Real Estate Valuation & Appraisal 1 — Questions and Answers
Question 1: The three standard approaches to value used by appraisers are:
- Sales, income, and replacement
- Sales comparison, cost, and income (Correct answer)
- Market, assessed, and insured
- Replacement, GRM, and tax
Correct answer: Sales comparison, cost, and income
Appraisers use the sales comparison approach, cost approach, and income approach, weighting each based on the property type and available data.
Question 2: The sales comparison approach estimates value primarily by:
- Calculating replacement cost minus depreciation
- Capitalizing net operating income
- Comparing the subject property to recently sold similar properties (Correct answer)
- Using the assessed tax value
Correct answer: Comparing the subject property to recently sold similar properties
The sales comparison approach adjusts the sale prices of comparable properties for differences to arrive at an indicated value for the subject property.
Question 3: Market value is defined as the most probable price a property would sell for:
- Under distressed conditions
- In an arm's-length transaction between informed and willing parties (Correct answer)
- To a related party
- After major renovation
Correct answer: In an arm's-length transaction between informed and willing parties
Market value assumes an arm's-length transaction with a willing buyer and seller, adequate time on the market, and no undue pressure on either party.
Question 4: In the sales comparison approach, if a comparable sold for more than the subject because it has a pool, the appraiser would make a:
- Positive adjustment to the comparable
- Negative adjustment to the comparable (Correct answer)
- Positive adjustment to the subject
- No adjustment
Correct answer: Negative adjustment to the comparable
When the comparable is superior to the subject (has a feature the subject lacks), a downward (negative) adjustment is made to the comparable's sale price.
Question 5: The principle of substitution states that a buyer will pay no more for a property than the cost of:
- Remodeling the existing property
- An equally desirable substitute property (Correct answer)
- The assessed tax value
- The property's replacement cost only
Correct answer: An equally desirable substitute property
The principle of substitution holds that value is set by the price of acquiring an equally desirable alternative, forming the basis of the sales comparison approach.
Question 6: Which type of depreciation in real estate refers to a loss in value from external factors outside the property?
- Physical deterioration
- Functional obsolescence
- Economic (external) obsolescence (Correct answer)
- Structural depreciation
Correct answer: Economic (external) obsolescence
Economic obsolescence (external obsolescence) results from factors outside the property such as a nearby factory, declining neighborhood, or zoning changes.
Real Estate Valuation & Appraisal 1
The three standard approaches to value used by appraisers are: