Real Estate Sales Exam Financing and Valuation 5 — Questions and Answers
Question 1: Which of the following is an example of 'external obsolescence' that would decrease a property's value?
- A leaking roof that needs repair
- Only one bathroom in a four-bedroom house
- A new highway constructed adjacent to a residential neighborhood (Correct answer)
- Outdated kitchen appliances
Correct answer: A new highway constructed adjacent to a residential neighborhood
External obsolescence is caused by factors outside the property, such as nearby noise, traffic, or undesirable land uses.
Question 2: A 'due-on-sale' clause in a mortgage requires that:
- The seller pay all closing costs
- The full loan balance is due when the property is sold (Correct answer)
- The buyer must obtain the same interest rate
- The appraisal must be completed before listing
Correct answer: The full loan balance is due when the property is sold
A due-on-sale (alienation) clause prevents assumption of the existing loan without lender approval by requiring full repayment upon sale.
Question 3: Which of the following best defines 'market value' as used in real estate appraisal?
- The price the seller paid for the property originally
- The assessed value used for property tax purposes
- The most probable price a property would bring in a competitive, open market under fair conditions (Correct answer)
- The replacement cost of the improvements minus depreciation
Correct answer: The most probable price a property would bring in a competitive, open market under fair conditions
Market value is the most probable price a knowledgeable buyer would pay a knowledgeable seller in an arm's-length transaction.
Question 4: A buyer assumes the seller's existing mortgage. This means the buyer:
- Takes out a new loan to pay off the seller's mortgage
- Becomes personally liable for the existing mortgage debt (Correct answer)
- Is not responsible for the original loan balance
- Must obtain lender approval to transfer the title only
Correct answer: Becomes personally liable for the existing mortgage debt
When a buyer assumes a mortgage, they take over the seller's loan and become personally responsible for the debt.
Question 5: Discount points on a mortgage are used to:
- Increase the loan amount without raising the monthly payment
- Buy down the interest rate, reducing the borrower's monthly payment (Correct answer)
- Compensate the real estate agent at closing
- Cover the cost of the property appraisal
Correct answer: Buy down the interest rate, reducing the borrower's monthly payment
Each discount point equals 1% of the loan amount and prepays interest to lower the note rate.
Question 6: The principle of substitution in appraisal states that:
- A property's value is set by the government
- No buyer will pay more for a property than the cost of an equally desirable substitute (Correct answer)
- A property's value increases when surrounding values rise
- The highest and best use determines the land value
Correct answer: No buyer will pay more for a property than the cost of an equally desirable substitute
The substitution principle is the foundation of the sales comparison approach: buyers compare alternatives and won't overpay.
Question 7: A reverse mortgage is designed primarily for:
- First-time homebuyers with limited savings
- Homeowners aged 62 or older who want to access their equity (Correct answer)
- Investors purchasing rental property
- Borrowers with poor credit who cannot qualify for conventional loans
Correct answer: Homeowners aged 62 or older who want to access their equity
A reverse mortgage (HECM) allows homeowners 62+ to convert home equity into cash without monthly mortgage payments.
Real Estate Sales Exam Financing and Valuation 5
Which of the following is an example of 'external obsolescence' that would decrease a property's value?