Chapter 3 Quiz

Question 1

Outdated, square tile countertops would
likely be considered:
a. incurable physical depreciation.
b. curable environmental
depreciation.
c. incurable functional obsolescence.
d. curable functional obsolescence.

Answer 1

D: The cost of replacing the outdated tile countertops with a current product such as granite
countertops will most likely recover the cost (increasing returns) by the property being more
attractive to buyers who are willing to pay more for the property with the more modern kitchens and
baths.

Question 2

Which of the following would be a
consideration in appraising property using
the Market Data Approach?
a. terms of the sale
b. original purchase price
c. annual income of the property
d. depreciation

Answer 2

A: Terms of the sale, physical characteristics, location, and the timeliness of closing date are all
areas in which the appraiser will make an adjustment. The original purchase price is irrelevant in
determining a property’s current value. The annual income of the property will come into play in the
income approach, but not the Market Data Approach. Likewise, depreciation is used in the cost
approach, but not the market data approach.

Question 3

The first step in the income approach to
valuation is:
a. calculate the potential gross
income of the property
b. factor in the vacancies and bad
debts
c. evaluate comparable sales
d. obtain the property’s operating
expenses

Answer 3

A: GSI – V/BD = EGI – OE = NOI; therefore the first step in the income approach to valuation is to
calculate the potential gross income of the property.

Question 4

An appraiser is assessing the value of a
commercial office building that earns
$35,000 per quarter after vacancies and
expenses. The appraiser uses a
capitalization rate of 6.75% for this type of
property. What is the likely valuation of
the building?
a. $518,518
b. $2,074, 074
c. $6,222,222
d. There is not enough information.

Answer 4

B: If the office building earns $35,000 per quarter after vacancies and expenses, it earns an NOI of
$140,000 annually. I ÷ R = V; $140,000 ÷ .0675 = $2,074, 074.

Question 5

If the appraiser in question #4 were using a
gross income multiplier of 15, what would
the value be?
a. $525,000
b. $2,100,000
c. $6,300,000
d. There is not enough information.

Answer 5

D: A gross income multiplier is used with gross annual income, not net operating income. The
income provided in question #4 is net, not gross, therefore there is not enough information.

Question 6

Depreciation is applied to:

a. the land.
b. the building.
c. the land and the building.
d. neither the land or the building.

Answer 6

B: Depreciation is only applied to the building. Land does not depreciate.

Question 7

Which of the following is considered
economic depreciation?
a. The interior and exterior needs
painting and the carpet and
padding need replacement.
b. The home backs up to a main
thoroughfare.
c. The floor plan is strange and not
desirable to buyers who see the
property.
d. all of these

Answer 7

B: Economic, locational, or environmental obsolescence are all terms to represent a decrease in
property value because of the property’s location. Location, location, location.

Question 8

The Harrigans write an offer of $175,000
on a home listed for $210,000 because
there are two others available in the same
subdivision for $179,900 and $175,900.
The Harrigans are probably basing their
offer on the theory of:
a. highest and best use.
b. conformity.
c. substitution.
d. contribution.

Answer 8

C: The theory of substitution states that if there are other, similar properties available, a buyer’s
willingness to pay a certain price will be limited based on there being more reasonably priced
alternatives.

Question 9

Your land is valued at $240,000 an acre. It
is determined by the appraiser that your
building’s replacement cost is $210,000. If
your building sits on 1⁄4 of an acre and the
depreciation was calculated at 24%, what
is the value of your property?
a. $50,400
b. $159,600
c. $219,600
d. $399,600

Answer 9

C: This requires the use of the cost approach:
Determine the value of the land ($240,000 per acre ÷ 4): $60,000 for the 1⁄4 acre
Determine the replacement cost of the structure: $210,000 given
Determine accumulated depreciation
($210,000 replacement cost x .24 depreciation) $50,400
Subtract accumulated depreciation from replacement cost
($210,000 replacement cost - $50,400 depreciation) $159,600
Add in the land value:
($159,600 depreciated structure + $60,000 land value) $219,600

Question 10

Which approach is best suited for a
special purpose structure such as the local
YMCA building?
a. cost approach
b. income approach
c. market data approach
d. any of these

Answer 10

A: Market data does not work as we cannot find buildings that have just sold comparable to the
YMCA that have just sold. The income approach is not a good fit as the property is not truly an
income generating investment property. The cost approach is therefore the most appropriate.

Question 11

Which of the following is NOT one of the
generally accepted characteristics of
value?
a. demand
b. use
c. scarcity
d. time

Answer 11

D: Characteristics of value are demand, utility (or use), scarcity (or supply) and transferability;
DUST.

Question 12

An out-of-state investor sees a 4-plex with
you, as his agent. After you have provided
him the net operating income of $677,000,
he tells you he will not accept a return on
his investment less than 9% annually.
What is the investor’s offer likely to be?
(Rounded)
a. $60,000
b. $615,000
c. $675,000
d. $7.5 Million

Answer 12

D: I ÷ R = V; $677,000 NOI, 9% annual rate of return; $677,000 ÷ .09 = $7,522,222. $7.5 million
rounded.

Question 13

With which type of income producing
property would a GRM likely NOT be
appropriate?
a. shopping center
b. free-standing office suite
c. single family home
d. a duplex

Answer 13

A: A shopping center is more commercialized than the other residential choices and a GIM
would be most appropriate for the shopping center.

Question 14

The subject property being appraised has
a family room, but the comparable does
not. Virtually all other aspects of the
comparable are similar. What adjustment
will the appraiser make?
a. adjust the subject upward for the
contribution of the room
b. adjust the subject downward for
the contribution of the room
c. adjust the comparable upward for
the contribution of the room
d. adjust the comparable downward
for the contribution of the room
15. What term would best indicate that the

Answer 14

C: The comparable is always adjusted, never the subject property. In this case, the comparable
is inferior to the subject. It does not have a family room. So, a family room has to be added. Adjust
the comparable upward (addition).

Question 15

What term would best indicate that the
buyer and seller had no special
relationship, such as being related, friends,
or business partners, and therefore the
sale reflected true market value?
a. arm’s length
b. fiduciary
c. unrelated
d. competitive

Answer 15

A: The wording in the question is actually the definition of arm’s Length; that the parties are
distant from one another – at an arm’s length.

Question 16

A comparable property just sold for
$395,000 and had 400 square feet more
than the subject, but the subject had an
additional half bath that the comparable
did not. If the contribution is $100 per
square foot and $5,500 for a half bath,
how will the appraiser reflect the
differences?
a. Adjust the subject property upward
$40,000 and then downward
$5,500.
b. Adjust the comparable property
upward $40,000 and then
downward $5,500.
c. Adjust the comparable property
downward $40,000 and then
upward $5,500.
d. Adjust the subject property
downward $40,000 and then
upward $5,500.

Answer 16

C: Adjustments are always made to the comparable; not the subject. The comparable is 400
square feet more than the subject, so the extra square footage has to be subtracted from the
comparable so it looks like the subject. The comparable is short a half bath, so the half bath has to
be added to the comparable.

$395,000 Sale Price - $40,000 (400 sq. ft. X $100 sq. ft.) for square footage + $5,500 (given) half bath
Adjust the comparable property downward $40,000 and then upward $5,500.
Adjust the comparable downward $34,500. ($360,500 reflects the adjusted price of the
comparable.)

Question 17

What is the name of the standard form of
appraisal required by most lenders and
governmental agencies?
a. Uniform Residential Appraisal
Report
b. Uniform Reconciliation Appraisal
Report
c. Standard Real Estate Appraisal
d. Market Valuation and Appraisal

Answer 17

A: Uniform Residential Appraisal Report (URAR)

Question 18

Which method of valuation would factor
in reproduction costs if applicable?
a. cost approach
b. income capitalization approach
c. sales comparison approach
d. none of these

Answer 18

A: Reproduction cost in the cost approach to valuation is used if the building were so unique
that using available materials and techniques would not produce a substantially similar building.

Question 19

The developer of her property intends to
build a movie theatre but has assessed
there is not enough property for ample
parking. There are two lots immediately
north of the property she can acquire for
approximately $80,000 each. The process
of her purchasing the properties and
combining them legally with the land she
currently owns is known as:
a. plottage.
b. progression.
c. contribution.
d. assemblage.

Answer 19

D: Assemblage is the process of adding the parcels together. If you selected plottage, plottage is
the increase in value as a result of the assemblage.

Question 20

What might be the cause of an appraisal
to be ordered?
a. to verify value of real estate
collateral for lenders
b. to establish value for insurance
companies
c. to determine if the value of
property owned by a tax payer is
consistent with the income
reported by the tax payer
d. all of these

Answer 20

D: All of the items are reasons for an appraisal to be ordered and utilized.