In applying the income approach to a California rental property, all of the following factors would typically justify using a LOWER cap rate (resulting in a higher property value) EXCEPT:
Correct Answer
D) The property is subject to California's AB 1482 Tenant Protection Act rent control, limiting future rent increases to 5% plus CPI annually
AB 1482 rent control, which limits annual rent increases to 5% plus CPI (capped at 10%), is a RISK factor that would typically justify a HIGHER cap rate, not a lower one. Rent control restricts the owner's ability to raise rents to market levels, increases regulatory compliance requirements, and adds just-cause eviction protections. These factors increase investment risk and typically result in a higher required cap rate.
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- → A 4-unit apartment building in Sacramento has monthly rents of $1,500 per unit. The submarket vacancy rate is 5%. Annual operating expenses are $28,800. The prevailing cap rate for comparable properties is 6%. Using the income approach, what is the estimated value of the property?
- → Under California law, when a real estate licensee prepares a Comparative Market Analysis (CMA) for a property, what is the legal distinction between a CMA and a formal appraisal?
- → Owner converted master bedroom into 'granny flat' costing $50,000 but adding $30,000 value. Later, kitchen remodel cost $15,000 but added $20,000 value. Which statement is correct?
- → The appraisal approach that estimates value by comparing a property to similar recently sold properties is the:
- → The period of time a structure continues to earn sufficient income to continue operations is referred to as the structure’s:
- → An appraiser in California is using the cost approach for a property in Sacramento and must account for entrepreneurial profit (also called developer's profit). A local developer confirms that typical profit margins in the Sacramento market are 15-20% of total development costs. How should the appraiser handle entrepreneurial profit?
- → A California buyer's agent is reviewing comparable sales data and notices that the county recorder's office lists different documentary transfer tax amounts for similar properties in the same city. Some properties show both a county and city transfer tax, while others show only the county tax. What does this difference indicate about the sale verification process?
- → When conducting a sales comparison analysis in California, an appraiser discovers that the subject property has an Accessory Dwelling Unit (ADU) that was built under California's recent ADU legislation. How should the appraiser handle this feature?
- → A California real estate agent is selecting comparable sales for a CMA on a property in Fresno. The agent finds a sale from 14 months ago in the same neighborhood. Under standard California CMA practice, why might the agent hesitate to use this comparable?
- → A California real estate licensee is preparing a CMA and notices that one comparable property sold in a foreclosure auction conducted by a trustee under a deed of trust. How should this sale be handled in the CMA?
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Previous Question
A California appraiser needs to determine the appropriate cap rate using the band of investment method. The property will be financed with a 70% LTV loan at 6.5% interest (annual constant of 7.585%) and the investor requires a 10% equity dividend rate on the 30% equity portion. What is the overall cap rate using the band of investment method?
Next Question
An investor calculates a property's NOI as $84,000 and applies a 5.25% cap rate, arriving at an initial value of $1,600,000. The investor then discovers that an annual Mello-Roos special tax of $6,000 was omitted from the operating expenses used to calculate NOI. What is the correct adjusted value?