assignment 17 direct comparison and cost approach Flashcards
Luigi is using the comparative approach of appraisal to value a house and has found a recent sale which he thinks is a good comparable to the subject property. The subject property has a swimming pool while the comparable does not. Swimming pools are a desirable amenity and a selling feature in this area. However, the subject property features a dated kitchen whereas the comparable has been updated with new appliances and stone countertops. When adjusting for these differences, he will:
- add the value of the swimming pool to the comparable and add the value of the kitchen updates to the subject property.
- add the value of the swimming pool to the comparable and subtract the value of the kitchen updates from the comparable.
- add the value of the swimming pool to the comparable and subtract the value of the kitchen updates from the subject property.
- subtract the value of the swimming pool from the subject property and add the value of the kitchen updates to the subject property.
Correct Answer: 2
This question requires you to adjust a comparable using the comparative approach of appraisal. The general rule when making adjustments is that the appraiser adjusts the comparables to make them identical to the subject. In this case, you would add the value of the swimming pool to the comparable, and subtract the value of kitchen updates from the comparable.
A three-storey, 45 year old, Tudor style home has the entrance way located so that one enters through the dining room. As well, the ceiling height on the main floor is only six feet, which was an acceptable height when the home was first built. These would be examples of:
- functional curable depreciation.
- functional incurable depreciation.
- physical curable depreciation.
- physical incurable depreciation.
Correct Answer: 2
This question requires you to distinguish between the various types of depreciation. In this case, the Tudor house has very low ceilings and a poor main floor plan with the entrance way located in the dining room. These would both be examples of functional incurable depreciation.
The deteriorating roof tiles of a ranch style home that was built in the late 1990s would be classified as:
- incurable physical depreciation.
- incurable functional depreciation.
- curable physical depreciation.
- curable functional depreciation.
Correct Answer: 3
Incurable depreciation refers to depreciation that is not economically worthwhile to correct. Deteriorating rooftiles can be corrected without completely rebuilding and therefore, it is considered curable depreciation. Functional depreciation refers to items of an outdated design which cause a decline in value. Physical depreciation represents the loss in value due to physical wear and tear. Deteriorating rooftiles would be classified as curable physical depreciation.
Consider the following statements with respect to the comparative approach of appraisal.
An appraiser can use the consumer price index to adjust a non-recent sale price to the appropriate level of value at the appraisal date because changes in the value of consumer products usually coincide with changes in the value of property.
Common area charges need not be included in the market value of a condominium unit because these charges are market related and are standard from project to project.
One problem in applying the comparative approach is the difficulty in establishing similarity. This problem is compounded when there are few comparable properties.
No adjustments for value are required for vendor takeback mortgages where the contract rate of interest is different from the prevailing market rate of interest given the stable and low market interest rate environment of recent years.
Which of the above statements are FALSE?
- A and C only
- C and D only
- A, B, and D only
- All of the above
Correct Answer: 3
Statements A, B, and D are false. Statement A is false because general price indices such as the consumer price index are irrelevant to the appraisal of one particular property since changes in the value of consumer products are not necessarily the same as changes in the value of property. Statement B is false because common area charges need to be included since they are not standard, rather they vary from project to project. Statement D is false because a differential in the contract rate and market rate (notwithstanding a stable and low interest rate environment), requires a finance adjustment to make it comparable with the subject property.
Atlas Appraisal Services Ltd is appraising a warehouse using the Cost Approach. The warehouse has an estimated economic life of 25 years and a salvage value of $5,000 at the end of that time. The current replacement cost is $1,500,000. If the effective age of the warehouse is 5 years at the time of the appraisal, what is the estimate for incurable physical depreciation using the straight-line method of depreciation?
- $60,000
- $299,000
- $59,800
- $300,000
Correct Answer: 2
The annual depreciation must be calculated using the following formula:
If the effective age of the building is 5 years at the time of the appraisal, the estimate for incurable physical depreciation is $299,000 (5 H $59,800). Therefore, option (2) is correct.
Eric Poolman has been asked to appraise a duplex in a subdivision in Calgary. The subject is on a 60 foot × 115 foot lot. Eric will be using the cost approach of appraisal and has obtained the following information:
The current replacement cost for a new building of this type is approximately $315 per square foot. The original cost of the duplex was $165 per square foot.
The balcony at the back of the house is deteriorating and is sorely in need of replacement. The cost of replacing the balcony is estimated to be $20,500.
The kitchen design is completely outdated and the two kitchens will need to be replaced at a total cost of $49,000.
Four empty lots in the neighbourhood recently sold for the following amounts:
Lot A: 60 feet × 112 feet Selling Price: $382,000
Lot B: 60 feet × 118 feet Selling Price: $396,000
Lot C: 80 feet × 150 feet Selling Price: $421,000
Lot D: 60 feet × 117 feet Selling Price: $392,000
The current use represents the highest and best use of this site.
The duplex measures 4,400 square feet
The estimate for physical curable depreciation and functional curable depreciation is:
- $0 and $49,000 respectively.
- $49,000 and $0 respectively.
- $20,500 and $49,000 respectively.
- $49,000 and $20,500 respectively.
Correct Answer: 3
Curable physical depreciation consists of physical wear and tear that can be corrected economically such as the balcony; the replacement cost is $20,500. Functional curable depreciation consists of an outdated design that can be corrected economically such as the outdated kitchens; the replacement cost is $49,000.
Eric Poolman has been asked to appraise a duplex in a subdivision in Calgary. The subject is on a 60 foot × 115 foot lot. Eric will be using the cost approach of appraisal and has obtained the following information:
The current replacement cost for a new building of this type is approximately $315 per square foot. The original cost of the duplex was $165 per square foot.
The balcony at the back of the house is deteriorating and is sorely in need of replacement. The cost of replacing the balcony is estimated to be $20,500.
The kitchen design is completely outdated and the two kitchens will need to be replaced at a total cost of $49,000.
Four empty lots in the neighbourhood recently sold for the following amounts:
Lot A: 60 feet × 112 feet Selling Price: $382,000
Lot B: 60 feet × 118 feet Selling Price: $396,000
Lot C: 80 feet × 150 feet Selling Price: $421,000
Lot D: 60 feet × 117 feet Selling Price: $392,000
The current use represents the highest and best use of this site.
The duplex measures 4,400 square feet
The estimated market value of the subject property’s lot is:
- $390,000.
- $376,000.
- $401,000.
- $398,000.
Correct Answer: 1
Based on a frontage foot comparison, Lot C larger size is not comparable to the subject property and should be eliminated from the analysis. From the information given, the remaining lots, A, B, and D, are similar and it does not appear that any one lot is more similar to the subject property than the other two; therefore a figure within the range of the sales prices of lots A, B, and D ($382,000 to $392,000) is considered reasonable and is used to estimate the market value of the subject property lot to be $390,000.
Eric Poolman has been asked to appraise a duplex in a subdivision in Calgary. The subject is on a 60 foot × 115 foot lot. Eric will be using the cost approach of appraisal and has obtained the following information:
The current replacement cost for a new building of this type is approximately $315 per square foot. The original cost of the duplex was $165 per square foot.
The balcony at the back of the house is deteriorating and is sorely in need of replacement. The cost of replacing the balcony is estimated to be $20,500.
The kitchen design is completely outdated and the two kitchens will need to be replaced at a total cost of $49,000.
Four empty lots in the neighbourhood recently sold for the following amounts:
Lot A: 60 feet × 112 feet Selling Price: $382,000
Lot B: 60 feet × 118 feet Selling Price: $396,000
Lot C: 80 feet × 150 feet Selling Price: $421,000
Lot D: 60 feet × 117 feet Selling Price: $392,000
The current use represents the highest and best use of this site.
The duplex measures 4,400 square feet
Suppose that Eric estimates the site value to be $395,000 and the total depreciation of the improvements to be $57,000. The market value of the property is:
- $1,912,000.
- $1,719,000.
- $1,281,000.
- $1,724,000.
Correct Answer: 4
Using the information presented in this problem, the market value of the subject property using the cost method of appraisal is estimated as follows:
Replacement Cost (New)
(4,400 H $315)
$1,386,000
Less Depreciation
(57,000)
Replacement Cost (New)
$1,329,000
Add Site Value
395,000
Market Value
$1,724,000
You have just been assigned to complete the appraisal of an old, two-storey house in Burnaby and are conducting an analysis of comparable sales. You have found a comparable property that is similar in all respects except that when sold, the seller arranged a buydown, offering the buyer an interest rate of 1.5% below the market rate. Which of the following statements is/are TRUE?
The price the buyer paid may be less than the market value of the real estate because of the benefit the buyer receives with below-market financing.
The price the buyer paid may be more than the market value of the real estate, because of the benefit the buyer receives with below-market financing.
The financing terms of a sale have no bearing on its price, and therefore do not need to be considered when analyzing comparable sales.
Non-market financing arrangements only warrant adjustments to the sale price of comparable properties if market evidence suggests that they affect value.
- C only
- A and D only
- B and D only
- D only
Correct Answer: 3
A developer or seller may have arranged a buydown, paying cash to the lender so that a mortgage with a below-market interest rate can be offered. The buyer may possibly have paid a higher price for the property to obtain below-market financing. The appraiser needs to investigate if these arrangements actually affected the sale price of the property. Market evidence is always the best indicator.
Which of the following statements is/are TRUE?
In property appraisal, “recent” refers to a time period where the market is relatively stable.
When determining market value using the comparative approach of appraisal, it is not necessary that recently sold comparables be similar to the subject property in every respect.
The total size of the lot rather than its frontage is a more important consideration when considering the site.
There is no certainty as to whether corner lots have greater or less value than inside lots.
- D only
- A and D only
- A, B, and C only
- A, B, and D only
Correct Answer: 4
Statements A, B, and D are true. Since houses are built parallel to the street, the frontage is a more important consideration rather that total area or depth. The value of the lot varies directly with frontage than with area or depth.
On their lunch break, three appraisers have become involved in a discussion about the appraisal of an older building using the cost approach of appraisal. They argue about what the replacement cost and reproduction cost should be. Which of the following statements is/are TRUE?
- Replacement cost is the cost incurred when the building was erected.
- Reproduction cost is the cost of providing an exact replica of the subject property.
- Reproduction cost and replacement cost are the same.
- Both (2) and (3) are true.
Correct Answer: 2
Statement (2) is true. Statement (1) is false because replacement cost is the cost of providing a building which would represent the modern equivalent of the house to be appraised in determining the construction cost of a building. Statement (3) is false; therefore, statement (4) is also false.
Subject Property
Comparable A
Comparable B
Comparable C
Number of Bedrooms
4
4
?
?
Number of Bathrooms
4
3
?
?
Air Conditioning
Yes
No
?
?
Deck
No
Yes
?
?
Living Room (square feet)
320
280
?
?
Sale Price
?
$1,252,000
$1,165,000
$1,243,000
Adjustments
Bedrooms
?
0
0
Bathrooms
?
+6,620
0
Air Conditioning
?
0
+3,250
Deck
?
?
–5,600
Living Area
?
0
–15,000
The market value of:
1 bedroom is $7,850;
1 bathroom is $6,620;
Air conditioning is $3,250;
A deck is $5,600; and
Above the 280 square feet benchmark, each square feet of living area is worth $375.
The living room of Comparable C is approximately ____________.
- 280 square feet
- 380 square feet
- 300 square feet
- 360 square feet
Correct Answer: 4
A negative adjustment to the sale price of a comparable indicates a superior feature as compared to the subject property. Comparable C has been adjusted downwards for square footage and, therefore, it must have more square footage than the subject property. An adjustment of -$15,000 implies a difference of 40 square feet; therefore, Comparable C has 360 square feet (320 + 40).
Subject Property
Comparable A
Comparable B
Comparable C
Number of Bedrooms
4
4
?
?
Number of Bathrooms
4
3
?
?
Air Conditioning
Yes
No
?
?
Deck
No
Yes
?
?
Living Room (square feet)
320
280
?
?
Sale Price
?
$1,252,000
$1,165,000
$1,243,000
Adjustments
Bedrooms
?
0
0
Bathrooms
?
+6,620
0
Air Conditioning
?
0
+3,250
Deck
?
?
–5,600
Living Area
?
0
–15,000
The market value of:
1 bedroom is $7,850;
1 bathroom is $6,620;
Air conditioning is $3,250;
A deck is $5,600; and
Above the 280 square feet benchmark, each square feet of living area is worth $375.
Comparable A will have to be adjusted for air conditioning, deck, and living room by:
- +$3,250, –$5,600, and +$15,000 respectively.
- –$3,250, +$5,600, and –$15,000 respectively.
- +$5,600, $0, and –$15,000 respectively.
- $0, +$5,600, and –$15,000 respectively.
Correct Answer: 1
An upward adjustment of $3,250 is necessary for air conditioning since Comparable A does not have it. A negative adjustment of $5,600 is necessary for the deck since Comparable A has a deck and the subject property does not. Since Comparable A has 40 square feet less living area than the subject property, an upward adjustment of $15,000(40 × $375) is needed.
Subject Property
Comparable A
Comparable B
Comparable C
Number of Bedrooms
4
4
?
?
Number of Bathrooms
4
3
?
?
Air Conditioning
Yes
No
?
?
Deck
No
Yes
?
?
Living Room (square feet)
320
280
?
?
Sale Price
?
$1,252,000
$1,165,000
$1,243,000
Adjustments
Bedrooms
?
0
0
Bathrooms
?
+6,620
0
Air Conditioning
?
0
+3,250
Deck
?
?
–5,600
Living Area
?
0
–15,000
The market value of:
1 bedroom is $7,850;
1 bathroom is $6,620;
Air conditioning is $3,250;
A deck is $5,600; and
Above the 280 square feet benchmark, each square feet of living area is worth $375.
Comparable A will have to be adjusted for bedrooms and bathrooms by:
- $0 and –$6,620 respectively.
- $0 and +$6,620 respectively.
- +$7,850 and $0 respectively.
- –$7,850 and $0 respectively.
Correct Answer: 2
No adjustment is needed for bedrooms because Comparable A has an equal number of bedrooms as the subject property (4 bedrooms). Comparable A has 3 bathrooms, one less than the subject property; therefore, an upward adjustment of $6,620 is necessary.
Subject Property
Comparable A
Comparable B
Comparable C
Number of Bedrooms
4
4
?
?
Number of Bathrooms
4
3
?
?
Air Conditioning
Yes
No
?
?
Deck
No
Yes
?
?
Living Room (square feet)
320
280
?
?
Sale Price
?
$1,252,000
$1,165,000
$1,243,000
Adjustments
Bedrooms
?
0
0
Bathrooms
?
+6,620
0
Air Conditioning
?
0
+3,250
Deck
?
?
–5,600
Living Area
?
0
–15,000
The market value of:
1 bedroom is $7,850;
1 bathroom is $6,620;
Air conditioning is $3,250;
A deck is $5,600; and
Above the 280 square feet benchmark, each square feet of living area is worth $375.
From the information provided above, it can be concluded that Comparable B has:
- 4 bedrooms, 3 bathrooms, air conditioning, and a deck.
- 3 bedrooms, 4 bathrooms, air conditioning, and no deck.
- 4 bedrooms, 3 bathrooms, no air conditioning, and no deck.
- 4 bedrooms, 4 bathrooms, no air conditioning, and no deck.
Correct Answer: 1
A positive adjustment of $6,620 for bathrooms indicates that Comparable B has one less bathroom than the subject (4 - 1 = 3 bathrooms). There is no adjustment for bedrooms or for air conditioning, meaning Comparable B is similar to the subject in this aspect. The negative adjustment of $5,600 indicates that Comparable B has a deck while the subject property does not. Therefore, Comparable B has 4 bedrooms, 3 bathrooms, air conditioning, and a deck.
