CHAP 05 REVIEW Q&A

Question 1

There are five sub-systems in a mass appraisal system:

1. Data Management
2. Valuation
3. Performance analysis
4. Administrative/support
5. Appeals.

Which do you feel is the most important sub-system and why?

Answer 1

The Data Management system is the most important because the other four sub systems (Valuation, performance analysis, administration / support, and appeals) are depend on the quality of data.

If the data management system is inadequate, the other four subsystems cannot work well. The data management system is also the most expensive to implement; it is very important to design it carefully.

Question 2

1. What is meant by “model specification” and “model calibration” in the context of mass appraisal?
2. Provide an example of what a model could look like in equation form. Supply your own variables.

Answer 2

(A). Model specification ; specifying a model which sets out the framework replicating the forces of demand and supply in the real estate market. The appraiser specifies:

1. Which variables are important in determining value,
2. How they are related to one another
3. How they are related to value, and therefore
4. which variable will be included in the model in what format.

Models must reflect the way buyers and sellers value real estate.

Model calibration ; coefficients or values are assigned to the variables included in the specified model based on market analysis.

(B). Example : MV=NBHDxTIMEADJx (BLDGQUALx (SQFTxB1)+(BEDROOMS xB₂)+(BATHROOMxB₃) +(SQFTLANDxB₄)

Where B₁ through B₄ are coefficients for the model (essentially the adjustments - respectively - for the square footage of the home, the number of bedrooms, the number of bathrooms, and the square footage of the lot).

Question 3

What are the major features of model calibration using the cost approach to value?

Answer 3

Supply side of market - costs; determination of replacement cost new.

Demand side of market - land value; depreciation; time and location adjustment.

Question 4

Discuss the differences between single-property appraisal and mass appraisal.

Answer 4

SINGLE-PROPERTY APPRAISAL:

• Value a single parcel only
• valuation model developed can only value that single property
• quality of appraisal determined by comparisons with sales of similar properties
• generally, one client to satisfy
• output is an appraisal report with one statement of value.

MASS APPRAISAL.

• develop valuation model to mirror demand and supply forces over large area.
• adjustments because of differences in architecture, age, condition, location, etc, are standardized.
• standardized adjustments must reflect market and be explainable.
• statistical methods used for quality control.
• must satisfy many different groups; taxpayers, politicians, municipalities, and other taxing authorities.
• must value according to statute
• output is an assessment roll stating assessed value of all properties in jurisdiction.

Question 5

Are there any advantages or disadvantages to using a discounted cash flow model over a direct capitalization model in the income method of appraisal?

Answer 5

Advantages of discounted cash flow over direct capitalization.

• flexibility in estimating cash flows; e.g. can accommodate the cash flows of a new development that is not 100% leased in the first year.
• can take impact of resale into account separately; this is important if the resale is expected to provide the majority of the return.
• can vary financing, vacancy, expense assumptions and examine impact.

Disadvantages of discounted cash flow compared to direct capitalization.

• More complicated
• requires a considerable amount of forecasting
• requires much more information that may be difficult to obtain
• may not provide more accuracy that direct capitalization.

Ultimately, must value property using the same method as the market.

Question 6

Describe some of the different types of boundaries that can form a neighbourhood. Provide examples.

Answer 6

Some of the different types of boundaries:

Natural boundaries : river, ridge, greenbelt, waterfront.

Man-made boundaries : highway, major intersection, points of access to freeway, major public institution such as a university, golf course.

Political boundaries : street boundary between two municipalities, boundary between developed property and agricultural land reserve.

Land use : agricultural area, central business district, strip commercial development, apartment area.

Question 7

You are appraising a commercial building consisting of a restaurant and small number of offices. What kind of information do you need and what sources would you use to collect this information?

Answer 7

You are appraising a commercial building consisting of a restaurant and small number of offices. What kind of information do you need and what sources would you use to collect this information?

General Data : Social, economic, governmental and environmental.

Sources :

• municipality
• Statistic Canada - demographics, income, nationality, interest rates.
• public library

Comparative Data : Data from other comparable real estate.

Sources:

• lease/rental rates-leasing agents, Canada Mortgage and Housing Corporation.
• sales of comparable buildings - realtors, MLS services, real estate board, property purchase tax department of government, land registry office.

Cost Data : site preparation, demolition, excavation, building costs, landscaping, licenses, fees, permits, professional fees.

sources:

• contractors, builders, developers
• municipality
• published cost manuals and indices

Income Data : vacancy rates, bad debts, expenses.

sources:

• expenses : leasing agents. realtors, property managers.
• vacancy, bad debts rates : CMHC, published sources, property managers.

Question 8

Regarding model calibration for the direct comparison approach, which statement is TRUE?

1. Simple linear regression analysis is the foremost mass appraisal application.
2. Base home tables are complicated and require simplification so that taxpayers can understand mass appraisal models.
3. Adaptive estimation procedure can be used to adjust cost data to the market.
4. Sale prices of comparable sales are not adjusted for physical and locational differences from the subject property, as it is important to maintain consistency.

Answer 8

Answer (3) Adaptive estimation procedure can be used to adjust cost data to the market.

Option (1) is False, because multiple regression, not simple linear regression, is the most common mass appraisal application.

Option (2) is False because base home tables are in themselves simplifications intended to help users and tax payers understand and accept mass appraisal models.

Option (4) is False because the prices of comparable sales are adjusted for physical and locational differences from the subject property.

Option (3) is the TRUE statement. AEP (Adaptive Estimation Procedure) is a technique that can be used to adjust cost data to the market.

Question 9

The valuation subsystem interacts with which of the other sub-systems:

1. Data management sub-system
2. Performance analysis sub-system
3. Administrative/support sub-system
4. All of the above

Answer 9

Answer (4) All of the above.

The valuation subsystem uses property characteristics from the data management subsystem.

As well, the valuation subsystem uses sales data and ratio study results from the performance analysis subsystem.

Finally, the values produced in the valuation subsystem are used in the performance analysis subsystem and the administrative/support subsystem.