Finance, Valuation, and Property Analysis
What this domain tests
Finance, valuation, and property analysis questions test numerical reasoning and the line between a broker's CMA and a licensed appraisal. Know loan math, the three approaches to value, and income-property metrics.
Core rules
- Loan-to-value (LTV) = loan ÷ price or appraised value, whichever is lower. Down payment = price − loan. Points are prepaid interest: one point = 1% of the loan. PITI includes principal, interest, taxes, and insurance; PMI may apply above 80% LTV. Ohio brokers may explain financing but may not originate loans without mortgage licensing.
- Market value is the most probable price in an arm's-length sale, not the asking price. A CMA is a brokerage pricing tool; an appraisal is a licensed valuation.
- Three approaches: sales comparison (adjust comparables for differences), cost (replacement cost minus depreciation plus land), and income (NOI ÷ cap rate). Highest and best use and reconciliation guide the final estimate.
- NOI = effective gross income − operating expenses, not debt service. Cap rate = NOI ÷ price. Gross rent multiplier = price ÷ gross rent. Use market-derived rates.
Worked example
A duplex sells for $420,000. Effective gross income is $60,000; operating expenses are $18,000; NOI = $42,000. Cap rate = $42,000 ÷ $420,000 = 10%. If the buyer finances $336,000 at 80% LTV, the loan is $336,000 and the down payment is $84,000. Two points cost $6,720. If a valuer used the same NOI with a market cap rate of 9%, indicated value = $42,000 ÷ 0.09 = $466,667, showing why cap-rate selection matters.
Traps
Using the list price as value; adjusting a comparable in the wrong direction; applying a cap rate to gross income; calling a CMA an appraisal; ignoring PMI; treating debt service as an operating expense.