Lesson 2

Question 1

There are three broad categories of rights that go with the ownership of real property : physical, legal, and financial. Explain what is meant by these categories and why it is important to fully understand their implications on a final estimate value

Answer 1

Ownership of real property consists of a number of specified rights, the function of appraisal is to estimate the value of real property encompassed by these rights. The rights associated with ownership can include three elements : physical, legal and financial considerations. In finding a value estimate, all three of these elements must be considered, or the value will not fully reflect the real property interest actually held. Perhaps the most common mistake would be to focus too much attention on the physical elements, forgetting that legal and financial considerations have an impact on value as well.

Below is a brief description of each of these three elements:
Physical elements
The quantity and quality of the property. Quantity consist of the dimensions of the land and improvements, while quality consists of the condition of the improvements. Less quantity and lower quality will have an adverse affect on value estimate

Legal elements
The highest form of ownership is unencumbered fee simple property. Any restrictions on fee simple ownership can lower value and therefore the appraiser must search for any private or public limitations on the use of the property. It is also important that the appraiser know all the possible uses for the property as favourable development choices can raise value estimates.

Financial elements
An appraiser must look to see if the sale of the property was at arms=length or if it had special financing terms (i.e vendor financing). If it was not arm-length or did contain special terms, then the sale price could be misleading. The appraiser must also investigate how possible leases and tenancy agreements could affect the value estimate.

Question 2

Briefly explain why the term real property appraisers is preferable to the terms real estate appraiser.

Answer 2

The term “real estate” implies a focus only on the physical components of real property (ie. Land, building, etc), while “real property” expands this definition to include intangible rights attached to property (i.e. lease terms, financing, easements, air rights, etc)
An appraiser does more than estimate the value of the real estate. He/She also examines the underlying property rights. Therefore, Real Property Appraiser is the preferred term.

Question 3

In a recent appraisal report, you used the term bundle of rights and the client has asked you to explain what you mean by this term, and how it affected the value of their property (in particular, the effect of any restrictions on title). State any necessary assumptions to help explain your answer.

Answer 3

The “bundle of rights” refers to the package of legal privileges which are attached to the ownership of real property. These include the right to :
- Use the property
- Sell the property
- Lease the property
- Enter the property
- Give the property away
- Refuse to do any of these actions.
An owner in fee simple has the right to do any of these with their real property. However, these rights may be limited through a number of voluntary or involuntary restrictions. For example,
- Taxation - The government has the right to charge the owner property taxes
- Expropriation - The government has the right to take private property for public benefit
- Policing - The government’s right to regulate the health, safety and welfare of the individual and community through building codes, zoning, sanitary regulations, etc.
- Escheat - the government has the right to take ownership of property if the owner dies and there is no known heir.

Voluntary restrictions on ownership rights could include a lease in which the owner allows others to use the property for a fee, an easement in which the owner allows a neighbour the right to enter a portion of the property, or a restrictive covenant where an owner agrees to not undertake some form of activity.

In appraising the value of a property, the appraiser must consider all ownership rights, including all restrictions on fee simple ownership. A property which has the full bundle of rights, unencumbered by restrictions, will typically have a higher value than another similar property which has less than the full bundle of rights.