Chapter 30: Valuation of Real Property (JAIIB – Paper 4)
1. Who is primarily responsible for conducting the valuation of a property for bank lending?
A. Bank Branch Manager
B. Customer requesting the loan
C. Registered Valuer or Accredited Valuer
D. RBI Inspector
Banks rely on registered or accredited valuers to ensure an independent and professional valuation of property before sanctioning loans.
2. Which of the following professionals is generally authorized to value both land and buildings for bank purposes?
A. Chartered Engineer or Registered Valuer
B. Accountant
C. Bank Branch Staff
D. Lawyer
Chartered Engineers and registered valuers have expertise to evaluate both land and built-up structures, ensuring accurate property valuation.
3. A property consists of a 500 sq. meter land with a building constructed on it. Which of the following methods is most suitable for its valuation?
A. Land value method only
B. Rental yield method only
C. Cost of construction method only
D. Combined method considering land and building separately
When a property has both land and building, valuation is done separately for land and building, then summed up to determine total value.
4. In bank lending, why is it important to value the building separately from the land?
A. Because land is never sold separately
B. To assess depreciation and construction quality separately
C. Because building value is always higher than land value
D. To avoid paying property tax
Separately valuing the building allows the bank to account for depreciation, quality, and current market construction rates while assessing collateral.
5. A bank is reviewing a loan against a property with a commercial building. The valuer reports: Land = ₹50 lakh, Building = ₹30 lakh. What is the total property value considered by the bank?
A. ₹30 lakh
B. ₹50 lakh
C. ₹80 lakh
D. ₹70 lakh
Total property value = Land value + Building value = ₹50 lakh + ₹30 lakh = ₹80 lakh.
6. The “life of a structure” in property valuation refers to:
A. The expected period during which the building remains functional and retains its utility
B. The legal ownership period of the land
C. The period for which the bank holds the loan
D. The warranty period provided by the constructor
Life of a structure indicates the duration for which the building is expected to remain useful and safe, influencing depreciation and valuation.
7. What is a sinking fund in the context of property financing?
A. A fund to cover the maintenance of swimming pools
B. A fund for paying property taxes annually
C. A fund to insure against fire and theft
D. A reserve fund accumulated periodically to meet future replacement or repair costs
Sinking fund is a reserve created over time to cover major repairs or replacement of structural components without affecting the bank’s loan security.
8. Reverse mortgage is mainly designed for which type of borrower?
A. Young professionals buying their first home
B. Senior citizens seeking periodic income using their residential property
C. Small businesses mortgaging commercial property
D. NRIs investing in land for speculation
Reverse mortgage allows senior citizens to receive regular payments from the bank against the mortgage of their residential property, while retaining ownership.
9. In a reverse mortgage, the repayment of the loan typically occurs:
A. Monthly along with interest
B. Annually in fixed installments
C. At the end of the borrower’s life or when the property is sold
D. Through periodic deductions from pension
Reverse mortgage repayment is deferred and is typically recovered from the sale proceeds of the property after the borrower’s demise or relocation.
10. How does the life of a structure affect bank lending against a property?
A. Banks ignore it, as only land value matters
B. Older structures with shorter remaining life may attract lower loan-to-value ratio
C. It affects only insurance charges, not loan amount
D. Banks increase interest rates if building life is long
Banks consider remaining life of the building; shorter remaining life reduces collateral value, leading to a lower loan-to-value ratio.
11. Which of the following is a commonly used method for valuing residential property?
A. Income capitalization method
B. Cost of construction method only
C. Depreciated replacement cost method only
D. Market comparison method
Residential property is generally valued using the market comparison method, which compares similar properties recently sold in the area.
12. For commercial property generating rental income, which valuation method is preferred?
A. Income capitalization method
B. Land residual method
C. Depreciated cost method
D. Comparative unit method
Commercial properties are often valued based on expected rental income, using the income capitalization method.
13. Depreciation in property valuation primarily accounts for:
A. Changes in land price only
B. Inflation adjustments
C. Wear and tear, age, and obsolescence of the building
D. Loan tenure of the property
Depreciation reflects reduction in building value due to physical wear, age, and functional or economic obsolescence.
14. Replacement cost method is most suitable when:
A. Land prices are volatile
B. There is no active market for the property
C. Property generates high rental income
D. LTV ratio is more than 80%
When market transactions are insufficient, valuation is done by estimating the cost to construct a similar property, adjusted for depreciation.
15. How does the bank typically adjust loan-to-value (LTV) ratio for older buildings?
A. LTV is kept same as new buildings
B. LTV is increased
C. LTV is ignored if land value is high
D. LTV is reduced based on remaining life and depreciation
Older buildings have reduced collateral value due to depreciation; banks reduce LTV ratio accordingly to mitigate risk.
16. Which factor is NOT usually considered in the valuation of residential property?
A. Location and neighborhood
B. Borrower’s income
C. Size and amenities of the property
D. Age and condition of the building
Borrower’s income is not part of property valuation; valuation focuses on the property’s intrinsic and market factors.
17. A commercial property is partly rented and partly owner-occupied. How should the valuer approach its valuation?
A. Value only the rented portion
B. Value only the owner-occupied portion
C. Value both portions separately using income method for rented and cost/market method for owner-occupied
D. Ignore the rented portion and apply LTV on total property
Different approaches are used: income capitalization for rented portion, cost or market comparison for owner-occupied portion; sum gives total value.
18. For a bank, why is it important to get a property valued before sanctioning a commercial loan?
A. To determine collateral value and mitigate lending risk
B. To decide the interest rate only
C. To verify borrower’s income statements
D. To comply with GST regulations
Banks require property valuation to assess collateral value, ensuring that loan exposure is adequately secured.
19. A bank considers a 10-year-old commercial building for a loan. The valuer reports: Replacement cost = ₹1 crore, Depreciation = 30%. What is the depreciated value for lending?
