THEBRIGHT EXAM SOLUTIONS 8/20/2024 8:37 PM
IAAO 102 Exam Questions With Correct
Answers
Components of Capitalization Process - answer✔✔Value, Net Operating Income, and
Capitalization Rate
The underlying economic principle of 3 approaches to value - answer✔✔substitution
Market Value is also known as - answer✔✔value in exchange
Most probable price the property will sell for in an arm's-length transaction under normal
conditions on the open market - answer✔✔market value
Higher Cap Rate - answer✔✔Means Higher Risk and Lower Overall Value
Lower Cap Rate - answer✔✔Means Lower Rise and Higher Overall Value
Return of investment aka - answer✔✔Recapture Rate (or getting back the amount invested)
Return on Investment - answer✔✔Overall Yield Rate (or discount rate; profit realized in
addition to getting back the amount invested)
The nine factors influencing the decisions of investors - answer✔✔Safety, Liquidity, Collateral,
Time, Size, Management, Appreciation, Income Tax Advantages, Leverage.
Time to convert to actual dollars - answer✔✔Liquidity
Collateral - answer✔✔The entire investment in a savings account can be used as collateral for a
loan. However, lending institutions generally will only allow a percentage of the real estates
market value to be used as collateral.
Leverage - answer✔✔The borrowing of funds in hopes of earnings greater return than the cost of
the borrowed funds.
3 types of leverage. - answer✔✔Positive negative neutral
The benefits from borrowing funds exceed the costs of borrowing. - answer✔✔Positive leverage
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An investment situation in which the cost of borrowed funds is exactly equal to the yield
provided by the investment. - answer✔✔Neutral
occurs when borrowed funds cost more than the income the funds generate - answer✔✔Negative
leverage
Cash, Trust Deed, Land Contract, Mortgages - answer✔✔Four types of real estate financing
Trust Deed - answer✔✔a legal instrument similar to a mortgage that transfers the title of a
property to a trustee. The borrow conveys the title to a trustee for the benefit of the lender but
retains the right to use and occupy the property. Used to eliminate the need for a foreclosure
proceeding against the borrower in the event of of a default.
Land Contract - answer✔✔aka as contract for deed or installment sales contract. the purchaser
agrees to pay a small down payment when the contract is signed with the balance is specified
amounts over the term of the contract.
7 types of mortgages - answer✔✔First Mortgage, Junior Mortgage (2nd), Purchase Money
Mortgage, Construction Loan Mortgage, Open End Mortgage, Chattel Mortgage, Package
Mortgage.
One of the 3 approaches to value in which the appraiser derives a value indication by converting
anticipated benefits through ownership of income producing property is the _______________
_________________. - answer✔✔Income Approach
Real estates competes with other investments for the investors dollar. As an investor analyzes
various opportunities what will they consider (5)? - answer✔✔Cost (am I giving up something
else to do this), what will i get back, when will i get it back, risk associated with investment, the
return compared to other investments.
The economic principle of ____________ states that value is created by the expectation of
benefits to be derived in the future. - answer✔✔anticipation
The economic principle of ______________ stats that the a property's maximum value tends to
be set by the lowest cost or price at which another property of equivalent utility can be acquired.
- answer✔✔substitution
Competition is created by the potential for profits. However, competiton among sellers may lead
to ________________, which reduces prices and profits. - answer✔✔oversupply
Competition among buyers may lead to _______________________, which increases prices and
profits to sellers. - answer✔✔shortages
The ________________ rate reflects the return of the investment in the wasting asset. -
answer✔✔recapture
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What are the nine factors influencing investor decisions - answer✔✔Appreciation,
COLLATERAL, LEVERAGE, LIQUIDITY, income, management, safety, size, time.
______________________ leverage is achieved when funds are invested in property, which has
a higher rate of return than the cost of borrowed funds. - answer✔✔Positive
The four most common methods of financing real estate are? - answer✔✔Cash, Trust Deed,
Land Contract, Mortgages
A mortgage on personal property is called what? - answer✔✔A chattel mortgage.\
A _________________ mortgage is also called a second mortgage - answer✔✔junior
The four types of mortgages classified according to repayment provisions. - answer✔✔Variable
or Adjustable Rate Mortgage, Straight Mortgage, Partially Amortized Mortgage, Reverse
Mortgage
A payment on the balance due of a note at the end of the loan term that is in excess of the regular
payment amounts is called a _____________________. - answer✔✔balloon payment.
What is the difference between straight mortgages and partially amortized mortgages? -
answer✔✔Straight mortgages initially involve interest-only payments, while partially amortized
mortgages include both principal and interest in the regular payments but may have a balloon
payment at the end.
A _________________ mortgage covers real estate as well as personal property included in real
estate. - answer✔✔Package Mortgage
The four variables in real estate financing that affect the mortgage payment are? -
answer✔✔Amount Borrowed, Interest Rate, Term of Loan, Frequency of Payments
The ________________ _______________________ rate or discount rate reflect the return on
the investment. - answer✔✔overall yield
The summation concept is a theoretical procedure in developing the discount rate for a real estate
investment and is comprised of the following four parts: - answer✔✔Safe Rates, Risk Rate, Rate
for Non Liquidity, Rate for Management
The ________________ __________________ rate reflects the relationship between the real
estate taxes and the value of the property. - answer✔✔effective tax
To obtain value using the IRV formula, one must _____________ the income by the rate. -
answer✔✔divide
