RES Valuation & Appraisal 2 — Questions and Answers
Question 1: External obsolescence (also called economic obsolescence) is best described as:
- Loss in value due to deferred maintenance on the subject property
- Loss in value due to outdated interior features within the property
- Loss in value caused by negative factors located outside the property boundaries (Correct answer)
- Loss in value resulting from structural defects in the foundation
Correct answer: Loss in value caused by negative factors located outside the property boundaries
External (economic) obsolescence is caused by factors outside the property boundaries, such as nearby nuisances, rezoning of surrounding land, or economic downturns, and is typically considered incurable.
Question 2: In the Income Approach, the capitalization rate (cap rate) is used to:
- Calculate the gross rent multiplier for a rental property
- Convert net operating income into an estimate of property value (Correct answer)
- Adjust comparable sales for differences from the subject property
- Estimate the physical depreciation of improvements over time
Correct answer: Convert net operating income into an estimate of property value
The capitalization rate converts the property's net operating income (NOI) into an estimate of market value using the formula: Value = NOI ÷ Cap Rate.
Question 3: The Income Approach to value is most appropriate for:
- Single-family residential properties in suburban neighborhoods
- Vacant land parcels awaiting residential development
- Investment or income-producing properties such as apartment buildings (Correct answer)
- Historic properties where reproduction cost is the primary concern
Correct answer: Investment or income-producing properties such as apartment buildings
The Income Approach is most applicable to income-producing properties like apartment complexes, office buildings, and shopping centers, where value is driven by the income stream.
Question 4: Reconciliation in the appraisal process refers to:
- Adjusting comparable sales for differences from the subject property
- The final step where the appraiser weighs value indications from each approach to reach a final opinion of value (Correct answer)
- Calculating the net operating income of an investment property
- Verifying the accuracy of the property's legal description in public records
Correct answer: The final step where the appraiser weighs value indications from each approach to reach a final opinion of value
Reconciliation is the final step in the appraisal process in which the appraiser analyzes and weighs the value indications from each approach applied to arrive at a final estimate of value.
Question 5: Market value in real estate appraisal is best described as:
- The price the current owner originally paid for the property
- The assessed value assigned by the county tax assessor
- The most probable price a property would bring in a competitive open market under arm's-length conditions (Correct answer)
- The insured replacement value listed on the homeowner's insurance policy
Correct answer: The most probable price a property would bring in a competitive open market under arm's-length conditions
Market value is the most probable price a property would sell for in an arm's-length transaction between a knowledgeable, willing buyer and seller, neither under duress.
Question 6: The Gross Rent Multiplier (GRM) is calculated by:
- Dividing the property's net operating income by the capitalization rate
- Dividing the sale price of a comparable property by its gross monthly rental income (Correct answer)
- Multiplying the monthly rent by 12 to convert it to annual income
- Dividing annual net income by the total property value
Correct answer: Dividing the sale price of a comparable property by its gross monthly rental income
The GRM is calculated by dividing a comparable property's sale price by its gross monthly (or annual) rent; this multiplier is then applied to the subject property's rent to estimate its value.
Question 7: An appraisal is formally defined as:
- A real estate agent's informal estimate of a property's recommended listing price
- The assessed value determined by the local tax authority for property tax purposes
- An unbiased written estimate of a property's market value prepared by a licensed appraiser (Correct answer)
- A bank's internal calculation of the maximum loan amount for a given property
Correct answer: An unbiased written estimate of a property's market value prepared by a licensed appraiser
An appraisal is a professional, unbiased written estimate of a property's market value prepared by a licensed or certified appraiser using recognized valuation methods.
RES Valuation & Appraisal 2
External obsolescence (also called economic obsolescence) is best described as: