Property Valuation and Financial Analysis
DRE gives this area approximately 14 percent and prints only three subtopics under it — Value, Methods of Estimating Value, and Financial Analysis — which makes it the broadest of the seven headings and the one where appraisal theory and investment arithmetic are both fair game.
Value and the forces that create it
Market value is the most probable price a property should bring in a competitive and open market under conditions requisite to a fair sale, with buyer and seller each acting prudently and neither under duress. The four elements of value are utility, scarcity, demand and transferability. Value is created by the interaction of physical, economic, governmental and social forces, and it is explained by principles including substitution, highest and best use, conformity, contribution, anticipation, change, and the paired principles of increasing and decreasing returns. Price is what was paid, cost is what was spent to build, and value is an opinion of worth; the exam tests that they are not synonyms.
The three approaches
The sales comparison approach adjusts recent sales of comparable properties, always adjusting the comparable and never the subject, and is the primary approach for single-family homes. The cost approach adds land value to the depreciated reproduction or replacement cost of the improvements and is most persuasive for new or special-purpose buildings; its depreciation is physical deterioration, functional obsolescence or external obsolescence, and only the first two arise inside the property line. The income approach capitalizes net operating income; because value equals net operating income divided by the capitalization rate, a higher rate produces a lower value on the same income. Gross rent multipliers are a screening device, not a substitute for capitalization.
Financial analysis of income property
Net operating income is effective gross income less operating expenses, before debt service, income tax and depreciation, so a change in the loan changes cash flow but not net operating income. Cash-on-cash return divides pre-tax cash flow by the cash invested. Positive leverage exists when the property's return exceeds the cost of the borrowed money. Proposition 13 assesses California real property at its 1975 base year value or at full cash value on a change in ownership or new construction, with annual increases capped at 2 percent, so a buyer's tax basis is normally reset by the purchase and is not the seller's old figure.
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State-specific details
State exam facts
- State regulator
- California Department of Real Estate (DRE)
- Prelicensing education
- 8 statutory college-level real estate courses
- Passing score
- 75%
- Scored questions
- 200
- Time limit
- 240 minutes
Who regulates real estate brokers in California?
The California Department of Real Estate (DRE) licenses and regulates real estate brokers and salespersons. Unlike most states, the DRE develops and administers the broker exam itself at its own electronic exam sites rather than contracting with PSI or Pearson VUE.
What experience do I need before the California broker exam?
Broker applicants must show at least two years of full-time licensed salesperson experience within the prior five years, or an equivalent qualifying background — for example, a four-year college degree with a major or minor in real estate. Experience is documented on the DRE's Broker Experience form.
How is the California broker exam structured?
The California broker examination is a single 200-question multiple-choice test given over 4 hours (one 4-hour session). A score of 75% or higher is required to pass. Applicants must also complete eight statutory college-level real estate courses before qualifying.
Sources: https://www.dre.ca.gov/examinees/brokerexperience.html, https://www.dre.ca.gov/examinees/TakingExam.html
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