National Valuation practice
Valuation practice: choose the evidence, then check the numbers
Before reaching for a formula, name the question you are answering. A sale price, a construction cost and a supported opinion of market value are different things. The right calculation can still produce the wrong answer if you start with the wrong income measure or adjust the wrong property.
Last reviewed:
The short answer
For a valuation question, identify the requested value, effective date, property interest and available evidence. Adjust comparable sales toward the subject. In a simplified cost problem, add current land value to improvement cost and subtract the specified depreciation. In a stated direct-capitalization problem, divide annual NOI by the decimal cap rate. With a gross multiplier, match the income definition and period used to derive it. Reconcile the evidence by relevance and reliability rather than automatically averaging every indication.
Reviewed for October 2026. PSI assigns 8 of the 100 scored national broker questions to Valuation. Its outline covers appraisals, economic principles, valuation approaches, CMA/BPO and AVM comparisons. The 20 questions below are original learning exercises, not official PSI items or a validated readiness test. Stated inputs are teaching assumptions, not current market adjustments, cap rates, property values or an actual appraisal.
Five checks before choosing an answer
- Read the assignment. What value concept, date, interest and purpose are given? A contract price or cost figure is evidence to evaluate, not an instruction to force every other indication to match it.
- Choose the evidence that fits. Recent relevant sales may support comparison. Current cost and depreciation evidence may help with a newer or unusual improvement. Income evidence matters when market participants focus on income and return. A property label does not make one approach the only acceptable approach in every assignment.
- Label the inputs. For a comparable, identify each supported difference and its direction. For cost, keep land, improvement cost and distinct depreciation separate. For income, write the income period, expense convention and rate or multiplier beside the figures.
- Calculate with consistent assumptions. A superior comparable feature generally calls for a subtraction from that comparable; an inferior feature calls for an addition. Convert a percentage rate to a decimal. Do not apply a monthly multiplier to annual rent or silently change how replacement reserves are treated.
- Check the result and its limits. Reverse the formula, check whether the direction makes sense and review the evidence quality. A broker product, appraiser opinion and model output have different legal and practical boundaries. An answer containing a dollar amount does not make the products interchangeable.
| Task | Setup | Keep straight |
|---|---|---|
| Sales comparison | Sale price plus or minus supported comparable adjustments | Adjust the comparable toward the subject |
| Simplified cost indication | Current land value + improvement cost - specified depreciation | Do not physically depreciate the land or duplicate a loss |
| Annual NOI | Effective income - defined operating expenses | Apply the stated reserve convention; debt service is separate |
| Direct-capitalization value | Annual NOI / decimal cap rate | The income definition and rate must match |
| Cap rate | Annual NOI / value | Convert the decimal result to a percentage |
| Gross rent multiplier | Comparable price / comparable gross rent | Use matching income type and period for the subject |
| Highest and best use | Physical, legal, financial and productivity tests | Highest gross revenue alone is insufficient |
| Reconciliation | Evaluate relevance, applicability and reliability | No automatic equal-weight average |
The distinctions that matter
| Distinction | How it works | What to notice |
|---|---|---|
| Cost, price and market value | Money spent, a quoted or transaction amount, and a supported opinion under a defined value concept are different measures. | A $50,000 improvement does not automatically add $50,000 to value. |
| Substitution and contribution | Substitution concerns a suitable alternative without costly delay. Contribution concerns what a component adds to the whole. | A comparable alternative and an added feature answer different questions. |
| Replacement and reproduction | Replacement concerns equivalent utility using current design and materials; reproduction concerns a replica. | Equivalent usefulness does not require copying every obsolete feature. |
| Physical, functional and external loss | Wear or component damage, design or utility deficiency, and negative outside influence are different causes. | An unaffordable roof repair remains physical deterioration; owner finances do not change the cause. |
| Economic cure and duration | A justified correction and the length of an effect are separate questions. | External loss may be temporary even if the owner cannot economically remove its cause. |
| Gross rent and NOI | Gross rent precedes the relevant operating deductions. NOI uses a defined net operating measure. | A gross multiplier and an NOI capitalization rate are not interchangeable. |
| Property tax and owner income tax | Property operating analysis generally includes the relevant property-tax expense but excludes the owner's income tax. | Do not exclude every tax simply because income tax is excluded. |
| NOI and replacement reserves | Some frameworks include a replacement allowance in NOI; others subtract it later to reach a separately defined net cash flow. | Follow the question's stated convention and use a consistent rate. |
| CMA/BPO and appraisal | Illinois permits specified broker products under Section 10-45, with purpose and written-report requirements. Brokerage licensure alone is not an unrestricted appraiser credential. | A not-an-appraisal label does not cure a prohibited intended use. |
| Valuation and physical inspection | A model estimate or valuation report does not by itself establish that every component has been inspected or is sound. | Identify the actual scope, evidence and stated assumptions. |
Work through the facts
Two comparable adjustments
A comparable sold for $420,000. Its garage is superior by a supported $20,000, but its bathroom feature is inferior by a supported $5,000. Assume these are the only adjustments.
- Subtract $20,000 for the comparable's superior feature.
- Add $5,000 for its inferior feature: $420,000 - $20,000 + $5,000.
Answer: The adjusted indication is $405,000. The supported adjustments apply to the comparable, not to the subject's asking price.
Cost evidence may deserve emphasis
A recently built special-purpose school has limited comparable sales and is not typically purchased on market-rental return. Reliable current site, cost and depreciation evidence is available.
- The facts explain why sales and rental evidence are limited.
- Cost evidence may be useful; the property label does not eliminate the need to evaluate applicable evidence.
Answer: The cost approach may receive strong emphasis on these facts. Do not convert that into a universal only-approach rule.
Build the simplified cost indication
Current site value is $80,000. The stated improvement cost is $400,000 and total specified improvement depreciation is $60,000. Assume no missing or duplicated component.
- Depreciated improvement indication: $400,000 - $60,000 = $340,000.
- Add the separately estimated current site value of $80,000.
Answer: The stated cost indication is $420,000. Do not depreciate the land by the building's wear allowance.
The outside influence
A sound home has a supported value loss caused by persistent noise from an outside industrial operation.
- The stated cause originates outside the property.
- The loss is established by the scenario, not merely presumed from the name of a neighboring use.
Answer: The loss is external obsolescence. Economic obsolescence is often another name for it; the effect can be temporary or permanent.
Build NOI with defined inputs
Annual potential rent is $120,000; vacancy and collection loss is $6,000; separate other income is $2,000. The supplied operating expenses total $36,000, including the stated property-tax expense. For this exercise, no replacement reserve is deducted in NOI.
- Effective gross income: $120,000 - $6,000 + $2,000 = $116,000.
- NOI: $116,000 - $36,000 = $80,000.
Answer: Annual NOI is $80,000 under the stated convention. Debt service and the owner's income tax are not deductions in that calculation.
Capitalize the matching NOI
Use the preceding $80,000 annual NOI and a supplied 8% rate derived on the same expense and reserve basis.
- Convert 8% to 0.08.
- $80,000 / 0.08 = $1,000,000; reverse-check $1,000,000 × 0.08 = $80,000.
Answer: The simplified indicated value is $1,000,000. The supplied rate is not a current Illinois market-rate recommendation.
Read the reserve instruction
A different problem expressly defines its NOI after an $8,000 replacement allowance. Its income and other operating-expense figures would otherwise produce $80,000.
- Use this problem's definition rather than importing the previous example's convention.
- $80,000 - $8,000 = $72,000.
Answer: Use $72,000 as this problem's NOI. A capitalization rate must be consistent with that convention; do not combine one framework's income with another's rate.
Keep the multiplier period
A comparable sold for $360,000 and has $3,000 monthly gross rent. Use the same gross-rent definition for a subject with $3,200 monthly gross rent.
- Monthly GRM: $360,000 / $3,000 = 120.
- Subject indication: $3,200 × 120 = $384,000.
Answer: The gross-multiplier indication is $384,000. On a consistent annual basis, the comparable's $36,000 annual gross rent gives a multiplier of 10; apply that to the subject's $38,400 annual gross rent for the same $384,000. These gross multipliers do not directly calculate either property's NOI.
Highest revenue is not enough
A proposed project has the highest gross revenue among the choices, but the question stipulates it is not legally permissible and no relevant change in permission is reasonably probable.
- Revenue is not the only test.
- The stipulated legal failure prevents it from satisfying all four highest-and-best-use tests.
Answer: Do not choose it solely for its top-line income. Compare the uses that satisfy the supplied physical, legal and financial conditions.
A contribution smaller than cost
An improvement costs $50,000. Reliable market evidence in the question supports a $40,000 contribution to total property value.
- Cost and market contribution are separate.
- The problem supplies the supported contribution; do not replace it with the expenditure.
Answer: Its stated contribution is $40,000, not automatically $50,000. No fixed contribution percentage is implied for another property.
A broker label cannot change the intended use
An Illinois broker is asked for a BPO to serve as the primary market-value basis for a financial institution's mortgage origination secured by that real estate. The broker suggests adding Not an appraisal to make it permissible under Section 10-45.
- The scenario matches the section's excluded intended use.
- A disclosure does not change what the recipient will use the product for.
Answer: The label does not make that intended use compliant. Other permitted recipients and purposes must not be collapsed into a ban on every lender-related broker service.
Reconcile instead of averaging
Sales comparison is well supported; the cost indication has dated inputs, and the supplied income indication is poorly matched to the owner-occupied subject's market.
- The indications do not have equal relevance or reliability.
- An arithmetic average does not repair weak inputs.
Answer: Evaluate and reconcile the evidence. The facts support emphasizing the strong sales evidence rather than automatically giving each indication one-third weight.
Mistakes to avoid
- Take every contract price as market value. Consider the value definition, terms, motivation and effective date.
- Add the adjustment because the comparable is superior. Bring the comparable toward the subject: subtract the supported superior feature difference.
- Use a renovation bill as the feature adjustment. Use supported market contribution, which can differ from cost.
- Deduct debt service to obtain property NOI. Keep financing cash flow separate from the stated property operating measure.
- Say reserves are always excluded from NOI. Frameworks differ. Follow the stated reserve treatment and match the rate basis.
- Mix monthly rent and an annual multiplier. Derive and apply the multiplier with matching gross-income definitions and periods.
- Treat the highest gross revenue as highest and best use. Apply all four tests under the assignment facts.
- Use a model estimate as proof of physical condition. The output alone does not establish inspection scope or a condition guarantee.
- Treat the question set as a passing predictor. Explain mistakes and use fresh practice; this set has no validated readiness threshold.
Check your understanding
These are original teaching questions, not recalled or predicted PSI questions. Answer first, then explain why the other choices fail.
1. A comparable sold for $420,000. Its only difference is a supported $20,000 superior garage feature. What is the adjusted indication?
- $400,000
- $440,000
- $420,000
- $20,000
Show answer and explanation
Answer: A. $400,000
Subtract the superior feature difference from the comparable: $420,000 - $20,000 = $400,000. Do not adjust the subject.
2. A comparable sold for $420,000. Subtract a supported $20,000 superior feature and add a supported $5,000 inferior feature. What is indicated?
- $395,000
- $445,000
- $435,000
- $405,000
Show answer and explanation
Answer: D. $405,000
The net adjustment is -$15,000: $420,000 - $20,000 + $5,000 = $405,000. The $25,000 gross size of the adjustments is not the net deduction.
3. An improvement cost $50,000, but the supplied market evidence supports $40,000 added to the whole property's value. Which principle directly addresses that difference?
- Substitution only
- Automatic cost recovery
- Contribution
- Tax depreciation
Show answer and explanation
Answer: C. Contribution
Contribution concerns the component's addition to the whole. Cost and contributory value are not necessarily equal.
4. A buyer compares an available equally desirable alternative without costly delay rather than paying more solely for the subject's name. Which principle is illustrated?
- Substitution
- Physical deterioration
- Anticipation of unspecified future income
- An automatic assessment ratio
Show answer and explanation
Answer: A. Substitution
The scenario emphasizes a suitable available substitute. This principle supports valuation reasoning but is not a promise that every buyer always pays a calculated maximum.
5. Which situation most supports giving current cost evidence strong emphasis, assuming reliable site and depreciation data?
- Every property solely because construction involves money
- A newer special-purpose improvement with limited sales and rental evidence
- A house for which the only supplied fact is its owner's asking price
- A property with excellent rental comparisons and no cost information
Show answer and explanation
Answer: B. A newer special-purpose improvement with limited sales and rental evidence
The stated evidence makes cost useful. It does not make cost the only approach for every special-purpose property or require unsupported inputs.
6. Site value is $80,000, improvement cost is $400,000 and specified improvement depreciation is $60,000. Assume no other components. What is indicated?
- $460,000
- $420,000
- $540,000
- $340,000
Show answer and explanation
Answer: B. $420,000
$80,000 + $400,000 - $60,000 = $420,000. The site value is separate from improvement depreciation.
7. Which description best fits replacement cost rather than reproduction cost?
- The price a buyer happened to pay
- A tax assessment multiplied by a fixed national ratio
- Equivalent utility using current design and materials
- A replica of every original obsolete feature
Show answer and explanation
Answer: C. Equivalent utility using current design and materials
Replacement focuses on equivalent utility. Reproduction focuses on recreating the original improvement. Neither cost estimate is automatically market value.
8. The stated loss arises from an inadequate internal floor plan, not wear or a negative outside influence. What fits?
- Functional obsolescence
- External obsolescence
- An increase in land area
- Physical deterioration
Show answer and explanation
Answer: A. Functional obsolescence
The cause is design or utility in the improvement. A poor layout does not become external merely because buyers respond to it.
9. A sound building has a supported value loss from outside industrial noise. What classification fits?
- Tax depreciation alone
- External obsolescence
- Physical wear in every case
- Functional obsolescence because noise affects usefulness
Show answer and explanation
Answer: B. External obsolescence
The stipulated cause is outside and has a negative value effect. External loss can be temporary or permanent; adjacency alone would not supply an amount.
10. Which highest-and-best-use test directly considers the supplied zoning and other applicable legal restrictions?
- Legal permissibility
- Financial feasibility
- Physical possibility alone
- Maximum productivity alone
Show answer and explanation
Answer: A. Legal permissibility
Legal permissibility addresses those restrictions. The full conclusion still requires the other tests and the assignment's assumptions, including any reasonably probable change where relevant.
11. A use has the highest gross revenue but is stipulated not legally permissible, with no relevant permission change reasonably probable. What follows?
- Gross revenue alone does not establish highest and best use
- Financial calculations eliminate the need for legal analysis
- Gross revenue automatically overrides the failed test
- The use becomes legal through an appraisal label
Show answer and explanation
Answer: A. Gross revenue alone does not establish highest and best use
The problem expressly supplies a failed legal condition. Highest and best use requires all four tests, not just the largest top-line income.
12. Annual potential rent is $120,000, vacancy and collection loss $6,000, separate other income $2,000 and operating expenses $36,000. No reserve is deducted in this problem's NOI. What is NOI?
- $78,000
- $80,000
- $84,000
- $116,000
Show answer and explanation
Answer: B. $80,000
$120,000 - $6,000 + $2,000 - $36,000 = $80,000. Other income is separate and not already included; apply the stated reserve convention.
13. Use annual NOI of $80,000 and a matching supplied 8% cap rate. What is the simplified value indication?
- $10,000,000
- $100,000
- $1,000,000
- $6,400
Show answer and explanation
Answer: C. $1,000,000
Convert the rate to 0.08, then divide: $80,000 / 0.08 = $1,000,000. Multiplying NOI by the rate solves a different calculation.
14. Annual NOI is $96,000 and value is $1,200,000. What cap rate does their relationship indicate?
- 0.08%
- 12.5%
- 8%
- 80%
Show answer and explanation
Answer: C. 8%
$96,000 / $1,200,000 = 0.08 = 8%. This property-income rate is not automatically a mortgage interest rate or a leveraged cash-on-cash return.
15. Hold annual NOI fixed at $80,000. What happens to the simplified value indication when the cap rate rises from 8% to 10%?
- It falls from $1,000,000 to $800,000
- It becomes $8,000
- It rises from $1,000,000 to $1,250,000
- It stays $1,000,000
Show answer and explanation
Answer: A. It falls from $1,000,000 to $800,000
At 8%, $80,000 / 0.08 = $1,000,000. At 10%, $80,000 / 0.10 = $800,000. The inverse relationship holds with the NOI assumption fixed.
16. A comparable price of $360,000 divided by $3,000 monthly gross rent gives a multiplier of 120. Matching subject monthly gross rent is $3,200. What is indicated?
- $4,608,000
- $3,840,000
- $32,000
- $384,000
Show answer and explanation
Answer: D. $384,000
$3,200 × 120 = $384,000. Annual consistency also gives $360,000 / $36,000 = 10 and $38,400 × 10 = $384,000. The $4,608,000 option wrongly applies the monthly multiplier to annual rent. No expense deduction or NOI conclusion is supplied by this gross calculation.
17. The supplied convention defines NOI after an $8,000 reserve allowance. All other income and operating figures produce $80,000 before that allowance. What NOI applies?
- $88,000
- $72,000
- $8,000
- $80,000 in every framework
Show answer and explanation
Answer: B. $72,000
Use the stated convention: $80,000 - $8,000 = $72,000. Reserve treatment is not identical across every lending, reporting and appraisal framework.
18. An Illinois BPO is intended as the primary market-value basis for a financial institution's mortgage origination secured by that real estate. Does adding Not an appraisal make that use compliant with Section 10-45?
- Yes, any label overrides intended use
- No; the stated intended use falls within the statutory exclusion
- Yes, if no physical inspection is performed
- Yes, because every lender use is permitted
Show answer and explanation
Answer: B. No; the stated intended use falls within the statutory exclusion
The excluded purpose is not cured by a label. This is not a ban on every permitted broker service for every existing or potential lienholder.
19. A model supplies a property-value estimate. Which conclusion does that output alone establish?
- That all components meet code
- Neither a complete physical inspection nor a guarantee of condition
- That every room was physically inspected
- That the provider holds every required appraiser credential
Show answer and explanation
Answer: B. Neither a complete physical inspection nor a guarantee of condition
A model output is not by itself proof of inspection scope, condition or provider credentials. Identify the actual assignment, data, legal rules and scope.
20. One approach has strong relevant data, while two others have materially weaker support. What is reconciliation?
- Using the contract price to erase inconsistent evidence
- Choosing the highest figure regardless of evidence
- Automatically weighting each exactly one-third
- Evaluating relevance and reliability to reach a supported conclusion
Show answer and explanation
Answer: D. Evaluating relevance and reliability to reach a supported conclusion
Reconciliation evaluates the evidence and applicable approaches. An automatic mean does not repair weak data or establish the correct final value.
Common questions
How many Valuation questions are on the national broker exam?
The PSI category has 8 of the 100 scored national broker questions. Its outline covers appraisal, economic principles, sales/cost/income approaches and comparative products. That is not a separate quota for each topic below. Related calculations can also be studied within Real Estate Math.
Are these real PSI questions?
No. These are original practice questions with stated assumptions and explained answers. They are not recalled items, an exam preview or a validated readiness test.
What is the best way to review a wrong answer?
Identify the error before doing more questions: wrong value concept, unsupported evidence, wrong adjustment direction, wrong income measure, mismatched period, percentage conversion or arithmetic. Rework the setup without looking at the options, then test yourself later with changed numbers.
Is sales comparison always best for a house?
No. Relevant comparable sales often make it persuasive, but the assignment, property and evidence matter. A property label alone does not settle applicability or the weight of every approach. Do not invent comparables or cost inputs that the question has not supplied.
Do I adjust the subject or the comparable?
In the stated sales-comparison method, adjust the comparable toward the subject. Subtract a supported superior feature difference and add a supported inferior one. The adjustment amount reflects market evidence, not automatically the component's construction bill.
What are the four highest-and-best-use tests?
Physical possibility, legal permissibility, financial feasibility and maximum productivity. Consider the assignment's vacant-versus-improved perspective. The highest gross revenue alone is insufficient, and the current use is not automatically the conclusion.
What is the cost-approach formula?
A simplified problem uses current site value plus improvement cost less the specified accrued depreciation. Check whether site improvements, distinct losses or other components are included. The formula is a teaching setup, not permission to ignore a missing component or depreciate land by a building-wear percentage.
What is the difference between functional and external obsolescence?
Functional loss concerns design or utility in the improvement. External loss comes from a negative outside influence and may be temporary or permanent. Economic obsolescence is often another name for external obsolescence. A loss must be supported; a neighboring use does not carry an automatic deduction.
Which expenses belong in NOI?
Use the defined property operating measure. Relevant property taxes, insurance, management and maintenance are operating categories. Financing debt service, the owner's income tax and accounting depreciation are separate. Replacement-reserve treatment varies by framework, so use the problem's convention and a consistent capitalization rate. Actual capital expenditures are also distinct from a stipulated replacement-reserve allowance; do not interchange the two without the problem's definitions.
Are replacement reserves always outside NOI?
No. OCC's commercial-real-estate handbook includes an imputed replacement reserve in its defined NOI. The cited Fannie Mae multifamily definition instead subtracts the underwritten replacement reserve from NOI to reach its defined net cash flow. These are framework-specific definitions; neither is a reason to mix one income basis with an incompatible rate.
What is the difference between a cap rate and a gross rent multiplier?
A cap rate relates annual NOI to value. A gross rent multiplier relates price to a defined gross rent figure. The multiplier does not directly deduct the subject's expenses; that does not mean the expenses are zero or that different expense structures can be ignored when choosing evidence. Derive and apply the multiplier with matching periods and income definitions. Neither figure is automatically a leveraged return after debt service.
Can an Illinois broker prepare a CMA or BPO?
Section 10-45 permits specified broker and managing-broker products for specified recipients and purposes, with written-report requirements. Its exception for a financial institution's primary market-value basis in a mortgage origination secured by that real estate matters. A disclaimer does not cure an excluded intended use. This is a summary, not a complete report-compliance checklist.
Does an AVM or appraisal guarantee the house is in good condition?
No. A value estimate does not by itself prove that every component was physically inspected or is sound. Read the actual scope and conditions. Do not treat a valuation as a substitute for the appropriate physical investigation.
Must a lender provide copies only when the report is called an appraisal?
No. For covered applications secured by a first lien on a dwelling, Regulation B addresses appraisals and other written valuations. Its examples include AVM reports and BPOs. Timing, coverage and waiver conditions matter; the rule does not independently authorize a broker product that state law prohibits.
Should I average all three appraisal approaches?
Not automatically. Reconciliation considers the quantity, quality, relevance and applicability of the evidence. Equally weighting a weak indication and a strong one merely because both contain numbers is not a substitute for analysis.
What practice percentage means I am ready for the exam?
This set has no validated passing or booking threshold. Use it to identify errors, explain the reasoning and check the setup on fresh mixed questions. Memorizing twenty keys does not establish readiness for the national and Illinois portions.
Keep practising
Your next practice step
Bring the national topics together
Move from a topic exercise to a longer national session, then review the explanations and topic report.
These web resources are free. The app has a separate free starter tier and optional paid full access.
Official sources and scope
PSI supplies the category boundaries; the exercises are original. IAAO and the California DRE chapter support general valuation teaching, not a current USPAP compliance opinion or California law applied to Illinois. Illinois broker and appraiser provisions control the stated licensing example. Fannie Mae and OCC examples retain their own program and income-definition contexts. The Fannie topics display June 4, 2025; the guide navigation identifies an October 7, 2026 publication. No example supplies a current market rate or actual property value.
- PSI June 24, 2026: national Valuation outline
- IAAO third-edition glossary: valuation principles, highest and best use, reconciliation and obsolescence
- Fannie Mae B4-1.3-09: market-supported comparable adjustments
- Fannie Mae B4-1.3-10: substitute construction and income context
- 12 CFR 34.42(h): federal market-value assumptions
- California DRE Reference Book chapter 15: overall-rate and income arithmetic
- OCC Commercial Real Estate Lending handbook: income and value analysis
- Fannie Mae multifamily: defined NCF subtracts replacement reserve from NOI
- 225 ILCS 458/5-5: appraisal licensing and selected exceptions
- 225 ILCS 454/10-45: permitted uses and complete written-report contents
- Regulation B 12 CFR 1002.14: valuation-copy coverage, timing and fees
- CFPB: appraisal and home inspection serve different purposes
This is exam preparation, not advice for a specific transaction. State law and the applicable facts control. Our editorial and corrections process explains how to report an issue.