Without a functional deficiency, a property's indicated value is $620,000. The deficiency causes a stabilized annual net income loss of $2,400. An 8% direct capitalization rate applies to that loss. All timing and other effects are accounted for, and the loss has not been deducted previously. What is the indicated value of the property with the deficiency?
Correct Answer
A) $590,000
Capitalized net loss=$2,400/0.08=$30,000; affected indication=$620,000−$30,000=$590,000. Common errors: adding the capitalized loss instead of deducting it gives $650,000; deducting the annual loss instead of its capitalized value gives $617,600; not deducting the loss gives $620,000.
Why This Is the Correct Answer
Option A is correct because the capitalized loss is $2,400 / 0.08 = $30,000, and the affected value is $620,000 - $30,000 = $590,000. The stem states all timing effects are accounted for and there is no prior deduction.
Why the Other Options Are Wrong
Option B: $617,600
Option B, $617,600, deducts only the one-year income loss ($620,000 - $2,400) instead of its capitalized value. The loss must first be capitalized: $2,400 / 0.08 = $30,000, giving $620,000 - $30,000 = $590,000.
Option C: $620,000
Option C, $620,000, is the value without the deficiency and ignores the loss entirely. The affected value is $620,000 - ($2,400 / 0.08) = $590,000.
Option D: $650,000
Option D, $650,000, comes from adding the capitalized loss ($620,000 + $30,000) instead of deducting it. A deficiency reduces value, so the result is $620,000 - $30,000 = $590,000.
Divide the loss by rate
Annual loss divided by the cap rate turns a yearly dent into a value dent; then subtract it.
How to use: Use this when a question gives an annual income loss and a capitalization rate.
Exam Tip
Do not subtract the annual loss directly from value; capitalize it first, then deduct.
Common Mistakes to Avoid
- -Deducting the annual income loss instead of its capitalized value
- -Multiplying the loss by the rate instead of dividing
- -Adding the capitalized loss to value
Concept Deep Dive
Analysis
This question tests the capitalization of income loss technique for measuring a functional deficiency. Convert the annual net income loss into a value loss by dividing by the capitalization rate, then deduct that capitalized loss from the unaffected value.
Background Knowledge
The capitalization of income or rental loss technique measures value loss by converting an annual income loss into a present value using a market-derived rate. It can be used to estimate loss from functional, external or other causes when the income effect is supported.
Real-World Application
An appraiser finds that a small rental building's awkward layout causes about $2,400 less net income per year than comparable buildings. Using a market-supported 8% rate, the appraiser capitalizes the loss at $30,000 and deducts it from the unaffected value.
More Property Description Questions
A local zoning ordinance allows these maximum densities: R-1, 4 units per acre; R-2, 8 units per acre; R-4, 20 units per acre; PUD (with approval), 12 units per acre. Which category allows the highest density?
What design advantage is commonly associated with post-and-beam construction?
A hypothetical local ordinance permits either a single-family house or duplex on the site. The existing single-family house complies with all current rules. Which statement is supported?
A zoning variance allowing a reduced side setback is granted for a parcel. After the parcel is sold, who generally holds the benefit of the variance, subject to its conditions?
Under ANSI Z765-2021 as applied by Fannie Mae, a staircase runs from the second floor down to the first floor. Its area is counted as part of:
Under ANSI Z765-2021, as Fannie Mae requires for a detached house, where are exterior dimensions taken on a brick-veneer wall?
A building's HVAC system would be classified as which type of building component?
A home on a large tract is valued at $620,000 including the land it needs. The remaining excess land could be sold separately and contributes a net $95,000 after separation costs. What is the total indicated value?
A covered sale concerns a residence built in 1965. Which hazard is the subject of the federal pre 1978 housing disclosure rule, without assuming its actual presence?
Which site characteristic is most likely to reduce site utility by restricting where a typical dwelling can be placed?
People Also Study
Real Estate Market
13.6% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam
Previous Question
A dwelling has two above-grade finished levels: 1,100 SF on the main floor and 1,100 SF on the second floor. Both levels meet all requirements of the applicable measurement standard, and no other area qualifies. What is the total qualifying area?
Next Question
A local zoning ordinance allows these maximum densities: R-1, 4 units per acre; R-2, 8 units per acre; R-4, 20 units per acre; PUD (with approval), 12 units per acre. Which category allows the highest density?