Real Estate Appraisal Quizzes PDF

**1. A gross income multiplier (GIM), as used in a commercial appraisal, is obtained by dividing the \_\_\_\_\_\_\_\_\_\_.**\ A) Sale price by annual gross income\ B) Sale price by monthly gross income\ C) Overall capitalization rate by the sale price\ D) Annual gross income by the sale price\ **Ans...

**1. A gross income multiplier (GIM), as used in a commercial appraisal, is obtained by dividing the \_\_\_\_\_\_\_\_\_\_.**\ A) Sale price by annual gross income\ B) Sale price by monthly gross income\ C) Overall capitalization rate by the sale price\ D) Annual gross income by the sale price\ **Answer: A**\ **Explanation:** The Gross Income Multiplier (GIM) is calculated by dividing the property's sale price by its annual gross income, providing a quick estimate of value. **2. The borrowing of funds in hopes of earning a greater return than the cost of the borrowed funds is known as \_\_\_\_\_\_\_\_\_\_.**\ A) Appreciation\ B) Liquidity\ C) Leverage\ D) None of the above\ **Answer: C**\ **Explanation:** Leverage involves using borrowed money to increase the potential return on investment, which can amplify both gains and risks. **3. Direct capitalization is a valid method when the overall rate is developed from sales in which \_\_\_\_\_\_\_\_\_\_.**\ A) The land-to-building ratios are similar to those of the subject property\ B) The remaining economic lives are similar to those of the subject property\ C) The income and expense ratios are similar to those of the subject property\ D) All of the above\ **Answer: D**\ **Explanation:** Direct capitalization requires comparables with similar land-to-building ratios, economic lives, and income-expense characteristics to ensure accurate valuation. **4. The subject property's net income is \$15,000 per year. Comparable investments sold and are reported below:** - Comparable 1: Net Income = \$14,400, Sales Price = \$120,000 - Comparable 2: Net Income = \$14,000, Sales Price = \$147,400 - Comparable 3: Net Income = \$13,500, Sales Price = \$122,700 - Comparable 4: Net Income = \$14,500, Sales Price = \$152,600 Using direct capitalization with an overall rate, what is the best estimate of the value of the subject property (rounded to the nearest \$1,000)?\ A) \$125,000\ B) \$137,000\ C) \$143,000\ D) \$158,000\ **Answer: D**\ **Explanation:** The overall rate for Comparables 2 and 4 is calculated as Ro=Net Income÷Sales  Ro=14,500÷152,600=9.50%.R\_o = 14,500 ÷ 152,600 = 9.50\\%.Ro​=14,500÷152,600=9.50%. Estimate the value for the subject: Value=Net Income÷Ro=15,000÷0.095=157,895 (or 158,000) **5. One of the standard techniques used by appraisers when analyzing the income of a property is to divide the income being generated between the land and the improvements and then to capitalize the residual income to the land into a value estimate. This technique is referred to as the \_\_\_\_\_\_\_\_\_\_.**\ A) Land residual technique\ B) Building residual technique\ C) Property residual technique\ D) Plottage residual technique\ **Answer: A**\ **Explanation:** The land residual technique allocates income between land and improvements to determine the land value by capitalizing the remaining income. **6. The direct relationship between a single year\'s annual net operating income and the property\'s sale price value is \_\_\_\_\_\_\_\_\_\_.**\ A) Direct capitalization\ B) Immediate capitalization\ C) Overall capitalization rate\ D) Future capitalization\ **Answer: A**\ **Explanation:** Direct capitalization establishes the property value by dividing the net operating income (NOI) by the capitalization rate, linking income directly to value. **7. A property has a land value of \$1,000,000, a net operating income of \$350,000, a land capitalization rate of 10%, and a building capitalization rate of 12.5%. What is the value of the subject property?**\ A) \$1,500,000\ B) \$2,000,000\ C) \$2,500,000\ D) \$3,000,000\ **Answer: D**\ **Explanation:**\ Land value = 1,000,000×0.10=100,000\ Building income = 350,000−100,000=250,000\ Building value = 250,000÷0.125=2,000,000\ Total value = 1,000,000+2,000,000=3,000,000 **8. A property comparable to your subject property has a net operating income of \$1,200,000 with an annual debt service of \$800,000. The property was financed with a loan for 70% of its value, at 7.95% for 20 years. The annual mortgage constant for this loan is 10%. Your subject property has a net operating income of \$840,000. What is the indicated subject value?**\ A) \$7,850,000\ B) \$8,000,000\ C) \$8,400,000\ D) \$7,600,000\ **Answer: B**\ **Explanation:**\ Debt coverage ratio DCR=NOI÷Debt Service=1,200,000÷800,000=1.5 Overall capitalization rate Ro=DCR×Mortgage Constant×Mortgage Percentage=1.5×0.10×0.70=0.105 Value = 840,000÷0.105=8,000,000840,000 ÷ 0.105 = 8,000,000840,000÷0.105=8,000,000. **9. When market rent exceeds contract rent, the difference is \_\_\_\_\_\_\_\_\_\_.**\ A) Excess rent\ B) Contract rent\ C) Effective rent\ D) Deficit rent\ **Answer: A**\ **Explanation:** Excess rent is the amount by which the market rent exceeds the rent specified in a contract, representing potential additional income. **10. A comparable property billed \$153,000 but only collected \$150,000. What is the collection loss?**\ A) 0.015\ B) 0.020\ C) 0.025\ D) 0.030\ **Answer: B**\ **Explanation:**\ Collection loss = Billed Amount−Collected Amount=153,000−150,000=3,000 Collection loss percentage = 3,000÷153,000=0.020 or 2%. **11. Using the band-of-investment technique, develop the overall capitalization rate from the following information: Mortgage = 80% of value at 8% annually with a 25-year term. Equity capitalization rate = 10%. The effective tax rate is 1%.**\ A) 0.11\ B) 0.10\ C) 0.12\ D) 0.13\ **Answer: B**\ **Explanation:**\ Overall rate Ro=(Debt Percentage×Mortgage Rate)+(Equity Percentage×Equity Cap Rate)+Effective Tax Rate Ro=(0.80×0.08)+(0.20×0.10)+0.01=0.064+0.02+0.01=0.10. **12. You are appraising a commercial property by the income approach. You have a net operating income of \$400,000. You estimate the overall yield rate (discount rate) to be 10%, the recapture rate to be 4%, and the effective tax rate to be 1%. Land value is \$800,000. What is the indicated value of the property?**\ A) \$2,080,000\ B) \$2,880,000\ C) \$3,120,000\ D) \$3,880,000\ **Answer: B**\ **Explanation:** Building Income=NOI−(Land Value×Land Rate)=400,000−(800,000×0.11)=312,000 Building value = 312,000÷0.15=2,080, Total value = 800,000+2,080,000=2,880,000 **13. In straight-line capitalization, \_\_\_\_\_\_\_\_\_\_ is received in equal amounts during the economic life of the improvement.**\ A) Rent\ B) Recapture\ C) Principal\ D) Property tax\ **Answer: B**\ **Explanation:** Recapture involves recovering the original investment in equal amounts over the improvement\'s economic life. **14. Given the following data, determine the improvement capitalization rate by using the IRV equation:** - Sale Price: \$1,125,000 - Land Value: \$225,000 - Net Operating Income: \$171,000 - Remaining Economic Life: 25 years\ A) 0.14\ B) 0.15\ C) 0.16\ D) 0.17\ **Answer: C**\ **Explanation:** Improvement rate = Net Operating Income÷(Sale Price−Land Value)=171,000÷900,000=0.16