assignment 16 introduction to appraisal Flashcards
Which of the following statements regarding appraisal is FALSE?
A sale is likely to be realized when the floor price is less than the offered price.
A form report appraisal meets the needs of, and is commonly used by financial institutions.
An appraiser need not understand the property interest that is to be valued, as long as they use the correct appraisal method.
Appraisers estimate value as at a specified date, known as the “date of valuation”.
Correct Answer: 3
p Option (3) is false because it is the value of the legal interests in real estate that is being estimated. The most common being fee simple interest but there are other lesser interests and there may be charges against these interests such as easements and liens. All other options are true.
A nine-storey apartment complex in Vancouver was recently destroyed by fire. The appraisal report recommends that a mixed-use development with residential above and street level commercial units be constructed. Given this information, which of the following statements is/are TRUE regarding the property BEFORE the fire?
The property had redevelopment potential.
The property had latent value.
The property was at its highest and best use.
Both (1) and (2) are correct.
Correct Answer: 4
As a rough indication of whether an existing property represents its highest and best use, it is useful to ask AIf this building burned down, would the same type of building be constructed in its place? If the answer is a yes, the existing development probably represents highest and best use. In this case the report recommends for a mixed-use development so that the property before the fire was not developed to highest and best use and that it had redevelopment potential and latent value.
Which of the following statements regarding the comparative approach is FALSE?
The income approach is similar to the comparative approach; both rely on market evidence from similar properties.
The comparative approach reflects market behaviour and requires a minimum of subjective opinion from the appraiser.
The residual method is only applicable when determining the highest and best use of the land as vacant.
The cost approach assumes that the improvement’s replacement cost new may exceed its market value.
Correct Answer: 3
Option (3) is false because the residual method may also be used to determine the value of the building as the residual amount. In this case, the land value may be known using the comparative approach and the value of the improvements is unknown. Option (1) is true because instead of comparing similar sales, the income approach compares revenues and expenses relative to the sale prices of similar properties. Option (2) is true, market data reflects market expectations; the proviso is that the quality of, and market data selected, is based on the appraiser’s experience and judgement. Option (4) is true because the improvement’s replacement cost new may exceed its market value since the cost of producing the asset may not directly relate to market expectations. An example is in the case where an individual with a personal preference to have their house built using triple glazed windows vs. double glazed windows (standard in the marketplace).
Which of the following statements is/are TRUE?
The direct comparison approach is based on the market principle.
Due to the immobility of real property, external factors or externalities will impact value.
The neighbourhood an appraiser should consider when doing an appraisal may not be limited to the subdivision in which the property is located.
The presence of a special purchaser in a sales transaction will greatly extend the range of possible bids.
A and B only
B, C, and D only
A, B, and C only
All of the above
Correct Answer: 2
Only statements B, C, and D are true. Statement A is false because the direct comparison approach is based on the principle of substitution: a property’s value should be no more than the cost of purchasing a substitute property that provides similar utility.
Which of the following statements is/are TRUE?
An appraiser owes a duty of care to those persons who he/she can foresee are likely to take action based on the appraisal report.
Soil conditions in a neighbourhood should not be overlooked in cases where they may influence the type of structure that can be constructed.
A government policy which allows homeowners to deduct interest paid on a mortgage from their taxable income would change the demand for real property across the country.
The supply of real property can be increased or decreased by changing the use of a parcel of real property.
A only
B and D only
A, C, and D only
All of the above
Correct Answer: 4
Statements A, B, C and D are true. Therefore, option (4) is correct.
Geraldo is considering a purchase of a condominium and engages an appraiser, Harvey to do an appraisal. The seller, Ivanhoe requests to see the report, since he doesn’t want to hire his own appraiser, and Harvey agrees. Harvey determines a market value of $985,000 which Geraldo subsequently offers to Ivanhoe. Ivanhoe accepts, but begins to wonder if he got a fair price. He hires another appraiser who determines a higher market value of $1,450,000. What actions might Ivanhoe take at this time?
Ivanhoe could sue Geraldo for the difference, since he picked an appraiser who did not exercise due diligence.
Ivanhoe can sue Harvey for breach of contract, because by showing the report to Ivanhoe, Harvey was agreeing to the same contract that governed his relationship to Geraldo.
Ivanhoe can sue Harvey for negligence, because Harvey should have reasonably foreseen that Ivanhoe would rely on the appraisal report.
Ivanhoe has no recourse.
Correct Answer: 3
Ivanhoe has no recourse against Geraldo, but can sue Harvey for the tort of negligence, since Harvey should have reasonably foreseen that Ivanhoe would rely on his appraisal, even though it was originally ordered by Geraldo. Therefore, option (3) is correct.
Consider a mid-size warehouse situated in downtown Vancouver, between the Scotiabank and HSBC buildings, both of which are skyscrapers. The warehouse is rented for storage space on a monthly basis, earning $60,000 in income per year. Which of the following options as an estimate of value would be most suitable for this property?
Comparative approach
Residual method
Income approach
Cost approach
Correct Answer: 2
Since the warehouse is located between two skyscrapers in downtown Vancouver and earns only $60,000 per year, it is unlikely that the warehouse represents the property’s highest and best use. In this case, the property possesses great potential for redevelopment. Thus, option (2) is correct, as the residual method will provide the most accurate estimate of value.
Of the following pairs, which best completes the following statement?
“Highest and best use is based on the principle that the market value of property depends on _______ use rather than on ________ use alone.”
current; potential
future; past
potential; current
past; future
Correct Answer: 3
The appraiser considers whether or not the current use of the land reflects its highest and best use and if not, then the value of the potential alternative uses should be considered such that the land meets its economic potential.
Kathy Myers, a professional appraiser, recently moved to a small suburban residential area. She has been asked to appraise a historic church which is located in the middle of a residential neighbourhood. Which approach of appraisal is Kathy most likely to use?
Income approach
Comparative approach
Investment approach
Cost approach
Correct Answer: 4
An appraiser who is asked to find the market value of a church would not be able to use the comparative or investment approaches due to the lack of available market data. The cost approach which determines the value of a property by adding the market value of the site to the cost of replacing the existing building, would be the most applicable method to use under these circumstances.
A provincial government’s decision to acquire a tract of land to widen the highway is an example of a property appraisal for _______ purposes. Whereas a parking lot considered for redevelopment requires a property appraisal for _______ purposes.
special; conventional
statutory; market
illegal; legal
public; private
Correct Answer: 2
Expropriation follows a statutory reason with the appraiser guided by provisions outlined in the relevant Acts to estimate value; a property being considered for redevelopment requires market data with no need to follow government statutes to determine value.
Which of the following statements is TRUE?
Latent value is most often defined as a short-term conservative estimate of market value.
An estimate of value together with a reasonable exposure time reflects the market expectations as of the date of appraisal.
A change in value after the effective date of appraisal invalidates the accuracy of the original appraisal.
If there is sufficient evidence of recent sales, there is no allowable error in the appraisal of single-family residences.
Correct Answer: 2
Statement (2) is true. Statement (1) is false because the term latent value is actually used to describe a property where the current use is not at its highest and best use. Statement (3) is false because value is related to a certain point in time and the market conditions ruling at that time; a subsequent change in value does not mean that the original appraisal was not accurate. Statement (4) is false because even where there are sufficient recent comparable sales, the courts have recognized a reasonable margin of error.
The “subject of an appraisal” is:
determined by the appraiser and the neighbourhood characteristics of the residence.
the land which will provide the maximum net return during the foreseeable future.
the legal rights of ownership vested in a certain piece of real estate.
determined by distinct boundaries which are natural, such as hills, streams and lakes.
Correct Answer: 3
In an appraisal, it is the value of legal interests in real estate that is estimated and not necessarily the physical property itself. The words “legal interests” mean “legal rights of ownership”, and the subject of an appraisal is the particular rights of ownership vested in a certain piece of real estate.
Ryan, a real estate appraiser, has appraised a property for a bank for mortgage loan purposes. Although the appraisal was intended for the use of the bank loans officer, the purchasers of the home were shown the appraisal by the loans officer. Later, it was found that the home was infested with bugs, and that the appraiser had negligently assessed the worth of the home as much higher than its actual value. Consider the following statements regarding the purchasers remedy against Ryan.
Based on the principles of negligent misrepresentation, the purchasers may have a claim against the appraiser.
As the appraisal was prepared for the bank, there is no privity of contract between the purchasers and the appraiser, and therefore the purchasers can have no remedy against the appraiser.
Damages resulting from a claim of this nature could properly be determined by calculating the difference between the actual value of the home and the price paid by the purchasers.
If the appraiser can demonstrate that the purchasers did not rely on the appraisal in making their purchase, then the purchasers will be denied a remedy.
Which of the above statements is/are FALSE?
A only
B only
A and D only
B and C only
Correct Answer: 2
While it is true that there is no privity of contract between the appraiser and the purchaser, the principle of negligent misrepresentation, if applicable, will operate to provide the purchasers with a remedy even without privity of contract. In order to succeed in a claim for negligent misrepresentation, the party seeking redress must be able to demonstrate that the statement was untrue, that it was made negligently, that there was a special relationship between the parties giving the rise to a duty of care, and that the plaintiff relied on the statement. Thus, if Ryan could prove that the purchasers did not rely on the statement then he will not be held liable for this negligent misrepresentation. A successful claim of negligent misrepresentation could result in an award of damages equal to the difference between the actual value of the home and the purchase price paid.
Why is an analysis of highest and best use of a property important?
It helps the appraiser identify comparable properties.
It identifies the use or uses on which the final opinion is based.
It helps to interpret the market forces that affect the subject property.
It helps to identify which appraisal approaches may be used.
A only
B and D only
A, C, and D only
All of the above
Correct Answer: 4
All the options are true.
In developing a real property appraisal, which of the following statements concerning scope of work determination is/are TRUE?
It is the appraiser/licensee’s responsibility to determine the scope of work and the level of information required to produce credible and reliable results.
An appraiser can rely on the client to identify and, to resolve the problem since it is the client who is requesting the report.
A brief appraisal with limited detail may be acceptable if the appraisal is within the client’s requested scope of work, and the limitations are explicitly written in the report.
The appraiser need not know the report’s intended use since the client is the one paying for the report and should know its purpose.
A, B and D only
B, C and D only
A and C only
All of the above
Correct Answer: 3
Statements A and C are true. Once the appraiser or licensee has established the scope of work, it is up to them to determine the level of detail and research necessary to produce a credible appraisal. Three different assignments involving the same property with three different intended uses and levels of detail required may be acceptable, if within the client’s scope of work and these limits are written in the report. Statement B is false. It is the appraiser who establishes with the client most of the information necessary for problem identification and using their experience and judgement determines what is relevant to the assignment. Statement D is false. Intended use is the key driver in making an appropriate scope of work decision. The appraiser needs to understand the client’s intended use in order to make the appropriate scope of work decision.
