Real Estate Sales Exam Property Valuation and Appraisal 2 — Questions and Answers
Question 1: Which appraisal approach is most commonly used for income-producing properties like apartment buildings?
- Sales comparison approach
- Income capitalization approach (Correct answer)
- Cost approach
- Gross rent multiplier only
Correct answer: Income capitalization approach
The income capitalization approach converts a property's expected income stream into a value estimate, making it the primary method for income-producing properties.
Question 2: A property generates a net operating income (NOI) of $60,000 and the capitalization rate is 6%. What is the estimated property value?
- $360,000
- $600,000
- $1,000,000 (Correct answer)
- $3,600,000
Correct answer: $1,000,000
Value = NOI ÷ Cap Rate = $60,000 ÷ 0.06 = $1,000,000.
Question 3: What does 'functional obsolescence' refer to in property appraisal?
- Physical deterioration from normal use
- A loss in value due to outdated or inadequate design features (Correct answer)
- Decline in value caused by negative external factors
- Depreciation from deferred maintenance
Correct answer: A loss in value due to outdated or inadequate design features
Functional obsolescence is a loss in value caused by deficiencies or superadequacies in the property's design, layout, or features relative to current market standards.
Question 4: An appraiser adjusts a comparable sale downward by $5,000 because the comp has a feature the subject property lacks. What does this mean?
- The subject property is worth $5,000 more than the comp
- The comp sold for $5,000 too much
- The subject property is worth $5,000 less than the comp (Correct answer)
- The appraiser made an error in the adjustment
Correct answer: The subject property is worth $5,000 less than the comp
When a comp has a superior feature, the appraiser adjusts the comp downward, indicating the subject property is worth less than the comp by that amount.
Question 5: What is the gross rent multiplier (GRM)?
- Annual NOI divided by property value
- Sales price divided by gross monthly rent (Correct answer)
- Monthly rent multiplied by vacancy rate
- Net income divided by operating expenses
Correct answer: Sales price divided by gross monthly rent
The GRM equals the sales price divided by the gross monthly (or annual) rent and is a quick valuation tool for small residential income properties.
Question 6: Which type of depreciation is generally considered incurable in an appraisal?
- Physical deterioration — short-lived items
- Functional obsolescence — superadequacy
- External (economic) obsolescence (Correct answer)
- Deferred maintenance on the roof
Correct answer: External (economic) obsolescence
External obsolescence (caused by factors outside the property such as a nearby industrial plant or zoning change) is typically incurable because the owner cannot correct it.
Question 7: In the cost approach, what does 'accrued depreciation' represent?
- The current replacement cost of improvements
- The total loss in value of improvements from all causes (Correct answer)
- The value of the land component alone
- Annual straight-line depreciation claimed for tax purposes
Correct answer: The total loss in value of improvements from all causes
Accrued depreciation is the total loss in value of improvements from all sources — physical deterioration, functional obsolescence, and external obsolescence.
Real Estate Sales Exam Property Valuation and Appraisal 2
Which appraisal approach is most commonly used for income-producing properties like apartment buildings?