Real Estate Investing Real Estate Valuation Methods 5

Question 1

A property's NOI is $90,000 and a buyer requires a 9% return on equity with a 70% LTV mortgage at a 7% mortgage constant. What overall cap rate does the band-of-investment method produce?

Accepted Answer

7.8%

Answer

Cap Rate = (0.70 × 7%) + (0.30 × 9%) = 4.9% + 2.7% = 7.6%; the closest answer using standard band-of-investment is 7.6% — option A is correct (select A).

Question 2

Which approach to value is MOST relied upon when appraising a special-purpose property like a church or school?

Accepted Answer

Cost approach

Answer

Special-purpose properties rarely sell, making comparables and income data scarce; the cost approach is typically primary.

Question 3

An investor calculates an internal rate of return (IRR) of 12% on a potential acquisition but requires a minimum 15% IRR. What should the investor do?

Accepted Answer

Negotiate a lower purchase price to increase the IRR

Answer

If the IRR falls below the required hurdle rate, the investor should seek a lower purchase price to improve returns or pass on the deal.

Question 4

Under USPAP (Uniform Standards of Professional Appraisal Practice), what is an 'extraordinary assumption'?

Accepted Answer

An assumption about an uncertain fact accepted as true for appraisal purposes

Answer

An extraordinary assumption is a specific assumption about an uncertain fact that, if found to be false, could alter the appraiser's opinions or conclusions.

Question 5

A property sells for $800,000 with seller financing at below-market rates. For comparable sales analysis, how should this sale be treated?

Accepted Answer

Adjusted for the financing concession before use as a comparable

Answer

Favorable seller financing inflates the sale price; an appraiser must adjust or verify the cash-equivalent price before using the sale as a comparable.

Real Estate Investing Practice Test

Real Estate Investing Practice Test

Real Estate Investing Real Estate Valuation Methods 5