Valuation & Market Analysis — Real Estate License practice questions

The appraisal principle of PROGRESSION states that a:

1. Lesser property gains from better nearby
2. Bigger property always sells for more
3. Property value always increases yearly
4. Most expensive home sets a ceiling

Answer: A — Lesser property gains from better nearby

A) Correct — progression principle. B) Not size-based. C) Values fluctuate. D) That is regression.

Comparable sold $200K; monthly rent $2,000. Monthly Gross Rent Multiplier equals:

1. A GRM of 8.33 units (annual)
2. A GRM of 83.33 units approx.
3. A GRM of 100.00 units exactly
4. A GRM of 10.00 units approx.

Answer: C — A GRM of 100.00 units exactly

A) Annual-based. B) Off-by-one decimal. C) Correct — 200K ÷ 2K. D) Direction reversal.

Property has $40,000 NOI and sells for $500,000. Cap rate?

1. 4%, from an NOI figure of 20,000 instead of the 40,000 stated
2. 6%, from a purchase price of 666,667 instead of 500,000 stated
3. 8%, from dividing the 40,000 NOI by the 500,000 sale price
4. 12.5%, from dividing 500,000 price by the 40,000 NOI figure

Answer: C — 8%, from dividing the 40,000 NOI by the 500,000 sale price

A) Used the wrong NOI. B) Used the wrong price. C) Correct — Cap = 40,000/500,000 = 8%. D) Inverted the formula — that gives GRM, not cap.

For a 100-unit apartment building, the appraiser weights most:

1. Cost approach on the building
2. Assessed-value approach for taxes
3. Sales comparison approach for units
4. Income approach using NOI/cap rate

Answer: D — Income approach using NOI/cap rate

A) Secondary. B) Not an approach. C) Secondary. D) Correct — income dominates.

The appraisal principle of SUBSTITUTION states that value tends to:

1. Always equal construction cost data
2. Rise dollar-for-dollar with improvements
3. Track cost of an equal substitute
4. Be set solely by the assessed value

Answer: C — Track cost of an equal substitute

A) Cost ≠ value. B) Marginal differs. C) Correct — substitution principle. D) Assessed ≠ market.

Which is NOT a valid reason to adjust a comparable in sales comparison?

1. The comparable has an attached garage
2. The comparable sold six months earlier
3. The comparable is farther from downtown
4. The comparable used a different appraiser

Answer: D — The comparable used a different appraiser

A) Feature adjustment valid. B) Time adjustment valid. C) Location adjustment valid. D) Correct — appraiser is irrelevant.

Which valuation approach is BEST for single-family homes?

1. Sales Comparison Approach based on recent nearby comps
2. Cost Approach using reproduction cost less depreciation
3. Income Approach using capitalization of net operating income
4. All three approaches are weighted equally on single-family

Answer: A — Sales Comparison Approach based on recent nearby comps

A) Correct — sales comparison is standard for residential. B) Cost approach fits new or unique property. C) Income approach fits rental/commercial. D) Appraisers weight sales comparison most heavily on SFR.

A property with NOI $60,000 and annual debt service $48,000 has DSCR of:

1. 0.80 (dividing debt service by NOI, giving the inverted ratio value)
2. 1.25 (NOI $60,000 divided by annual debt service $48,000 amount)
3. 1.80 (using only principal portion, ignoring the loan interest paid)
4. 2.50 (doubling NOI before dividing by the annual debt service total)

Answer: B — 1.25 (NOI $60,000 divided by annual debt service $48,000 amount)

A) Wrong - inverted. B) Correct - lenders want ≥1.20-1.25. C) Wrong - uses total service. D) Wrong - miscalculation.

Net operating income (NOI) on a property equals:

1. Gross income minus annual debt service on the loan amount
2. Gross income minus income tax paid by the owner-investor
3. Effective gross income minus operating expenses of the property
4. Gross income plus non-cash depreciation deductions taken

Answer: C — Effective gross income minus operating expenses of the property

A) Wrong - NOI is before debt service. B) Wrong - before income tax. C) Correct - property-level cash flow. D) Wrong - depreciation is tax.

A title search of the public records is primarily performed to:

1. Confirm the current market value of the property
2. Reveal recorded liens, easements, and title defects
3. Ensure the property complies with zoning regulations
4. Verify the buyer's ability to obtain adequate financing

Answer: B — Reveal recorded liens, easements, and title defects

A) Wrong - that is appraisal. B) Correct - finds encumbrances. C) Wrong - zoning check separate. D) Wrong - underwriting.

A property has a 9% cap rate and is valued at $800,000. What is the NOI?

$72,000. NOI = Value × Cap Rate = $800,000 × 0.09 = $72,000.

What is an appraisal?

An unbiased professional opinion of a property's market value, typically required by lenders before approving a mortgage.

What is functional obsolescence?

Loss in value due to outdated features or inefficient design (e.g., one bathroom in a four-bedroom home, awkward floor plan).

What are the three approaches to property valuation?

Sales Comparison Approach (compares similar recent sales), Cost Approach (land + reproduction cost − depreciation), and Income Approach (based on income generated).