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Appraisal: Determining Property Value, Exams of Economics

A.T. Still University of Health Sciences (ATSU)Economics

A comprehensive overview of the real estate appraisal process, including the key steps, principles, and methods used by professional appraisers to determine the value of a property. It covers topics such as the definition of a correct appraisal, the role of appraisers in the mortgage industry, the appraiser independence requirements (air), the steps involved in the appraisal process, the different types of property values that can be estimated, the economic principles that affect property value, and the three main approaches to appraising a property: the sales comparison approach, the cost approach, and the income approach. The document also discusses the importance of using comparable sales, adjusting for differences between properties, and determining the highest and best use of a property. Overall, this document offers a detailed and informative guide to the complex and critical task of real estate appraisal.

Typology: Exams

2023/2024

Available from 09/20/2024

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Valuation and Market Analysis- GA Salesperson Exam Prep
Edge National & State Portions
1. Appraisal - Correct Answer is a formal opinion of value that a real estate
appraiser assigns, based on supportable evidence, for a specific purpose, party,
and property, as of a specific date, and in accordance with Uniform Standards of
Professional Appraisal Practice (USPAP). Appraisals aren't performed or offered
by real estate licensees, as only a licensed or certified appraiser may perform an
appraisal.
2. Appraisers - Correct Answer estimate the value of a building or a piece of land.
They may specialize in either commercial or residential property. Appraisers
typically appraise a property before it's sold, mortgaged, or taxed.
3. Valuation (formal appraisal) - Correct Answer is the process of forming an
opinion of a property's value.
4. The real estate and mortgage industries rely on - Correct Answer appraisals to
ensure that the value of a mortgaged property is sufficient to support the loan
amount.
5. Lenders or appraisal management companies - Correct Answer generally select
and hire appraisers, but the buyer generally pays.
6. Financial institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989 -
Correct Answer requires that appraisals performed in conjunction with federally
related transactions must be completed by state-certified or licensed appraisers.
7. Federally related transactions - Correct Answer are not FHA-insured or VA-
guaranteed and will not be sold to a government-sponsored enterprise (GSE),
such as Fannie Mae or Freddie Mac. Residential properties valued at $400,000
or less are exempt from federal appraisal requirements.
8. Purchases financed with a loan insured by the Federal Housing Administration
(FHA) must be appraised by - Correct Answer a state-licensed appraiser who's
approved by the U.S. Department of Housing and Urban Development (HUD).
9. Purchases financed with a loan guaranteed by the U.S. Department of Veterans
Affairs (VA) must be appraised by - Correct Answer a VA-certified state-
licensed appraiser.
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Valuation and Market Analysis- GA Salesperson Exam Prep

Edge National & State Portions

  1. Appraisal - Correct Answer is a formal opinion of value that a real estate appraiser assigns, based on supportable evidence, for a specific purpose, party, and property, as of a specific date, and in accordance with Uniform Standards of Professional Appraisal Practice (USPAP). Appraisals aren't performed or offered by real estate licensees, as only a licensed or certified appraiser may perform an appraisal.
  2. Appraisers - Correct Answer estimate the value of a building or a piece of land. They may specialize in either commercial or residential property. Appraisers typically appraise a property before it's sold, mortgaged, or taxed.
  3. Valuation (formal appraisal) - Correct Answer is the process of forming an opinion of a property's value.
  4. The real estate and mortgage industries rely on - Correct Answer appraisals to ensure that the value of a mortgaged property is sufficient to support the loan amount.
  5. Lenders or appraisal management companies - Correct Answer generally select and hire appraisers, but the buyer generally pays.
  6. Financial institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989 - Correct Answer requires that appraisals performed in conjunction with federally related transactions must be completed by state-certified or licensed appraisers.
  7. Federally related transactions - Correct Answer are not FHA-insured or VA- guaranteed and will not be sold to a government-sponsored enterprise (GSE), such as Fannie Mae or Freddie Mac. Residential properties valued at $400, or less are exempt from federal appraisal requirements.
  8. Purchases financed with a loan insured by the Federal Housing Administration (FHA) must be appraised by - Correct Answer a state-licensed appraiser who's approved by the U.S. Department of Housing and Urban Development (HUD).
  9. Purchases financed with a loan guaranteed by the U.S. Department of Veterans Affairs (VA) must be appraised by - Correct Answer a VA-certified state- licensed appraiser.
  1. Key mortgage industry players, including Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency (FHFA), - Correct Answer implemented the Appraiser Independence Requirements (AIR) in 2010.
  2. AIR's intent is to ensure that appraisals reflect an accurate, unbiased property value by requiring that appraisers be: - Correct Answer -Certified or licensed in the state in which the appraised property is located -Knowledgeable about the local real estate market -Qualified to appraise the subject property
  3. AIR also prohibits lenders from - Correct Answer attempting to influence or coerce an appraiser with respect to the opinion of value.
  4. Lenders that want to sell their conventional mortgage loans to Fannie Mae must - Correct Answer comply with AIR.
  5. AIR permits lenders to - Correct Answer select residential appraisers from an approved list or panel if the lender employee(s) involved in the selection have no involvement in loan approval.
  6. To help ensure they're in compliance with AIR standards, - Correct Answer some lenders contract with third-party companies to manage appraisals.
  7. Appraisers follow the USPAP and use these steps: - Correct Answer 1. State the Problem
  8. Identify data needed
  9. Gather and analyze data
  10. Determine highest and best use
  11. Estimate the land value
  12. Use one or more of the 3 approaches to valuation
  13. Reconcile values to determine the final appraised value
  14. Develop and deliver the appraisal report.
  15. State the problem - Correct Answer This means to identify the specific property, the rights associated with it, the purpose of the appraisal, and what type of value needs to be estimated.
  16. Gather and analyze data - Correct Answer Appraisers look at general city, neighborhood, demographic, and other data, as well as property-specific data.
  17. Determine highest and best use - Correct Answer What would the best use of the property be if there were no existing building on it? This matters more for commercial properties, though residential properties in a mixed-use neighborhood can be impacted.
  1. utility - Correct Answer the property's function
  2. scarcity - Correct Answer relates to market supply
  3. transferability - Correct Answer 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.
  4. Other types of value: - Correct Answer -value in use -assessed value -mortgage value -insured value -investment value
  5. value in use - Correct Answer what a property is worth to the person using it.
  6. assessed value - Correct Answer what the local taxing authority thinks a property is worth.
  7. mortgage value - Correct Answer price at which the property can be loaned on or sold for at foreclosure sale.
  8. insured value - Correct Answer cost to replace or rebuild a property.
  9. investment value - Correct Answer the return on investment a property may provide.
  10. The value of a property is affected by certain economic principles of value, including: - Correct Answer -the principle of conformity -the principle of competition -the principle of substitution -the principle of plottage -the principle of assemblage -the principle of regression -the principle of progression -the principle of anticipation
  11. the principle of conformity - Correct Answer 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).
  12. the principle of competition - Correct Answer A property's value is determined in part based on what else is available.
  13. the principle of substitution - Correct Answer A reasonable person will not pay more for a property if a comparable one can be had for less.
  1. the principle of contribution - Correct Answer 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.
  2. the principle of plottage - Correct Answer An increase in value that occurs by combining adjacent parcels of land into a single parcel
  3. the principle of assemblage - Correct Answer the process of combing the parcels
  4. the principle of regression - Correct Answer A decline in value due to the decline in value of neighboring properties
  5. the principle of progression - Correct Answer The increase in property value from increased surrounding property values
  6. the principle of anticipation - Correct Answer 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.
  7. Market cycles and other factors affecting property value: - Correct Answer - Reduced consumer confidence makes new buyers wary of purchasing and homeowners hesitant to trade up. -Higher unemployment reduces the number of buyers, putting downward pressure on housing prices. -Higher taxes decrease buying power; lower taxes increase buying power. -Higher interest rates reduce buyer affordability. Lower interest rates increase buyer affordability. -Supply and demand significantly affect property value. More demand than supply means buyers are competing for the same properties, driving prices up. Less demand, or fewer buyers, puts downward pressure on housing prices.
  8. The sales comparison appraisal approach is based on - Correct Answer 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."
  9. (sales comparison appraisal approach) this approach is most commonly used when - Correct Answer appraising single-family homes.
  1. The cost of recreating the existing structure/improvement (cost approach) - Correct Answer is adjusted based on depreciation since the structure being sold is not brand new.
  2. Depreciation, as it relates to appraisals, - Correct Answer is unrelated to tax depreciation. There are three causes of depreciation: external depreciation, functional obsolescence, and physical deterioration.
  3. External depreciation (economic obsolescence), - Correct Answer is caused by factors outside the property (e.g., an airport is nearby, causing noise).
  4. Functional obsolescence - Correct Answer 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.
  5. Physical deterioration - Correct Answer occurs with wear and tear, damage, and improper maintenance.
  6. Curable depreciation - Correct Answer 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.
  7. Incurable depreciation - Correct Answer includes items not practical to correct.
  8. replacement cost - Correct Answer approach bases value on the cost to build a functionally equivalent property.
  9. reproduction cost - Correct Answer approach determines the cost to build an exact replica of the property with the same materials and deficiencies.
  10. The cost approach assumes - Correct Answer the land is vacant and bases the opinion of value on highest and best use.
  11. (Income analysis approach) This approach bases - Correct Answer 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.
  12. (income analysis approach) This is the most reliable approach to value when - Correct Answer the property being appraised is primarily used to generate rental income, which includes shopping centers, apartment buildings, and office buildings.
  13. investment value can - Correct Answer tell an investor the expected rate of return for a property.
  1. There are 3 different methods for estimating value within the income approach: - Correct Answer the gross rent multiplier the gross income multiplier the capitalization method
  2. Gross rent multiplier (GRM) - Correct Answer is used for the appraised value of four or fewer units. GRM = sales price ÷ the gross monthly rent. Gross monthly rent × GRM = value.
  3. Gross income multiplier (GIM) - Correct Answer is used for the appraised value of five or more units (considered "commercial" property). GIM = sales price ÷ gross annual income. Gross annual income × GIM = value.
  4. Capitalization rate (Cap rate) - Correct Answer An annual rate of return from an income-producing property. Used by appraisers to estimate value of rent generating properties. Used by investors to compare one investment to another.
  5. Determine cap rate - Correct Answer Divide net operating income by value (or sales price) (I ÷ V = R).
  6. Determine value using the cap rate formula - Correct Answer Divide net operating income by cap rate (I ÷ R = V).
  7. Determine net operating income using the cap rate formula - Correct Answer Multiply cap rate by value (R × V = I).
  8. Capitalization is always based on - Correct Answer net annual operating income numbers
  9. Determine net operating income - Correct Answer Begin with potential gross income, asking if every unit were rented for a full year, what could the owner expect to collect in rent? Subtract the probable loss as a result of projected vacancy from potential gross income to estimate effective gross income. Subtract operating expenses from effective gross income to arrive at net operating income.
  10. Real estate licensees perform ____ to help clients make price decisions. They help seller clients decide how to price the property and buyer clients decide how much they're willing to pay. CMAs are not appraisals; instead, they're an informal estimate of market value. - Correct Answer comparative market analyses (CMAs)
  11. Comparable or comp - Correct Answer A comparable property is one that's quite similar to the subject property in terms of size, style, condition, number of rooms, and location.
  1. If a comparable is inferior to the subject (e.g., next to a busy street), - Correct Answer adjust upward. If it's superior (e.g., in a secluded, quiet neighborhood), adjust downward.
  2. Adjustments may be made for - Correct Answer location, property attributes, and market conditions.
  3. Subject and comparable property attributes are nearly identical except the subject has a two-car garage and the comparable has a three-car garage. In the given area, an additional garage bay is worth approximately $7,000. The comparable sold for $328,500. - Correct Answer The goal is to determine what the comp would have sold for if it were identical to the subject, so subtract $7, from the comparable's sales price, making the value of the subject property $321,500.
  4. Subject and comparable property attributes are nearly identical except the subject has a three-car garage and a swimming pool (in a climate where a pool is a highly desirable attribute). Garage bays are worth approximately $6,000 and the pool is valued at approximately $22,000. The comparable sold for $422,000. - Correct Answer Since the subject is superior to the comp, add the garage bay and swimming pool value to the comp's sales price, for a subject value of $450,000.
  5. Ashton, an appraiser, is estimating value using the sales comparison approach. He applies more weight to two comparables over several others he used. What process is he utilizing? - Correct Answer Correlation -Through a correlation process, the most weight may be given to one or two comparables, or equal weight may be given to all. The term reconciliation is often synonymous with correlation.
  6. When appraisers look past how a property is being used to determine a more optimal function, what are they determining? - Correct Answer Highest and best use -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.
  7. Your client is purchasing a single-family home using a VA-guaranteed loan. The sales price is $150,000. Is an appraisal by a certified appraiser required? - Correct Answer Yes, and since the purchase is being financed with a VA-guaranteed loan, the appraiser must be VA certified.
  8. -A VA loan requires an appraisal by a VA-certified appraiser, who must also be licensed or certified by the state. Most of the homes in Betty's new neighborhood are valued between $400,000 and $450,000. All of the homes in the neighborhood are very beautiful, the lots are large, and everyone's yard has impeccable landscaping. If Betty's home were in another

neighborhood only a few miles away, it might only be valued at $300,000, due to its smaller size. But her home is valued at $400,000 in her neighborhood due to the desirability of the area. Why is her home in this neighborhood worth significantly more? - Correct Answer Progression

  1. -You got it! Think about it this way: In real estate, it's better to be the worst house in a nice neighborhood than the nicest house in a bad neighborhood. A property's value increases if it's surrounded by higher-valued homes and decreases if it's surrounded by lower-valued homes. Betty's home is in a very desirable neighborhood, helping increase the value of her home. This is the principle of progression.
  2. Robin, the appraiser of the Birkenstock's property, wants to make sure her computations of adjustments on their home are valid. She's using the sales comparison approach, so she'll prioritize the ______ as the highest priority. - Correct Answer Conditions of sale
  3. -The elements considered in the sales comparison approach are applied in a specific order: financing terms and cash equivalency, conditions of sale, market conditions at the time of contract and closing, location, and physical characteristics.
  4. When the Browns first purchased their home, the area was primarily agricultural. But over the years, as more homes were built, the area has undergone some major changes. What was once a quiet neighborhood is now on the corner of a major busy intersection with lots of traffic, noise, and light pollution throughout the night. What type of depreciation has the Browns' home undergone? - Correct Answer External depreciation
  5. -External depreciation (or economic obsolescence) is a loss in value caused by an undesirable or hazardous influence offsite.
  6. Kevin's lender just ordered an appraisal on the five-unit apartment building he's contracted to purchase. He's especially interested in hearing about the estimated rate of return the property could pull. What type of value is he interested in? - Correct Answer Investment value
  7. -An investment value can tell a consumer about the expected rate of return for a property.
  8. Steve is preparing a market analysis for the Jones's and has selected three comparables. What's the maximum number of adjustments Steve should make to the Jones's property? - Correct Answer Zero
  9. -Good job! Only the comparable sales price is adjusted. If it is inferior, adjust upward. If it's superior, adjust downward.
  10. One month after passing his real estate licensing exam, Max was contacted by a couple via referral, asking him to represent them in the sale of their home. Max meets with his clients at their home, does a walk-through, takes a drive through the neighborhood, and then heads back into the office to conduct
  1. -A real estate licensee typically performs a comparative market analysis (CMA) as part of the listing process with a seller. A CMA can also assist buyers in determining offer price.
  2. Which of the following features is most likely to be the cause of an adjustment to a comparable when preparing a CMA? - Correct Answer Busy street
  3. Interest rates determine buying power. Which of the following is a true statement? - Correct Answer When interest rates are high, buyers are often priced out of the market. -Interest rates impact affordability. Higher rates mean higher mortgage payments, pricing some buyers out of certain markets.
  4. Kenneth, an appraiser, is driving around the area where the subject property is located. Which step in the appraisal process does this represent? - Correct Answer Gather and analyze data
  5. -When gathering and analyzing data, appraisers look at general city, neighborhood, demographic, and other data.
  6. Which economic principle says that value is created and maintained when the characteristics of a property fit in with its surroundings? - Correct Answer Conformity
  7. Which factor that influences value considers the property's function? - Correct Answer Utility
  8. When you're using the sales comparison approach to value a property, which of the following is considered a category of adjustment? - Correct Answer Financing terms and cash equivalency
  9. What does a CMA determine? - Correct Answer Market price range
  10. Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 states that its purpose, in part, is to require that real estate appraisals used in connection with federally related transactions be performed ______. - Correct Answer In writing, and in accordance with uniform standards
  11. A property's value is dropping because the neighboring property's yard is filled with trash. What's this an example of? - Correct Answer Regression
  12. According to the process appraisers follow, what action is taken first upon being assigned a property for appraisal? - Correct Answer State the problem. -The first step of the appraisal process defined by the Uniform Standards of Professional Appraisal Practice (USPAP) is to state the problem.
  1. The best way to start comparative market analysis data collection is to use properties that sold within which timeframe? - Correct Answer No later than 3 to 6 months ago
  2. When prices go down because there are too many homes on the market and too few buyers, what economic principle is at work? - Correct Answer Competition -Competition is related to supply and demand. Multiple similar properties on the market create competition, causing a decrease in value (lower prices) because the supply exceeds demand. Fewer homes on the market means less competition, increasing demand and driving prices upward.
  3. Which of the following is the price a lender believes the property will bring at a foreclosure sale? - Correct Answer Mortgage value -Lenders won't lend on what they can't recoup. Therefore, the loan amount will be based on what a lender would hope to recoup, should a foreclosure sale be necessary.
  4. Ashton, an appraiser, is estimating value using the sales comparison approach. He applies more weight to two comparables over several others he used. What process is he utilizing? - Correct Answer Reconciliation -Through the reconciliation process, the most weight may be given to one or two comparables, or equal weight may be given to all. The term correlation is often synonymous with reconciliation. Another term for this is weighted averaging.
  5. In the sales comparison approach, which of these are selected and evaluated both quantitatively and qualitatively against the subject property? - Correct Answer Comparables
  6. Marsha made an offer of $325,000 on a home listed for $350,000. The seller accepted her offer. What service will her lender order to determine the home's actual value? - Correct Answer Appraisal by an appraiser -An appraisal by an unbiased appraiser will give her an estimate of the true (or fair market) value of what the home is worth.
  7. The question, "What's the purpose of this appraisal?" can be answered by this first step of the appraisal process. - Correct Answer State the problem -The first step is to state the problem so the appraiser can identify what data is needed. After that, the appraiser will identify the data needed, gather it, and analyze it.
  8. The ease with which the property can be conveyed to another describes which factor that influences value? - Correct Answer Transferability
  9. A CMA or a BPO is an example of ______. - Correct Answer An informal estimate of market value
  1. You're performing a market analysis for the Swansons. Comparable A has an adjusted sales price of $251,250. Comparable B has an adjusted sales price of $265,000. What would be a good way to use this data to arrive at a suggested list price range? - Correct Answer Base list price on the comparable most similar to the subject property.
  2. Which type of listing can help a real estate professional determine how quickly a home in a given price range received an accepted offer? - Correct Answer Pending
  3. Which of these helps a licensee determine an appropriate listing price range? - Correct Answer Comparative market analysis
  4. The fewer properties on the market, the greater the scarcity. What's the effect on prices? - Correct Answer Prices are pushed upward.
  5. A strip mall valued at $850,000 has a $67,500 annual net operating income. What is the capitalization rate for the strip mall? - Correct Answer 7.9%
  6. Which approach to value measures the cost to produce a property, including land acquisition and construction costs? - Correct Answer Cost approach
  7. John is considering purchasing an office building and is trying to determine whether or not it's a good investment. The methods of income approach he may use when estimating the value are all of the following EXCEPT for which? - Correct Answer Market or sales comparison
  8. Rico is an appraiser who is performing a valuation on a property. What's another term for what Rico is doing? - Correct Answer Formal appraisal
  9. Steve is preparing a comparative market analysis for the Joneses and has selected three comparable properties. How many adjustments should Steve make to the Joneses' property? - Correct Answer Zero
  10. What's another term for a valuation that's an unbiased opinion of value? - Correct Answer Formal appraisal
  11. Your client is purchasing a single-family home with a VA-guaranteed loan. The listing price is $150,000. Is an appraisal by a certified appraiser required? - Correct Answer Yes, and since the purchase is financed with a VA-guaranteed loan, the appraiser must be VA certified.
  12. When you use a comparative market analysis to calculate a suggested listing price range for a particular property, which of the following actions will you

take? - Correct Answer Use adjusted prices from comparable and refine a range using active listings, expired listings, and possibly pending listings.

  1. When market conditions indicate top-of-the-market pricing, is it always in your client's best interest to price it there? - Correct Answer No, it still has to appraise
  2. Kevin is having an appraisal performed on a piece of property he's interested in buying. He's especially interested in hearing about the estimated rate of return the property could pull. What type of value is he interested in? - Correct Answer Investment value
  3. Using the capitalization formula, what is the value if the net operating income is $20,000 and the rate of capitalization is 10%? - Correct Answer $200, (20,000 / 10%)
  4. What is an appraisal? - Correct Answer an opinion of a property's value as of a specific date
  5. What are the two categories of comparison when evaluating comparables to a subject property in the market comparison approach? - Correct Answer Elements and units
  6. Giant Industries has a $674,232 gross operating income, operating expenses of $329,129, and other expenses totaling $38,719. What is the net operating income? - Correct Answer $345, (gross income - operating income 674,232 - 329,129)
  7. Who typically performs an appraisal? - Correct Answer Certified appraiser
  8. When completing a CMA, what might be indicated if a comparable property had a quick sale? - Correct Answer The market for similar homes is good
  9. Oliver is working to provide a buyer and a lender with a formal opinion of the value of the property the buyer is purchasing. What is Oliver's role? - Correct Answer He's a certified or licensed appraiser
  10. When interest rates are ______, buyers are often priced out of the market.
- **Correct Answer** high
  1. The loss in value caused by deterioration in physical condition is called ______. - Correct Answer Physical depreciation