SAEE SAEE - Core Valuation Principles Questions and Answers 2 — Questions and Answers
Question 1: Which valuation approach relies on comparing the subject property to similar properties that have recently sold in the same market area?
- Income approach
- Cost approach
- Sales comparison approach (Correct answer)
- Residual approach
Correct answer: Sales comparison approach
The sales comparison approach estimates value by analyzing prices of comparable properties that have recently transacted in the market.
Question 2: In the cost approach to valuation, what does 'external obsolescence' refer to?
- Physical deterioration of the building structure
- Loss in value due to factors outside the property boundaries (Correct answer)
- Outdated floor plan or design features
- Deferred maintenance costs accumulated over time
Correct answer: Loss in value due to factors outside the property boundaries
External obsolescence is a loss in value caused by factors outside the property itself, such as environmental hazards or adverse economic conditions in the area.
Question 3: What is the primary purpose of the principle of substitution in real estate appraisal?
- To ensure appraisers use at least three valuation methods
- To establish that a buyer will not pay more for a property than the cost of an equally desirable alternative (Correct answer)
- To require that all comparable sales be within one mile of the subject
- To mandate adjustments for differences in financing terms
Correct answer: To establish that a buyer will not pay more for a property than the cost of an equally desirable alternative
The principle of substitution holds that a prudent buyer would pay no more for a property than the cost of acquiring an equally desirable substitute property.
Question 4: When applying the income capitalization approach, which formula correctly represents the relationship between value, net operating income, and capitalization rate?
- Value = NOI x Cap Rate
- Value = Cap Rate / NOI
- Value = NOI / Cap Rate (Correct answer)
- Value = NOI - Cap Rate
Correct answer: Value = NOI / Cap Rate
The direct capitalization formula divides net operating income by the capitalization rate to arrive at an estimate of property value.
Question 5: Which principle of value states that the maximum value of a property is influenced by the degree of homogeneity present in the surrounding neighborhood?
- Principle of anticipation
- Principle of conformity (Correct answer)
- Principle of contribution
- Principle of balance
Correct answer: Principle of conformity
The principle of conformity holds that property values are maximized when land uses in an area are compatible and buildings are similar in design, construction, and age.
Question 6: What does the concept of 'highest and best use' require an appraiser to determine?
- The current zoning classification of the property only
- The use that produces the highest gross income regardless of legality
- The most profitable, legally permissible, physically possible, and financially feasible use of the property (Correct answer)
- The use preferred by the current property owner
Correct answer: The most profitable, legally permissible, physically possible, and financially feasible use of the property
Highest and best use analysis identifies the use that is legally permissible, physically possible, financially feasible, and maximally productive.
SAEE SAEE - Core Valuation Principles Questions and Answers 2
Which valuation approach relies on comparing the subject property to similar properties that have recently sold in the same market area?