Real Estate Investing Property Valuation Techniques 5 — Questions and Answers
Question 1: What is the primary limitation of using the GRM as a valuation tool?
- It requires complex cash flow projections
- It ignores operating expenses, making it unreliable for expense-heavy properties (Correct answer)
- It can only be applied to commercial properties
- It overstates value in declining markets
Correct answer: It ignores operating expenses, making it unreliable for expense-heavy properties
GRM uses gross rent only, so two properties with identical rents but very different expense ratios will appear equally valued.
Question 2: A property's NOI increases by 5% while the cap rate remains unchanged. What happens to its value?
- Value decreases by 5%
- Value increases by 5% (Correct answer)
- Value remains the same
- Value increases by 10%
Correct answer: Value increases by 5%
Since Value = NOI ÷ Cap Rate, a 5% rise in NOI with a constant cap rate produces a direct 5% increase in value.
Question 3: What is 'price per square foot' most useful for in real estate valuation?
- Precise income capitalization of commercial buildings
- Quick benchmarking and comparison of similar properties within a market (Correct answer)
- Determining depreciation in the cost approach
- Setting asking rents for retail strip centers
Correct answer: Quick benchmarking and comparison of similar properties within a market
Price per square foot normalizes properties of different sizes to enable fast market comparisons, though it must be used alongside other metrics.
Question 4: When appraising a property for refinancing purposes, which value standard is typically required by lenders?
- Investment value
- Liquidation value
- Market value (Correct answer)
- Assessed value
Correct answer: Market value
Lenders require market value appraisals because they need to know what the collateral would sell for under normal market conditions.
Question 5: What does a 'sensitivity analysis' in property valuation reveal?
- The property's resistance to physical deterioration
- How changes in key assumptions (rent, cap rate, vacancy) affect estimated value or returns (Correct answer)
- The lender's cushion against borrower default
- The tax impact of depreciation recapture on sale
Correct answer: How changes in key assumptions (rent, cap rate, vacancy) affect estimated value or returns
Sensitivity analysis stress-tests a valuation model by varying inputs to show how much the output changes with each assumption.
Question 6: In highest and best use analysis, which test must a use satisfy LAST?
- Physically possible
- Legally permissible
- Financially feasible
- Maximally productive (Correct answer)
Correct answer: Maximally productive
Highest and best use follows the sequence: physically possible → legally permissible → financially feasible → maximally productive.
Question 7: Which appraisal approach is generally given the most weight when valuing an owner-occupied single-family home?
- Income approach
- Cost approach
- Sales comparison approach (Correct answer)
- Gross rent multiplier method
Correct answer: Sales comparison approach
Owner-occupied homes are bought and sold based on comparable sales, making the sales comparison approach most reflective of market behavior.
Real Estate Investing Property Valuation Techniques 5
What is the primary limitation of using the GRM as a valuation tool?