Property Valuation and Financial Analysis (Exam Questions) and Answers

Property Valuation and Financial Analysis (Exam Questions) and Answers Which of these properties are exempt from the FIRREA federal appraisal guidelines? Properties valued at $400,000 or less The Hendersons were hoping to list their home for $400,000; however, four other comparable homes in the neighborhood just went up for sale, and they now must list their property at $380,000 to sell quickly. Which economic principle is at work here? Competition What is the definition of "before-tax cash flow"? Cash flow before taking income taxes into account What type of value may consumers be interested in if they are looking for the potential rate of return? Investment value Which of these choices defines "potential gross income"? Income that a property could bring if fully leased With the cost approach to value, what is the replacement cost? Cost to build a functionally equivalent improvement What does the income approach to value rely on when valuing properties that are five or more units? Gross income multiplier In investments, there are two types of depreciation, and each is defined by a particular event. Which of the following most accurately pairs the depreciation type with the event it is tied to? Tax depreciation and cost recovery With the cost approach to value, what is the reproduction cost? Cost to build an exact replica of the subject, with the same materials and deficiencies The smallest property on the block is priced lower than any others, but the higher-priced properties that surround it help to drive the property's market value up. What economic principle is at work here? Progression Using the income approach, determine the value of a property that has a net operating income of $15,000 and a cap rate of 15%. $100,000 Althea is starting her own candle business. Her plan is to rent a space to sell her products for several years, with the hope of expanding. In this scenario, which item represents supply? Commercial space for lease Which approach to estimating property value relies almost exclusively on recent sales of comparable properties? Sales comparison approach To make valid computations of adjustments for the sales comparison approach to value, elements of comparison must be applied in a specific order. Which one of these elements is applied last? Physical characteristics What does the Financial Institutions Reform, Recovery, and Enforcement Act require? Federally related appraisals must be conducted by an appraiser who's either licensed or certified by the state. What economic principle is related to a property's most profitable use that is both legal and economically feasible? Highest and best use Which economic principle pertains to how a change in a property affects its value as a whole? Contribution What standards do appraisers follow? Uniform Standards of Professional Appraisal Practice A property has 10 units and is 90% occupied. Rent is $500 per month. Total vacancy and collection loss equals 10%. What's the potential gross income? $60,000 Which of the following is the cost of replacing a building in the case of total loss? Insured value What's the price at which a willing buyer and a willing seller would strike a deal given normal market conditions? Market value What does the quick and dirty 70% formula mean to investors? The purchase price shouldn't be more than 70% of the repaired value A loss in value caused by an undesirable or hazardous influence offsite is which type of depreciation? External depreciation Which factor influences property value and addresses questions such as, "What's the market like?" and "Are there more buyers than sellers, or vice versa?" Demand What is the effective gross income for a property that has a potential gross income of $50,000, a vacancy and collection loss of 10%, and pays 10% in additional taxes? $45,000 (Taxes aren't part of this equation.) Parcels of land are valued at $50,000 each. However, when two of the parcels are joined, they are valued at $120,000. What economic principle is at work here? Plottage Which of the following items directly increases the supply of real estate properties on the market? Conversion of properties Which of these terms can be defined as what a buyer has paid for a property and what the seller has accepted? Price Trudy loved her new neighbors. The investor couple bought every available house on Trudy's block and was working hard to renovate them and increase their value. Trudy decided that she'd sit back, relax, and let her property's value go up, too, thanks to ______. Progression ______ is the principle that the more similar properties there are on the market, the lower the price will be driven. Competition An investor is analyzing a property by looking at its ability to produce future income. The property is a 10-unit apartment building. Which of the following would be used to determine this value? Gross income multiplier In the sales comparison approach, which of these are selected and evaluated both quantitatively and qualitatively against the subject property? Comparables In the sales comparison approach, using comparables that are five and 15 years old when appraising a subject that is 10 years old is an example of what? Bracketing A poor floor plan is an example of which type of depreciation? Functional obsolescence Which category of appraiser can appraise any real property without any limitations related to value or complexity? Certified general appraiser Malcolm purchased an old convenience store, and after renovations will open a small vegan grocery. He paid $517,000, of which $417,000 was for the building, and renovations cost him $107,000. What does the amount $524,000 represent? Depreciable basis Which of the following terms may be defined as a form of depreciation or loss in value caused by defects in design? Functional obsolescence A property generates $30,000 in net operating income and has a 15% cap rate. Using the income approach, what is its value? $200,000 Soren is an appraiser. As such, what guidelines must he follow? Uniform Standards of Professional Appraisal Practice (USPAP) Tyrell and Barb bought a commercial investment property in 2009 during the real estate market downturn. Through what year will they be able to depreciate the investment? 2048 Which of the following properties is exempt from the FIRREA federal appraisal guidelines? A refinance of a property valued at $375,000 Which of the following best describes the state of the market during the recession phase of the real estate cycle? Unemployment increasing, prices falling, and foreclosures on the rise Burt owns a development company that specializes in constructing new, energy-efficient houses. The best approach for an appraiser to use in the appraisal of Burt's newly built homes is the ______. Cost approach To make valid computations of adjustments for the sales comparison approach to value, elements of comparison must be applied in a specific order. Which element is applied first? Financing terms and cash equivalency To make valid computations of adjustments for the sales comparison approach to value, elements of comparison must be applied in a specific order. Which one of these elements listed has the highest priority? Conditions of sale If there is some kind of defect on a property's title, what effect does this level of transferability have on the property's value? The value falls. Which of the following best describes a seller's market? Demand is greater than supply What's the capitalization formula used in the income approach? Value = net operating income ÷ cap rate Interest rates, availability of credit, and employment trends are examples of which force that influences property value? Economic Which one of these would NOT be an element of comparison an appraiser would use when applying the sales comparison approach to a property valuation? Income generated The sales price, acquisition costs, and capital improvement costs (such as renovations or additions) of a property combine to make up what? Basis John's home is up for sale. He originally bought it five years ago for $300,000. Its current value is $350,000. His real estate agent notified him that a buyer just made an offer on his home for $365,000, which is the price for which other similar homes in the neighborhood are selling, and John accepts. What does the price of $365,000 represent? The market value Your client Joseph has a commercial income-producing property. How long does he depreciate this property? 39 years The Siegels are purchasing a commercial investment property and plan to use straight-line depreciation on their financial statements and tax calculations. Which of the following would NOT be included in the Siegels' depreciation basis calculations? The loan origination and lender fees that they paid at closing Homes in a new home development have been built with a floor plan that doesn't appeal to today's buyers. In a cost approach valuation of the houses, what sort of depreciation will the appraiser apply? Functional obsolescence A rundown home, overgrown with weeds and in desperate need of repairs, is driving down property values on the block. What economic principle is at work here? Regression Quality of amenities, climate, and topography are examples of which force that influences property value? Physical/environmental A fire destroyed Meredith's house. Meredith contacted her insurance company, and she was shocked to learn her insurance policy didn't fully cover what she paid for the property. How does the insurance company determine the replacement value of her home? The amount it would cost to completely replace her home Which of these is defined by "income received before expenses are deducted"? Gross income The GRM for Sunny Hills is 147. If a three-bedroom, one-bath house in Sunny Hills rents for $820 monthly and sold for $125,000, what is the suggested value of a house that leases for $1,000 monthly based on the GRM? $147,000 When prices go down because there are too many homes on the market and too few buyers, what economic principle is at work? Competition The Richards family farm is located on a 10-acre parcel of land, which is very rare in their area. However, the house is rundown and in need of many repairs. Most buyers in the area are looking for a move-in-ready home, which means they would need to either look elsewhere or wait several months for the home to be renovated. Which factor is most negatively impacting the value of the Richards' property? Utility What do you do to determine debt coverage ratio? Divide net income by debt service Which of the following items directly influences real estate demand? Loan availability If a property's income value is $200,000 and it's earning a net operating income of $40,000, what is the cap rate? 20% Gary, your investor client, has an annual net income of $50,000. His annual debt service is $12,500. What is his debt coverage ratio? 4.0 There are a lot more sellers than buyers in the current market. How does this demand influence value? Value is pushed downward. Which economic principle states that the value of property today is impacted by the current value of the total expected future benefits? Anticipation What "quick and dirty" investment formula seeks to achieve a percentage of gross monthly rental income as compared to purchase price? 2% You're preparing a CMA for a new listing. Which of the following will you use to estimate market value? Comparable sales Which category of appraiser can appraise any residential property without any limitations related to value or complexity, but only non-residential properties valued below $250,000? Certified residential appraiser A property's value is dropping because the neighboring property's yard is filled with trash. What's this an example of? Regression Which of the following best describes the state of the market during the expansion phase of the real estate cycle? Increases in hiring, employment, and public confidence, and lots of buyers in the market