Chapter 21 (Assignment 16) Appraisal and the Appraisal Process Flashcards
Which of the following statements regarding the comparative approach is FALSE?
1) The cost approach assumes that the improvement’s replacement cost new may exceed its market value.
2) The income approach is similar to the comparative approach; both rely on market evidence from similar properties.
3) The residual method is only applicable when determining the highest and best use of the land as vacant.
4) The comparative approach reflects market behaviour and requires a minimum of subjective opinion from the appraiser.
The residual method is only applicable when determining the highest and best use of the land as vacant.
is incorrect 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.
A ten-storey apartment complex in Surrey was recently destroyed by fire. The appraisal report recommends that a mixed-use development with residential above and street level commercial units be constructed. Given this information, which of the following statements is/are TRUE regarding the property BEFORE the fire?
1) The property had redevelopment potential.
2) The property had latent value.
3) The property was at its highest and best use.
4) Both (1) and (2) are correct.
Option (4) is correct and options (1), (2), and (3) are incorrect because a rough indication of whether an existing property
represents its highest and best use can be achieved by asking, “If this building burned down, would the same type of building be
constructed in its place?”
If the answer is yes, the existing development probably represents highest and best use. In this case, the report recommends for a mixed-use development so the property before the fire was not developed to its highest and best use and it had redevelopment potential and latent value.
Which of the following statements regarding appraisal is FALSE?
1) A form report appraisal meets the needs of, and is commonly used by financial institutions.
2) Appraisers estimate value as at a specified date, known as the “date of valuation”.
3) An appraiser need not understand the property interest that is to be valued, as long as they use the correct appraisal
method.
4) A sale is likely to be realized when the floor price is less than the offered price.
An appraiser need not understand the property interest that is to be valued, as long as they use the correct appraisal
method.
because it is the value of the legal interests in real estate that is being estimated. The most common legal interest is fee simple interest, but there are other lesser interests and there may be charges against these interests such as
easements and liens.
OTHER ANSWERS ARE TRUE
A provincial government’s decision to acquire a tract of land to widen the highway is an example of a property appraisal for _______ purposes. Whereas a parking lot considered for redevelopment requires a property appraisal for _______ purposes.
statutory; market
Which of the following statements is TRUE?
1) An appraiser owes a duty of care to those persons who they can foresee are likely to take action based on the appraisal report.
2) Soil conditions in a neighbourhood should not be overlooked in cases where they may influence the type of structure
that can be constructed.
3) A government policy that allows homeowners to deduct interest paid on a mortgage from their taxable income would change the demand for real property across the country.
4) All of the above
All of the above
ALL ARE TRUE
Geraldo is considering a purchase of a condominium and engages an appraiser, Harvey, to do an appraisal. The seller, Ivanhoe, requests to see the report, since he doesn’t want to hire his own appraiser, and Harvey agrees. Harvey determines a market value of $965,000, which Geraldo subsequently offers to Ivanhoe. Ivanhoe accepts, but begins to wonder if he got a fair price. He hires another appraiser who determines a higher market value of $1,350,000. What actions might Ivanhoe take at this time?
Ivanhoe can sue Harvey for negligence, because Harvey should have reasonably foreseen that Ivanhoe would rely on
the appraisal report.
Consider a small 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 $50,000 in income per year. What best estimate of value would be most suitable for this property?
Residual method
the residual method will provide the most accurate estimate of value. Since the warehouse is located between two skyscrapers in downtown Vancouver and earns only $50,000 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.
Highest and best use is based on the principle that the market value of property depends on _______ use rather than on ________ use alone.
potential; current
Kathy Myers, a professional appraiser, recently moved to a small suburban residential area. She has been asked to appraise a historic church, which is located in the middle of a residential neighbourhood. Which approach of appraisal is Kathy most likely to
use?
Cost approach
The cost approach of appraisal, which determines the value of a property by adding the market value of the site to the cost of replacing the existing building, would be the correct method of appraisal to use under these circumstances.
Which of the following statements is FALSE?
1) Due to the immobility of real property, external factors or externalities will impact value.
2) The neighbourhood an appraiser should consider when doing an appraisal may not be limited to the subdivision in
which the property is located.
3) The direct comparison approach is based on the market principle.
4) The presence of a special purchaser in a sales transaction will greatly extend the range of possible bids.
The direct comparison approach is based on the market principle.
Option (3) is correct and options (1), (2), and (4) are incorrect because the direct comparison approach is based on the principle substitution: a property’s value should be no more than the cost of purchasing a substitute property that provides similar utility.
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.
ESTIMATE + TIME
An estimate of value together with a reasonable exposure time reflects the market expectations as of the date of
appraisal.
because the land that will provide the maximum net return during the foreseeable future.
The subject of an appraisal is:
the legal rights of ownership vested in a certain piece of real estate.
Ryan, a real estate appraiser, has appraised a property for a bank for mortgage loan purposes. Although the appraisal was intended for the use of the bank loans officer, the purchasers of the home were shown the appraisal by the loans officer.
Later, it was found that the home was infested with bugs, and that the appraiser had negligently assessed the worth of the home as much higher than its actual value. Given this information, which of the following statements is FALSE?
1) Based on the principles of negligent misrepresentation, the purchasers may have a claim against the appraiser.
2) As the appraisal was prepared for the bank, there is no privity of contract between the purchasers and the appraiser, and therefore the purchasers can have no remedy against the appraiser.
3) Damages resulting from a claim of this nature could properly be determined by calculating the difference between the
actual value of the home and the price paid by the purchasers.
4) If the appraiser can demonstrate that the purchasers did not rely on the appraisal in making their purchase, then the purchasers will be denied a remedy.
As the appraisal was prepared for the bank, there is no privity of contract between the purchasers and the appraiser, and therefore the purchasers can have no remedy against the appraiser.
incorrect because while it is true that there is no privity of contract between
the appraiser and the purchaser, the principle of negligent misrepresentation, if applicable, will operate to provide the purchasers with a remedy even without privity of contract.
In order to succeed in a claim for negligent misrepresentation, the party seeking redress must be able to demonstrate that the statement was untrue, that it was made negligently, that there was a special relationship between the parties giving the rise to a duty of care, and that the plaintiff relied on the statement.
Thus, if Ryan could prove that the purchasers did not rely on the statement then he will not be held liable for this negligent misrepresentation. A successful claim of negligent misrepresentation could result in an award of damages equal to the difference between the actual
value of the home and the purchase price paid.
Name objective measures of value?
1) Market value
2) Insurable value
3) Lending value
In developing a real property appraisal, which of the following statements concerning scope of work determination are TRUE?
A. It is the appraiser/licensee’s responsibility to determine the scope of work and the level of information required to produce credible and reliable results.
B. An appraiser can rely on the client to identify and to resolve the problem since it is the client who is requesting the report.
C. A brief appraisal with limited detail may be acceptable if the appraisal is within the client’s requested scope of work, and the
limitations are explicitly written in the report.
D. The appraiser need not know the report’s intended use since the client is the one paying for the report and should know its purpose.
A and C only
Mark wants to sell his home and asks a reputable appraiser to determine the price he will likely realize for the property. What definition of value will the appraiser likely use?
Market value
Marge owns and operates a warehouse located on the perimeter of a small town. The land is zoned I3, light industrial. The net operating income (NOI) was the highest when she commenced his business operations some 8 years ago but has been falling ever since.
She is reconsidering the property’s use. Her research of the market evidences a growing demand for rental properties
due in part to a university opening up within 8 km of the warehouse.
Marge believes she can realize the highest net return of her property if the warehouse is converted into a rental apartment building. Which of the following statements is TRUE?
1) The rental apartment building represents the property’s highest and best use.
2) Marge’s warehouse possesses latent value.
3) The zoning restriction may prevent development or use that would yield the greatest return to the land.
4) Since the NOI has been falling, the warehouse is not its highest and best use.
The zoning restriction may prevent development or use that would yield the greatest return to the land.
OTHERS ARE FALSE
When appraising older buildings using the cost approach, the most difficult aspect to calculate is:
the amount of depreciation.
because when using the cost method of appraisal on an older building, determining the amount of depreciation is the most difficult aspect to calculate. Generally, the value of the land and the cost of replacing the building can be determined with relative ease.
Which of the statements regarding the supply and demand of real property is FALSE?
1) As the price of real property increases, the supply increases.
2) The demand for real property will decrease as the price increases.
3) The absolute supply of real land is fixed, and therefore the supply of real property cannot be altered.
4) Real property is fixed in location.
The absolute supply of real land is fixed, and therefore the supply of real property cannot be altered.
OTHERS ARE TRUE
Why is an analysis of highest and best use of a property important? (3)
1) It helps the appraiser identify comparable properties.
2) It identifies the use or uses on which the final opinion is based.
3) It helps to interpret the market forces that affect the subject property.
Need for Appraisals
The flow of information concerning real property is limited and difficult to collect for the following reasons: (4)
LOWN TURNOVER, UNIQUE, DURABLE / LONG LASTING, LOCAL
1) The turnover rate for real property is low, resulting in limited data sources and information available for an opinion of value
2) Every parcel of real property is distinct, unique and heterogeneous, meaning property values cannot easily be standardized or generalized and therefore expertise is necessary to differentiate among value influences
3) Real property is durable and long-lasting, meaning it may not be quick to respond to market pressures (once you built a house you are stuck with it for years) and thus expertise is needed to account for changes over time
4) Real property markets are local, with real estate fixed in location. Similar to the impact of durability, real property can be affected by external influences from neighbouring properties. These are called externalities, when can be positive, such as a park being developed across the street, or negative such as a noxious industrial use operating next door.
What is an externality?
Factor separate from the property can affect the property’s value, either in a positive or negative manner
Intended Use and Purpose of the Appraisal:
An appraiser needs to understand why the client has requested the appraisal. Name two reasons?
- Statutory Reason - Ex. for expropriation or taxation purposes; where the appraiser is guided by provisions outlined in relevant Acts.
- Market Reason - such as buying, selling, leasing or developing a property; where the appraiser may consider market data and is not forced to follow government statutes.
What is Latent Value?
The value possessed by a property which has POTENTIAL FOR REDEVELOPMENT because it is currently not employed at its highest and best use.
