Real Estate Sales Exam Property Valuation and Appraisal 3 — Questions and Answers
Question 1: What is the primary purpose of a Comparative Market Analysis (CMA) performed by a real estate agent?
- To establish a legally binding appraised value
- To estimate a listing price or offer price based on recent sales (Correct answer)
- To replace a licensed appraisal for mortgage lending
- To determine assessed value for property tax purposes
Correct answer: To estimate a listing price or offer price based on recent sales
A CMA helps agents and clients estimate a competitive market price using recent comparable sales, but it is not a licensed appraisal and cannot be used for mortgage lending.
Question 2: The principle of substitution in appraisal states that:
- A property's value is created by its income potential
- No buyer will pay more for a property than the cost of an equally desirable substitute (Correct answer)
- Value is influenced by the anticipated future benefits of ownership
- The greatest value is achieved when land use is at its highest and best use
Correct answer: No buyer will pay more for a property than the cost of an equally desirable substitute
The principle of substitution holds that a rational buyer will not pay more for a property than the cost to acquire a comparable substitute, forming the foundation of the sales comparison approach.
Question 3: Which of the following best describes 'effective age' in property appraisal?
- The actual number of years since the building was constructed
- The age indicated by the property's condition and utility relative to similar properties (Correct answer)
- The remaining economic life of the improvement
- The age used by the county assessor for tax calculations
Correct answer: The age indicated by the property's condition and utility relative to similar properties
Effective age reflects the building's condition and functionality rather than its chronological age — a well-maintained older home may have a lower effective age than its actual age.
Question 4: When using the sales comparison approach, an appraiser should give the most weight to comparables that:
- Sold the longest time ago to capture market trends
- Are most similar to the subject in size, location, and condition (Correct answer)
- Have the highest sales prices to support a higher value
- Were bank-owned or distressed sales for conservative estimates
Correct answer: Are most similar to the subject in size, location, and condition
The best comparables require the fewest and smallest adjustments, meaning they closely match the subject property in key characteristics.
Question 5: A building has a replacement cost of $300,000 and accrued depreciation of $60,000. The land value is $80,000. What is the indicated value using the cost approach?
- $240,000
- $320,000 (Correct answer)
- $360,000
- $380,000
Correct answer: $320,000
Cost approach value = (Replacement cost − Depreciation) + Land = ($300,000 − $60,000) + $80,000 = $320,000.
Question 6: What does a capitalization rate (cap rate) indicate?
- The ratio of gross rent to property value
- The expected rate of return on an income-producing property (Correct answer)
- The percentage of a loan amount charged as interest
- The ratio of operating expenses to gross income
Correct answer: The expected rate of return on an income-producing property
The cap rate is the ratio of a property's NOI to its value, representing the expected annual rate of return if the property were purchased with all cash.
Question 7: Which appraisal principle holds that adding more of a factor of production will eventually yield smaller increases in value?
- Principle of contribution
- Principle of increasing and decreasing returns (Correct answer)
- Principle of conformity
- Principle of anticipation
Correct answer: Principle of increasing and decreasing returns
The principle of increasing and decreasing returns (diminishing returns) states that beyond a certain point, adding improvements generates smaller and smaller increments of value.
Real Estate Sales Exam Property Valuation and Appraisal 3
What is the primary purpose of a Comparative Market Analysis (CMA) performed by a real estate agent?