Nebraska Real Estate Salesperson Exam — All Questions

An appraiser is valuing a single-family home in an established neighborhood. Which approach to value will the appraiser rely on most heavily?

• a.Sales comparison approach✓
• b.Cost approach
• c.Income approach
• d.Gross rent multiplier approach

The sales comparison approach, which analyzes recent sales of similar nearby properties, is the most reliable and heavily weighted method for single-family residences because such homes are bought and sold frequently, giving plenty of comparable data. The cost approach is most useful for new or special-purpose buildings, and the income approach (and gross rent multiplier) apply to income-producing property, not owner-occupied homes.

The principle that a property's maximum value tends to be set by the cost of acquiring an equally desirable substitute property is known as:

• a.Progression
• b.Contribution
• c.Anticipation
• d.Substitution✓

The principle of substitution holds that an informed buyer will pay no more for a property than the cost of an equally desirable substitute; it is the foundation of the sales comparison approach. Progression is when a lower-value property gains value from higher-value neighbors. Contribution measures how much a specific component adds to total value. Anticipation is value based on expected future benefits.

The four characteristics essential to value, remembered as DUST, are demand, utility, scarcity, and:

• a.desirability
• b.taxability
• c.transferability✓
• d.durability, meaning how long the item physically lasts

The elements of value are Demand, Utility, Scarcity, and Transferability (DUST): a good must be wanted, useful, in limited supply, and legally transferable to have market value. Durability, taxability, and desirability are not the four recognized elements.

Market value is best defined as:

• a.the exact amount that one particular, motivated buyer actually paid for it at the closing table
• b.the most probable price a property should bring in a competitive and open market✓
• c.the total money spent to build the improvements new
• d.the value the assessor sets for property taxation

Market value is the most probable price a property should bring in a competitive, open market under fair conditions with a willing, informed buyer and seller. Price is what a specific buyer actually pays, cost is the money to create the improvements, and assessed value is set for tax.

The principle holding that value is created by the expectation of future benefits from owning a property is:

• a.contribution
• b.anticipation✓
• c.substitution
• d.regression

Anticipation holds that value is created by the expectation of future benefits, such as income or appreciation - a key idea in the income approach. Substitution caps value at the cost of an equal alternative, contribution measures a component's added value, and regression is loss of value from lower-valued neighbors.

A modest house located among much larger, more expensive homes tends to be worth more than it otherwise would because of the principle of:

• a.contribution
• b.conformity
• c.progression✓
• d.regression

Progression means a lower-valued property gains value from being near higher-valued properties. Regression is the opposite - a high-value home loses value among lower-value ones. Contribution concerns a component's added value, and conformity favors similar, harmonious uses.

In the cost approach, the loss in value of the improvements from all causes is called:

• a.depreciation✓
• b.capitalization
• c.appreciation
• d.amortization

The cost approach estimates value as the replacement cost of the improvements new, minus accrued depreciation, plus land value; depreciation is that loss in value. Appreciation is a gain, amortization is loan repayment, and capitalization converts income to value.

An outdated floor plan with a bedroom reachable only by walking through another bedroom is an example of:

• a.external obsolescence
• b.functional obsolescence✓
• c.physical deterioration from ordinary wear and tear
• d.economic appreciation

Functional obsolescence is a loss in value from outdated or poorly designed features within the property, such as a bad floor plan or too few bathrooms. Physical deterioration is wear and tear, and external obsolescence comes from negative influences outside the property.

A well-maintained home loses value because a noisy new highway is built right next to it. This loss is:

• a.physical deterioration from wear
• b.a form of curable depreciation the owner can fix
• c.functional obsolescence in the design
• d.external (economic) obsolescence✓

External (economic) obsolescence is loss in value caused by factors outside the property boundary, such as a new highway, and it is generally incurable because the owner cannot fix it. Physical deterioration is wear, and functional obsolescence is an internal design flaw.

Using the income approach, a property has a net operating income of $60,000 and the market capitalization rate is 8%. What is the indicated value?

• a.$750,000✓
• b.$480,000
• c.$600,000
• d.$68,000

Income-approach value equals net operating income divided by the capitalization rate: $60,000 / 0.08 = $750,000. Multiplying by the rate would give $4,800, and the other figures come from mis-dividing; a lower cap rate would indicate an even higher value.

For a given, unchanging net operating income, as the capitalization rate applied to it increases, the indicated value:

• a.stays the same
• b.increases
• c.decreases✓
• d.doubles

Value equals income divided by the cap rate, so raising the cap rate lowers the value for the same net operating income (an inverse relationship); a higher required return means a buyer pays less per dollar of income. Value does not stay constant or double.

The gross rent multiplier (GRM) is calculated by dividing:

• a.the sale price by the gross monthly (or annual) rent✓
• b.the sale price by the annual net operating income
• c.the property's monthly rental income by its sale price
• d.the net operating income by the capitalization rate

The gross rent multiplier equals sale price divided by gross rent (Price = GRM x Rent). It uses gross rent, not net income, and does not subtract expenses, which makes it a quick screening tool rather than a precise valuation method.

A comparable property is superior to the subject because it has an extra garage. To account for this in the sales comparison approach, the appraiser:

• a.adjusts the subject property's value upward
• b.subtracts value from the comparable's sale price✓
• c.ignores the difference between the two
• d.adds value to the comparable property's recorded sale price

In the sales comparison approach, adjustments are made to the comparables, never the subject. If a comparable is superior (has a feature the subject lacks), the appraiser subtracts value from the comparable's price to make it equivalent to the subject; inferior comparables are adjusted upward.

A comparative market analysis (CMA) prepared by a licensee differs from an appraisal because it:

• a.is required by federal law on every real estate sale
• b.is an informal pricing tool, not a formal appraisal✓
• c.must always be performed by a state-certified appraiser under USPAP
• d.relies exclusively on the cost approach to value

A CMA is an informal estimate a licensee prepares from comparable sold, active, and expired listings to help price a property; it is not a certified appraisal and does not require an appraiser's license. Formal appraisals are USPAP-governed opinions of value.

Reconciliation, in the appraisal process, refers to:

• a.prorating the property taxes at the closing table
• b.recording the deed in the county public records
• c.balancing the broker's separate client trust and operating escrow accounts
• d.weighing the results of the approaches into a final value opinion✓

Reconciliation is the appraiser's final step of analyzing and weighting the value indications from the applicable approaches to reach a single, supportable opinion of value; it is judgment, not a simple average. It is unrelated to escrow, recording, or proration.

The cost approach to value is generally MOST appropriate for valuing:

• a.a parcel of vacant farmland
• b.a newly built public library✓
• c.a small rental duplex
• d.a thirty-year-old single-family tract home

The cost approach works best for new or special-purpose properties (schools, libraries, churches) that rarely sell and generate no market income, so comparables and income data are scarce. Standard homes use sales comparison, and income property uses the income approach.

'Plottage' refers to the increase in value that can result when:

• a.a single large lot is subdivided into many separate smaller lots
• b.a building physically depreciates over time
• c.two or more adjoining parcels are combined under one owner✓
• d.the market capitalization rate rises

Plottage is the added value created when adjacent parcels are merged (assembled) into one larger, more useful parcel under a single owner; the process of combining them is assemblage. Splitting land is subdivision, and the other choices are unrelated.

An appraisal is best defined as:

• a.the figure set by the tax assessor
• b.a guaranteed final selling price for the subject property
• c.the price the seller is currently asking
• d.an opinion or estimate of value as of a specific date✓

An appraisal is a professional, supportable opinion or estimate of a defined value (such as market value) as of a specific effective date; it is not a guarantee of sale price. The list price is the seller's asking figure, and assessed value is set for taxation.

The principle of contribution states that the value of any component of a property is measured by:

• a.the amount it originally cost the owner to construct
• b.how much it adds to the whole, not what it cost✓
• c.the total price of the entire property
• d.its full replacement cost when new

Contribution holds that a component (such as a remodeled kitchen or a pool) is worth what it adds to the property's total value, which may be more or less than its cost. An improvement can cost more than it returns, so cost does not equal value added.

Installing a $100,000 kitchen in a neighborhood of modest, lower-priced homes usually will not return its full cost. This illustrates the principles of:

• a.littoral rights
• b.escheat
• c.anticipation of future ownership benefits
• d.contribution and regression✓

An over-improvement will not return its full cost because the market and the surrounding lower-valued homes limit how much value the upgrade contributes - the principles of contribution and regression. Anticipation concerns future benefits, while escheat and littoral rights are unrelated.

The relationship between a capitalization rate and value for a given income stream is:

• a.Fixed and identical, so that the property's value is always exactly equal to its capitalization rate
• b.Entirely unrelated, meaning the capitalization rate has no effect on the property's value at all
• c.Direct, so that a higher capitalization rate always produces a correspondingly higher value
• d.Inverse: a higher cap rate means a lower value, and vice versa✓

Because Value = Income / Rate, raising the cap rate divides the same income by a larger number, lowering value; lowering the cap rate raises value. Investors demand higher cap rates (and pay less) for riskier income, so cap rate and value move inversely.

In the income approach, the IRV formula expresses the relationship among Income, Rate, and Value as:

• a.Rate equals the value multiplied by the income, which is not a valid form of the relationship
• b.Value = Income / Rate✓
• c.Income equals the value divided by the rate, reversing the roles of income and value entirely
• d.Value equals the income multiplied by the rate rather than divided by it, which inflates value

The IRV relationship is Value = Net Operating Income / capitalization Rate. From it you can also solve Income = Rate x Value and Rate = Income / Value. Remembering the triangle (I on top, R and V on the bottom) keeps the algebra straight.

For federal income-tax purposes, an investor's ADJUSTED basis in a property is generally the:

• a.Current appraised market value of the property as of the date the investor decides to sell it
• b.Outstanding principal balance still owed on the mortgage loan secured by the property itself
• c.Original purchase price alone, a figure that is never adjusted upward or downward over time
• d.Original cost plus capital improvements, minus depreciation taken✓

Adjusted basis starts with the original cost basis, increases for capital improvements, and decreases by depreciation (cost recovery) claimed. It is used to compute gain or loss on sale and is not the same as market value or the loan balance.

When an investment property is sold, the taxable capital gain is generally computed as:

• a.The entire gross sale price of the property, with no deductions of any kind subtracted from it
• b.The total amount of rent that the investor collected from tenants over the years of ownership
• c.The original purchase price reduced by the remaining balance owed on the mortgage at closing
• d.The amount realized (net sale price) minus the adjusted basis✓

Capital gain = amount realized (sale price minus selling costs) - adjusted basis (cost plus improvements minus depreciation). Only the gain, not the entire sale price, is potentially taxable, and depreciation previously taken lowers basis and thus increases the gain.

A Section 1031 like-kind exchange allows an investor to:

• a.Permanently eliminate and forever forgive all capital gains tax that would otherwise be owed
• b.Defer capital gains tax by exchanging qualifying investment property for like-kind property✓
• c.Exchange a personal residence completely tax-free as often as once during every single year
• d.Avoid all tax simply by selling the property for cash and personally keeping all of the proceeds

A 1031 exchange lets an investor DEFER (not permanently forgive) capital gains tax by reinvesting into like-kind real property held for investment or business use, following strict identification and timing rules. It does not apply to a personal residence, and simply taking cash defeats the deferral.

In a 1031 exchange, 'boot' refers to:

• a.The like-kind real estate itself, which is the qualifying property at the heart of the exchange
• b.The total combined value of the replacement property that the investor receives in the exchange
• c.Non-like-kind value received, such as cash or debt relief, which is taxable✓
• d.The fee that the qualified intermediary charges for facilitating and administering the exchange

Boot is any non-like-kind consideration, such as cash received or a net reduction in debt, and it is taxable to the extent of gain even within an otherwise tax-deferred exchange. Receiving boot triggers recognition of gain up to the amount of the boot.

For federal tax depreciation (cost recovery) of investment real estate, which portion is depreciable?

• a.Both the land and the improvements together, since the whole property loses value over time
• b.Neither the land nor the improvements, because real estate is presumed to only appreciate
• c.Only the improvements (buildings), not the land✓
• d.Only the land itself, because land is the truly permanent and most valuable part of the asset

Only improvements are depreciable because they wear out over time; land is deemed to have an unlimited useful life and is never depreciated. That is why investors allocate the purchase price between land and building before computing depreciation.

In real estate investment, 'leverage' refers to:

• a.The overall physical size and total square footage of the building sitting on the property
• b.The commission that is paid to the real estate broker who arranges the investment purchase
• c.Using borrowed funds to control property and magnify the return on invested cash✓
• d.Paying entirely in cash for the property so as to avoid taking on any mortgage debt at all

Leverage means financing part of a purchase with debt so the investor controls a larger asset with less of their own cash, amplifying both potential gains and losses. Buying all cash is the opposite of using leverage.

Positive leverage occurs when:

• a.The interest rate on the debt is actually higher than the property's overall rate of return
• b.The property steadily loses market value each and every year that the investor continues to own it
• c.The investor uses no borrowed money at all and instead funds the entire purchase with cash
• d.The property's return exceeds the cost of the borrowed money, boosting equity return✓

Positive leverage exists when the return on the total investment is greater than the interest rate on the debt, so borrowing boosts the return on the investor's equity. If borrowing costs exceed the property's return, leverage becomes negative and reduces equity returns.

The principle of 'highest and best use' holds that a property should be valued based on:

• a.The legal, possible, feasible use that produces the greatest value✓
• b.The very cheapest and least intensive possible use that the land could conceivably be put to
• c.Whatever particular use the current owner happens to personally prefer for the property
• d.The specific use that existed on the land back when the area was originally first settled

Highest and best use is the reasonably probable use that is legally permissible, physically possible, financially feasible, and maximally productive, and it sets the framework for the appraisal. It is an objective market concept, not the owner's personal preference.

The principle of contribution states that the value of a component or improvement is measured by:

• a.The raw number of square feet of floor area or land area that the improvement happens to occupy
• b.The owner's personal emotional attachment to and sentimental feelings about that improvement
• c.Its original construction or installation cost in every case, dollar for dollar, with no exception
• d.How much it adds to the overall value of the property, not its cost✓

Under contribution, an improvement is worth the amount it adds to the whole property's market value, which may be more or less than its cost. This principle explains why some renovations do not fully return their expense, a key point in over-improvement analysis.

Under Internal Revenue Code Section 121, a qualifying homeowner may generally EXCLUDE from taxable capital gain:

• a.Up to $250,000 of gain if single, or $500,000 if married filing jointly✓
• b.Up to a full one million dollars of gain on any property at all, at any time and any frequency
• c.All gain on any and every investment or rental property the taxpayer happens to own and sell
• d.Absolutely nothing, because gain on the sale of a home is always fully and entirely taxable

Section 121 lets homeowners who owned and used the home as their principal residence for at least two of the prior five years exclude up to $250,000 of gain (single) or $500,000 (married filing jointly). It applies to a primary residence, not to investment property.

Depreciation recapture on the sale of investment real estate means that:

• a.All of the depreciation deductions previously claimed are simply refunded to the investor in cash
• b.The investor is legally required to physically restore and rebuild the depreciated building itself
• c.Gain from prior depreciation may be taxed, often at a special rate✓
• d.No income tax is ever owed at all on the sale of a property that has previously been depreciated

When depreciated property is sold at a gain, the portion of gain due to depreciation deductions is 'recaptured' and taxed under special rules, reflecting the earlier tax benefit. It is a tax concept, not a requirement to rebuild, and it increases, not eliminates, tax on sale.

Which appraisal approach is generally MOST reliable for a special-purpose property, such as a church or public school, that rarely sells and earns no market income?

• a.The sales comparison approach, which depends on recent sales of similar comparable properties
• b.The income approach, which converts a property's market rental income into an indicated value
• c.The gross rent multiplier method, which relies on typical market rents that these lack entirely
• d.The cost approach✓

Special-purpose properties have few or no comparable sales and generate no market rent, so the cost approach (replacement cost new, less depreciation, plus land) is typically most reliable. Sales comparison lacks comparables and the income/GRM methods need market income these properties do not produce.

The four characteristics an item must have to possess value in the market, often remembered as DUST, are:

• a.Debt, Utility, Supply, and Taxes, a mix of unrelated financing and cost terms rather than value
• b.Demand, Utility, Scarcity, and Transferability✓
• c.Depreciation, Use, Sale, and Title, which describe stages of ownership rather than value itself
• d.Demand, Ownership, Scarcity, and Time, which swaps in two terms that are not part of the concept

For something to have market value it must have Demand (buyers who want it), Utility (usefulness), Scarcity (limited supply), and Transferability (the ability to convey it). The DUST acronym captures these four essentials of value.