Chapter 15 - Intro To Real Estate Appraisal

Question 1

Highest and best use is defined as the use of land which, within all CONSTRAINTS for example, zoning bylaws), will provide the maximum NET RETURN during the foreseeable future. Will result in the highest Value

Rough test: building burned down, would the same type of building be constructed in its place. There is latent value ( redevelopment potential) if not put to maximum use.

Question 2

Appraisers are typically called upon to estimate objective values, which are categorized into the following:

Insurance value
Lending value 
Taxable value 
Actual value 
Market value

Question 3

Define cost approach

The Cost Approach is a method of last resort that is used for a very UNIQUE property like a church, Pulp Mill etc.

A method of appraisal which determines the value of a property by adding the market value to the cost of replacing the existing building

Method of last resort. Can’t find comparable.

Question 4

The COMPARATIVE method of appraisal bases the value of the subject property on the PRICE of similar properties which have SOLD recently.

Works best where there is lots of information. Typically residential home, condos, rental apartments the comparative method is best.

Question 5

Define ceiling price

The ceiling price is the maximum price that a purchaser is willing to pay for a property

Question 6

What is latent value (hidden value)

Latent value is

The value possessed by a property which has potential for redevelopment because it is currently not employed at its highest and best use.

A single family residence is only house on the block not yet converted to the commercial use which is the Zoning

When a property possesses latent value a higher value may result through a change of use.

A property which is not employed in its highest and best use possesses LATENT VALUE

Question 7

The direct comparison approach is based on the principle of SUBSTITUTION

Question 8

An estimate of the value of an interest in real property is called:

A An appraisal ( or property valuation)

Question 9

An appraiser must understand the purpose of appraisal assignment. A STATUTORY reason, for example, for expropriation or taxation purposes or a MARKET reason, such as buying, selling, leasing, or developing a property.

Question 10

What value is expressed a lump sum, it is referred to as a CAPITAL VALUE appraisal.

Question 11

Real Estate is different than other assets because:

They are:
1/ It is Unique
2/ it has low turnover
3/ it is durable (the life of a building depends on economic durability, not physical durability)
4/ Immobile
5/ leads to externalities, positive and negative

Question 12

Real Estate is different than other assets:

It is Unique, has low turnover, highly local, it is durable (the life of a building depends on its economic durability, NOT its physical durability)

It’s immobile, Leads to externalities, positive and negative.

The flow of information concerning real property is limited and difficult to collect
— the turnover rate for real property is LOW, compared to stocks. Stock’s you can sell quickly as opposed to homes.

All properties are unique. Difficult to find properties are alike.

Question 13

The flow of information concerning real property lis limited and difficult to collect because:

The turnover rate of real property is low. Takes time to sell unlike stock market.

• Stock if real property is limited in quantity
• illiquidity compared to Luquidity (ex stock market)

Question 14

It is highly local

One side of street could be more expensive than other side. Local markets are different.

Question 15

It is durability Economic vs Physical. Which one you value more

Generally economic durability is worth more.
Commercial building. Rate of return. How much will i make more money. As long as it makes more money.

Question 16

Leads to Externalities - positive and negative

Externalities are physically next to you.

Positive:
Schools. Hospitals
and Parks are positive

Negative

Factory
Prisons
Golf course

These affect property value

Question 17

Real Estate values are influenced by Externalities.

Externalities are things like what EXISTS PHYSICALLY NEXT to homes or commercial buildings.

For instance oil prices increase is not externality

Unemployment is NOT an externality.

Virus Covid is not an externality.

Question 18

Who can do Appraisals?

Anyone can do appraisals

BUT

BC is self-regulating by professional association

Require education programs, experience, code of ethics, insurance

Effectively cant get appraisal work without designation

Question 19

Why clients request appraisal? Why are they done?

1/ A STATUTORY (Government) REASON - for Expropriation or taxation purposes

2/ MARKET REASON (personal or business)- such as buying, selling, leasing or developing a property; where the appraiser may consider the market data and is not forced to follow government statutes.

Question 20

What is market value

An estimate of what property is likely to sell for in an arms length transaction between buyer and seller, if the property is on the market for a reasonable time when market conditions remain unchanged.

Question 21

Appraisers Legal Responsibilities

Legal liability

No set limit of allowable error in appraisal work

Margin of error 10%. The courts have recognized that a reasonable margin of error exists when calculating damages resulting from a negligent appraisal.

No license required

An appraiser may be held liable for negligence if a property is over valued.

Question 22

Calculating margin if error in appraisals

Take the Appraisal amount and divide by sales price

Just divide Appraised Value with the sale price.

Appraisal divided by Sale

App. 462,000. (Numerator)
Sale. 410,200. (Denominator)
= 1.126

Question 23

Factors Affecting Value

House, lot locaton
Neighborhood
Local economy
Regional economy
Prov’l / National Economy
Special Purchaser - will greatly extend the range of bids
Highest and Best Use ( the most profitable legal use of the property)

Question 24

Special Purchaser

On the exam they dont consider famous people like Prime Minister or Football Player or painter as special purchaser.

They want someone like a retail merchant who wants a specific view. Or they want it for a special reason.

Special Purchasers are not famous people. DON’T PICK FAMOUS PEOPLE

Question 25

What would account for difference in selling price in two identical homes

If there was an urgency like you bought another house and now you need to sell current home, you may sell it st lower price.

Question 26

Factors most likely Affecting market Value — short term factor

For exam they are looking for Short Term Trends

Short term Trends

• Consumer pessimism or optimism
• change in interest rates (mtg, bonds, loans)

Long Term Trends

• shift in age composition
• goverment programs affecting real estate
• supply and cost of raw materials
• shift in govt composition

Question 27

Usually on the Exam****
The “Subject of Appraisal”

It “is the legal rights of ownership vested in a particular piece of real estate”

Legal interests are:

• air space
• fee simple ownersip
• leasehold estate
• condo ownership
• easements

Question 28

Objective Value

It is verifiable. Same thing as sales Price or value in exchange

What it sold for. Verifiable. In the records.

Question 29

Subjective Value or Market Value

Is not the subjective value (opinion) of the Owner

What the owner thinks it is valued at. Based on his feelings.

In an investment analysis you could include the “value to owner”. Like for a church They might have an idea.

Question 30

Floor Price - Lowest price the seller wants

Buyers ceiling has to be higher than Floor

Lowest price the seller wants.

• Asking price. Listing price is higher than floor price but lower than ceiling.

Question 31

Ceiling Price the maximum price the Buyer can pay based on how much he can afford

Ceiling price will be equal to or above the asking price

Highest price Buyer will pay. What buyer aporoved by bank. Buyer will offer lower than ceiling price

Question 32

Comparative Method - Direct Comparison Method

Compare your property to other properties sold in your area.

Compare similar property that sold recently
1/ residentual
2/ empty lots

• rely on market evidence from similar properties -

RECENT SALE - refers to when market conditions remain same

Arms length transactions - no previous relationship by parties

similar - with respect to factors judged important buyers and sellers

Principle of Substitution (IASS)
you do plus or minus of bedrooms or bathrooms ir other unique features

• reflects opinion from the appraiser. Dont need any one elses opinion

Question 33

Cost Method. - Nothing to Compare such as a Church. This method is just a GUESS.

Used for these unique properties:
Temple/ Church/ mill/ concrete plant

Cost Method cannot be used for Vacant Land. Because this method estimates the cost of LAND and cost to Build IMPROVEMENTS. Should use Comparative method. It is possible to use cost method for residential properties or anything that has improvements on it.

Cost of improvement is determining by the CURRENT REPLACEMENT COST.

Cost method is considered the least reliable method of Appraisal

1/ no income
2/ unique - nothing to compare like a church
3/ based on replacement cost

Look at cost of land and replacement cost of building

Question 34

Income (Investment) Method - anything that has income producing. Don’t care about depreciation since Looking at Economic Value

Used for:

• Rental properties
• Commercial properties
• multi unit building

Look at rate if return

No depreciation Used

Question 35

Residual (hybrid) method - Latent Value - not highest and best use - better for redevelopment

Latent Value ( not at best use)

Residential development Potential

Residential house in middle of business district

In its most simple form, the Residual Approach allows site value to be estimated by deducting from the value as developed, construction costs (either site servicing or building costs, depending on circumstances), marketing costs, finance costs, professional fees, developer’s profit and other costs, to derive a Residual Value that is then expressed as the site value. Use of computer-based analysis and spreadsheet programs has allowed the residual to develop a sometimes very sophisticated form but, whether simple or complex, the technique has to be applied correctly.

Question 36

Comparative

Cant use
Non arms length sale property. Related parties are non arms length. Can’t use.

Special Purchasers are not Famous People.
—They could be someone who wants to create economic value such as a business man.

Question 37

Value in exchange is Market Value

The Sale Price. Objective Value. The property sold for.

Question 38

To find range if the sale price was within 10% of appraised value

Example
AP = 102,000
SP = 91,000

Do +/- of Appraised Value
102,000 x 1.10% = 112,200
102,000 x .90% = 91,800

SP was more than 10% below Appraised value. It was out of range.

Question 39

Is Cost Method reliable

It is the least reliable. Churches, unique properties

Question 40

Latent value is

Hidden value in redevelopment
Like small house among skyscrapers on downtown. Not the Highest or Best Use HBU

Question 41

Externalities are something located next to your home or property, models GEO political problems that affect property value.



Question 42

Comparative (Market Comparison Method)

—residential (houses and condos)
— empty lots

Based on theory of substitution — similar properties which are recently sold are comparable

“Recent” refers to when market conditions remain stable
— arms length transaction— no previous relationship of parties
— similar with respect to factors judged important by buyers and sellers

Question 43

Market Analysis or Background Analysis

— indicate the current status of the subject property, in relation to property value
— to confirm that comparable property are selected from the same market as the subject property
— to provide client with socio-economic determinants of supply and demand
ALL ABOVE ARE TRUE

Question 44

In a fast selling market the SELLER may get less than the market value of the property.

Prices could be increasing on a daily weekly basis

In a fast selling market the SELLER may get less than the market value of the property.

Question 45

Arms Length sales not a representation of market value. As discount could have been give to a family member

Question 46

Wood burning Furnace is a functional CURABLE depreciation

— something that is outdated or outmoded

Question 47

When applying Cost Approach To house built 50 years ago the value of improvement is determined by the CURRENT REPLACEMENT COST OF CONSTRUCTING A MODERN EQUIVALENT OF THE SUBJECT PROPERTY.

Question 48

Comparative Approach uses RECENT. WHAT IS RECENT?

A period of time time during which supply and demand conditions have not changed.

Recent is the period of time immediately preceding the appraisal date, during which property values in the region have remained stable.

Question 49

In cost approach the major difficulty is experienced calculating INCURABLE PHYSICAL DEPRECIATION

Remember you have to build modern replacement of the building but something INCURABLE would be hard to replace. Especially in a church.

Question 50

Reproduction Cost is best defined as:

The current cost of constructing an Exact Replica of the subject property.

Question 51

Functional Depreciation can be defined as as:

The loss in value caused by outmoded or inadequate design.

Question 52

Cost method of appraisal is not generally used to value:

Vacant Land, since there are NO improvements the COST approach could not be used.

Question 53

In a Comparative Appraisal with a Vendor Supplied Mortgage:

It can be used as a comparable BUT the price must be adjusted downward to offset the benefit provided by the below market interest rate on the mortgage.

Question 54

In Residual approach to appraisal it is not necessary the subject property and comparable have a market value of zero in their current use.

It is necessary However they have similar highest and best use after redevelopment, gave similar current uses, expect to undergo redevelopment at a similar point of time.

Question 55

The Residual Method of Appraisal should be used for A Vacant Lot that possess Latent value

Where the subject property possesses Development potential 

Question 56

Vacant Lot — use COMPARATIVE METHOD

Vacant Lot with Developmental potential — use RESIDUAL METHOD

Question 57

Real estate different than other assets.

They have unique characteristics. Real estate is Heterogeneous. Stocks are Homogeneous, not different Fromm each other

Low turn over. Don’t get the flow of information in real estate sales.

It is very local. Agents try to focus in their area.

Durable and immobile. Lasts longer and not moveable

Leads to externalities, positive and negative. Airport could be good and people like it. Some don’t like the noise.

Question 58

Why appraisals needed?

Mortgages finance
Expropriation 
Property tax assessment 
Insurance 
Legal estate planning and divorce 

Informal appraisal
- for buying / selling homes

Question 59

No licensing requirements in BC, but Banks want accredited appraisers to do it.

Some error allowable. 10% acceptable by courts
Negligence
Hedley Byrne. - duty of care third parties.

Not meant for third party to rely on it. Appraiser will put disclaimer “you can’t use without my permission”

Real Estate Agents do Market Assessment not appraisal

However, courts do expect a duty of care.

Question 60

Ceiling Price Buyer (BC). The max price Buyer will pay

Floor (Seller) Price The Lowest Price Seller will accept.

If Ceiling lower than Floor — sale will not happen.

If they do agree on price, this is called
— VALUE IN EXCHANGE
— MARKET VALUE
This sale was completed Objectively.

— Value at a point in time
— reasonably expected price
— no undue influence (arms length)
— adequate time and exposure to market (advertising).

Question 61

Appraisal Methods

1. Comparative (market) method
   — residential: houses and condos
   — simple commercial
2. Cost Method
   — unusual/ Unique properties
   — method of last resort
3. Income Method
   — most commercial properties
4. Residual Method
   — properties with latent value and not at highest and best use
   — value in use . $10,000,000
   — deduct Cost to Construct. - 2,000,000
   — site Prep. - 1,000,000
   Residual Value (land mkt value 7,000,000