RPA Property Valuation Principles & Methods 5 â Questions and Answers
Question 1: The discounted cash flow (DCF) method differs from direct capitalization primarily because DCF:
- Uses a single stabilized income year to estimate value
- Requires a gross rent multiplier
- Analyzes variable income and expenses over a projection period and discounts them to present value (Correct answer)
- Ignores the reversion (resale) value at the end of the holding period
Correct answer: Analyzes variable income and expenses over a projection period and discounts them to present value
DCF models projected income and expenses year-by-year over a holding period and discounts all cash flowsâincluding the reversionâback to present value using a yield rate.
Question 2: Which of the following land valuation techniques is most appropriate when comparable land sales are unavailable but the property produces income?
- Allocation method
- Land residual technique (Correct answer)
- Extraction method
- Sales comparison approach
Correct answer: Land residual technique
The land residual technique isolates income attributable to land by subtracting income attributable to improvements from total NOI, then capitalizing the residualâuseful when direct land sales are lacking.
Question 3: An appraiser uses the sales comparison approach and brackets the subject with comparables that are both superior and inferior. The primary purpose of bracketing is to:
- Minimize the number of comparables needed
- Demonstrate that the value conclusion falls within a supportable range (Correct answer)
- Avoid making adjustments
- Satisfy USPAP's requirement for three comparable sales
Correct answer: Demonstrate that the value conclusion falls within a supportable range
Bracketing ensures the subject's value is supported by comparables on both sides of the adjustment spectrum, strengthening the credibility of the final value conclusion.
Question 4: In the cost approach, what is the formula for estimating the value of improved property?
- Land Value + Reproduction Cost New â Accrued Depreciation (Correct answer)
- Reproduction Cost New + Accrued Depreciation + Land Value
- Net Operating Income Ă· Cap Rate + Land Value
- Adjusted Sale Price of Comparables + Land Value
Correct answer: Land Value + Reproduction Cost New â Accrued Depreciation
Cost Approach Value = Land Value + Reproduction (or Replacement) Cost New of Improvements â Accrued Depreciation.
Question 5: The principle of conformity suggests that property values are maximized when:
- A property is the most expensive in its neighborhood
- Land uses and improvements are compatible and reasonably homogeneous (Correct answer)
- A property has the most unique design features
- Improvements exceed typical neighborhood standards
Correct answer: Land uses and improvements are compatible and reasonably homogeneous
The principle of conformity holds that reasonable homogeneity in land use supports and stabilizes property values within a neighborhood.
Question 6: Which appraisal approach is generally considered most reliable when appraising a newly constructed special-purpose facility such as a fire station?
- Sales comparison approach
- Income approach
- Cost approach (Correct answer)
- Gross rent multiplier method
Correct answer: Cost approach
Special-purpose properties rarely sell or generate market rents, so the cost approachâestimating land value plus depreciated cost of improvementsâis typically the most reliable method.
Question 7: An appraiser notes that a comparable sale included personal property (appliances and furniture) valued at $8,000. How should this be handled?
- Ignore it because personal property is typically minor
- Add $8,000 to the comparable's sale price
- Subtract $8,000 from the comparable's sale price to isolate real property value (Correct answer)
- Report it as a negative adjustment to the subject
Correct answer: Subtract $8,000 from the comparable's sale price to isolate real property value
Since real property appraisals exclude personal property, the appraiser must subtract the personal property value from the sale price to reflect the real property component only.
RPA Property Valuation Principles & Methods 5
The discounted cash flow (DCF) method differs from direct capitalization primarily because DCF: