Arkansas Real Estate License Property Valuation and Appraisal 2 — Questions and Answers
Question 1: Which appraisal approach estimates value by calculating the cost to replace the improvements minus depreciation, plus land value?
- Sales comparison approach
- Income capitalization approach
- Cost approach (Correct answer)
- Gross rent multiplier approach
Correct answer: Cost approach
The cost approach values property by estimating replacement cost of improvements, deducting depreciation, then adding land value.
Question 2: Functional obsolescence in a property is best described as:
- Physical deterioration from age and wear
- Loss of value due to external factors outside the property
- Loss of value from outdated design or features that no longer meet market needs (Correct answer)
- Depreciation from deferred maintenance
Correct answer: Loss of value from outdated design or features that no longer meet market needs
Functional obsolescence occurs when a property's design, layout, or features are outdated and no longer desirable in the current market.
Question 3: An appraiser is valuing a rental property generating $36,000 annual net operating income with a 9% cap rate. What is the estimated value?
- $324,000
- $400,000 (Correct answer)
- $360,000
- $300,000
Correct answer: $400,000
Value = NOI ÷ Cap Rate = $36,000 ÷ 0.09 = $400,000.
Question 4: The principle of substitution states that:
- Value is created by the expectation of future benefits
- A buyer will pay no more for a property than the cost of an equally desirable substitute (Correct answer)
- Value depends on the supply and demand of comparable properties
- The highest use determines a property's maximum value
Correct answer: A buyer will pay no more for a property than the cost of an equally desirable substitute
The principle of substitution holds that a rational buyer will not pay more for a property than the cost of acquiring a comparable substitute.
Question 5: Which type of depreciation is generally considered incurable?
- Deferred maintenance on exterior paint
- External obsolescence from a nearby highway (Correct answer)
- A leaking roof that needs repair
- Worn carpeting throughout the home
Correct answer: External obsolescence from a nearby highway
External obsolescence results from factors outside the property boundary, such as a nearby highway, which the owner cannot control or cure.
Question 6: In the sales comparison approach, an adjustment is made to a comparable sale when:
- The subject and comparable have identical features
- The comparable has a feature the subject lacks, requiring a negative adjustment to the comparable (Correct answer)
- The subject has a feature the comparable lacks, requiring a negative adjustment to the subject
- Both properties were sold in the same market conditions
Correct answer: The comparable has a feature the subject lacks, requiring a negative adjustment to the comparable
When a comparable is superior to the subject (has a feature the subject lacks), a negative adjustment is made to the comparable's sale price.
Question 7: What is the gross rent multiplier (GRM) used to estimate?
- Net operating income after expenses
- Property value based on a ratio of sale price to gross annual rent (Correct answer)
- Capitalization rate for income properties
- Effective gross income after vacancy allowance
Correct answer: Property value based on a ratio of sale price to gross annual rent
The GRM is calculated by dividing the sale price of a property by its gross annual (or monthly) rent, then applied to the subject's rent to estimate value.
Arkansas Real Estate License Property Valuation and Appraisal 2
Which appraisal approach estimates value by calculating the cost to replace the improvements minus depreciation, plus land value?