Real Estate Appraisal Practice Exam

Which techniques are used by appraisers to capitalize net operating income (NOI) into a value?

1. Market and cost techniques

2. Building residual and land residual techniques

3. Income and expense techniques

4. Sales comparison and income techniques

The correct answer is: Building residual and land residual techniques

The building residual and land residual techniques are significant in determining value based on the capitalization of net operating income (NOI). These methods analyze the income-producing potential of a property by separating the total value into two parts: the value attributed to the building and the value assigned to the land. In the building residual technique, appraisers calculate the income generated from the property after deducting the expenses, thereby determining the net operating income. This NOI is then capitalized to estimate the value of the building itself, while the land residual approach similarly seeks to isolate the value of the land component, attributing value based on its potential to generate income. The other methods listed, even if they relate to valuation in real estate, do not specifically focus on the capitalization of NOI in the same structural way as the residual techniques. Market and cost techniques are more about comparing properties or assessing replacement value rather than specifically relating to NOI. Income and expense techniques may involve analyzing financial aspects but are not singularly focused on transforming NOI into value. Lastly, sales comparison and income techniques do take into account various market and income-related factors, but they do not break down the components as distinctly as the building and land residual methods do.