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PSI CH 5 (copy)

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1. The characteristics required for a property to have value include all of the following EXCEPT

1. effective demand.
2. scarcity.
3. depreciation.
4. transferability.
1. (3) Depreciation is used in the cost approach to value. (48-49)
2. Which of the following laws require that appraisals performed as part of a federally related transaction must comply with federal standards and be performed by a state-certified or state-licensed appraiser?

1. Financial Institutions Reform,
2. (1) FIRREA became effective in 1989. (47)
3. You own land worth $40,000 and your building has a replacement cost of $ 160,000. What would be the value if the appraiser used a depreciation rate of 30 percent?

1. $148,000
2. $152,000
3. $188,000
4. None of the above
3. (2) Replacement cost of building $160,000
Depreciation of 30% x.30
Depreciation 48,000
$160,000 Replacement Cost
- Depreciation of $48,000 = $112,000
Added land value = $ 40,000
Value = $152,000 (49-51)
4. Which of the following does NOT apply to the definition of market value?

1. Both buyer and seller must be well informed.
2. Market value is the average price that a property will bring.
3. Both buyer and seller must act without un
4. (2) Appraisers do not average to determine market value. Appraisers work from comparable transactions to arrive at an estimate of market value for the subject property. (48)
5. The annual net income for an office building is $20,000. If an owner realized a 9 percent return on her investment, the value of the building would be

1. $1,800.
2. $22,222.
3. $222,222.
4. $285,714.
5. (3) Income / Rate = Value
$20,000/.09 = $222,222 (50-51)
6. You look at four similar houses for sale in the same area and choose the house with the lowest asking price. You probably are basing your decision on the principle of

1. highest and best use.
2. substitution.
3. contribution.
6. (2) The principle of highest and best use deals with the most profitable use. Contribution refers to cost and benefits of a particular improvement. Conformity is a factor in the stability of property values; zoning is an example of conformity. (48)
7. A builder developed a subdivision in which the demand for homes was great. He sold the last lot in his subdivision for a much higher price than that for which he had sold the first lot in the area. This example illustrates the principle of

7. (4) A limited supply combined with a great demand will result in a higher price for lots. (49)
8. In appraising a special-purpose building such as a post office, the most reliable approach to an indication of its value would generally be the

1. cost approach.
2. market/data approach.
3. income approach.
4. sales compariso
8. (1) The cost approach is most applicable to the appraisal of a special-purpose building. (48-49)
9. Which of the following is an example of locational obsolescence?

1. Termite damage
2. Negligent care of property
3. A zoning ordinance allowing a decrease in the minimum lot size
4. Poor architectural design
9. (3) Decreasing lot size is locational obsolescence. Termite damage and negligent care are physical deterioration. Poor architectural design represents functional obsolescence. (49)
10. Economic obsolescence does NOT result from

1. adverse zoning changes.
2. a city's leading industries moving out.
3. an inharmonious land use in a neighborhood.
4. outdated kitchens.
10. (4) Economic obsolescence is a loss in value due to factors outside the property. Functional obsolescence is a loss in value due to a deficiency in the floor plan or design of a building. (49)
11. Depreciation generally applies to

1. the building only.
2. the land only.
3. both the land and the building.
4. the net income of the building.
11. (1) Land is not depreciated; it is assumed that the land value will be recovered at the end of the economic life of the building. (49)
12. A principal factor for which adjustments must be made in using the market/data approach is

1. depreciation.
2. the date of sale.
3. the amount of real estate taxes.
4. the cost of replacement.
12. (2) Time, location, physical characteristics, and terms of sale are factors considered in the market or sales comparison approach. (50)
13. An appraiser is estimating the value of a building that has a net income of $5,000 per quarter and a capitalization rate of 8 percent. What is the value of this property?

1. $25,000
2. $62,500
3. $250,000
4. $312,500
13. (3) $5,000 per quarter x 4 = $20,000 annual net income
$20,000 / .08 capitalization rate = $250,00 value (50)
14. An appraiser is using the gross-rent-multiplier (GRM) method to estimate the market value of a single-family home. The home has an annual gross income of $7,200, with quarterly expenses of $900. The recognized GRM for the neighborhood is 110. The app
14. (3) $7,200 gross / 12 = $600 x 110 = $66,000 value (50)
15. The GRM is used in the

1. market/data approach.
2. income approach for office buildings.
3. cost approach.
4. income approach for single-family homes.
15. (4) The GRM is used as a substitute for the income approach in appraising a single-family home. (50)
16. An office building recently sold for $600,000, with a monthly rental income of $5,000. The GIM for the property was

1. 120.
2. 100.
3. 10.
4. None of the above
16. (3) $5,000 monthly rental income x 12 months = $60,000 annual gross income
Selling price of $600,000 / Gross annual rental income = $600,000 / $60,000 = 10 (50)
17. In determining the value of a 20-unit apartment building, the appraiser has established the gross income from rents. After deducting the loss for vacancies and collection losses from this gross income, the appraiser would have established the
17. (4) The gross income would be reflected in the first step of the operating statement. Annual net income is the bottom line in the operating statement and serves as the basis for capitalization of the income stream. (50)
18. What is the first step an appraiser would take to arrive at an estimated value using the income approach?

1. Determine annual potential gross income.
2. Determine operating expenses.
3. Determine effective gross income.
4. D
18. (1) Annual potential gross income is based on 100% of economic or market rent plus other income such as income from vending machines. Effective gross income is annual potential gross income minus vacancy and rent loss. Operating expenses include fixed expenses such as real estate taxes and variable expenses such as management expense; The vacancy rate is used to calculate effective gross income. (50)
19. An airport routing was changed, with the result that airplanes flew over a residential area. The subsequent loss in value caused by the airplane noise would be best described as

1. physical depreciation.
2. functional obsolescence.
19. (3) External or economic obsolescence is a loss in value from factors external to the property (49)
20. Which of the following factors would be considered in the market/data or sales comparison approach to value?

1. Conditions under which property was sold
2. Annual gross income
3. Replacement cost
4. Original cost
20. (1) Conditions under which the property was sold would be used in the market data approach. Cost would be used in the cost approach; annual gross income would be used in the income approach. (49-50)
21. Outmoded plumbing fixtures are an example of

1. curable physical deterioration.
2. curable functional obsolescence.
3. incurable physical deterioration.
4. curable external obsolescence.
21. (2) Functional obsolescence is a loss in the value due to deficiency in the floor plan or design of a building. The obsolescence would be curable if it were economically feasible to update the plumbing fixtures. Economic or external obsolescence is assumed to be incurable only because it is caused by factors outside the property. (49)
22. In the income approach to appraisal, if the net income was $42,000 and the capitalization rate was 12 percent, to find the value of the property the appraiser would

1. multiply the income by the capitalization rate.
2. multiply the ca
22. (3) The capitalization approach was discussed above. (50)
23. D lived in a house with a well. The groundwater entering the homeowner's well became contaminated and lessened the value of D's home. The loss in value is an example of

1. physical deterioration.
2. external obsolescence.
3. func
23. (2) This is an example of external obsolescence, which would generally be incurable, depending on the cost to cure. (49)
24. The appraiser profession is regulated at the national level by

1. Congress.
2. the FDIC.
3. the national real estate commission.
4. the Appraisal Foundation.
24. (4) Congress delegated the regulatory responsibility to the Appraisal Foundation. (47)
25. Which of the following reflects the stages through which a neighborhood passes?

1. Growth, decline, stability, and revitalization
2. Growth, stability, decline, and revitalization
3. Decline, growth, stability, and revitalization
25. (2) There are numerous examples in cities like Chicago and New York where neighborhoods have gone through the entire process, resulting in higher than ever property values. (51)
26. Gross rent multipliers are generally used in appraising

1. forms.
2. shopping centers.
3. single-family homes.
4. hotels.
26. (3) The gross rent multiplier is used as a substitute for the income approach in the appraisal of a single-family home. (50)
27. You purchased an apartment building for $600,000 nearly 6 years ago. The building accounted for 80 percent of the purchase price. If the building's economic life is estimated to be 60 years, what is the current total depreciation of the property?
27. (2) $600,000 x .80 = $480,000 value of building $480,000 / 60 years = $8,000 annual depreciation charge $8,000 x 6 years = $48,000 current total depreciation. (50)
28. R purchased an office building with an annual effective gross income of $208,000 and expenses of $74,000. What capitalization rate was used by R to arrive at a value of $1,576,470?

1. 7.5 percent
2. 8.5 percent
3. 9.5 percent
28. (2) $208,000 annual effective gross income - $74,000 expenses = $134,000; $134,000 / $1,576,470 = .085 = 8.5 (50)
29. M was appraising a three-bedroom house. M had a comparable with four bedrooms that sold for $160,000. M makes an adjustment of $5,000 to the comparable for the difference in the number of bedrooms. The adjusted sales price of the comparable will be
29. (1) C.B.S - Comparable Better Subtract $160,000 price of comparable - $5,000 adjustment for one bedroom = $155,000 adjusted sales price of comparable (50)
30. If the house you are appraising has central air conditioning valued at $2,500 and your comparable does not, you will adjust the sales price of the comparable by

1. -$2,500.
2. +$2,500.
3. -$1,250.
4. None of the above
30. (2) S.B.A - Subject Better Add. The subject property is better than the comparable; thus you add the value of the air conditioning to the sale price of the comparable. (50)
31. A home's value is increased because of its proximity to schools, parks, and transportation lines. These neighborhood sites are referred to as

1. features.
2. benefits.
3. amenities.
4. attachments.
31. (3) Amenities are neighborhood facilities and services that enhance a home's value but are always outside of the property. Swimming pools, 3-car garages, decks, etc. that are on the property are called features. (51)
32. A bike trail that enhances the value of a neighboring home is called

1. a feature.
2. a benefit.
3. an amenity.
4. None of the above
32. (3) An amenity is always outside the confines of the property, but it adds value because of its proximity. (51)
33. What phrase describes a neighboring property that was sold to a relative for 75% of its market value?

1. arm's length
2. less than arm's length
3. comparable property
4. reconciliation property
33. (2) Arm's length transactions describe those that mirror the definition of market value. Less than arm's length transactions do not reflect market value and, therefore, are not included in the appraiser's analysis. (49-50)
34. A comparable property sold for $250,000, and it has 200 more square feet than a subject property. If square footage contributes $30 per square foot, what is the adjusted value of the comparable?

1. $250,000
2. $260,000
3. $244,00
34. (3) 200 sq. ft. x $30 sq. ft. in contributory value = $6,000. Then take the sold price of $250,000 and subtract the square footage amount of $6,000 to arrive at the adjusted value of $244,000. In other words, if everything else was the same between the two properties, the subject property would most likely sell for $244,000. (50)

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