Wisconsin Real Estate License Valuing and Financing Property 3 — Questions and Answers
Question 1: The cost approach is MOST appropriate for valuing which type of property?
- A newly built church or school (Correct answer)
- A 50-year-old rental duplex
- A typical resale home with many comparables
- Vacant land
Correct answer: A newly built church or school
The cost approach works best for special-purpose or new properties that lack comparable sales.
Question 2: In the cost approach, what is subtracted from the cost of improvements?
- Accrued depreciation (Correct answer)
- The land value
- Market interest
- Closing costs
Correct answer: Accrued depreciation
The cost approach subtracts accrued depreciation from reproduction/replacement cost, then adds land value.
Question 3: Loss in value from an outdated floor plan is an example of:
- Functional obsolescence (Correct answer)
- Physical deterioration
- External obsolescence
- Economic appreciation
Correct answer: Functional obsolescence
Functional obsolescence is a loss in value caused by outdated or poor design features within the property.
Question 4: Depreciation caused by factors outside the property boundaries is called:
- External obsolescence (Correct answer)
- Functional obsolescence
- Physical deterioration
- Curable depreciation
Correct answer: External obsolescence
External (economic) obsolescence results from negative influences outside the property, such as neighborhood decline.
Question 5: The income approach is primarily used to value:
- Income-producing rental properties (Correct answer)
- Single-family owner-occupied homes
- Raw undeveloped land
- New custom homes
Correct answer: Income-producing rental properties
The income approach values properties based on the income they generate, ideal for rentals and commercial buildings.
Question 6: In the income approach, capitalization rate is calculated by dividing net operating income by:
- Value (or sale price) (Correct answer)
- Gross income
- Annual expenses
- The loan amount
Correct answer: Value (or sale price)
Cap rate = Net Operating Income / Value; rearranged, Value = NOI / Cap Rate.
Question 7: A property has NOI of $20,000 and a cap rate of 10%. Its estimated value is:
- $200,000 (Correct answer)
- $20,000
- $100,000
- $2,000,000
Correct answer: $200,000
Value = NOI / Cap Rate = $20,000 / 0.10 = $200,000.
Wisconsin Real Estate License Valuing and Financing Property 3
The cost approach is MOST appropriate for valuing which type of property?