Chapter 21 - Intro to Real Estate Appraisal

Question 1

Purpose of an appraisal

Answer 1

Sale/purchase
Development
Loan
Insurance
Assessment
Legal issue (will, division of assets)
Expropriation

Question 2

Ceiling price

Answer 2

Max. price a purchaser willing to pay

Question 3

Floor price

Answer 3

Lowest price a seller/vendor willing to sell

Question 4

Relationship between sale price, ceiling price and floor price?

Answer 4

Sale price must be:
EQUAL TO OR LESS than ceiling price
AND
EQUAL TO OR MORE than floor price

Question 5

Define value to the owner and market value, and the difference between an estimate of each

Answer 5

Value to owner: the personal opinion of a property’s value held by an individual owner; in appraisal, this refers to floor and ceiling prices, where owner includes a prospective owner
Individual owners each have their own SUBJECTIVE tastes, preferences and biases. It is difficult for an appraiser to estimate subjective values.

Market value: the price that might reasonably be expected to realize when sold by a willing seller to a willing buyer after adequate time and exposure to the market.
- AN OBJECTIVE VALUE. A value that is determined based on market evidence and by applying generally accepted valuation techniques.

Question 6

“Highest and best use” in property possessing redevelopment potential

Answer 6

“Highest and best use”: a rough indication of whether an existing property represents its highest and best use is to ask, “if this building were to be burnt down, would the same type of building be constructed in its place?”

Question 7

Latent value (potential for redevelopment)

Answer 7

Latent value exists when the maximum net returns are likely to result if existing development is changed at some time in the near future.

Question 8

Factors (4) that affect the demand and supply of real property

Answer 8

Economic
Political/government
Social
Physical

Question 9

What are the (4) appraisal approaches?

Answer 9

Direct
Income
Cost
Residual

Question 10

Direct comparison approach

Answer 10

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. Assumes the market value of the subject property is equal to the prices recently paid for similar properties.

Good for single family homes.

Question 11

Income approach

Answer 11

The sale prices and revenues for properties similar to the subject property are analyzed. The subject property’s market value is then estimated using the results of this analysis.

Good for commercial or income producing properties.

Question 12

Cost approach

Answer 12

Assumes the market value of a property is equal to the value of the vacant site plus the cost of construction and less depreciation.

Least exact because cost of replacing building may not directly relate to how market perceives the value and difficult to accurately measure depreciation in older buildings.