RPA Property Valuation Principles & Methods 3 — Questions and Answers
Question 1: A parking lot in a central business district generates $120,000 NOI annually. If the market-derived capitalization rate for similar properties is 8%, what is the indicated value?
- $960,000
- $1,200,000
- $1,500,000 (Correct answer)
- $1,050,000
Correct answer: $1,500,000
$120,000 ÷ 0.08 = $1,500,000 using the direct capitalization formula.
Question 2: The effective gross income (EGI) of an income property is calculated by:
- Subtracting operating expenses from potential gross income
- Adding vacancy loss to potential gross income
- Subtracting vacancy and collection loss from potential gross income (Correct answer)
- Dividing net operating income by the cap rate
Correct answer: Subtracting vacancy and collection loss from potential gross income
EGI = Potential Gross Income − Vacancy and Collection Loss, representing the income actually expected to be collected.
Question 3: Which of the following best describes the 'effective age' of a building?
- The number of years since the building was constructed
- The age indicated by the building's condition and utility relative to new construction (Correct answer)
- The remaining years of economic productivity
- The building's age as recorded in public records
Correct answer: The age indicated by the building's condition and utility relative to new construction
Effective age reflects how old a building appears based on its condition and maintenance, which may differ significantly from its actual (chronological) age.
Question 4: Under USPAP, an appraiser performing a market value appraisal must assume which type of motivation for both buyer and seller?
- Motivated seller and any buyer
- Typical (arm's-length) motivations with neither under duress (Correct answer)
- Buyer motivated by investment only
- Seller motivated by relocation only
Correct answer: Typical (arm's-length) motivations with neither under duress
Market value by definition assumes both buyer and seller are typically motivated and acting in their own best interests in an arm's-length transaction.
Question 5: The gross rent multiplier (GRM) is most appropriately used when appraising:
- Large commercial office buildings
- Single-family residential rentals and small income properties (Correct answer)
- Vacant land parcels
- Special-purpose industrial facilities
Correct answer: Single-family residential rentals and small income properties
GRM is a simplified income measure (sales price ÷ gross rent) best suited to residential and small income properties where detailed expense data may be unavailable.
Question 6: When a neighborhood is experiencing rapid new development and property values are rising sharply, an appraiser would identify this as which stage of the neighborhood life cycle?
- Decline
- Revitalization
- Growth (Correct answer)
- Stability
Correct answer: Growth
The growth phase is characterized by new construction, increasing demand, and rising property values as a neighborhood develops.
Question 7: In the cost approach, 'replacement cost' differs from 'reproduction cost' in that replacement cost uses:
- Identical materials and construction methods
- Current materials and standards to provide equivalent utility (Correct answer)
- Historical construction costs adjusted for inflation
- The depreciated value of existing improvements
Correct answer: Current materials and standards to provide equivalent utility
Replacement cost estimates the cost to construct an improvement with equivalent utility using current materials, design standards, and techniques, not identical ones.
RPA Property Valuation Principles & Methods 3
A parking lot in a central business district generates $120,000 NOI annually.
If the market-derived capitalization rate for similar properties is 8%, what is the indicated value?