CA Real Estate Property Valuation and Appraisal 2 — Questions and Answers
Question 1: The principle of substitution states that a buyer will pay no more for a property than:
- Its assessed value
- The cost of an equally desirable substitute property (Correct answer)
- Its appraised value plus 10%
- The seller's asking price
Correct answer: The cost of an equally desirable substitute property
The principle of substitution holds that value is capped at the cost of acquiring a comparable substitute.
Question 2: Which type of depreciation refers to a loss in value due to outdated or inefficient design features within the property?
- Physical deterioration
- Economic obsolescence
- Functional obsolescence (Correct answer)
- Deferred maintenance
Correct answer: Functional obsolescence
Functional obsolescence is a loss in value caused by outdated design, layout, or equipment within the property.
Question 3: A property generates a net operating income of $50,000 per year and has a capitalization rate of 5%. What is the estimated value?
- $250,000
- $500,000
- $1,000,000 (Correct answer)
- $2,500,000
Correct answer: $1,000,000
Value = NOI ÷ Cap Rate = $50,000 ÷ 0.05 = $1,000,000.
Question 4: In California, who is licensed to perform federally related real property appraisals?
- Any licensed real estate salesperson
- A licensed or certified appraiser (Correct answer)
- A broker with 5 years experience
- A notary public
Correct answer: A licensed or certified appraiser
Only licensed or certified appraisers may perform federally related real estate appraisals under FIRREA requirements.
Question 5: The income approach to value is MOST appropriate for which type of property?
- Owner-occupied single-family homes
- Vacant land
- Income-producing investment properties (Correct answer)
- Historic landmark buildings
Correct answer: Income-producing investment properties
The income approach is most suitable for investment properties where investors base value on income-generating potential.
Question 6: What is the gross rent multiplier (GRM) used to estimate?
- Monthly operating expenses
- Property value based on rental income (Correct answer)
- Annual depreciation amount
- Vacancy rate
Correct answer: Property value based on rental income
The GRM is calculated by dividing the sale price by the gross monthly (or annual) rental income to estimate value.
CA Real Estate Property Valuation and Appraisal 2
The principle of substitution states that a buyer will pay no more for a property than: