CSLB General Building (B) — All Questions
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Which approach to value estimates a property's worth by comparing it to recently sold similar properties?
- a.The sales comparison approach✓
- b.The cost approach
- c.The income approach
- d.The gross rent multiplier method only
The sales comparison approach estimates value by analyzing recent sales of comparable properties and adjusting for differences. It is the most common method for valuing single-family homes. It relies on the principle of substitution.
The appraisal principle stating that a buyer will pay no more than the cost of an equally desirable substitute property is:
- a.The principle of anticipation
- b.The principle of substitution✓
- c.The principle of regression
- d.The principle of escheat
The principle of substitution holds that a buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. It underlies the sales comparison approach. It reflects rational buyer behavior in a competitive market.
The cost approach to value is often most appropriate for:
- a.Typical existing single-family homes with many recent sales
- b.Vacant land with no improvements
- c.Newer or special-purpose properties with few comparable sales✓
- d.Rental apartment complexes valued on income
The cost approach estimates value as land value plus the depreciated cost to rebuild the improvements, and it works best for newer or special-purpose buildings such as schools or churches where comparable sales are scarce. It relies on estimating replacement or reproduction cost and deducting depreciation. It is less reliable for older properties with significant depreciation.
In the income approach, the relationship used to convert net operating income into value is the:
- a.Gross rent multiplier only
- b.Loan-to-value ratio
- c.Assessment ratio
- d.Capitalization rate✓
The income approach converts a property's net operating income (NOI) into value using a capitalization (cap) rate, where value equals NOI divided by the cap rate. It is used mainly for income-producing properties. A higher cap rate generally indicates higher risk and lower value for the same income.
An appraisal is best described as:
- a.An opinion or estimate of value as of a specific date✓
- b.A guarantee of the exact future sale price
- c.A legal transfer of title
- d.A type of mortgage loan
An appraisal is a professional, supportable opinion of value as of a particular date, not a guarantee of price. Appraisers use recognized approaches to reach their conclusion. Lenders rely on appraisals to ensure the loan is adequately secured.
Depreciation in appraisal that results from outdated design or features, such as an obsolete floor plan, is called:
- a.Physical deterioration
- b.Functional obsolescence✓
- c.External (economic) obsolescence
- d.Accrued appreciation
Functional obsolescence is a loss in value caused by outdated or poorly designed features within the property, such as an awkward floor plan or too few bathrooms. It is one of three types of depreciation. It can sometimes be cured through remodeling.
A loss in property value caused by negative factors outside the property, such as a nearby factory or declining neighborhood, is:
- a.Functional obsolescence
- b.Physical deterioration
- c.External (economic) obsolescence✓
- d.Curable depreciation
External or economic obsolescence is a loss in value caused by factors outside the property boundaries, such as adverse neighborhood conditions or nearby nuisances. Because the owner cannot control off-site factors, this type of depreciation is generally incurable. It contrasts with functional obsolescence, which stems from the property itself.
The concept of 'highest and best use' refers to the use that is:
- a.Whatever the current owner personally prefers
- b.Always the most expensive possible structure
- c.Determined solely by the listing agent
- d.Legally permissible, physically possible, financially feasible, and maximally productive✓
Highest and best use is the reasonably probable use that is legally permissible, physically possible, financially feasible, and produces the highest value. Appraisers analyze it to value land and improvements properly. It may differ from the property's current use.
An appraiser making adjustments in the sales comparison approach adjusts the:
- a.Comparable properties' prices to the subject, not the subject itself✓
- b.Subject property's price to match each comparable
- c.Buyer's mortgage rate
- d.Local property tax rate
In the sales comparison approach, the appraiser adjusts the sale prices of the comparables to account for their differences from the subject property. The subject is never adjusted because its value is unknown. If a comparable is superior, its price is adjusted downward, and if inferior, upward.
The principle of 'conformity' in appraisal suggests that a property's maximum value is generally realized when:
- a.It is far larger and more expensive than all neighbors
- b.It is similar in style and use to surrounding properties✓
- c.It is the smallest home in the area
- d.It has no relationship to nearby properties
The principle of conformity holds that properties reach their maximum value when they are reasonably similar to others in the neighborhood. Overimprovement or underimprovement relative to neighbors can reduce value. Related principles are regression and progression.
Under the principle of regression, a high-value home located among lower-value homes will tend to:
- a.Increase the value of all neighbors to its level
- b.Have no effect on its own value
- c.Be pulled downward in value by the lesser surrounding properties✓
- d.Automatically become the neighborhood standard
The principle of regression states that the value of a superior property is adversely affected by the presence of inferior surrounding properties. Conversely, progression holds that a lesser property benefits from higher-value neighbors. Both relate to conformity.
A comparative market analysis (CMA) prepared by a licensee differs from a formal appraisal because it:
- a.Is legally binding on the lender
- b.Must be prepared only by a licensed appraiser
- c.Establishes the assessed value for taxes
- d.Is an estimate to help price a listing, not a certified appraisal✓
A CMA is an informal analysis licensees prepare using comparable sales to help sellers price a home or buyers make offers. It is not a formal, certified appraisal and should not be represented as one. Lenders generally require a licensed appraiser's appraisal for financing.
Accrued depreciation in the cost approach represents:
- a.The total loss in value from all causes since construction✓
- b.The increase in land value over time
- c.The lender's required insurance
- d.The buyer's down payment
Accrued depreciation is the total loss in value of the improvements from physical deterioration, functional obsolescence, and external obsolescence since they were built. In the cost approach, it is subtracted from the reproduction or replacement cost. Land is valued separately and is not depreciated.
Market value, as used in appraisal, generally assumes:
- a.A forced sale under time pressure
- b.A willing buyer and willing seller, each acting knowledgeably and without undue pressure✓
- c.That the buyer is unaware of the property's condition
- d.The highest price any single buyer might ever pay
Market value assumes a transaction between a willing, informed buyer and seller, neither under duress, with reasonable market exposure. It differs from a distressed or forced sale price. This standard underlies most lending appraisals.
Which of the following is a form of physical deterioration in an appraisal?
- a.An outdated one-car garage in a two-car neighborhood
- b.A newly built freeway causing noise nearby
- c.A worn roof and peeling paint due to age and wear✓
- d.A declining local job market
Physical deterioration is a loss in value from wear, tear, age, and the action of the elements, such as a worn roof or peeling paint. It can be curable or incurable depending on cost. Functional and external obsolescence are the other two categories of depreciation.
The 'gross rent multiplier' (GRM) is calculated by:
- a.Multiplying net income by the cap rate
- b.Dividing the loan amount by the down payment
- c.Subtracting expenses from the sale price
- d.Dividing the sale price by the gross rental income✓
The gross rent multiplier is found by dividing a property's price by its gross rental income, giving a quick relationship between price and rent. It is a simple screening tool for income properties, often using monthly or annual rent. Unlike the cap rate, it does not account for operating expenses.
An appraiser reconciling the results of the three approaches to value will:
- a.Weigh the approaches based on reliability and the property type to reach a final opinion✓
- b.Simply average the three values together in every case
- c.Always use the highest of the three values
- d.Discard all approaches and use the asking price
Reconciliation is the process of weighing the value indications from the applicable approaches to arrive at a single, supported opinion of value. The appraiser gives more weight to the approach most reliable for the property type, rather than mechanically averaging. Judgment and data quality guide the final conclusion.
Which factor would most likely cause economic (external) obsolescence?
- a.An outdated kitchen layout inside the home
- b.Construction of a noisy airport expansion adjacent to the property✓
- c.A cracked driveway on the property
- d.Worn interior carpeting
Economic or external obsolescence results from negative influences outside the property, such as a new airport, highway, or industrial use nearby. Because these factors are beyond the owner's control, this depreciation is usually incurable. Internal issues like layout or carpeting are functional or physical in nature.