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BREA Broker Exam study materials
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BREA Broker Exam practice questions

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Question 1Real Estate Appraisal Principles and Procedures

A property generates a potential gross income of $120,000, has a vacancy and collection loss allowance of 5%, and operating expenses of $45,000. Using the income approach, what is the net operating income?

  1. $114,000
  2. $69,000 Correct answer.
  3. $75,000
  4. $71,400

Explanation

Effective gross income equals potential gross income minus the vacancy and collection allowance, so $120,000 × 0.95 = $114,000. Subtracting operating expenses of $45,000 yields a net operating income of $69,000. Debt service and income taxes are not deducted when calculating NOI.

Question 2Real Estate Appraisal Principles and Procedures

An appraiser values a property using a gross rent multiplier of 8 applied to a monthly market rent of $2,000. What indicated value does this method produce?

  1. $24,000
  2. $200,000
  3. $192,000 Correct answer.
  4. $16,000

Explanation

The gross rent multiplier method multiplies the market rent by a factor derived from comparable sales. With monthly rent of $2,000 and a multiplier of 8, the indicated value is $16,000 only if annual rent were used; here the multiplier is monthly, so $2,000 × 8 = $16,000 is monthly-based, and annualizing gives $192,000. Consistency between the rent period and the multiplier is essential.

Question 3Real Estate Appraisal Principles and Procedures

Which principle of appraisal holds that a property's value is set by the cost of acquiring an equally desirable substitute property?

  1. Conformity
  2. Contribution
  3. Substitution Correct answer.
  4. Anticipation

Explanation

The principle of substitution states that a prudent buyer will pay no more for a property than the cost of obtaining an equally desirable substitute. It underlies the sales comparison and cost approaches. Contribution, conformity, and anticipation address different relationships within valuation.

Question 4Real Estate Appraisal Principles and Procedures

A building has an estimated replacement cost new of $500,000 and accrued depreciation of $125,000. The land is valued at $150,000. What is the value indicated by the cost approach?

  1. $650,000
  2. $375,000
  3. $475,000
  4. $525,000 Correct answer.

Explanation

The cost approach subtracts accrued depreciation from replacement cost new to obtain the depreciated improvement value, then adds land value. Here $500,000 − $125,000 = $375,000, plus $150,000 land equals $525,000. Land is never depreciated in this calculation.

Question 5Real Estate Appraisal Principles and Procedures

In the sales comparison approach, an adjustment is made to the sale price of a comparable property when the comparable is superior to the subject in a given feature. How is that adjustment applied?

  1. Apply the adjustment to the subject's final value estimate
  2. Add the adjustment amount to the comparable's price
  3. Subtract the adjustment amount from the comparable's price Correct answer.
  4. Ignore the difference because the subject is inferior

Explanation

Adjustments are made to the comparable sale price to make it equivalent to the subject. If the comparable is superior, its price is reduced so it reflects the subject's inferior feature. The direction of adjustment always moves the comparable toward the subject.

Question 6Real Estate Appraisal Principles and Procedures

Which type of depreciation is caused by factors outside the property itself, such as changes in neighborhood zoning or market demand?

  1. Physical deterioration
  2. External obsolescence Correct answer.
  3. Curable deferred maintenance
  4. Functional obsolescence

Explanation

External obsolescence arises from forces outside the property boundary, such as adverse zoning, traffic patterns, or economic decline. It is generally considered incurable because the owner cannot correct the outside cause. Physical deterioration and functional obsolescence originate within the property.

Question 7Real Estate Appraisal Principles and Procedures

An appraiser is estimating the value of a special-purpose property such as a church or museum that rarely sells. Which approach is generally given the greatest weight?

  1. Income approach
  2. Cost approach Correct answer.
  3. Gross rent multiplier method
  4. Sales comparison approach

Explanation

Special-purpose properties seldom trade and generate little or no income, so the cost approach often carries the most weight. The absence of comparable sales and reliable income data limits the other approaches. Replacement cost new less depreciation plus land becomes the primary indicator.

Question 8Real Estate Appraisal Principles and Procedures

What does a capitalization rate represent in the income approach?

  1. The annual rate of property tax assessment
  2. The ratio of gross income to operating expenses
  3. The ratio of net operating income to value Correct answer.
  4. The rate at which a building physically deteriorates

Explanation

The capitalization rate expresses the relationship between a property's net operating income and its value. It is derived from the market and converts income into an indication of value. Dividing net operating income by the rate yields value.

Question 9Real Estate Appraisal Principles and Procedures

A comparable property sold for $300,000 and has a net operating income of $24,000. What capitalization rate does this sale indicate?

  1. 8.0% Correct answer.
  2. 12.5%
  3. 1.25%
  4. 0.8%

Explanation

The capitalization rate is net operating income divided by sale price. Dividing $24,000 by $300,000 yields 0.08, or 8.0%. This market-derived rate can then be applied to the subject's income.

Question 10Real Estate Appraisal Principles and Procedures

Which of the following best describes the highest and best use of a property?

  1. The use that the current owner prefers
  2. The use that produces the largest building footprint
  3. The use permitted by the most recent zoning amendment
  4. The most profitable legal use that is physically possible and financially feasible Correct answer.

Explanation

Highest and best use is the reasonably probable use that is legally permissible, physically possible, financially feasible, and maximally productive. It considers all four tests, not simply owner preference or zoning. It may differ from the current use.

Question 11Real Estate Appraisal Principles and Procedures

An appraiser must estimate the value of a property as of a specific past date, such as the date of a condemnation. This assignment is best described as which type of appraisal?

  1. Insurance appraisal
  2. Retrospective appraisal Correct answer.
  3. Feasibility appraisal
  4. Prospective appraisal

Explanation

A retrospective appraisal estimates value as of a date in the past. It is common in litigation, condemnation, and estate matters. A prospective appraisal, by contrast, values property as of a future date.

Question 12Real Estate Appraisal Principles and Procedures

A property's land value is $80,000, and the depreciated value of improvements is $220,000. What is the total value indicated by the cost approach?

  1. $220,000
  2. $300,000 Correct answer.
  3. $80,000
  4. $140,000

Explanation

The cost approach adds the depreciated improvement value to the land value to reach total property value. Adding $220,000 and $80,000 yields $300,000. Land is not depreciated.

Question 13Real Estate Appraisal Principles and Procedures

Which of the following is an example of curable functional obsolescence?

  1. A house with a badly outdated kitchen that could be updated Correct answer.
  2. A building with foundation settlement
  3. A house located next to a new industrial plant
  4. A neighborhood experiencing rising vacancy

Explanation

Functional obsolescence is a defect within the property, and it is curable when the cost to correct it is recovered in value. An outdated kitchen is a classic curable functional defect. The other options describe external obsolescence or physical deterioration.

Question 14Real Estate Appraisal Principles and Procedures

In the appraisal process, what is the purpose of defining the appraisal problem?

  1. To reconcile the approaches to value
  2. To inspect the property for physical defects
  3. To determine the final value conclusion
  4. To identify the client, intended use, value type, and effective date Correct answer.

Explanation

Defining the appraisal problem establishes the scope of work by identifying the client, intended use, type of value, subject property, and effective date. These elements guide the rest of the assignment. The final conclusion and reconciliation occur much later.

Question 15Real Estate Appraisal Principles and Procedures

An appraiser uses a gross income multiplier developed from comparable sales. Which income figure is typically multiplied by the gross income multiplier?

  1. Net operating income
  2. Potential gross income
  3. Effective gross income
  4. Gross annual rent Correct answer.

Explanation

The gross income multiplier is applied to the gross rental income of the subject to indicate value. It is derived by dividing comparable sale prices by their gross rents. Consistency between the rent basis of the comparables and the subject is required.

Question 16Real Estate Appraisal Principles and Procedures

Two otherwise identical properties are located in the same market, but one has a superior view. According to appraisal principles, how is this difference typically handled?

  1. As a capitalization rate adjustment
  2. As a deduction from replacement cost
  3. As external obsolescence
  4. As a paired data adjustment in the sales comparison approach Correct answer.

Explanation

Paired data analysis isolates the effect of a single feature, such as a view, by comparing otherwise similar sales. The price difference is attributed to that feature and applied as an adjustment. This is a standard technique within the sales comparison approach.

Question 17Real Estate Appraisal Principles and Procedures

Which of the following best describes the principle of contribution?

  1. The value of a component depends on how much it adds to the whole property's value Correct answer.
  2. Value is set by the cost of a substitute property
  3. Value is influenced by the uniformity of surrounding properties
  4. Value is created by expected future benefits

Explanation

Contribution holds that the value of any component is measured by how much it adds to the value of the whole property. An improvement may cost more than it contributes, in which case it does not add full value. This principle guides decisions about additions and renovations.

Question 18Real Estate Appraisal Principles and Procedures

A property has a net operating income of $60,000, and the market capitalization rate is 10%. What is the indicated value using direct capitalization?

  1. $60,000
  2. $660,000
  3. $6,000
  4. $600,000 Correct answer.

Explanation

Direct capitalization divides net operating income by the capitalization rate. Dividing $60,000 by 0.10 yields $600,000. This is a single-year income conversion method.

Question 19Real Estate Appraisal Principles and Procedures

An appraiser is estimating replacement cost new. What does replacement cost represent?

  1. The cost to build a structure of equivalent utility using current materials and methods Correct answer.
  2. The original construction cost adjusted for inflation
  3. The market value of the land plus improvements
  4. The cost to reproduce an exact replica using original materials

Explanation

Replacement cost new is the cost to construct a building of equivalent utility using current materials and standards. Reproduction cost, in contrast, is the cost to replicate the original structure exactly. Appraisers often prefer replacement cost because it reflects what a buyer would actually build today.

Question 20Real Estate Appraisal Principles and Procedures

Which of the following situations would most likely call for the income approach to value?

  1. A public school building
  2. An apartment building purchased primarily for its rental income Correct answer.
  3. A single-family home in a neighborhood of similar owner-occupied homes
  4. A vacant parcel of land with no improvements

Explanation

The income approach is most reliable for properties bought and sold on the basis of their income-producing capacity, such as apartment buildings. Investors price such properties by the income they generate. Owner-occupied homes, vacant land, and public buildings typically lack reliable income data.

Question 21Real Estate Appraisal Principles and Procedures

An appraiser is analyzing a comparable sale that involved favorable seller financing below market rates. How should this sale be treated in the sales comparison approach?

  1. Increase the sale price to reflect the favorable terms
  2. Use the sale price without adjustment
  3. Reject the sale entirely as unusable
  4. Adjust the sale price to reflect cash-equivalent terms Correct answer.

Explanation

When a sale involves atypical financing, the price may not reflect market value under cash terms. The appraiser adjusts the price to a cash-equivalent basis before comparing it to the subject. This ensures the comparables reflect typical market conditions.

Question 22Real Estate Appraisal Principles and Procedures

What is the primary purpose of reconciliation in the appraisal process?

  1. To determine the highest and best use
  2. To select the most reliable value indication based on the quality and relevance of the data Correct answer.
  3. To average all three approaches to value
  4. To calculate the replacement cost new

Explanation

Reconciliation weighs the indications from each approach and selects the most credible final value based on data quality and relevance to the property type. It is a reasoned judgment, not a simple average. The appraiser explains why one approach carries more weight.

Question 23Real Estate Appraisal Principles and Procedures

A property's effective gross income is $90,000, operating expenses are $30,000, and the market capitalization rate is 12%. What is the indicated value?

  1. $250,000
  2. $60,000
  3. $750,000
  4. $500,000 Correct answer.

Explanation

Net operating income equals effective gross income minus operating expenses, so $90,000 − $30,000 = $60,000. Dividing by the 0.12 capitalization rate yields $500,000. Debt service is not deducted in this calculation.

Question 24Real Estate Appraisal Principles and Procedures

Which of the following is generally considered incurable physical deterioration?

  1. A leaking faucet
  2. A worn roof covering
  3. Structural damage from foundation movement that costs more to fix than it adds in value Correct answer.
  4. Peeling exterior paint

Explanation

Deterioration is curable when the cost of correction is recovered in value; otherwise it is incurable. Major structural problems whose repair cost exceeds the value added are treated as incurable. Minor items like paint, roofing, and faucets are typically curable.

Question 25Real Estate Appraisal Principles and Procedures

What is the difference between market value and investment value?

  1. Market value is the same as investment value for all properties
  2. Investment value is set by government assessment
  3. Market value ignores the property's income potential
  4. Market value reflects the typical buyer, while investment value reflects a specific investor's requirements Correct answer.

Explanation

Market value assumes a typical, well-informed buyer and seller under open market conditions. Investment value reflects the worth of a property to a particular investor based on that investor's specific criteria. The two can differ for the same property.

Question 26Real Estate Appraisal Principles and Procedures

Which appraisal principle holds that a property's maximum value is generally achieved when its improvements are similar in size, style, and quality to surrounding properties?

  1. Substitution
  2. Conformity Correct answer.
  3. Progression
  4. Anticipation

Explanation

Conformity states that value is maximized when a property fits its neighborhood in use, size, and design, because buyers will pay more for a home that does not stand out as over- or under-improved relative to its neighbors. Progression and regression describe how a property's value is influenced by better or poorer surrounding properties, and substitution concerns the price a buyer would pay for an equally desirable alternative.

Question 27Real Estate Appraisal Principles and Procedures

An appraiser values a property using the cost approach and concludes that the improvements suffer from deferred maintenance, such as peeling paint and a leaking roof. Into which category does this loss of value fall?

  1. Functional obsolescence
  2. External obsolescence
  3. Physical deterioration Correct answer.
  4. Economic obsolescence

Explanation

Physical deterioration is a loss in value from wear and tear, decay, or damage to the improvements, including curable items such as deferred maintenance. Functional obsolescence arises from defects in design or utility within the property, while external or economic obsolescence comes from forces outside the property.

Question 28Real Estate Appraisal Principles and Procedures

An appraiser is preparing a report and must identify the property rights being valued, the purpose and intended use of the assignment, and the effective date of value. These activities are best described as part of which step?

  1. Applying the sales comparison approach
  2. Defining the appraisal problem Correct answer.
  3. Reconciling the value indications
  4. Gathering general data

Explanation

Defining the appraisal problem requires identifying the client and intended users, the purpose and intended use, the property rights to be valued, the effective date, and the type of value sought. These elements frame the entire assignment and determine which data and approaches are appropriate.

Question 29Real Estate Appraisal Principles and Procedures

A subject property has three bedrooms, while the most comparable sale has four bedrooms and sold for $320,000. Market data indicate that an additional bedroom contributes $12,000 to value. What adjustment should the appraiser make to the comparable sale price?

  1. Subtract $36,000
  2. Make no adjustment
  3. Add $12,000
  4. Subtract $12,000 Correct answer.

Explanation

Adjustments are made to the comparable to make it equivalent to the subject, so when the comparable is superior in a feature, the appraiser subtracts the value of that advantage. Because the comparable has an extra bedroom worth $12,000, subtracting that amount converts the sale price to the subject's basis.

Question 30Real Estate Appraisal Principles and Procedures

An appraiser uses a gross rent multiplier of 140 developed from comparable sales. If the subject property's monthly market rent is $1,500, what is the indicated value?

  1. $21,000
  2. $180,000
  3. $1,400,000
  4. $210,000 Correct answer.

Explanation

The gross rent multiplier is applied by multiplying the subject's monthly rent by the multiplier: $1,500 times 140 equals $210,000. The multiplier is derived from comparable sales prices divided by their monthly rents, so the same relationship is applied to the subject.

Question 31Real Estate Appraisal Principles and Procedures

Which of the following best describes the principle of balance in real estate valuation?

  1. Value is created by the expectation of future benefits from ownership
  2. Value is maximized when a property conforms to surrounding land uses
  3. Value is influenced by the cost of acquiring an equally desirable substitute
  4. Value is maximized when the agents of production, such as land, labor, capital, and management, are in proper proportion Correct answer.

Explanation

The principle of balance holds that maximum value occurs when the factors of production, land, labor, capital, and management, are combined in proper proportion, and that imbalance, such as over-improvement or under-improvement, reduces value. Conformity is a related but distinct principle focused on similarity to surrounding uses.

Question 32Real Estate Appraisal Principles and Procedures

An appraiser is estimating the value of a 20-year-old building using the cost approach. The building's replacement cost new is $500,000, its expected economic life is 50 years, and its effective age is 10 years. Using the age-life method, what is the estimated depreciated value of the improvements?

  1. $450,000
  2. $300,000
  3. $100,000
  4. $400,000 Correct answer.

Explanation

Under the age-life method, accrued depreciation equals effective age divided by total economic life, or 10 divided by 50, which is 20 percent. Twenty percent of $500,000 is $100,000, so the depreciated improvement value is $500,000 minus $100,000, or $400,000.

Question 33Real Estate Appraisal Principles and Procedures

A property generates potential gross income of $120,000, has a vacancy and collection loss allowance of 5 percent, and incurs operating expenses of $45,000. What is the net operating income?

  1. $69,000 Correct answer.
  2. $75,000
  3. $63,000
  4. $114,000

Explanation

Potential gross income of $120,000 minus a 5 percent vacancy and collection loss of $6,000 gives an effective gross income of $114,000. Subtracting operating expenses of $45,000 yields a net operating income of $69,000, which is the figure capitalized in the income approach.

Question 34Real Estate Appraisal Principles and Procedures

An appraiser is analyzing a property whose highest and best use is determined to be its current use as a retail store. Which statement best explains the role of this conclusion in the valuation?

  1. The value estimate should reflect the property's current use, because that use is legally permissible, physically possible, financially feasible, and maximally productive Correct answer.
  2. The value estimate should reflect the most intensive use permitted by zoning, regardless of financial feasibility
  3. The appraiser must value the property as vacant land because current use is never the highest and best use
  4. The appraiser should ignore the highest and best use conclusion once the income approach is applied

Explanation

Highest and best use is the reasonably probable and legal use that is physically possible, appropriately supported, financially feasible, and results in the highest value. When current use meets all four tests, the valuation proceeds on that basis and all approaches should be consistent with it.

Question 35Real Estate Appraisal Principles and Procedures

In the sales comparison approach, an appraiser makes a downward adjustment to a comparable sale for a feature the comparable possesses that the subject lacks. What is the underlying rationale for the direction of this adjustment?

  1. The sale price is adjusted to reflect what the comparable would have sold for if it had the subject's characteristics Correct answer.
  2. The adjustment converts the comparable's sale price to its original construction cost
  3. The adjustment reflects the appraiser's opinion of the subject's listing price
  4. The adjustment accounts for changes in market conditions between the sale date and the effective date

Explanation

Each comparable is adjusted to simulate what its sale price would have been if it had the same features as the subject, so a superior feature in the comparable is removed by a downward adjustment. Adjustments for market conditions are a separate category that addresses price changes over time rather than physical or locational differences.

Question 36Real Estate Appraisal Principles and Procedures

Which method of estimating accrued depreciation is best suited to a property that has both physical deterioration and functional obsolescence that can be separately identified and measured?

  1. The age-life method
  2. The market extraction method
  3. The breakdown method Correct answer.
  4. The straight-line method

Explanation

The breakdown method separates depreciation into curable and incurable physical deterioration, functional obsolescence, and external obsolescence, allowing each component to be measured individually. The age-life method and market extraction provide overall estimates without itemizing the causes.

Question 37Real Estate Appraisal Principles and Procedures

An appraiser is valuing a property under a lease that provides below-market rent for the remaining five years. In the income approach, how should the appraiser treat the lease?

  1. Refuse to value the property until the lease expires
  2. Value the contract rent for the remaining lease term and market rent thereafter, reflecting the leasehold or leased fee interests as appropriate Correct answer.
  3. Use market rent for the entire holding period, ignoring the existing lease
  4. Use contract rent for the entire holding period, ignoring market rent after expiration

Explanation

When a lease is at other than market terms, the appraiser must reflect the contract rent during the remaining lease term and market rent thereafter, because the lease affects the income the property can produce. The resulting value reflects the specific property rights being appraised, such as the leased fee or leasehold interest.

Question 38Real Estate Appraisal Principles and Procedures

An appraiser is reconciling value indications from the cost, sales comparison, and income approaches for a well-maintained apartment building in an active market. Which factor is most important in deciding the weight given to each approach?

  1. The approach most frequently used by the appraiser in past assignments
  2. The quantity and reliability of data available for each approach and the relevance of each approach to the property type and typical buyer Correct answer.
  3. The approach that requires the least time to complete
  4. The approach that produces the highest indicated value

Explanation

Reconciliation weighs the indications based on the adequacy and reliability of the data supporting each approach and on how typical buyers of that property type make decisions. For an income-producing apartment building, the income approach generally carries substantial weight because investors purchase based on income.

Question 39Real Estate Appraisal Principles and Procedures

An appraiser is estimating the value of land using the allocation method. Which procedure does this method involve?

  1. Capitalizing the net income attributable to the land alone
  2. Subtracting the depreciated cost of improvements from the sale price of a comparable
  3. Estimating the cost to acquire and develop a substitute parcel
  4. Deriving a typical ratio of land value to total property value from comparable sales and applying it to the subject Correct answer.

Explanation

The allocation method extracts a typical land-to-value ratio from comparable improved properties and applies that ratio to the subject's total value to indicate land value. It is a relatively simple technique but is only as reliable as the consistency of the ratio in the market.

Question 40Real Estate Appraisal Principles and Procedures

An appraiser is estimating the value of a subject property that lacks a garage, using a comparable sale with a two-car garage. Market data indicate that buyers in this neighborhood typically pay about $18,000 for a two-car garage. To make the comparable sale equivalent to the subject, how should the appraiser treat this feature in the sales comparison approach?

  1. Adjust the subject's indicated value upward by $18,000 after reconciliation of all approaches
  2. Make no adjustment, because garage differences are considered curable physical deterioration
  3. Make a downward adjustment of $18,000 to the comparable sale price, because the comparable has a feature the subject lacks Correct answer.
  4. Make an upward adjustment of $18,000 to the comparable sale price, because the subject is inferior to the comparable

Explanation

In the sales comparison approach, the comparable is adjusted to reflect what it would have sold for if it had the same features as the subject. Because the comparable has a garage the subject lacks, the comparable is superior, so its price is adjusted downward by the market-derived value of the garage. Adjustments are always applied to the comparable, never to the subject's final value.

Question 41Valuation Approaches and Methods

A broker is estimating the market value of a single-family home. Which of the following best describes the sales comparison approach?

  1. Estimating value by comparing the subject property to recently sold similar properties and adjusting for differences Correct answer.
  2. Estimating value by adding the cost of land to the depreciated cost of improvements
  3. Estimating value by calculating the present value of expected future income the property could produce
  4. Estimating value by averaging the assessed value and the most recent purchase price

Explanation

The sales comparison approach derives value from prices paid for comparable properties, then adjusts for differences such as size, condition, and location. It is the most common approach for residential properties where active comparable sales exist.

Question 42Valuation Approaches and Methods

In the income approach, a property generates a net operating income of $48,000 per year and the market capitalization rate is 8%. What is the indicated value?

  1. $540,000
  2. $480,000
  3. $600,000 Correct answer.
  4. $384,000

Explanation

Value under direct capitalization equals net operating income divided by the capitalization rate. Dividing $48,000 by 0.08 yields $600,000. The cap rate reflects the market's required return and is applied to a single year's stabilized income.

Question 43Valuation Approaches and Methods

Which of the following is the best definition of market value?

  1. The assessed value placed on the property by the county tax authority
  2. The highest price any buyer has ever offered for the property
  3. The price the current owner originally paid plus documented improvements
  4. The most probable price in a competitive and open market under all conditions requisite to a fair sale Correct answer.

Explanation

Market value is the most probable price a property should bring in a competitive and open market under fair sale conditions, with both parties acting knowledgeably and without undue pressure. It assumes a reasonable exposure period and informed, prudent parties.

Question 44Valuation Approaches and Methods

When using the cost approach, what does the term "accrued depreciation" refer to?

  1. The difference between the asking price and the final sale price
  2. The total loss in value of the improvements from all causes as of the effective date Correct answer.
  3. The annual tax deduction allowed for wear and tear on an investment property
  4. The decline in land value caused by neighborhood economic changes

Explanation

In appraisal usage, accrued depreciation is the total loss in value of the improvements from any cause as of the effective date. It includes physical deterioration, functional obsolescence, and external obsolescence. It is distinct from accounting depreciation used for tax purposes.

Question 45Valuation Approaches and Methods

A comparable property sold for $320,000. It has a two-car garage, while the subject property has no garage. The market indicates a garage contributes $15,000 in value. What adjustment should be made to the comparable's sale price to indicate the subject's value?

  1. Add $30,000 to the sale price
  2. Make no adjustment because the difference is minor
  3. Add $15,000 to the sale price
  4. Subtract $15,000 from the sale price Correct answer.

Explanation

Adjustments are made to the comparable to make it equivalent to the subject. Because the comparable has a feature the subject lacks, its price must be reduced to reflect that the subject is inferior. The adjustment direction always runs from the comparable toward the subject.

Question 46Valuation Approaches and Methods

Which approach to value is generally given the most weight when appraising a special-purpose property such as a church or a public museum?

  1. The income approach
  2. The gross rent multiplier method
  3. The cost approach Correct answer.
  4. The sales comparison approach

Explanation

Special-purpose properties rarely sell and seldom produce income, so the cost approach often carries the most weight. Reproduction or replacement cost of the improvements plus land value provides the most reliable indication. Market and income evidence are typically limited for such properties.

Question 47Valuation Approaches and Methods

A property's potential gross income is $90,000, vacancy and collection loss is 5%, and operating expenses total $30,000. What is the net operating income?

  1. $52,500
  2. $85,500
  3. $60,000
  4. $55,500 Correct answer.

Explanation

Effective gross income equals potential gross income less vacancy and collection loss, or $90,000 minus $4,500, which is $85,500. Subtracting $30,000 of operating expenses gives a net operating income of $55,500. Debt service is not deducted when computing net operating income.

Question 48Valuation Approaches and Methods

What does a gross rent multiplier (GRM) compare?

  1. Net operating income to total debt service
  2. Assessed value to market value
  3. Sale price to monthly or annual gross rent Correct answer.
  4. Replacement cost to accrued depreciation

Explanation

The gross rent multiplier relates a property's sale price to its gross rental income, either monthly or annual depending on the convention used. It is a quick screening tool that ignores operating expenses. Consistency in the rent period is essential when applying it.

Question 49Valuation Approaches and Methods

An appraiser values a property using a capitalization rate of 9.5% and concludes a value of $760,000. What net operating income does this imply?

  1. $72,200 Correct answer.
  2. $82,000
  3. $68,400
  4. $80,000

Explanation

Rearranging the direct capitalization formula, net operating income equals value multiplied by the capitalization rate. Multiplying $760,000 by 0.095 gives $72,200. This demonstrates the inverse relationship between value, income, and cap rate.

Question 50Valuation Approaches and Methods

A comparable sold for $450,000 and included $20,000 of personal property that is not part of the real estate transaction. What adjustment is appropriate before using this sale as a comparable?

  1. Make no adjustment because personal property is irrelevant
  2. Subtract $20,000 from the sale price Correct answer.
  3. Add $20,000 to the sale price
  4. Subtract $40,000 from the sale price

Explanation

The sale price must be adjusted to reflect real property only, because the subject valuation concerns real estate. Removing the value of included personal property requires subtracting $20,000 from the comparable's price. This is a transaction adjustment made before any physical comparisons.