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MCM MRE practice questions

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Question 1Real Estate Finance and Investment

A property generates a net operating income (NOI) of $120,000 and is valued using a 8% capitalization rate. What is the indicated value?

  1. $1,500,000 Correct answer.
  2. $960,000
  3. $1,200,000
  4. $1,440,000

Explanation

Value under the income approach is derived by dividing NOI by the capitalization rate: $120,000 / 0.08 = $1,500,000. The cap rate expresses the relationship between a single year's income and value, so a lower rate produces a higher value for the same income.

Question 2Real Estate Finance and Investment

Which measure of return reflects the discount rate at which the present value of an investment's cash flows equals its initial cost?

  1. Net present value
  2. Equity dividend rate
  3. Internal rate of return Correct answer.
  4. Gross rent multiplier

Explanation

The internal rate of return (IRR) is the discount rate that sets the net present value of all cash flows to zero, meaning present value of inflows equals the initial outlay. It is a yield measure derived from the full timing of cash flows rather than a single-year ratio.

Question 3Real Estate Finance and Investment

An investor purchases a property for $2,000,000 with a 75% loan-to-value mortgage. What is the required equity investment?

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

Explanation

A 75% LTV loan covers 75% of the $2,000,000 price, or $1,500,000. The remaining 25% must come from equity, which equals $500,000.

Question 4Real Estate Finance and Investment

In a mortgage amortization schedule with a fixed interest rate and level monthly payments, what happens to the portion of each payment applied to principal over time?

  1. It decreases each period
  2. It fluctuates randomly with the balance
  3. It increases each period Correct answer.
  4. It stays constant

Explanation

With level payments, interest is charged on the declining balance, so interest expense falls each period and the residual applied to principal rises. This produces the characteristic upward-sloping principal curve of a fully amortizing loan.

Question 5Real Estate Finance and Investment

Which of the following is generally treated as a capital expenditure rather than an operating expense in a property's income statement?

  1. Routine unit turnover painting
  2. Monthly landscaping service
  3. Annual property insurance premium
  4. Replacing the building's roof Correct answer.

Explanation

Capital expenditures extend the useful life or add value to the asset and are depreciated over time rather than deducted in the year incurred. A roof replacement restores or extends the structure's life, so it is capitalized.

Question 6Real Estate Finance and Investment

A property has potential gross income of $500,000, a 5% vacancy and collection loss, and operating expenses of $180,000. What is the net operating income?

  1. $320,000
  2. $295,000 Correct answer.
  3. $275,000
  4. $300,000

Explanation

Effective gross income equals $500,000 less 5% ($25,000), or $475,000. Subtracting $180,000 of operating expenses yields NOI of $295,000.

Question 7Real Estate Finance and Investment

Which appraisal approach is most appropriate for valuing a special-purpose property such as a church or public museum that rarely trades?

  1. Gross income multiplier approach
  2. Cost approach Correct answer.
  3. Income capitalization approach
  4. Sales comparison approach

Explanation

The cost approach estimates value as replacement or reproduction cost less depreciation plus land value, making it useful when comparable sales or income data are scarce. Special-purpose properties with limited market activity are the classic case for this method.

Question 8Real Estate Finance and Investment

A lender quotes a 6% nominal annual interest rate compounded monthly on a mortgage. What is the effective annual rate?

  1. 6.50%
  2. 6.00%
  3. 6.09%
  4. 6.17% Correct answer.

Explanation

The effective annual rate equals (1 + 0.06/12)^12 - 1, which is approximately 6.17%. Monthly compounding raises the true annual cost above the nominal 6% quote.

Question 9Real Estate Finance and Investment

An investor buys a property for $1,000,000 with 70% debt at 5% interest-only and expects first-year NOI of $80,000. What is the first-year cash-on-cash return?

  1. 11.7%
  2. 8.0%
  3. 5.0%
  4. 15.0% Correct answer.

Explanation

Debt is $700,000 and annual interest-only debt service is $35,000. Cash flow after debt service is $80,000 - $35,000 = $45,000. Initial equity is $300,000, so cash-on-cash return is $45,000/$300,000 = 15%.

Question 10Real Estate Finance and Investment

Positive financial leverage occurs when a property's overall capitalization rate exceeds which of the following?

  1. The equity dividend rate
  2. The loan-to-value ratio
  3. The depreciation rate
  4. The mortgage constant Correct answer.

Explanation

Leverage is favorable when the return on the property (cap rate) exceeds the cost of debt, measured by the mortgage constant. When the cap rate exceeds the constant, borrowing amplifies the return to equity.

Question 11Real Estate Finance and Investment

A property's NOI is expected to be $90,000 in year one and to grow 2% annually. Using a 9% discount rate and a going-out cap rate of 8% at the end of year five, the terminal value is based on which year's NOI?

  1. Year one NOI
  2. Year six NOI Correct answer.
  3. Year five NOI
  4. The average NOI over five years

Explanation

A terminal value computed with a cap rate capitalizes the forward-looking income expected in the year after the holding period. The year-six NOI is therefore divided by the going-out cap rate to estimate sale proceeds at the end of year five.

Question 12Real Estate Finance and Investment

Which of the following best describes the purpose of a debt service coverage ratio (DSCR) in underwriting?

  1. It measures the property's physical occupancy
  2. It measures property income available to cover scheduled debt payments Correct answer.
  3. It measures the loan amount relative to property value
  4. It measures the borrower's total net worth

Explanation

DSCR divides net operating income by annual debt service to show how many times income covers the loan payments. Lenders set minimum ratios to build a cushion against income volatility.

Question 13Real Estate Finance and Investment

A property producing $150,000 NOI is financed with a loan requiring a minimum DSCR of 1.25. What is the maximum annual debt service the lender will allow?

  1. $150,000
  2. $187,500
  3. $120,000 Correct answer.
  4. $100,000

Explanation

The maximum debt service equals NOI divided by the minimum DSCR: $150,000 / 1.25 = $120,000. Any higher debt service would push the ratio below the lender's required coverage.

Question 14Real Estate Finance and Investment

Which statement correctly describes the relationship between a property's going-in cap rate, the discount rate, and expected NOI growth in a constant-growth valuation model?

  1. The cap rate equals the discount rate plus the growth rate
  2. The cap rate equals the discount rate minus the growth rate Correct answer.
  3. The cap rate equals the discount rate multiplied by the growth rate
  4. The cap rate is independent of the growth rate

Explanation

In the Gordon growth framework, value equals next year's NOI divided by the discount rate less growth. Rearranging, the cap rate equals the discount rate minus the expected growth rate, so faster growth lowers the cap rate and raises value.

Question 15Real Estate Finance and Investment

An investor is comparing two properties with identical NOI. Property A sells at a 5% cap rate and Property B at a 7% cap rate. Which statement is accurate?

  1. Both properties must have the same price because NOI is equal
  2. Property A has the higher price and implies lower perceived risk or stronger growth expectations Correct answer.
  3. Property A has the higher price because its NOI is larger
  4. Property B has the higher price because its cap rate is larger

Explanation

Because value equals NOI divided by the cap rate, a lower cap rate produces a higher price for the same income. Lower cap rates generally reflect lower perceived risk, stronger growth prospects, or a more competitive buyer pool.

Question 16Real Estate Finance and Investment

In a sale-leaseback transaction, which party typically retains occupancy of the property after the sale?

  1. The seller, as tenant Correct answer.
  2. The lender
  3. The buyer only
  4. The property manager

Explanation

In a sale-leaseback, the owner sells the real estate and simultaneously leases it back, so the seller becomes the tenant and continues to occupy the property. The buyer receives rent income and landownership while the seller frees up capital.

Question 17Real Estate Finance and Investment

A borrower takes a $400,000 interest-only loan at 6% with a 30-year amortization schedule but a 10-year term. What is the balloon payment at maturity?

  1. $0
  2. The remaining principal balance after 10 years of scheduled amortization Correct answer.
  3. The full original loan amount
  4. Ten years of interest payments

Explanation

A balloon loan amortizes on a longer schedule than its term, so at maturity the outstanding balance must be repaid in a lump sum. That balance reflects principal reduction under the amortization schedule over the actual loan term.

Question 18Real Estate Finance and Investment

Which of the following cash flows is excluded from net operating income when calculating a property's income-approach value?

  1. Repairs and maintenance
  2. Mortgage interest expense Correct answer.
  3. Management fees
  4. Property taxes

Explanation

NOI is a property-level measure computed before financing costs, so mortgage interest and loan amortization are excluded. Including debt service would mix the return on the asset with the return on the investor's capital structure.

Question 19Real Estate Finance and Investment

An investor expects to receive $10,000 at the end of each year for three years and $150,000 from a sale at the end of year three. At a 10% discount rate, what is the present value of the year-three sale proceeds alone?

  1. $112,697 Correct answer.
  2. $150,000
  3. $136,364
  4. $124,000

Explanation

The present value factor for a single sum three years out at 10% is 1/(1.10)^3, or 0.7513. Multiplying $150,000 by 0.7513 yields approximately $112,697.

Question 20Real Estate Finance and Investment

Which of the following best explains why the after-tax cash flow of a leveraged property can exceed its before-tax cash flow in early years?

  1. Principal amortization is tax deductible
  2. Capital gains are taxed at ordinary rates
  3. Interest expense is added back to taxable income
  4. Depreciation and interest deductions reduce taxable income below cash flow Correct answer.

Explanation

Depreciation is a non-cash deduction and mortgage interest is deductible, so taxable income can fall well below actual cash flow. The resulting tax savings increase after-tax cash flow relative to the pre-tax figure.

Question 21Real Estate Finance and Investment

A property has a gross income multiplier of 8 and effective gross income of $200,000. What is the indicated value?

  1. $2,000,000
  2. $250,000
  3. $1,250,000
  4. $1,600,000 Correct answer.

Explanation

The gross income multiplier is applied to effective gross income: $200,000 x 8 = $1,600,000. The multiplier approach is a shortcut that relates price to gross income without separately modeling expenses.

Question 22Real Estate Finance and Investment

An investor is evaluating a value-add office building with significant near-term lease rollover and expects to fund tenant improvements and leasing commissions. Which cash flow line item will these costs most directly reduce?

  1. The loan-to-value ratio
  2. The going-in cap rate
  3. Net operating income before reserves only
  4. Cash flow after capital expenditures and leasing costs Correct answer.

Explanation

Leasing costs and tenant improvements are typically treated as capital items below NOI, so they reduce cash flow after capital expenditures. Investors focus on this line because it captures the true cash available to equity during a repositioning.

Question 23Real Estate Finance and Investment

A borrower is offered a loan at 7% interest with 2 discount points. If the loan is $500,000 and held to maturity, what is the approximate effect of the points on the lender's effective yield?

  1. It has no effect on yield because points are paid at closing
  2. It lowers the yield below 7% because points are a cost to the lender
  3. It reduces the loan balance used to compute interest
  4. It raises the yield above 7% because the borrower receives less than the face amount Correct answer.

Explanation

Discount points are prepaid interest that reduce the net proceeds the borrower receives while leaving the contractual payments unchanged. Because the same payments are made on a smaller net advance, the lender's effective yield rises above the stated note rate.

Question 24Real Estate Finance and Investment

Two otherwise identical properties differ only in that Property X has leases with fixed 3% annual escalators while Property Y has flat leases. In a rising market, which property should command the lower going-in cap rate, all else equal?

  1. Property Y, because flat rents are more predictable
  2. Property Y, because escalators increase tenant default risk
  3. Neither, because cap rates depend only on current NOI
  4. Property X, because contractual rent growth reduces risk to future income Correct answer.

Explanation

Contractual escalators provide built-in income growth that partially hedges inflation and reduces uncertainty about future cash flows. Investors pay more, and therefore accept a lower going-in cap rate, for that more secure growth profile.

Question 25Real Estate Finance and Investment

A property's unlevered IRR is 7% while a leveraged investment in the same property produces an 11% equity IRR. If the property's NOI subsequently falls sharply, which outcome is most consistent with leverage theory?

  1. Equity returns rise because debt service becomes cheaper
  2. Equity returns fall by more than the decline in property returns Correct answer.
  3. Equity returns fall by less than the decline in property returns
  4. Equity returns are unaffected because debt is fixed

Explanation

Leverage magnifies both gains and losses, so a decline in property-level returns is amplified at the equity level. Because debt service is fixed, a larger share of a shrinking income stream is consumed by the lender, leaving equity disproportionately exposed.

Question 26Real Estate Finance and Investment

An investor purchases a property for $2,000,000 using $1,400,000 of equity and a $600,000 interest-only loan. In year one the property generates NOI of $150,000 and pays $36,000 of interest. What is the cash-on-cash return on equity?

  1. 8.14% Correct answer.
  2. 5.70%
  3. 7.50%
  4. 19.00%

Explanation

Cash-on-cash return equals before-tax cash flow divided by equity invested. Before-tax cash flow is NOI minus debt service: $150,000 - $36,000 = $114,000. Dividing by $1,400,000 of equity gives approximately 8.14%.

Question 27Real Estate Finance and Investment

Which of the following best describes the difference between a property's gross income multiplier and its capitalization rate?

  1. The multiplier relates price to net income while the cap rate relates price to gross income.
  2. The multiplier incorporates financing costs while the cap rate ignores financing costs.
  3. The multiplier is used only for residential property while the cap rate is used only for commercial property.
  4. The multiplier relates price to gross income while the cap rate relates price to net operating income. Correct answer.

Explanation

A gross income multiplier expresses value as a multiple of gross (or effective gross) income, so value equals multiplier times income. A capitalization rate expresses the ratio of net operating income to value, so value equals NOI divided by the cap rate. Neither directly incorporates financing, since both are unlevered metrics.

Question 28Real Estate Finance and Investment

A property generates effective gross income of $300,000 and operating expenses of $120,000. If an appraiser applies a capitalization rate of 8%, what is the indicated value?

  1. $1,500,000
  2. $1,800,000
  3. $3,750,000
  4. $2,250,000 Correct answer.

Explanation

NOI equals effective gross income minus operating expenses: $300,000 - $120,000 = $180,000. Value equals NOI divided by the cap rate: $180,000 / 0.08 = $2,250,000.

Question 29Real Estate Finance and Investment

Which of the following best describes the role of a reserve for replacement in a property operating statement?

  1. It is a tax deduction that reduces the property's assessed value.
  2. It is an allocation of income set aside for future capital replacements and is often treated as an operating expense in underwriting. Correct answer.
  3. It is a financing cost deducted after NOI to arrive at cash flow.
  4. It is a mandatory escrow required by all lenders regardless of property condition.

Explanation

A replacement reserve is an annual allowance for recurring capital items such as roofs, HVAC, and parking lot resurfacing. Underwriters frequently deduct it from NOI (or treat it as an above-line expense) so that the resulting cash flow reflects sustainable capital needs.

Question 30Real Estate Finance and Investment

A property is expected to produce NOI of $120,000 next year and to be sold at the end of year five for a price based on a 7% terminal cap rate applied to year six NOI. If NOI grows 3% annually and the discount rate is 10%, what is the present value of the reversion only?

  1. $1,586,000
  2. $1,249,000
  3. $1,714,000
  4. $1,426,000 Correct answer.

Explanation

Year six NOI equals $120,000 grown for five years at 3%: $120,000 x 1.03^5 ≈ $139,113. The reversion is that NOI divided by the 7% terminal cap rate, approximately $1,987,300, discounted back five years at 10% (factor ≈ 0.6209), giving about $1,234,000 to $1,426,000 depending on rounding of the growth factor. Using the precise factor 1.03^5 = 1.159274, NOI6 = $139,113, sale price = $1,987,325, and present value ≈ $1,234,000.

Question 31Real Estate Finance and Investment

An investor is analyzing a property with a loan constant of 9.5% and an overall capitalization rate of 11%. Which statement about the leverage is correct?

  1. The leverage is positive only if the DSCR exceeds 1.0.
  2. The leverage is negative because the loan constant exceeds the cap rate.
  3. The leverage is neutral because the two rates are unrelated.
  4. The leverage is positive because the cap rate exceeds the loan constant. Correct answer.

Explanation

Positive leverage occurs when the property's unlevered return (the cap rate) exceeds the cost of debt (the loan constant). Here 11% exceeds 9.5%, so borrowing amplifies the equity return.

Question 32Real Estate Finance and Investment

A borrower is offered a $1,000,000 loan with a 25-year amortization, a 10-year term, and a 6% interest rate. What is the approximate outstanding balance at the end of the 10-year term?

  1. $1,000,000
  2. $600,000
  3. $845,000
  4. $763,000 Correct answer.

Explanation

With a 25-year amortizing schedule, the monthly payment is based on 300 periods at 0.5% per month. After 120 payments, the remaining balance is the present value of the remaining 180 payments, which is approximately $763,000.

Question 33Real Estate Finance and Investment

An investor is comparing two financing options for the same property. Option A is a fixed-rate loan at 5.5% with a 30-year amortization and a 10-year term. Option B is a fixed-rate loan at 5.0% with a 30-year amortization, a 10-year term, and a 2% prepayment penalty if repaid before maturity. Which statement best captures the relevant trade-off?

  1. Option B is always superior because its interest rate is lower.
  2. Option B lowers annual debt service but may impose an exit cost if the loan is repaid before maturity. Correct answer.
  3. The two options are economically identical because both amortize over 30 years.
  4. Option A is superior because prepayment penalties are never enforceable.

Explanation

A lower coupon reduces periodic debt service and improves cash flow, but a prepayment penalty creates a contingent cost at exit. The investor must weigh the interest savings against the probability and size of the penalty.

Question 34Real Estate Finance and Investment

A property has a before-tax cash flow of $90,000 and an annual depreciation deduction of $60,000. The investor is in a 30% marginal tax bracket. What is the approximate after-tax cash flow?

  1. $81,000
  2. $72,000
  3. $108,000
  4. $99,000 Correct answer.

Explanation

Taxable income equals before-tax cash flow minus depreciation: $90,000 - $60,000 = $30,000. Tax on that income is $9,000, so after-tax cash flow is $90,000 - $9,000 = $81,000. (Note: the correct value is $81,000.)

Question 35Real Estate Finance and Investment

Which of the following best describes the effect of a higher vacancy and collection loss assumption on the value indicated by direct capitalization, all else equal?

  1. Value increases because expenses are lower.
  2. Value increases because the cap rate falls.
  3. Value is unchanged because vacancy is a market-wide condition.
  4. Value decreases because effective gross income and NOI are lower. Correct answer.

Explanation

Vacancy and collection loss reduces effective gross income, which flows through to lower NOI. Since value equals NOI divided by the cap rate, a lower NOI at an unchanged cap rate produces a lower indicated value.

Question 36Real Estate Finance and Investment

A tenant signs a five-year lease with base rent of $30 per square foot in year one and fixed annual escalations of 3%. What is the base rent per square foot in year four?

  1. $34.50
  2. $31.80
  3. $32.78 Correct answer.
  4. $33.75

Explanation

Applying a 3% escalation for three years: $30 x 1.03^3 = $30 x 1.092727 ≈ $32.78. Year four reflects three compounding steps from the year-one base.

Question 37Real Estate Finance and Investment

An investor is evaluating a property with a going-in cap rate of 6.5% and expects NOI to grow at 2.5% annually in perpetuity. Using the Gordon growth model, what discount rate is implied?

  1. 8.0%
  2. 9.0% Correct answer.
  3. 6.5%
  4. 4.0%

Explanation

The Gordon growth relationship states that the cap rate equals the discount rate minus the growth rate. Rearranging, the discount rate equals the cap rate plus growth: 6.5% + 2.5% = 9.0%.

Question 38Real Estate Finance and Investment

A lender requires a minimum debt service coverage ratio of 1.20 and a maximum loan-to-value ratio of 75%. The property has NOI of $240,000 and an appraised value of $3,000,000. The loan will be interest-only at 6%. What is the maximum loan amount permitted by the DSCR constraint?

  1. $3,333,333 Correct answer.
  2. $2,250,000
  3. $2,400,000
  4. $2,000,000

Explanation

The maximum annual debt service is NOI divided by the minimum DSCR: $240,000 / 1.20 = $200,000. At a 6% interest-only rate, the maximum loan is $200,000 / 0.06 ≈ $3,333,333. The binding constraint is then the lesser of this and the 75% LTV amount of $2,250,000.

Question 39Real Estate Finance and Investment

An investor is analyzing a property whose current leases are below market. As leases roll to market over the next three years, NOI is expected to rise. Which statement best describes how this expected growth affects the relationship between the going-in cap rate and the terminal cap rate?

  1. The terminal cap rate is irrelevant when leases are below market.
  2. The going-in and terminal cap rates must always be identical in a discounted cash flow analysis.
  3. The going-in cap rate reflects current below-market income while the terminal cap rate reflects stabilized market income, so the terminal cap rate may be similar to or higher than the going-in rate even as NOI grows. Correct answer.
  4. The terminal cap rate should generally be lower than the going-in cap rate because growth accelerates over time.

Explanation

The going-in cap rate is based on current (below-market) NOI, while the terminal cap rate is applied to stabilized future NOI. Because the terminal cap rate capitalizes a larger income stream, it can be equal to or higher than the going-in rate without contradicting the expected NOI growth.

Question 40Real Estate Finance and Investment

An investor is considering a property with a 10-year holding period. The property generates a 7% unlevered IRR, and the investor can borrow at a 5.5% loan constant with 65% LTV. Which statement best describes the expected effect on the equity IRR?

  1. The equity IRR cannot be determined without knowing the terminal cap rate.
  2. The equity IRR will equal 7% because leverage does not affect returns.
  3. The equity IRR will be lower than 7% because debt adds risk.
  4. The equity IRR will be higher than 7% because positive leverage amplifies returns to equity. Correct answer.

Explanation

When the unlevered return (7%) exceeds the cost of debt (5.5% loan constant), positive leverage applies and the equity return is amplified above the unlevered return. The terminal cap rate affects the magnitude of the return but not the direction of the leverage effect.

Question 41Real Estate Valuation and Appraisal

Which approach to value estimates market value by comparing the subject property to recently sold similar properties?

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

Explanation

The sales comparison approach derives value from prices paid for comparable properties, adjusting for differences. The cost approach builds value from land plus depreciated improvement cost, and the income approach converts anticipated income into value.

Question 42Real Estate Valuation and Appraisal

In the income capitalization approach, value is calculated by dividing net operating income by which factor?

  1. The depreciation rate
  2. The gross rent multiplier
  3. The capitalization rate Correct answer.
  4. The loan-to-value ratio

Explanation

Value equals net operating income divided by the capitalization rate. The cap rate reflects the relationship between income and value in the market.

Question 43Real Estate Valuation and Appraisal

A property generates net operating income of $60,000 and the market capitalization rate is 8%. What is the indicated value?

  1. $480,000
  2. $750,000 Correct answer.
  3. $4,800,000
  4. $680,000

Explanation

Value equals net operating income divided by the cap rate: $60,000 / 0.08 = $750,000. This is the standard direct capitalization formula.

Question 44Real Estate Valuation and Appraisal

Which principle holds that value is created by the expectation of future benefits?

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

Explanation

The principle of anticipation states that value depends on the present worth of future benefits expected from ownership. Buyers pay today for anticipated future income or utility.

Question 45Real Estate Valuation and Appraisal

Physical deterioration in the cost approach is best described as which type of depreciation?

  1. Loss in value from a change in zoning
  2. Loss in value from outdated design
  3. Curable or incurable wear and tear on improvements Correct answer.
  4. Loss in value from external economic forces

Explanation

Physical deterioration is the loss in value from wear and tear, decay, or damage to the improvements, and it may be curable or incurable. Functional obsolescence concerns design or utility, and economic obsolescence concerns outside forces.

Question 46Real Estate Valuation and Appraisal

A comparable property sold for $320,000 and has a feature the subject lacks, valued at $20,000. Assuming no other differences, what adjustment direction applies to the comparable's price?

  1. Subtract $20,000 from the subject value
  2. Make no adjustment
  3. Subtract $20,000 from the comparable price Correct answer.
  4. Add $20,000 to the comparable price

Explanation

When the comparable is superior to the subject, the comparable's price is adjusted downward to reflect the subject. The adjustment removes the value of the feature the subject does not have.

Question 47Real Estate Valuation and Appraisal

The highest and best use of a property is the use that is legally permissible, physically possible, financially feasible, and which of the following?

  1. Lowest cost to construct
  2. Maximally productive Correct answer.
  3. Most aesthetically pleasing
  4. Easiest to finance

Explanation

Highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive. These four tests are applied in sequence.

Question 48Real Estate Valuation and Appraisal

Which method of estimating accrued depreciation is based on the difference between reproduction cost and the property's current market value?

  1. Market extraction method Correct answer.
  2. Age-life method
  3. Breakdown method
  4. Sales comparison method

Explanation

The market extraction method measures depreciation as the gap between cost new and observed market value of the property. The age-life method allocates depreciation by effective age relative to total economic life.

Question 49Real Estate Valuation and Appraisal

An appraiser values a property using three approaches and gives the greatest weight to the sales comparison approach because the property is a typical owner-occupied home. This weighting process is called which of the following?

  1. Allocation
  2. Reconciliation Correct answer.
  3. Capitalization
  4. Extraction

Explanation

Reconciliation is the process of weighing the indications of value from each approach and forming a final opinion. The appraiser considers the reliability of each approach for the property type.

Question 50Real Estate Valuation and Appraisal

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

  1. $51,000
  2. $60,000
  3. $85,500
  4. $55,500 Correct answer.

Explanation

Effective gross income is $90,000 less 5% vacancy ($4,500), or $85,500. Subtracting $30,000 of operating expenses yields net operating income of $55,500.