General Practice Flashcards

An example of functional obsolescence is which of the following?

Answer: four bedroom, one bath house

Functional obsolescence refers to a loss in value due to an outdated or poorly designed feature within the property itself, making it less desirable or efficient by current standards. A four-bedroom, one-bath house is a classic example because modern buyers typically expect more bathrooms for a house with that many bedrooms, making the design functionally inadequate. This internal design flaw reduces the property's market appeal and value.

Investor Charles Greenacre is purchasing a building from the Acme Tool Company with a 20-year net-net-net leaseback offering outstanding cash throwoff and good tax treatment. The building was built to the seller's needs under strict specifications to the seller's business. Greenacre should be most concerned with

Answer: the financial condition of the seller.

In a net-net-net (triple net) leaseback, the tenant (the seller, in this case) is responsible for nearly all property expenses, including taxes, insurance, and maintenance. If the seller's financial condition deteriorates, they may be unable to meet these lease obligations, potentially leaving the investor (Greenacre) with an empty, specialized building and significant financial liabilities. The building's specific construction for the seller's business further exacerbates this risk, as it might be difficult to re-lease to a new tenant.

An appraiser noted a 3 year-old air conditioning system which was operable. He assigned $2,500 depreciation to the system. What type of depreciation is it?

Answer: incurable physical deterioration

Physical deterioration refers to the wear and tear on a property due to age and use. An air conditioning system that is three years old and operable but assigned depreciation suggests it's experiencing normal wear and tear that is not economically feasible to fully restore to new condition, making it 'incurable' in the context of a typical appraisal. 'Curable' physical deterioration would be something like a broken window that is cost-effective to fix, while functional obsolescence relates to design flaws.

Which two expenses are deductible for income taxes that are not deducted in calculating net operating income?

Answer: interest and depreciation

Net Operating Income (NOI) is calculated by subtracting operating expenses (like utilities, property taxes, insurance, and management fees) from effective gross income. However, interest on a mortgage and depreciation are not considered operating expenses for NOI calculation because they are financing and accounting deductions, respectively. These two expenses are deductible for income tax purposes, reducing the taxable income, but they do not reflect the property's operational profitability before financing and tax considerations.

If the capitalization rate increases, the value

Answer: decreases.

The capitalization rate (cap rate) is used in real estate to estimate the value of income-producing properties. The formula is Value = Net Operating Income / Capitalization Rate. Therefore, if the capitalization rate increases while the net operating income remains constant, the calculated value of the property will decrease, as the cap rate is in the denominator.

Which is synonymous?

Answer: mortgagee - lender

In a mortgage transaction, the mortgagee is the party who receives the mortgage as security for a loan, which is the lender. Conversely, the mortgagor is the party who gives the mortgage as security, which is the borrower. Thus, 'mortgagee' and 'lender' are synonymous terms.

Which is most closely related to the comparable sales approach?

Answer: principle of substitution

The comparable sales approach (or sales comparison approach) relies on the principle of substitution. This principle states that a prudent buyer will pay no more for a property than the cost of acquiring an equally desirable substitute property. Appraisers use this by comparing the subject property to similar recently sold properties and making adjustments based on differences.

Plottage is

Answer: an increase in value of individual parcels when joined with other parcels.

Plottage refers to the increase in value that occurs when two or more smaller, individual parcels of land are combined into one larger parcel. This consolidation often makes the combined property more valuable than the sum of its parts, due to increased utility, better development potential, or economies of scale.

Concerning the buyer's attitude and willingness to pay, the lender considers

Answer: credit rating

While assets and income demonstrate a buyer's *ability* to pay, a lender assesses a buyer's *willingness* to pay primarily through their credit rating. A credit rating provides a historical record of the borrower's financial responsibility and their likelihood of making future payments on time, which is crucial for determining loan eligibility.

Which of the following forms of depreciation is usually found in external obsolescence?

Answer: incurable

External obsolescence is a form of depreciation caused by factors outside the property itself, such as economic downturns, environmental issues, or changes in the neighborhood. Because these factors are beyond the property owner's control and cannot be remedied by improving the property, this type of depreciation is typically considered incurable.

What is not available to the Federal Reserve System in controlling the money supply?

Answer: changing depreciation rules

The Federal Reserve System controls the money supply through monetary policy tools like open market operations, adjusting the discount rate, and changing the reserve requirement for banks. Changing depreciation rules is a fiscal policy matter, typically handled by Congress through tax legislation, and is not a tool available to the Federal Reserve for controlling the money supply.

Under the income approach, value equals

Answer: income divided by rate

Under the income approach to valuation, the value of an income-producing property is determined by dividing its net operating income (NOI) by the capitalization rate. This formula, often expressed as Value = Income / Rate (V = I / R), converts the property's future income stream into a present value.

Lien theory means that the mortgage

Answer: is a lien on the property, but property title is vested with the mortgagor

In a lien theory state, the borrower (mortgagor) retains legal title to the property, and the mortgage merely creates a lien against the property as security for the debt. If the borrower defaults, the lender (mortgagee) must initiate a judicial foreclosure process to enforce the lien and obtain title.

What is the final step after an appraiser has utilized all three approaches to value?

Answer: reconciliation

After an appraiser has applied all three approaches to value (sales comparison, cost, and income), the final step is reconciliation. This involves critically analyzing the results from each approach, weighing their reliability and applicability to the specific property, and arriving at a single, final value estimate, rather than simply averaging the figures.

Which of the following expenses is not deducted from effective gross income in calculating net operating income?

Answer: depreciation

Net Operating Income (NOI) is calculated by subtracting all operating expenses from the effective gross income. Depreciation is an accounting expense that reflects the loss of value over time and is deducted for tax purposes, but it is not a cash operating expense and is therefore not included in the calculation of NOI.

John purchases a home, and the seller helps to finance the sale. The price is $100,000, and John is to make a $10,000 cash down payment. The amount of the mortgage payments would pay it off in thirty years, but the owner requires that it come due in seven years. What type mortgage is this?

Answer: partially amortizing

A partially amortizing mortgage features regular payments calculated as if the loan would be paid off over a longer term, but the loan itself matures and becomes due in full much sooner. This structure results in a large lump sum payment, known as a balloon payment, at the end of the loan term, as the principal has not been fully paid down.

A seller tells a real estate licensee that he does not want his house shown to ethnic buyers. The sales associate should say

Answer: “I can't handle the sale of your property if you expect me to discriminate.”

The Fair Housing Act prohibits discrimination based on race, color, religion, sex, national origin, familial status, or disability. A real estate licensee cannot comply with a seller's discriminatory instructions, as doing so would violate federal and state fair housing laws. The licensee must refuse the listing rather than participate in illegal discrimination.

Jim Singletary wishes to construct an office building containing 24,000 square feet. The zoning in the area requires 1 parking space for every 400 square feet of building area. How many spaces will be necessary?

Answer: 60

To determine the number of parking spaces required, divide the total building area by the square footage required per parking space. In this scenario, 24,000 square feet divided by 400 square feet per space equals 60 parking spaces.

Which is not correct? I. Redlining is not a violation of state and federal laws. II. “Blockbusting” is a description of the practice of scaring owners into selling because of 'undesirable elements' moving into the neighborhood. III. A sales associate has a direct fiduciary relationship with his seller under an exclusive right of sale agreement.

Answer: I and III

Statement I is incorrect because redlining is an illegal discriminatory practice under federal and state laws. Statement III is incorrect because a sales associate has a direct fiduciary relationship with their employing broker, and the broker then has the direct fiduciary relationship with the seller. Therefore, I and III are not correct statements.

John is a broker in Tallahassee, and meets for lunch with Martha, his most important competitor. They agree that, effective January 1 of the following year, both companies will begin charging 7.5% commissions on all residential properties. Which is correct?

Answer: This is a violation of anti-trust laws.

An agreement between competing brokers to fix commission rates is a clear violation of anti-trust laws, specifically the Sherman Antitrust Act. Such collusion stifles competition and is illegal, regardless of whether the sellers and buyers agree to the rates, as it harms the free market.