CA Real Estate Property Valuation and Appraisal 2 — Questions and Answers
Question 1: The principle of substitution states that a buyer will pay no more for a property than:
- Its assessed value
- The cost of an equally desirable substitute property (Correct answer)
- Its appraised value plus 10%
- The seller's asking price
Correct answer: The cost of an equally desirable substitute property
The principle of substitution holds that value is capped at the cost of acquiring a comparable substitute.
Question 2: Which type of depreciation refers to a loss in value due to outdated or inefficient design features within the property?
- Physical deterioration
- Economic obsolescence
- Functional obsolescence (Correct answer)
- Deferred maintenance
Correct answer: Functional obsolescence
Functional obsolescence is a loss in value caused by outdated design, layout, or equipment within the property.
Question 3: A property generates a net operating income of $50,000 per year and has a capitalization rate of 5%. What is the estimated value?
- $250,000
- $500,000
- $1,000,000 (Correct answer)
- $2,500,000
Correct answer: $1,000,000
Value = NOI ÷ Cap Rate = $50,000 ÷ 0.05 = $1,000,000.
Question 4: In California, who is licensed to perform federally related real property appraisals?
- Any licensed real estate salesperson
- A licensed or certified appraiser (Correct answer)
- A broker with 5 years experience
- A notary public
Correct answer: A licensed or certified appraiser
Only licensed or certified appraisers may perform federally related real estate appraisals under FIRREA requirements.
Question 5: The income approach to value is MOST appropriate for which type of property?
- Owner-occupied single-family homes
- Vacant land
- Income-producing investment properties (Correct answer)
- Historic landmark buildings
Correct answer: Income-producing investment properties
The income approach is most suitable for investment properties where investors base value on income-generating potential.
Question 6: What is the gross rent multiplier (GRM) used to estimate?
- Monthly operating expenses
- Property value based on rental income (Correct answer)
- Annual depreciation amount
- Vacancy rate
Correct answer: Property value based on rental income
The GRM is calculated by dividing the sale price by the gross monthly (or annual) rental income to estimate value.
