Real Estate Investing Property Valuation Techniques 4

Question 1

What is 'functional obsolescence' in real estate valuation?

Accepted Answer

Value loss from outdated design, layout, or features within the property

Answer

Functional obsolescence is caused by flaws or outdated features within the property itself, such as a poor floor plan or outdated kitchen.

Question 2

An investor uses a 10% discount rate to evaluate a property. If the required rate rises to 12%, how does the present value of future cash flows change?

Accepted Answer

It decreases

Answer

A higher discount rate reduces the present value of future cash flows because future dollars are worth less in today's terms.

Question 3

In the cost approach, what does 'reproduction cost' mean?

Accepted Answer

The cost to rebuild the exact same structure with identical materials and methods

Answer

Reproduction cost is the cost to construct an exact replica using the same materials, design, and quality as the original structure.

Question 4

What does a cap rate compression indicate about market conditions?

Accepted Answer

Investor demand is strong, driving prices up relative to income

Answer

Cap rate compression (falling cap rates) signals strong buyer demand, which pushes prices up faster than income, reducing yield.

Question 5

Which type of comparable sale adjustment is NOT typically applied in the sales comparison approach?

Accepted Answer

Appraiser's personal preference adjustment

Answer

Adjustments must be market-derived and objective; personal preference has no role in a credible appraisal.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

Real Estate Investing Property Valuation Techniques 4