RES Valuation & Appraisal 1 — Questions and Answers
Question 1: Which three approaches are used by appraisers to estimate property value?
- Sales Comparison, Income, and Cost Approaches (Correct answer)
- Market, Replacement, and Depreciation Approaches
- Gross Rent, Net Income, and Replacement Approaches
- Comparative Market, Replacement Cost, and Capitalization Approaches
Correct answer: Sales Comparison, Income, and Cost Approaches
The three recognized approaches to value are the Sales Comparison Approach, the Income Approach, and the Cost Approach.
Question 2: The Sales Comparison Approach to value is primarily based on:
- The cost to replace the improvements on the property
- The income the property is capable of generating
- Recent sales of similar properties in the area (Correct answer)
- The assessed value assigned by the local tax assessor
Correct answer: Recent sales of similar properties in the area
The Sales Comparison Approach determines value by comparing the subject property to recent sales of similar (comparable) properties in the market.
Question 3: What does GRM stand for in real estate valuation?
- Gross Revenue Multiplier
- Gross Rent Multiplier (Correct answer)
- General Rate of Market
- Gross Ratio Measure
Correct answer: Gross Rent Multiplier
GRM stands for Gross Rent Multiplier, which estimates value of income-producing properties by multiplying gross rents by a derived multiplier.
Question 4: In appraisal, depreciation is defined as:
- The annual tax deduction allowed for property improvements
- The increase in property value over time due to inflation
- Any loss in value from any cause (Correct answer)
- The difference between the list price and the final sale price
Correct answer: Any loss in value from any cause
In appraisal, depreciation refers to any loss in value from any cause, including physical deterioration, functional obsolescence, and external obsolescence.
Question 5: The principle of substitution states that:
- A property's value is created by its highest and best use
- A prudent buyer will pay no more for a property than the cost of acquiring an equally desirable substitute (Correct answer)
- Properties of similar type tend to conform to neighborhood standards
- Value is created when supply and demand are in balance
Correct answer: A prudent buyer will pay no more for a property than the cost of acquiring an equally desirable substitute
The principle of substitution holds that a prudent buyer will pay no more for a property than the cost to purchase a comparable substitute property.
Question 6: Functional obsolescence in a property refers to:
- Physical deterioration caused by wear and tear on structural components
- Loss in value due to factors located outside the property boundaries
- Loss in value due to outdated design, poor floor plan, or inadequate features (Correct answer)
- A decrease in value caused by rising property tax assessments
Correct answer: Loss in value due to outdated design, poor floor plan, or inadequate features
Functional obsolescence is a loss in value resulting from deficiencies or superadequacies in the design, layout, or features of the property, such as an outdated floor plan.
Question 7: The Cost Approach to value estimates:
- The income stream a property will generate over its economic life
- The cost to reproduce or replace improvements plus land value, minus accrued depreciation (Correct answer)
- The price a willing buyer would pay based on comparable sales data
- The present value of future rental income streams discounted at the cap rate
Correct answer: The cost to reproduce or replace improvements plus land value, minus accrued depreciation
The Cost Approach estimates value by calculating the cost to reproduce or replace the improvements, subtracting accrued depreciation, and adding the separately estimated land value.
RES Valuation & Appraisal 1
Which three approaches are used by appraisers to estimate property value?