted from Potential Gross Income to arrive at Effective Gross Income.
Question 6: The principle of 'regression' in real estate valuation suggests that:
- A superior property in an inferior neighborhood may suffer value loss (Correct answer)
- An inferior property benefits from surrounding superior properties
- Property values always decline over time
- Improvements always add more value than their cost
Correct answer: A superior property in an inferior neighborhood may suffer value loss
Regression holds that a higher-value property surrounded by lower-value properties tends to be pulled down toward the inferior values.
Question 7: Which extraction method estimates land value by subtracting the depreciated cost of improvements from the total sale price of a comparable property?
- Allocation method
- Land residual technique
- Abstraction (extraction) method (Correct answer)
- Ground rent capitalization
Correct answer: Abstraction (extraction) method
The abstraction method derives land value by removing the contributory value of improvements from a comparable improved sale price.
REA Property Valuation & Appraisal Methods 3
The 'band of investment' technique is used in appraisal to determine the: