CHAPTER 1 / Real Property and the Nature of Value Flashcards
An appraiser has obligations to five stakeholder groups
List the five stakeholders
Clients, Third parties, Society, Appraisal profession, Peers
Explain an appraiser’s obligation to society?
Society in general: by the valuation process, appraisers can help to promote the wise and efficient use of a scarce and limited resource, that is, land and land-related resources. Appraisers can be important in guiding sound real estate decisions, thereby helping society to avoid wasting resources that can cause urban problems.
Explain an appraiser’s obligation to peers?
Peers: by adhering to professional standards in the delivery of appraisal services, the appraiser represents all appraisers in how services are delivered and in establishing a positive rapport and trust between all appraisers and members of the other four groups.
List and explain three traits of a professional
A professional is defined by three traits:
1. Integrity: absolute honesty and conduct above reproach must prevail.
2. Competence: possessing thorough theoretical and practical training along with sufficient work experience.
3. Quality Work: the professional’s work must be thorough, painstakingly meticulous, impartial, and based upon sound judgment. All work must be carefully prepared, thoroughly checked, and reports expertly written.
List 3 Types of Appraisers
Three Types of Appraisers
- Fee appraisers
- Institutional appraisers
- Government appraisers
TRUE OF FALSE?
Most provinces have no legislation requiring appraisers to be licensed, meaning anyone may legally undertake appraisal work and charge a fee for the appraisal services.
ANSWER: TRUE
List the First Principles of Value?
First Principles of Value
• Problem Identification
- Purpose, Intended Use, Definition of Value
• Property Content
- Physical, Legal, Financial,
- Location Understanding
- Legal Considerations
- Property Rights, Land Use Regulations
- Legislation and the Courts
• Highest and Best Use
• Economic Analysis
Explain What the First Principles of Value Are?
The Principles of Value represent the fundamental concepts underpinning the work of real property valuation professionals. They are applicable to all valuation work, no matter what the specialization. Depending on the assignment, some First Principles may be more prevalent than others, but knowledge of all the First Principles and the ability to apply them correctly is universally paramount in the field of real property valuation.
TRUE OR FALSE?
Immobility is responsible for the local nature of real property markets.
ANSWER: TRUE
List the significant characteristics of land?
ANSWER: The significant characteristics of improved land are its immobility, the durability of its improvements, the indivisibility of the services it provides and the divisibility of ownership it allows.
Explain the difference between fixtures & chattels?
ANSWER:
Fixture is part of the real estate.
Chattel is personal property, not affixed to the real estate.
Property can be classified as either fixtures or chattels. Appraisers do not value chattels, as these can be removed easily. Fixtures are included because they are attached and form part of the real estate.
In many cases, the sale of a residential property includes personal property or chattels such as a stove, fridge, or washer and dryer. The used value of these items is usually small in relation to the total sale price of the property. Therefore, they are not normally considered in an appraisal.
To decide whether an item is a fixture or a chattel, the courts have adopted a general two-part test. The first aspect of the test has to do with _ _ _ _ _ _ _ _
To decide whether an item is a fixture or a chattel, the courts have adopted a general two-part test. The first aspect of the test has to do with the DEGREE OF AFFIXATION.
Explain the second aspect of the two-part test . . .
The second aspect of the test concerns the purpose of affixation. Where an object is affixed for the better use or enjoyment of the object as an object, it will be considered a chattel. Where the object is affixed in order to enhance the land to which it is affixed, the object will probably be considered to be a fixture.
CUSAP definition of Value?
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.
TRUE OR FALSE?
Value is related to a certain, specified point in time.
ANSWER: TRUE
NOTE ONLY:
Value is the price which might reasonably and probably be expected. Value is the expectation of someone who has sufficient knowledge of the real estate market to form an opinion; it is not the reasonable expectation of someone without this knowledge. It must be emphasized that “reasonably expected” does not infer that the appraiser himself or herself considers the price to be reasonable, but that market evidence supports the estimate as being reasonable and probable.
NOTE ONLY:
Value is the price which might reasonably and probably be expected. Value is the expectation of someone who has sufficient knowledge of the real estate market to form an opinion; it is not the reasonable expectation of someone without this knowledge. It must be emphasized that “reasonably expected” does not infer that the appraiser himself or herself considers the price to be reasonable, but that market evidence supports the estimate as being reasonable and probable.
Give 3 examples of transactions NOT included in the definition of Market Value?
ANSWER:
sales in which there is a special relationship between buyer and seller;
sales in which one party is exerting undue influence over the other in the transaction; and
unusual prices due to an odd combination of circumstances that result in prices beyond any reasonable expectation and are not likely to recur with any frequency.
NOTE ONLY:
Justified Price Versus Market Value
**Before concluding this section, we now return to the concept of justified price, in order to contrast what market value is and what it is not. Justification of the market price is a separate problem from estimating market value, and its solution does not depend on the definition of market value. This brings us back to the discussion of ceiling price and floor price.
Justifying the price falls in the area of real estate investment counselling, not appraisal. Investment counselling relates more to the individual circumstances of the buyer (or seller) and to the value to the owner. If a client, who has stated that they are considering buying an apartment block for $2,900,000, has asked an appraiser if the property can be expected to realize this price, the appraiser estimates market value. However, if the client asks the appraiser if this is a reasonable price for him to pay, it is another question altogether. The appraiser might be of the opinion that the expected price of the apartment building is too high (or low) with regard to the future economic prospects of ownership, or that the client’s requirements and tax position may make the price of $2,900,000 too high or low. The appraiser is then attempting to find the client’s ceiling price and is expected to use the client’s own assessment of future returns and yields. It often happens that the estimate of value on this basis is much different from market value. There is no cause for concern as long as the two different concepts of value are kept in mind. Because these issues are not always kept separate in practice, appraisers should insist on precise instructions including a statement of the purpose of the appraisal. These instructions should be incorporated into the appraisal report.**
NOTE ONLY:
Justified Price Versus Market Value
Before concluding this section, we now return to the concept of justified price, in order to contrast what market value is and what it is not. Justification of the market price is a separate problem from estimating market value, and its solution does not depend on the definition of market value. This brings us back to the discussion of ceiling price and floor price.
Justifying the price falls in the area of real estate investment counselling, not appraisal. Investment counselling relates more to the individual circumstances of the buyer (or seller) and to the value to the owner. If a client, who has stated that they are considering buying an apartment block for $2,900,000, has asked an appraiser if the property can be expected to realize this price, the appraiser estimates market value. However, if the client asks the appraiser if this is a reasonable price for him to pay, it is another question altogether. The appraiser might be of the opinion that the expected price of the apartment building is too high (or low) with regard to the future economic prospects of ownership, or that the client’s requirements and tax position may make the price of $2,900,000 too high or low. The appraiser is then attempting to find the client’s ceiling price and is expected to use the client’s own assessment of future returns and yields. It often happens that the estimate of value on this basis is much different from market value. There is no cause for concern as long as the two different concepts of value are kept in mind. Because these issues are not always kept separate in practice, appraisers should insist on precise instructions including a statement of the purpose of the appraisal. These instructions should be incorporated into the appraisal report.
