Chapter 6.1: Appraisals Introduction Flashcards
Real estate is different then other assets as it is unique and ____________
Unique and heterogeneous
Heterogeneous = different, not the same!
Real estate is different then other assets as it has a _________________ - causes limited data sources available
Low turnover
Real estate is different then other assets as it is durable / __________ (the life of the building depends on its ______________________)
Durable / long lasting
Economic durability , not physical!
Real estate is different then other assets as it’s local / _________, as in stuck in one place
Local / Immobile
It can’t be moved!
The immobility of real estate leads to positive and negative _______________
Externalities
Real property markets are local by nature due to the ____________ of real property
Immobility
Heterogeneous means what? In real estate specifically…
Knowledge concerning one property cannot necessarily be applied to another property
The complexity of real estate as a product required the involvement of an ________________
Expert appraiser
Appraisers are needed as real estate is __________ - meaning what?
Unique
It is difficult to find real properties that are very much alike
Who can conduct appraisals?
Anyone!
BC has no __________________ for who can conduct an appraisal
Licensing requirements
______________ is self regulating by professional association
Appraisal
Those who can conduct appraisals require education programs, experience requirements, _______________, and ____________
Code of ethics
Insurance
The courts may conclude that even people without formal training as appraisers are responsible for their actions in the role of _______________
Appraisal work
Who needs appraisals?
Formal (specific contracts)
- Mortgage finance
- Expropriation
- Property Tax Assessment
- Insurance
- Executor of an estate
But never strata councils
Who needs appraisals
Informal (no specific contract)
- from real estate agents
- any time properties are bought or sold
Usually part of larger package of jobs and this is just a component
The appraiser must determine the __________________ and the level of information required to produce credible and reliable results
Scope of work
The appraiser must determine the _________________________
Clients intended use
The appraiser must consider the ______________ of the report
effective date
Aka the specific date an evaluation is made
The appraisal must understand that _________________ may be acceptable if it falls within the requested scope of work
Limited detail
The appraiser cannot ____________________ to identify and resolve the problem
The client
Even if it is the client who is requesting the information
The registered owner is not the ______________________________
Ultimate source of data on the property
Yes they may have lived there for a decade, but they’re not always correct
2 reasons why the client has requested an appraisal
1) statutory reasons
2) market reason
1) Statutory reason
Part of Why the Client has Requested the Appraisal
Expropriation or taxation purposes
2) market reason
Part of Why the Client has Requested the Appraisal
Buying, selling, leasing, or developing a property
Where the appraiser may consider market data and is not forced to follow government statues
Appraiser are liable under two types of law, which are:
1) contract law
2) tort law
1) contract law
Appraisers are liable under 2 types of law, this being 1
Formal - breach of contract
When you have a contract with an appraiser
Such as banks, lenders, government
2) tort law
Appraisers are liable under 2 types of law, this being
Informal - negligence
3rd party can reasonably rely on the appraisal report
Such as buyers and sellers
Remember, tort = wrongdoing
One legal responsibly of an appraiser is the ______________ to both parties
Legal liability
Appraisers have no set limit of _____________________ in appraisal work - it will vary based on the market and complexity of the appraisal needing to be done
Allowable error
A margin of error of +/- _____% is allowed for finding market value of common property types with enough data
+/- 10% boi
There is no ________ required for appraisals
License
But just schooling and experience
The courts have recognized that a reasonable ____________________ exists when calculating __________ resulting from a negligent appraisal
Margin of error
Damages
An appraiser may be held liable for ____________ if a property is ____________
Negligence
Over-valued
What is ceiling price ?
The highest price the BUYER is willing to pay
Either equal to or below the asking price (as the buyer wants the best and lowest deal)
Is the ceiling price objective or subjective
It is 100% subjective as you decide how much you’re willing to spend
What is the sale price!
The price actually listed for / appraised at
Is the sale price objective or subjective
It is 100% objective as it’s based on facts and details through appraisals
The floor price is what?
The lowest price the SELLER will accept
As ideally, the seller wants the most amount of money possible, but knows they’ll need to budge / compromise to sell
Is the floor price subjective or objective?
It is 100% subjective as it determines how low the seller will go before the price is too low
The asking price is not ____________
The floor price
As most people will try to negotiate on the asking price, so keep it higher always in case it gets negotiated down
Therefore, the Sale price must be 2 things
1) equal to or less than the ceiling price (the highway amount the buyer will pay)
2) equal to or more than the floor price (the amount the seller is willing to lose to sell)
Just always remember then, the _______ must always be above the _______
Ceiling
Floor
Subjective value =
Value to the owner
Whatever they see in their eyes, can be different for everyone
Objective value =
Value in exchange (sales price)
Insurable, assessed, and market value
Based on fact
Lending value =
A long term conservative estimate of the values of the interest in land pledged as a security
What are the 2 elements of market value
1) Rights of ownership
2) The physical property (in which those rights are vested)
And also, market value does not equal
Value to the owner
The market value could be $400,000 but because his daughter was born in the living room, it’s priceless
The “_____________________” is the __________ of ownership vested in a particular piece of real estate
Subject of appraisal
Legal rights
What are examples of legal interests
Air space
Fee simple ownership
Leasehold estate
Easements
Factors affecting value can be __________ or __________ trends
Long term or short term trends
Long term trends are what?
- shifts in age composition
- government programs effecting real estate
- supply and cost of raw materials
- shifts in government compositions
Short term trends are what?
Consumer pessimism or optimism
Change in interest rates (mortgage, loan, bonds)
care for these more
Additional factors that could affect value are:
3 things
1) physical factors
2) economic factors
3) political / government factors
1) physical factors
Local, topography, soil fertility, climate, community factors (transportation, schools, churches, parks)
2) economic factors
Interest rates Unemployment rates Wage levels Price levels Taxes
3) Political / government factors
Zoning bylaws Building codes Fire regulations Public health measures Rent controls Government housing programs
And the final 4 factors that could affect value are:
1) advertising
2) relationship between the parties to the sale
3) time allowed for sale
4) special purchaser
Special purchaser specifics
- will greatly extend the range of possible bids
- not about the person, it’s about the property
What are the 4 types of appraisal Methods
Comparative method
Cost method
Income / investment method
Residual / hybrid method
Appraisal Method: Comparative Method
- Aka direct comparison
- residential, empty lots
- principle of substitution
- required a minimum of subjective opinion from the appraiser
Examples: empty lots, residential houses
The comparative method focusses on what types of properties?
Residential and empty lots!
The ____________ method requires a minimum of subjective opinion from appraiser
Comparative
As you mostly compare the house to other houses nearby
_____________________: a property’s value should be no more than the cost of purchasing a substitute property that provides similar utility
Principle of substitution
Aka, why spend more money on a home that has a close duplicate for less
Cost method
- no income
- unique…nothing to compare it to
- based on replacement cost
- depreciation is used
Property examples: churches, temples, mills, concrete plant, museums, art gallery
The _________ method has super unique homes, you’d want to use this method for valuing castles, the shoe house, and other homes that are 1 of a kind
Cost
Examples of cost method properties
Churches, temples, mills, concrete plants, museums, art gallery
The ____________ method uses depreciation
Cost
Income / investment method
- commercial properties
- rental properties
- Rate of Return
- No depreciation is used
- no single family
Property examples: multi-unit apartment, warehouses, leasehold interest
The ____________ method is for commercial and rental properties
Income / investment
The ______________ method doesn’t use depreciation
Income / investment
Only cost method uses depreciation
The ____________ method does not deal with any single-family
Income / investment
Income / investment property types
Multi unit apartment
Warehouses
Leasehold
Residual / hybrid method
- latent value
- redevelopment potential
- higher value may result through change of use
Property examples: residential house in the middle of business district
The _________________ method has latent value, which means a higher value may result through a change of use
Residual / hybrid method
Meaning the property has potential, but right now it’s a dump and needs lots of work
Residual / hybrid method property examples
Residential house in the middle of the business district
“Similar” means what?
With respect to factors judged important by buyers and sellers
“Recent” means what?
When the market conditions (property values) have remained stable
Latent Value means what?
Not at its best / highest use
Good for redevelopment
Which of the following statements regarding immobility and durability of land is false
When considering the durability of structure, it is not important to distinguish between economical life and physical life of the structure
Economical life is always more important than physical life
Real property is affected by external influences from neighbouring properties. What characteristic of real estate causes this?
Real property is immobile
It cannot be moved, so whatever is around your land is very important
Which of the following factors will not affect the value of land
The owners personal financial situation
Of the following externalities, which one presents Both positive and negative?
Proximity to a transportation facility
Convenient, yes , but lots of traffic and people
An appraiser must understand why the client has requested the appraisal.
If the purpose is for property development, it would be known as
Market reason
Remember, it’s either a statutory or market reason, and anything that isn’t expropriation or taxation purposes is always market reason
An appraiser has estimated the market value of a single family dwelling to be $410,000. On the day of the appraisal, the house sold for $370,000. Given that there was sufficient evidence of recent sales, was the appraisers estimate of value reasonable?
Yes, because appraisers have no maximum allowable error when calculating market value of a residence
SUPER IMPORTANT! When calculating multiple appraisals against each other, you need to take the appraised price and divide it by the selling price to calculate the %
Example: appraised for $235,000 sells on the appraisal date for $250,000
235,000 / 250,000 = 0.94 or 94%
But: appraised for $462,000 sells on the appraisal date for $410,200
462,000 / 410,200 = 1.126 or 112.6% - this is over the 10% allowable error
Which of the following is key determinant of the value of property
Rights of ownership
Which of the following might be the subject of a real property appraisal
Air space rights
Not the diamond or insurance policy
A real estate appraiser would not value:
The legal interest in cattle on agricultural land
The “subject of an appraisal” is
The value of the legal rights of ownership vested in a particular piece of real estate
Which of the following factors is most likely to affect the value of residential real property in the short run
Consumer opinions relating to residential real estate values
