State Exam Prep 3

Front 1

Which of the following statement regarding capitalization rates is least correct?

a. Lowering the cap rate increases the value of the property.

b. Increasing the cap rate lowers the value of the property.

c. Increasing the risk of loss increases the cap rate.

d. Decreasing the risk of loss increases the cap rate.

Back 1

d. Decreasing the risk of loss increases the cap rate.

(The capitalization rate (cap rate) is the annual rate of return produced by the operations of an income property. The cap rate is calculated by dividing the net operating income (NOI) by the price asked or offered for income property. Thus, the value moves in the opposite direction of the rate, and a higher risk is rewarded by a higher return.)

Front 2

Loss of value of an expensive home due to the close proximity of lower-priced homes in a neighborhood is known as:

a. regression.

b. progression.

c. functional obsolescence.

d. physical depreciation.

Back 2

a. regression.

(Regression is the loss of value of nicer homes due to lower-value neighboring properties, progression is the increase in value of lesser homes due to higher-value neighboring properties. Both are elements of the principle of conformity.)

Front 3

An apartment building produces a monthly rent of $16,000. A similar property with monthly rents of $21,000 recently sold for $2,940,000. Using this as the only data, the appraiser would say that the first apartment building is worth:

a. 2940000

b. 2240000

c. 2936000

d. 2475000

Back 3

b. 2240000

(When an appraiser is appraising income-producing property, they use the income approach to determine its value. This is accomplished by dividing the value by the rent, yielding the gross rent multiplier (GRM). Then, using the rent of the subject property, the appraiser can determine the value of the subject property. $2,940,000 ÷ $21,000 = 140 140 x $16,000 = $2,240,000)

Front 4

Demand has no effect on value unless there is also:

a. a need for the thing in demand.

b. an adequate supply of the thing in demand.

c. a scarcity of the thing in demand.

d. purchasing power which enables the ability to buy the thing in demand.

Back 4

d. purchasing power which enables the ability to buy the thing in demand.

(You are correct.Demand requires the ability to pay, called purchasing power.)

Front 5

The vacancy rate of an apartment building under normal competitive conditions is primarily the result of:

a. employment fluctuations.

b. housing supply and demand in the area.

c. the cost of construction and the cost of money.

d. taxes and insurance.

Back 5

b. housing supply and demand in the area.

(The vacancy level and rental income will fluctuate as supply increases or demand grows or shrinks.)

Front 6

The period for which a property can show a return attributable to the improvements is known as the property's:

a. economic life.

b. chronological life.

c. effective age.

d. depreciation life.

Back 6

a. economic life.

(Economic life is that length of time during which the building remains viable and generates a return on investment.)

Front 7

A property is valued at $300,000 with a 5% capitalization rate (cap rate). If the prospective buyer wants an 8% return on their money, the property's value would be:

a. 187500

b. 270000

c. 480000

d. 420000

Back 7

a. 187500

(As explained in Question 1, the value will move in the opposite direction as the capitalization rate (cap rate). $300,000 x .05 = $15,000 (net income) $15,000 ÷ .08 = $187,500)

Front 8

The elements of value do not include:

a. cost and age.

b. utility and demand.

c. scarcity and transferability.

d. demand and scarcity.

Back 8

a. cost and age.

(The elements of value are Demand, Utility, Scarcity and Transferability (DUST). Therefore, the correct answer, that which is not included as an element of value, is A.)

Front 9

Each unit in a duplex rents for $1,000 per month. With a price of $240,000, the monthly gross multiplier is:

a. 10

b. 120

c. 240

d. 20

Back 9

b. 120

(As shown in Question 3, $240,000 (value) / $2,000 (rent) = 120. Note the property is a duplex, requiring the given rent amount to be doubled to solve for the gross multiplier.)

Front 10

In using the market comparison approach in appraising a single family residence (SFR), comparisons should be made based on:

a. gross multipliers.

b. the total cubic footage of the property.

c. the location of the property.

d. the entire property.

Back 10

d. the entire property.

(Comparisons need to consider all elements of a property and its neighborhood. Therefore, answer selection C is not the best answer, and answer select B is not a measurement that is considered in residential real estate.)

Front 11

The relationship between the thing desired and the potential purchaser could be described as:

a. value.

b. the present worth amortized.

c. depreciation.

d. cost.

Back 11

a. value.

(Value is the relationship. Cost is simply the price.)

Front 12

Which of the following statements does not define value?

a. A relationship between demand for something and the supply of that same product.

b. The ability of one commodity to command other commodities in exchange.

c. The price an unreasonable, pressured buyer would offer for a property.

d. The present worth of future benefits.

Back 12

c. The price an unreasonable, pressured buyer would offer for a property.

(The price a reasonable, unpressured buyer would agree to for property on the open market refers to fair market value (FMV).)

Front 13

All of these are good reasons for making a separate site valuation, except:

a. to apply a residual technique.

b. to determine building obsolescence.

c. for taxation purposes.

d. to apply the gross rent multiplier (GRM) technique.

Back 13

d. to apply the gross rent multiplier (GRM) technique.

(Answer choice D is the exception. The other choices might be appropriate reasons for a separation of site and improvements, whereas the gross rent multiplier (GRM) approach requires nothing other than calculating the rent multiplied by a multiplier to arrive at a value.)

Front 14

The most common appraisal approach used by an appraiser in the appraisal of a single family residence (SFR) is:

a. replacement cost.

b. reproduction cost.

c. market comparison.

d. capitalization.

Back 14

c. market comparison.

(Whenever possible, an appraiser prefers to compare properties.)

Front 15

The narrative form of an appraiser's report includes all the following except:

a. a description of the property.

b. the neighborhood amenities.

c. the appraiser's qualifications.

d. the financial terms of the sale.

Back 15

d. the financial terms of the sale.

(Financing is not part of the appraisal process. All the other answer selections are part of the narrative report.)

Front 16

An appraiser describes "replacement cost" as:

a. the original cost to build the structure.

b. the current cost to build a replica of the original structure.

c. the current cost to build a structure of similar utility using modern methods and materials.

d. the current cost to build a structure representing the highest and best use of the site.

Back 16

c. the current cost to build a structure of similar utility using modern methods and materials.

(Replacement cost is the cost to build a structure of a similar size and utility using modern methods and materials. Reproduction cost is creating something as similar as possible to the original. Both use current costs in the calculation.)

Front 17

Restoring a property to a satisfactory condition without changing the floor plan, form, or style of the building is known as:

a. reproduction.

b. replacement.

c. remodeling.

d. rehabilitation.

Back 17

d. rehabilitation.

(Rehabilitation suggests making necessary repairs without changing any other elements of the property. Remodeling would change things to current style and preference.)

Front 18

To arrive at a final estimate of value secured under each of the three appraisal approaches, an appraiser:

a. averages the estimates.

b. uses the lowest value.

c. uses the highest value.

d. explains why or why not the other approaches were not used, then chooses the approach the appraiser believes to be the most appropriate.

Back 18

d. explains why or why not the other approaches were not used, then chooses the approach the appraiser believes to be the most appropriate.

(Note how long this answer selection is. Such an extreme length disproportionate to the other answer selections indicates this is likely the correct answer. Appraisers never average numbers between appraisal methods to arrive at a conclusion.)

Front 19

When an appraiser relies on the principle of substitution, they assume that one property may be substituted for another in terms of all of the below, except:

a. income.

b. nostalgic significance.

c. structural design.

d. use.

Back 19

b. nostalgic significance.

(Substitution applies to income, structural design and use. Nostalgic significance is unique to a property or individual and is not considered in the principle of substitution.)

Front 20

The premise that no prudent person would pay more for a parcel of real property than the price of a reasonably close alternative which is available without undue delay refers to the principle of:

a. balance.

b. contribution.

c. substitution.

d. anticipation.

Back 20

c. substitution.

(Substitution applies.)

Front 21

Which of the following is not an example of functional obsolescence:

a. a swimming pool in cold climate.

b. proximity of obnoxious nuisances.

c. an old kitchen.

d. a one car garage.

Back 21

b. proximity of obnoxious nuisances.

(Functional obsolescence applies to aspects within the property. External conditions may represent an economic obsolescence.)

Front 22

Which of these most nearly refers to a loss in value due to economic obsolescence:

a. an architectural design which is out of style.

b. a zoning change.

c. improper maintenance of the property.

d. an increased demand for more luxurious units.

Back 22

b. a zoning change.

(When demand for a property type changes, it can cause a diminished value for existing buildings. Answer selection B. a zoning change is the best answer since it suggests a need for an entirely different property use.)

Front 23

Which of these factors does not contribute to obsolescence?

a. Misplaced improvements.

b. Out-of-date equipment.

c. Changes in traffic patterns.

d. Worn out carpeting.

Back 23

d. Worn out carpeting.

(Worn out carpeting is an example of physical deterioration, not an obsolescence.)

Front 24

Which of the following appraisal reports is the most detailed?

a. Summary report.

b. Restricted use report.

c. Narrative report.

d. Oral report.

Back 24

c. Narrative report.

(Among the written reports, a narrative report is the most detailed and the restricted use is the least.)

Front 25

The ultimate test to determine the functional utility of a property is the:

a. property's maintenance costs.

b. property's marketability.

c. building codes controlling the property's use.

d. zoning laws where the property is located.

Back 25

b. property's marketability.

(Marketability is the ultimate test.)

Front 26

Which of the following does a property owner not show as an expense?

a. management fees.

b. depreciation.

c. utilities.

d. property taxes.

Back 26

b. depreciation.

(Only depreciation is a non-cash factor.)

Front 27

In using the capitalization process, which of the following cannot be deducted to determine the net income?

a. Electricity.

b. Maintenance expense.

c. Management.

d. Debt service.

Back 27

d. Debt service.

(Just as finance is not a consideration in appraisal (see Question 15), the debt service would also not apply.)

Front 28

The gross rent multiplier (GRM) is calculated by dividing:

a. gross monthly rents by market value.

b. gross monthly rents by selling price.

c. net monthly rents by market value.

d. sales price by gross monthly rents.

Back 28

d. sales price by gross monthly rents.

(Review Questions 3 and 9 for example calculations for determining the gross rent multiplier (GRM).)

Front 29

To calculate a capitalization rate (cap rate), the appraiser uses which of the following methods:

a. market comparison.

b. band of investment.

c. summation.

d. Any of the above.

Back 29

d. Any of the above.

(Any of these can be applied.)

Front 30

An analysis of rental income does not determine the income's:

a. durability.

b. quantity.

c. quality.

d. suitability for reinvestment.

Back 30

d. suitability for reinvestment.

(As applied to rental income, durability = longevity; quantity = amount of rent; quality = assurance of payment.)

Front 31

John is considering an extensive modernization program for an older apartment building he owns. His decision should give most emphasis to:

a. actual cost.

b. history of vacancy.

c. potential increase in rents.

d. effect on the net income.

Back 31

d. effect on the net income.

(Net income is the key. Increased rents may generate even higher costs.)

Front 32

The term "highest and best use" can best be defined as:

a. the use that produces the biggest building.

b. the use that produces the highest building.

c. the use that produces the greatest gross income.

d. the use that creates the greatest net return.

Back 32

d. the use that creates the greatest net return.

(Once again, net results are the most relevant. The maximum productivity that generates the greatest net return is the highest and best use.)

Front 33

An appraiser uses a site analysis to determine the:

a. highest and best use of a property.

b. appropriate zoning designation for a property.

c. type of soil under an improved property.

d. comparable values of similar properties.

Back 33

a. highest and best use of a property.

(The purpose of a site analysis is to determine the highest and best use of a property.)

Front 34

Which of the following is not a force that influences value?

a. Economic.

b. Social.

c. Demand.

d. Physical.

Back 34

c. Demand.

(The forces are: Physical, Economic, Government, and Social (PEGS). Demand is one of the elements of value, not an influence on value.)

Front 35

Which of the following is ethical for an appraiser to do?

a. Establish a minimum value prior to accepting the assignment.

b. Use other than accepted methodology in an appraisal assignment.

c. Base the appraisal fee as a percentage of property value.

d. Appraise a property in which the appraiser has an interest, provided they first disclose their interest in the property.

Back 35

d. Appraise a property in which the appraiser has an interest, provided they first disclose their interest in the property.

(Disclosure is what makes this answer ethical. Note that none of the other choices are acceptable.)

Front 36

All of the following are essential elements of value, except:

a. anticipation.

b. demand.

c. scarcity.

d. utility.

Back 36

a. anticipation.

(Anticipation is a principle. The elements of value are listed in Question 8. Notice it is not unusual to recognize answers for questions embedded in other questions and answer selections.)

Front 37

When comparing the economic life and the physical life of an improvement:

a. economic life is shorter.

b. economic life is the same as the physical life.

c. economic life is longer.

d. physical life is shorter.

Back 37

a. economic life is shorter.

(A building will become economically undesirable long before it is physically unusable.)

Front 38

An appraiser defines depreciation as:

a. economic obsolescence.

b. loss in value from any cause.

c. wear and tear of the improvements.

d. recapture that has been realized.

Back 38

b. loss in value from any cause.

(A loss in value is the best answer. Economic obsolescence happens off the property. Wear and tear is dealt with through proper maintenance.)

Front 39

To depreciate real estate, it needs to be:

a. free of debt.

b. encumbered.

c. improved.

d. 1,000 square feet or larger.

Back 39

c. improved.

(There must be an improvement to calculate depreciation. Raw land cannot depreciate in value.)

Front 40

Which of the following is a cost associated with home ownership:

a. amenity value.

b. loss in value as a result of adverse zoning.

c. loss of interest on owner's equity.

d. improvement appreciation.

Back 40

c. loss of interest on owner's equity.

(The owner's equity invested into a property cannot earn interest as it does when deposited in the bank.)

Front 41

Which of the following approaches to valuation yields the highest estimate of value?

a. market comparison.

b. reproduction.

c. substitution.

d. comparable sales.

Back 41

b. reproduction.

(Reproduction is a version of the cost approach. Generally, the cost approach produces the highest estimate of value of all the appraisal methods. The income approach generates the lowest estimate of value.)

Front 42

When appraising a special purpose property, an appraiser uses the:

a. cost approach.

b. capitalization method.

c. market data approach.

d. land residual approach.

Back 42

a. cost approach.

(A special purpose property will not have sufficient comparable sales to generate a valid analysis nor an income to produce an accurate value. Therefore, the cost approach is the only appropriate approach to determine value.)

Front 43

To calculate replacement cost, compute the cost to replace:

a. an equally desirable property with the same utility value.

b. the identical structure using the original materials.

c. the identical structure using modern materials.

d. the most economical structure having the same utility value.

Back 43

a. an equally desirable property with the same utility value.

(A replacement property is to produce a similar level of utility and be as desirable as the subject property.)

Front 44

Which of the following is not a part of the cost approach appraisal method?

a. Unit-in-place.

b. Capitalization.

c. Quantity survey.

d. Index method.

Back 44

b. Capitalization.

(Capitalization is an income approach method. Unit-in-place is a sub-element of construction. The index method is for historic cost valuations. Quantity survey is the most detailed method used by sub-contractors when making bids on projects.)

Front 45

Appraisers attempt to estimate the value of real estate. The value is:

a. derived from an income analysis.

b. based solely on the reproduction cost.

c. projected from the original cost.

d. based on an analysis of facts as of a specified date.

Back 45

d. based on an analysis of facts as of a specified date.

(This is the best answer. Income analysis and reproduction costs may play a part in the decision but are not exclusively correct. Thus, answer selection D best states how an appraiser estimates value.)

Front 46

When conducting an appraisal, an appraiser considers all the following except:

a. the definition of value.

b. the highest and best use of a property.

c. the assessed value of a property.

d. the legal description of a property.

Back 46

c. the assessed value of a property.

(The assessed value is the county tax assessor's determination of value for the purposes of calculating property taxes.)

Front 47

The first step in the appraisal process is to:

a. set the appraisal fee.

b. gather data.

c. define the problem.

d. analyze data.

Back 47

c. define the problem.

(Like in any similar effort, you must first define what the problem is.)

Front 48

An appraisal is made as of a given date to indicate:

a. when the appraiser inspected the property.

b. the loan balance at the time of the appraisal.

c. the market condition at the time the appraisal was completed.

d. the true age of the property.

Back 48

c. the market condition at the time the appraisal was completed.

(The best answer selection here is C. An appraisal is an objective opinion of value based on the market conditions at a specific time.)

Front 49

Based on recent comparable sales, an agent's opinion of a property's fair market value (FMV) is referred to as a(n):

a. broker price opinion (BPO).

b. comp.

c. appraisal.

d. home inspection report.

Back 49

a. broker price opinion (BPO).

(The broker's price opinion (BPO) is based on comparable sales only.)

Front 50

The statement "more buildings are torn down than wear out" is an illustration of:

a. physical deterioration.

b. functional obsolescence.

c. economic obsolescence.

d. accelerated depreciation.

Back 50

c. economic obsolescence.

(The fact that buildings are torn down that are not yet physically worn out suggests economic obsolescence. Market expectations will drive many of these decisions.)

Front 51

The capitalization method of the income approach determines:

a. the value of a property based on its net operating income (NOI).

b. the effective interest rate on the debt encumbering the property.

c. the value of the property based on its gross operating income.

d. the property owner's net worth.

Back 51

a. the value of a property based on its net operating income (NOI).

(The capitalization method uses an income-producing property's net operating income (NOI). The gross rent multiplier (GRM) method uses the gross rent generated by an income producing property.)

Front 52

When comparable sales are unavailable or inadequate and a property generates no income, an appraiser would likely use the:

a. capitalization approach.

b. gross multiplier approach.

c. cost approach.

d. sales comparison approach.

Back 52

c. cost approach.

(The cost approach is the best answer selection. As the property does not generate income, neither answer selection A or B are applicable as they are both based on the income approach. Further, answer selection D may be eliminated as there is insufficient sales data of comparable properties available to make a comparison.)

Front 53

When a residence has a physical age of 20 years, but the appraiser notes the building has the appearance of being only 10 years old, the appraiser is referring to:

a. effective age.

b. economic life.

c. actual age.

d. progressive age.

Back 53

a. effective age.

(Effective age refers to the 10 year old condition of the property. Actual age is 20 years.)

Front 54

All of the following are included in the laws governing the government power of eminent domain, except:

a. the right of the government to take property from the owner for a legitimate public use.

b. a condemnation action in court.

c. compensation at fair market value (FMV).

d. the exercise of zoning authority.

Back 54

d. the exercise of zoning authority.

(Eminent domain has no specific relevance to zoning. The consideration that must be paid to the owner is the fair market value (FMV) of the property which is determined as the price a willing buyer would pay to a willing seller when the property has had adequate exposure on the market and neither party is under any duress.)

Front 55

The loan-to-value ratio (LTV) is best described as:

a. the ratio of the loan to the sales price.

b. the ratio of the loan to the appraised value of the property.

c. the loan as a percent of assessed value.

d. the loan as a percent of interest.

Back 55

b. the ratio of the loan to the appraised value of the property.

(The loan-to-value ratio (LTV) reflects the mortgage balance as a percentage of the mortgaged property's fair market value (FMV). Lenders will loan against the sales price or the value of the property as determined by an appraisal, whichever is lower.)

Front 56

Compared to a property's physical life, economic life is generally:

a. shorter.

b. longer.

c. about the same.

d. varies with property type.

Back 56

a. shorter.

(This is similar to Question 37. Note that economic life represents the length of time a building produces a reasonable return. Alternatively, physical life is based on how long the building would remain physically standing. Thus, a property's economic life is the shorter of the two.)

Front 57

Return on investment (ROI) comes in the form of profit, while return of investment comes in the form of:

a. rents.

b. taxes.

c. depreciation.

d. appreciation.

Back 57

c. depreciation.

(While the return on investment is profit, the return of investment is the recuperation of the investment through depreciation.)

Front 58

When an appraiser values a property under the cost approach, they add the value of the site to the depreciated cost new of improvements. If the value of a site is $150,000, the cost to build a new house is $300,000, the cost to build a new garage is$75,000, and the value of site improvements such as landscaping and the driveway are $75,000, what is the final value of the property under the cost approach when a 20% physical depreciation factor is applied?

a. $510,000.

b. $480,000.

c. $525,000.

d. $375,000.

Back 58

c. $525,000.

(The cost approach requires the appraiser to adjust the house and garage costs, known as the “cost new” of constructed improvements, by a depreciation factor. Thus: $300,000 (house) + $75,000 (garage) = $375,000 x 0.2 (20% depreciation) = $75,000. Then subtract the depreciation amount from the cost new. $375,000 (cost new) - $75,000 (accrued depreciation) = $300,000 (depreciated cost new). Finally, add the various amounts: $150,000 (site) + $300,000 (depreciated construction costs) + $75,000 (site improvements) = $525,000.)