Chapter 15: Application Analysis - Property Valuation

Question 1

What are the factors that affect the demand for real estate?

(5)

Answer 1

Demographics
Interest rates
Government policies
The economy
Affordability

Question 2

What are the factors that affect the supply of real estate?

(3)

Answer 2

Building permits
Listings
Land use regulations

Question 3

List the different purposes for which an appraisal might be required.

(7)

Answer 3

The cost to rebuild the home in case of damage, such as by fire (insurable value)
A value so that a municipality can apply its property tax rate (taxation purposes)
The price that a real estate investor would pay for a property based on his or her preferred rate of return (investment value)
The amount that the property can obtain if sold (selling price)
The future value of a property under construction (future price)
The value of a property being expropriated by the Crown (expropriation value)
The market value of a property for a Lender to decide on an appropriate loan amount for mortgage financing.

Question 4

What organizations award designations to appraisers?

(3)

Answer 4

The Appraisal Institute of Canada (AIC), Canadian National Association of Real Estate Appraisers (CNAREA), Ontario Real Estate Association and the Real Estate Institute of Canada.

Question 5

Discuss the three approaches to calculating the market value of a property and describe the most relevant approach for mortgage financing.

Answer 5

Income Approach: this approach is typically used for commercial income producing properties, using the property’s income to determine the market value

Cost Approach: this approach uses the cost of rebuilding the property less depreciation plus the value of the property. This is most widely used to confirm the value determined by the direct comparison approach as well as being used to determine the replacement value of a building for insurance purposes

Direct Comparison Approach: This approach uses the theory of substitution, comparing similar properties that have recently sold to the property being appraised. The Direct Comparison Approach is the most appropriate for mortgage financing and is therefore relied heavily upon in the appraisal report

Question 6

Explain how adjustments are made in the direct comparison approach.

(2)

Answer 6

If the comparable characteristic is superior to the subject, subtract from the comparable property’s value

If the comparable characteristic is inferior to the subject, add to the comparable property’s value

Question 7

Discuss the pros and cons of AVMs.

Answer 7

AVMs can provide quick, basic property values, however they are prone to producing values that may or may not actually be representative of the subject property since an AVM cannot make adjustments for the physical condition of the property.

Question 8

When is the cost approach typically used?

Answer 8

This is most widely used to confirm the value determined by the direct comparison approach as well as being used to determine the replacement value of a building for insurance purposes