Real Estate Investing Real Estate Valuation Methods 4 β Questions and Answers
Question 1: An investor projects an apartment complex will be sold in year 5 for $1,800,000. If the required discount rate is 10%, what is the present value of that reversion?
- $900,000
- $1,117,529 (Correct answer)
- $1,327,900
- $1,636,364
Correct answer: $1,117,529
PV = $1,800,000 Γ· (1.10)^5 = $1,800,000 Γ· 1.61051 β $1,117,529.
Question 2: Which method does an appraiser use to estimate land value when improved comparable sales are unavailable?
- Sales comparison using improved comps
- Allocation method using land-to-value ratios
- Income capitalization of land rent
- Both B and C are common land valuation techniques (Correct answer)
Correct answer: Both B and C are common land valuation techniques
When vacant land sales are scarce, appraisers use allocation (ratio of land to total value from comps) or land residual/ground rent capitalization techniques.
Question 3: A retail strip mall has potential gross income of $300,000, vacancy/credit loss of $30,000, and other income of $10,000. What is the Effective Gross Income (EGI)?
- $260,000
- $270,000
- $280,000 (Correct answer)
- $300,000
Correct answer: $280,000
EGI = Potential Gross Income ($300,000) β Vacancy ($30,000) + Other Income ($10,000) = $280,000.
Question 4: In the band-of-investment method for deriving a cap rate, which two components are weighted?
- Equity dividend rate and mortgage constant (Correct answer)
- Cap rate and discount rate
- NOI and EGI
- Land value ratio and building value ratio
Correct answer: Equity dividend rate and mortgage constant
The band-of-investment technique weights the mortgage constant (debt component) and the equity dividend rate by their respective shares of the total property value.
Question 5: A property recently appraised using the income approach at $500,000 and the sales comparison approach at $520,000. The appraiser weights the income approach at 70% and sales comparison at 30%. What is the reconciled value?
- $506,000 (Correct answer)
- $510,000
- $512,000
- $514,000
Correct answer: $506,000
Reconciled Value = ($500,000 Γ 0.70) + ($520,000 Γ 0.30) = $350,000 + $156,000 = $506,000.
Question 6: What distinguishes an 'as-is' value from an 'as-stabilized' value in income property appraisal?
- As-is ignores physical condition; as-stabilized includes it
- As-is reflects current occupancy; as-stabilized assumes market-rate occupancy at stabilization (Correct answer)
- As-is uses the cost approach; as-stabilized uses the income approach
- There is no meaningful distinction between the two
Correct answer: As-is reflects current occupancy; as-stabilized assumes market-rate occupancy at stabilization
As-is value reflects current conditions including lease-up discounts, while as-stabilized value assumes the property reaches normal market occupancy.
Question 7: Which statement about automated valuation models (AVMs) is most accurate?
- AVMs are legally recognized substitutes for USPAP-compliant appraisals in all lending
- AVMs use statistical algorithms and public data but lack physical property inspections (Correct answer)
- AVMs are more accurate than human appraisals in every market condition
- AVMs cannot be used by mortgage lenders under any circumstances
Correct answer: AVMs use statistical algorithms and public data but lack physical property inspections
AVMs rely on statistical modeling and public records but cannot inspect physical condition, making them supplements rather than replacements for full appraisals.
Real Estate Investing Real Estate Valuation Methods 4
An investor projects an apartment complex will be sold in year 5 for $1,800,000.
If the required discount rate is 10%, what is the present value of that reversion?