PSI Exam Prep: Valuation and Market Analysis

Question 1

it is a formal opinion of value that a real estate have, based on supportable evidence, for a specific purpose, party, and property, as of a specific date

Answer 1

An appraisal

Question 2

it is the process of forming an opinion of a property’s value.

Answer 2

Valuation (formal appraisal)

Question 3

Appraisers follow the Uniform Standards of Professional Appraisal Practice (USPAP) and use these steps:

Answer 3

State the problem
Identify data needed
Gather and analyze data
Determine highest and best use
Estimate the land value
Use one or more of the three approaches to valuation
Reconcile values to determine the final appraised value

Question 4

Residential properties valued at ___________ or less are exempt from federal appraisal requirements.

Answer 4

$400,000

Question 5

Does FHA loans should be appraised?

Answer 5

Yes, by a state licensed appraiser

Question 6

Does VA loans should be appraised?

Answer 6

Yes, by a VA licensed appraiser

Question 7

What AIR stands for?

Answer 7

Appraiser Independence Requirements of 2010

Question 8

What are the 3 requirements of AIR appraisers?

Answer 8

1. State Certified
2. Local Market knowledge
3. Qualify to appraise

Question 9

it is the most probable price a property will sell for in an open market if neither the buyer nor the seller is under duress.

Answer 9

Market value

Question 10

it is a property’s objective worth and may not equal price or cost.

Answer 10

Value

Question 11

it is the amount to recreate that property if it disappeared off the face of the earth today

Answer 11

Cost

Question 12

it is the amount a buyer paid for a property and the seller accepted.

Answer 12

Market price

Question 13

it refers to a property’s legal and feasible use that would be the most profitable.

Answer 13

The principle of highest and best use

Question 14

How popular or desirable a property is.

Answer 14

Demand

Question 15

The property’s function

Answer 15

Utility

Question 16

Relates to market supply

Answer 16

Scarcity

Question 17

The ease with which another person can purchase the property; a property with a title defect may suffer a loss of value because of the difficulty of being able to transfer title to another.

Answer 17

Transferability

Question 18

What a property is worth to the person using it.

Answer 18

Value in use

Question 19

What the local taxing authority thinks a property is worth

Answer 19

Assessed value

Question 20

Price at which the property can be loaned on or sold for at a foreclosure sale

Answer 20

Mortgage value

Question 21

Cost to replace or rebuild a property

Answer 21

Insurance value

Question 22

The return on investment a property may provide

Answer 22

Investment Value:

Question 23

A property’s value is determined in part by how well it conforms to its surrounding area (how similar it is to other properties in the neighborhood).

Answer 23

The principle of conformity

Question 24

A property’s value is determined in part based on what else is available.

Answer 24

The principle of competition

Question 25

A reasonable person will not pay more for a property if a comparable one can be had for less.

Answer 25

The principle of substitution

Question 26

The value of any given change to the property is dependent on the value of the property as a whole. Because of this, the same improvement to different houses may result in an increase in value in one, while the other sees no appreciable change.

Answer 26

The principle of contribution

Question 27

An increase in value that occurs by combining adjacent parcels of land into a single parcel

Answer 27

The principle of plottage

Question 28

The process of combing the parcels

Answer 28

The principle of assemblage

Question 29

A decline in value due to the decline in value of neighboring properties

Answer 29

The principle of regression

Question 30

The increase in property value from increased surrounding property values

Answer 30

The principle of progression

Question 31

Changes in value may be caused by the expectation of events. A suburban residential property that is located near the site of a proposed public transportation facility may see an increase in value before the actual benefit is realized.

Answer 31

The principle of anticipation:

Question 32

is based on the principle of substitution and uses the prices for which similar properties have sold recently to estimate the subject property’s market value. The similar properties are referred to as “comps” or “comparables.” The property being appraised is called “subject property.”

Answer 32

The sales comparison appraisal approach

Question 33

it is a process in which an appraiser uses both superior and inferior units of comparison such as age, transaction price, etc., to determine a probable range of values for a property.

Answer 33

Bracketing

Question 34

Appraisers will make adjustments for a number of factors, applying the elements of comparison in this specific order, including:

Answer 34

Financing terms and cash equivalency
Conditions of sale
Market conditions 
Location
Physical characteristics

Question 35

it is based on the concept that the entire property is worth the sum of the value of the land and the value of the improvements on that land.

Answer 35

The cost approach

Question 36

Appraisers use and rely on this approach when the property is unique and is not being used to generate rental income. A movie theater, hospital, church, or school fall into this category. It is also used in newly constructed or unique high-value homes.

Answer 36

The cost approach

Question 37

it is caused by factors outside the property (e.g., an airport is nearby, causing noise).

Answer 37

External depreciation, also known as economic obsolescence

Question 38

it is a form of depreciation or loss in value caused by defects in design and can occur with outdated structures or systems or when a property is overbuilt for the area.

Answer 38

Functional obsolescence

Question 39

it occurs with wear and tear, damage, and improper maintenance

Answer 39

Physical deterioration

Question 40

it refers to an item of physical deterioration or functional obsolescence where the cost to cure the item is less than or the same as the anticipated increase in the property’s value after the item is cured.

Answer 40

Curable depreciation

Question 41

it includes items not practical to correct

Answer 41

Incurable depreciation

Question 42

it bases value on the cost to build a functionally equivalent property.

Answer 42

The replacement cost approach

Question 43

it determines the cost to build an exact replica of the property with the same materials and deficiencies

Answer 43

The reproduction cost approach

Question 44

it assumes the land is vacant and bases the opinion of value on highest and best use.

Answer 44

The cost approach

Question 45

This approach bases the current property value on potential income that the property can generate for residential investment rental properties, such as single-family homes or residential buildings that comprise two- to four-family units.

Answer 45

Income analysis approach

Question 46

This is the most reliable approach to value when the property being appraised is primarily used to generate rental income, which includes shopping centers, apartment buildings, and office buildings.

Answer 46

Income analysis approach

Question 47

Your client is purchasing a single-family home with a conventional loan. The listing price is $150,000. Does this situation require a licensed or certified appraiser?

Answer 47

No, since the sales price is less than $400,000

Question 48

What is an appraisal?

Answer 48

An opinion or estimate of a property’s value as of a specific date

Question 49

There are three different methods for estimating value within the income approach:

Answer 49

1. Gross Rent multiplier = GSM = Sale/Gross Monthly Rent
2. Gross income multiplier. GIM=Sale price ÷ gross annual income
3. CAP RATE. Divide net operating income by value (or sales price)

Question 50

they’re an informal estimate of market value.

Answer 50

comparative market analyses (CMAs)

Question 51

What are arm’s length transactions?

Answer 51

Transactions that are not sold to relatives or under duress

Question 52

How many comparable a licensee should do?

Answer 52

at least three comparables. More may be necessary if good comparables are difficult to find.

Question 53

If a comparable is inferior to the subject property (e.g., next to a busy street), adjust upward. If it’s superior (e.g., in a secluded, quiet neighborhood), adjust downward.

Answer 53

Check point

Question 54

When appraisers look past how a property is being used to determine a more optimal function, what are they determining?

Answer 54

Highest and best use looks past the current use (if there is one) to determine if there is another use that provides a higher value.

Question 55

What are the two categories of comparison when evaluating comparables to a subject property in the market comparison approach?

Answer 55

Elements and units

Question 56

What’s the estimated value by cost approach for a property if the site value is $25,000, the new cost of improvements is $100,000, and the total depreciation estimate is $15,000?

Answer 56

To estimate value using the cost approach, an appraiser adds the site value to the cost to replace improvements, then subtracts the amount of depreciation. Here, that gives us $100,000 + $25,000 - $15,000.