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BUSI 330 > Key Terms & Concepts > Flashcards

Key Terms & Concepts Flashcards

1
Q

Three Categories of Appraisal Practice

A

Fee Appraisers (paid by $), Institutional Appraisers (employed by an organization, ex: a bank), and Government Appraisers.

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2
Q

What are an Appraiser’s 4 professional obligations?

A
  1. Clients
  2. Third parties
  3. Society in General
  4. The appraisal profession
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3
Q

What are the First Principals and Professional competencies for AIC members?

A

Principals:
-Problem Identification
-Property Content
-Legal Considerations
-Highest and Best Use
-Research
-Economic analysis

Competencies:
-analytical thinking
-conceptual thinking
-decisiveness
-focus on quality
-client service

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4
Q

Define Real Estate

A

Physical assets, like land and buildings

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5
Q

Define Real Property

A

The legal rights that attach to land. Real property can’t be touched, but can be appraised and sold

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6
Q

Define Bundle of Rights

A

The packaging of all the rights of ownership attributable to a property

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7
Q

What are the characteristics of Real Property?

A

Immobility, durability of improved land, indivisibility of services, & divisibility of ownership

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8
Q

What are the four concepts of land?

A

Geographic and environmental (Physical), legal, economic, & social

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9
Q

What is Entrepreneurial incentive aka Developers profit?

A

Without sufficient expectation of profit, investors won’t invest, financiers won’t finance, and developers won’t develop. Entrepreneurial incentive must be subtracted from the total value as a cost.

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10
Q

What are the 4 factors of Value? (hint: they interact to create supply and demand factors that underlie a market)

A

Utility and Scarcity (Supply)
&
Desire and Effective Purchasing Power (Demand)

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11
Q

Define the concept Anticipation & Change

A

-Present worth of future benefits & real estate markets change constantly

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12
Q

Define Direct Comparison Approach

A

Finding good comparables that are as similar to the subject property as possible, analyzing or adjusting their sales prices for differences to arrive at the estimated market value.

Most common approach for vacant land, residential and some simple commercial properties.

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13
Q

Define Income Approach

A

The appraiser must analyze the property and market to determine rent amounts, vacancy rates, collections losses, operating expenses and yield rates.

Best for commercial properties that trade in the market primarily for their income earning capabilities.

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14
Q

Define Cost Approach

A

The cost approach assumes that a purchaser should pay no more for a new property than the cost of buying a similar parcel of land and constructing a new building. The cost approach involves estimating land value, construction costs, and subtracting depreciation.

Best used for very new or very old buildings, as well as unique ones

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15
Q

Define highest and best use

A

The appraiser must consider whether the property’s current use reflects the most profitable, legal use of land, and if not, must consider the value of potential alternative uses.

Typically is similar to nearby properties. Requires the appraiser to look into the future and consider what is reasonable and realistic.

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16
Q

What 3 traits does an appraiser need?

A

Integrity, competence, quality work

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17
Q

Define the principal of substitution

A

A buyer will not pay more for a property than for one that as equally desirable

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18
Q

Define Principal of Conformity

A

Values are maximized when the property’s characteristics conform to market demand.

Example: the nicest, newest house built in a less-desirable neighbourhood will bring its value downwards

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19
Q

Define floor price

A

The minimum price at which a seller is willing to sell their property

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20
Q

Define ceiling price

A

The maximum price a purchaser is willing to pay for a property

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21
Q

Justified investment price

A

A value that is justified for a single owner based on their specific investment needs and wants

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22
Q

What is market value?

A

The most probable price as of a specified date for which the property should sell for after reasonable exposure in a competitive market under all conditions required for a fair sale

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23
Q

Define chattel

A

Personal property, not related to real estate (appraisers do not value chattels as they can be removed easily)

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24
Q

Define fixture

A

Part of the real estate (example: sink or toilet)

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25
Q

Define Scope of Work

A

Refers to the degree of research and analysis necessary in valuation

Scope of work report would include inspection details, type of analysis, data research, audits and verification of 3rd party information.

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26
Q

What are the 2 types of data?

A
  1. Primary- gathered and analyzed directly by the appraiser (more reliable)
  2. Secondary- not applicable to the subject property, may not know the source of the data or accuracy.
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27
Q

What are some sources of data?

A

-economic: trends in commerce/industry, interest rates, price levels

-political: zoning bylaws, building codes, rent controls

-social: population growth/decline, changes in family size, desire for privacy

-physical: climate, location, community factors

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28
Q

The measured front property line that abuts a street is called which of the following?

A. Abutment
B. Width
C. Frontage
D. Depth

A

C. Frontage

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29
Q

Which of the following relate to green building practices?

A. Development density
B. Use of renewable materials
C. Innovative design
D. All of the above

A

D. All of the above

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30
Q

Define latent value

A

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

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31
Q

TRUE OR FALSE:

Does CUSPAP require appraisers to provide an opinion of highest and best use in every valuation assignment, along with rationale and supporting evidence?

A

True- the degree of support and explanation will vary depending on circumstances.

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32
Q

What are the 4 criteria of Highest and Best use?

A

Maximally productive
Physically possible
Legally permissible
Financially feasible

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33
Q

Define excess land

A

Unused land that can not be separated from the larger property and used in its own highest and best use.

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34
Q

Define surplus land

A

Unused land that cannot be separated and can only be used in support of the existing improvements.

Uses for this land could be storage of equipment or keeping it for a future development.

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35
Q

What is interim use?

A

A property in transition, where the current improvements do not contribute to the highest and best use as vacant.

Example: a site that has been rezoned as commercial and has both the physical possibility and financial feasibility to build commercial use. The rental house on site is effectively waiting demolition until the new use can be implemented.

36
Q

The absorption period is a measure of time to do which of the following?

A. Obtain approvals to develop a subdivision
B. Develop vacant lots in a subdivision
C. Service vacant lots in a subdivision
D. Sell all lots in a subdivision

A

D. Sell all lots in a subdivision.

37
Q

In an analysis of the highest and best use of land as though vacant, the most important consideration listed is which of the following?

A. The amount of the mortgage loan
B. The size of the improvements on site
C. any existing improvements can be demolished
D. The type of appraisal report requested by the client

A

C. Any existing improvements can be demolished.

38
Q

In the market delineation process which of the following factors is typically not used?

Social preferences
Property type
Market area
Complementary properties

A

Social preferences

39
Q

What are Pegs Factors? (hint: 4 categories)

A

Physical (environmental and locational)
Economic
Government (legal and political)
Social

40
Q

What is the most common and preferred land valuation technique?

A

Direct comparison approach

41
Q

Describe irregular shape adjustments

A

Lots are not all uniform rectangular shapes. Appraisers must account for value differences of irregular lots (loss of utility for construction and general use).

42
Q

Describe corner influence adjustments

A

Corner location can influence land sales, for example, an industrial corner location can benefit from two access points and a residential property it may have better access opportunities.

43
Q

Describe the Market Extraction Method

A

Start by estimating the replacement cost and depreciation cost for each of the comparables. Subtracting the improvement value from the overall sale price helps isolate the land value and therefore indicates market value of the site.

Useful in high developed areas, where there are few or no vacant land sales. More accurate for relatively new structures as depreciation can be hard to calculate.

44
Q

Define the Allocation Method

A

Another method that helps determine land values when there are insufficient vacant land sales in a given area.

Does not require estimation of improvement costs are depreciation, but relies on rule of thumb aka common sense/general knowledge. Could be determined from looking at an analysis of recent developments in the area.

45
Q

What is ground rent capitalization?

A

A ground lease is a lease of unimproved land. Is used when the owner does not want to give up future rights to the land but is permitting its use to another party.

Common with Crown and First Nations land.

46
Q

What is subdivision development analysis?

A

Based on principle of surplus productivity, meaning land value is calculated as a residual after the requirements of labour, capital and management are satisfied (includes construction and development costs for a new build).

Best used for properties that have redevelopment potential, site specific zoning or for properties mid way development.

47
Q

What are some key factors of Subdivision development analysis?

A

-assumes land value is based on development potential
-requires analysis to confirm it is feasible to develop the project: physically possible, legal or reasonable probability of zoning, financially feasible
-can be cross checked to other property sales with similar development potential and highest and best use

48
Q

Which of the following land valuation techniques is NOT an income based technique?

A. Discounted cash flow analysis
B. Ground rent capitalization
C. Allocation
D. Land residual

A

C. Allocation

49
Q

The principle of _______ holds that the value of property tends to equal the cost of acquiring an equally desirable substitute property.

A

Substitution

50
Q

Jessie Johal, a professional appraiser, based the value of a subject site on similarities and dissimilarities in comparison with two other parcels of land. This demonstrates which land valuation method?

A. Income comparison
B. Direct comparison
C. Indirect comparison
D. Allocation

A

B. Direct comparison

51
Q

A property had improvements that will be continued to be rented out while awaiting redevelopment. This is called _________ and must be considered against demolition and holding costs.

A. Highest and best use
B. Use value
C. Residential redevelopment use
D. Holding use

A

D. Holding use

52
Q

Define externalities

A

External factors that can have a positive or negative effect on a property’s value.

Example: opening of a major retail development nearby may mean improved amenities and greater demands.

53
Q

What are the 5 steps in applying the direct comparison approach?

A
  1. Researching data
  2. Verifying data
  3. Selecting units in comparison
  4. Analyzing and adjusting comparable sales
  5. Reconciling value indications in the Direct Comparison Approach
54
Q

What does “Bracketing the Subject” mean?

A

When selecting comparable properties in direct comparison approach, make sure to “bracket” the property. Aka having comparables that are both superior and inferior to the subject (showcases a range of values, with the subject property falling in between).

55
Q

What is the order of adjustments in the Direct Comparison approach?

A

Transactional Adjustments:
-property rights conveyed, financing, conditions of sale, expenditures, market conditions (time)

Property Adjustments (in any order):
-location, physical characteristics, economic characteristics, use, non-realty components

56
Q

What are some disadvantages of the Direct Comparison Approach?

A
  1. There can be few or no current sales that can be logically used
  2. Comparisons are difficult as no 2 properties are the same
  3. Data is historical and does not always predict future trends
  4. It is hard to get certain information regarding individual sales
57
Q

The principle of __________ holds that both the relationship between land and improvements and the relationship between a property and its environment must be in equilibrium for a property to achieve its optimal market value.

A

Balance

58
Q

Which of the following is a qualitative technique used to study comparable sales?

A. Graphic analysis
B. Grouped data analysis
C. Statistical analysis
D. Relative comparison analysis

A

D. Relative comparison analysis

59
Q

Which of the following statement regarding adjustments is TRUE?

A. They are made to the subject to make it like the comparables
B. They are made to the comparables to make them like the subject
C. They are made to the subject to make it like the market
D. They are made to the comparables to make them like the market

A

B. They are made to the comparables
To make them like the subject

60
Q

What is paired sales analysis?

A

The most common technique for analyzing market support for adjustments.

Focuses on pairs of sales, where you can isolate a single characteristic as the subject of the adjustment, and then determine that characteristic’s impact on price.

61
Q

Explain location adjustment. Provide an example.

A

Location adjustment accounts for the value differences in area between comparables and the subject. Location is one of the key attributes of real estate (focus on properties as close to the subject as possible).

Example: a home in a cul-de-sac compared to a home on a busy street.

62
Q

Provide some examples of adjustments for Physical Attributes?

A

Size of land and building, condition/age of improvements , amenities, functional utility

63
Q

Questions the appraiser should ask themselves while doing adjustments?

A
  1. Is the direction of the adjustment (plus or minus) logical?
  2. Does the adjustment size seem reasonable relative to the sales price?
  3. Did the appraiser provide support or at least explain the basis for the adjustments?
  4. Are the overall adjustments reasonable, in both net and gross terms?
64
Q

Define reproduction cost

A

Cost of providing an exact replica of the subject property

65
Q

Define replacement cost

A

Cost of providing a building that would represent the equivalent utility of the building to be appraised, using modern construction materials and techniques

66
Q

What are direct costs?

A

Also known as “hard costs”, they are clearly related to the construction activity. This cost would be included in the cost of building

Example: cost of materials and labour

67
Q

What are indirect costs?

A

Also known as “soft costs”, are related expenses besides the direct costs (materials, labour).

Example: interest on construction loads, administrative fees, marketing expenses, etc.

68
Q

What are the 3 major causes of depreciation?

A

Physical deterioration- tangible defects, wear and tear
Functional obsolescence- intangible defects, example: poor design
External obsolescence- negative influences from outside property (beyond owners control)

69
Q

How does the comparative unit method measure cost?

A

Cost per unit of area, 300$ per square foot for a house.

70
Q

What is quantity survey method?

A

Quantity surveying involves an item by item inventory of all construction material and labour costs, plus contractor’s profit and any other aspects of the construction process.

It is time consuming and detailed- normally for by a professional quantity surveyor.

71
Q

Define economic life

A

How long a building is anticipated to contribute to its highest and best use

72
Q

Define short-lived items

A

Building components where the remaining life expectancy is less than that of the structural elements.

Example; furnaces, hot water tanks, windows, doors, flooring, kitchen cupboards

73
Q

Describe the age life method (depreciation calculation)

A

Assumes all aspects of the building depreciate on a straight line basis, meaning equal percentage of depreciation every year. Depreciation is not divided into categories, but are in one estimate

74
Q

Describe the breakdown method (calculates depreciation)

A

Breaks down depreciation into 3 categories: physical, functional and external. It is then broken down into further subcategories (curable and incurable)

75
Q

What are curable and incurable items?

A

Curable- items that is economically worth repairing or replacing
Incurable- an item that is not worth repairing or replacing

76
Q

In the cost approach, reproduction or replacement cost does not include which of the following?

A. Direct or hard costs
B. Indirect or soft costs
C. Fixed and variable expenses
D. Entrepreneurial profit

A

C. Fixed and variable expenses

77
Q

The period of time over which a structure or a component of a property may reasonably be expected to perform the function for which it was designed is which of the following?

A. Effective age
B. Physical life expectancy
C. Useful life
D. Economic life

A

C. Useful life

78
Q

Direct and indirect costs must be calculated and included in which of the following methods?

  1. All cost estimating methods
  2. Unit in place method only
  3. Quantity survey method only
  4. Comparative unit method only
A
  1. All cost estimating methods
79
Q

Define capitalization rate

A

The return an investor requires for investing in a property to receive the annual net operating income flows

80
Q

The income approach has two main techniques, what are they?

A
  1. Direct capitalization
  2. Discounted cash flow
81
Q

What is the difference between fixed and variable operating expenses?

A

Fixed expenses are the same no matter the building occupancy.

Variable expenses increase with building occupancy (heat, water etc.)

82
Q

How do you calculate PGI (potential gross income) in the income approach?

A

PGI reflects the most revenue that might be possible for a property to collect and is based on market rents.

Analyze the past and present performance of the property (review precious income and expense statements, review lease agreements).

Analyze market comparables to see what the subject property would rent for if it were vacant.

83
Q

NOI excludes consideration of what?

A

Depreciation, capital cost allowance, income tax, debt repayment

84
Q

A reconstructed operating statement should include which of the following?

  1. Additions to capital
  2. Income tax
  3. Book appreciation
  4. Management charges
A
  1. Management charges
85
Q

What are 3 common appraisal errors?

A

Failure to discover defects or flaws, incorrect area measurements and the wrong asset (make sure you have correct address)

BUSI 330 (1 decks)

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