Arkansas Real Estate Broker Exam — All Questions

The four elements that must be present for a property to have value in the appraisal sense are:

• a.supply, zoning, access, and improvements
• b.demand, utility, scarcity, and transferability✓
• c.cost, price, income, and depreciation
• d.demand, location, condition, and financing

The four elements of value, often remembered as DUST, are demand (a desire to own coupled with the ability to pay), utility (the capacity to satisfy a need), scarcity (limited supply relative to demand), and transferability (the ability to convey title reasonably freely). All four must be present; remove any one and there is no value in the appraisal sense. Cost, price and value are distinct ideas: cost is what was spent to create the improvement, price is what a particular buyer paid, and value is an opinion of what the property should bring under stated conditions.

In appraising an owner-occupied single-family residence, an appraiser ordinarily gives the most weight to the:

• a.sales comparison approach✓
• b.gross rent multiplier method
• c.cost approach less depreciation
• d.income capitalization approach

The sales comparison approach analyzes recent sales of similar properties and adjusts each comparable for differences from the subject, and it is the primary approach for owner-occupied residences because that is how the market for those properties actually behaves. The income capitalization approach is the primary method for income-producing property. The cost approach, which is reproduction or replacement cost less depreciation plus land value, carries the most weight for new construction and for special-purpose buildings with few comparable sales. The gross rent multiplier is a rough screening tool for small residential rentals, not a full approach to value.

Ark. Code Ann. § 17-42-110(d) provides that a broker's price opinion or market analysis issued by a licensee shall not contain the terms:

• a."list price," "asking price," or "offering price"
• b."comparable," "adjustment," or "capitalization rate"
• c."estimate," "opinion," or "probable selling price"
• d."market value," "appraised value," or "appraisal"✓

Section 17-42-110(d) is one sentence: "A broker's price opinion or market analysis issued by a real estate licensee shall not contain the terms 'market value', 'appraised value', or 'appraisal'." Regulation 10.15(a) adds that using any of those terms "shall be presumed to be in violation of Ark. Code Ann. § 17-42-110(d) and subject to appropriate sanctions," and highly recommends avoiding other general references to value. Section 17-42-110(a) is the enabling provision, letting a licensee prepare and charge for a price opinion for a seller, a buyer, a third party performing due diligence, or a lienholder, notwithstanding the Arkansas Appraiser Licensing and Certification Act.

Regulation 10.15 requires a written broker's price opinion report to carry a prescribed disclaimer set in:

• a.at least 8-point capital letters
• b.at least 14-point bold type✓
• c.at least 12-point italic type
• d.at least 10-point bold type

Regulation 10.15(a)(8) requires the report to include, "in at least 14-point bold type," the prescribed disclaimer beginning "Notwithstanding any preprinted language to the contrary, this opinion is not an appraisal of the market value of the property. If an appraisal is desired, the services of a licensed or certified appraiser must be obtained." Seven other elements must also appear: a description of the property, the basis used, any assumptions or limiting conditions, disclosure of any interest of the preparing licensee, the names and signatures of the licensee and the supervising broker, the firm name, and the date of issuance.

Regulation 10.15(a) distinguishes a market analysis from a broker's price opinion by saying a market analysis is usually limited to:

• a.the capitalization of the property's net operating income over ten years
• b.an estimate of the cost to rebuild the improvements at today's prices
• c.an inspection of the property's condition by a licensed home inspector
• d.comparison with other real property currently or recently on the market✓

Regulation 10.15(a) defines a broker's price opinion as an estimate detailing the probable selling price with varying detail about condition, market, neighborhood and comparable sales, then says a market analysis "is similar to a broker price opinion but is usually limited to comparison to other real property currently or recently in the market place; whereas, the preparer of a broker price opinion may utilize other basis for the report." Both are subject to § 17-42-110(d), so neither may use the words market value, appraised value, or appraisal, and Regulation 10.15(b) requires copies of every price opinion report to go to the principal broker or designated executive broker for the file.

An ad valorem real property tax is calculated on the basis of:

• a.the original cost of construction
• b.the property's assessed value✓
• c.the seller's net sale proceeds
• d.the owner's annual rental income

Ad valorem means according to value, so the tax is the assessed value of the property multiplied by the tax rate, expressed as a millage or as dollars per hundred of assessed value. Assessed value is derived from market value by an assessment ratio and may be reduced by exemptions or credits before the rate is applied. A tax on the seller's proceeds would be a transfer or documentary tax, a tax on rental income would be an income tax, and original construction cost is one input to the cost approach to value rather than the tax base itself.