chapter 16 compare

Question 1

Which of the following statements regarding the comparative approach is FALSE?

1. The income approach is similar to the comparative approach; both rely on market evidence from similar properties.
2. The comparative approach reflects market behaviour and requires a minimum of subjective opinion from the appraiser.
3. The residual method is only applicable when determining the highest and best use of the land as vacant.
4. The cost approach assumes that the improvement’s replacement cost new may exceed its market value.

Answer 1

Correct Answer: 3

Option (3) is false because the residual method may also be used to determine the value of the building as the residual amount. In this case, the land value may be known using the comparative approach and the value of the improvements is unknown. Option (1) is true because instead of comparing similar sales, the income approach compares revenues and expenses relative to the sale prices of similar properties. Option (2) is true, market data reflects market expectations; the proviso is that the quality of, and market data selected, is based on the appraiser’s experience and judgement. Option (4) is true because the improvement’s replacement cost new may exceed its market value since the cost of producing the asset may not directly relate to market expectations. An example is in the case where an individual with a personal preference to have their house built using triple glazed windows vs. double glazed windows (standard in the marketplace).

Question 2

Which of the following statements is/are TRUE?

A. The direct comparison approach is based on the market principle.

B. Due to the immobility of real property, external factors or externalities will impact value.

C. The neighbourhood an appraiser should consider when doing an appraisal may not be limited to the subdivision in which the property is located.

D. The presence of a special purchaser in a sales transaction will greatly extend the range of possible bids.

1. A and B only
2. B, C, and D only
3. A, B, and C only
4. All of the above

Answer 2

Correct Answer: 2

Only statements B, C, and D are true. Statement A is false because the direct comparison approach is based on the principle of substitution: a property’s value should be no more than the cost of purchasing a substitute property that provides similar utility.

Question 3

Consider a mid-size warehouse situated in downtown Vancouver, between the Scotiabank and HSBC buildings, both of which are skyscrapers. The warehouse is rented for storage space on a monthly basis, earning $60,000 in income per year. Which of the following options as an estimate of value would be most suitable for this property?

1. Comparative approach
2. Residual method
3. Income approach
4. Cost approach

Answer 3

Correct Answer: 2

Since the warehouse is located between two skyscrapers in downtown Vancouver and earns only $60,000 per year, it is unlikely that the warehouse represents the property’s highest and best use. In this case, the property possesses great potential for redevelopment. Thus, option (2) is correct, as the residual method will provide the most accurate estimate of value.

Question 4

Which of the following statements is TRUE?

1. Latent value is most often defined as a short-term conservative estimate of market value.
2. An estimate of value together with a reasonable exposure time reflects the market expectations as of the date of appraisal.
3. A change in value after the effective date of appraisal invalidates the accuracy of the original appraisal.
4. If there is sufficient evidence of recent sales, there is no allowable error in the appraisal of single-family residences.

Answer 4

Correct Answer: 2

Statement (2) is true. Statement (1) is false because the term latent value is actually used to describe a property where the current use is not at its highest and best use. Statement (3) is false because value is related to a certain point in time and the market conditions ruling at that time; a subsequent change in value does not mean that the original appraisal was not accurate. Statement (4) is false because even where there are sufficient recent comparable sales, the courts have recognized a reasonable margin of error.

Question 5

Why is an analysis of highest and best use of a property important?

A. It helps the appraiser identify comparable properties.

B. It identifies the use or uses on which the final opinion is based.

C. It helps to interpret the market forces that affect the subject property.

D. It helps to identify which appraisal approaches may be used.

1. A only
2. B and D only
3. A, C, and D only
4. All of the above

Answer 5

Correct Answer: 4

All the options are true.