Lesson 2- Learning Objectives Flashcards
Explain the various principles that affect real estate values
Principles Impacting Real Property Value:
- Anticipation
price we pay for goods and services is the present worth of the anticipated future benefits we hope to receive from these goods and services
-Supply
quantity of property that will be supplied at any given price. In contrast to demand, the supply of real property increases as price increases.
-Competition
Competition exists between two or more buyers or tenants to purchase or lease a property, or between two or more owners marketing their properties.
-Balance
The principle of balance states that the real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium.
-Surplus productivity
Net income to the land remaining after the other agents of production (labour, coordination (operating expenses), Capital (investment), and land) have been paid.
-Externalities
Property and its value are immediately affected by changes that take place beyond its borders. Offences of noise, sight, and smell.
-Change
Shifts in market preferences and demographics directly impact residential properties and their values
-Demand
Demand for real property for real property will decrease as price increases.
Substitution
The principle for substitution states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. Buyer will not pay more for a property than for another that is equally desirable.
-Contribution
A value of a particular component of real estate is measured in terms of its contribution to the value of the whole property. How an item contributes to the overall value of a property.
-Conformity
Holds that real property value is created and sustained when the characteristics of a property conform to the demands of its market. Examining the effect of a property conforming or not conforming to surrounding uses.
Describe the valuation process as it applies to appraisals
- Identification on the Appraisal Problem
- The purposed and intended use of the appraisal must also be shown in the report to comply with appraisal standards. The date the value applies. - Scope of Work Determination
- Refers to the amount and type of information researched, and the analysis applied in the valuation assignment. - Data Collection and Property Description
- Two types of data to be collected when carrying out appraisals: 1) general data is information on the country, province, municipality, and neighbourhood categorized under social, economic, political, and physical factors.
2) Specific data that related to the property and its rights
4.Data Analysis
Market Analysis- The appraiser must be aware of what is happening in the local, national, and international markets–all of these may have some affect on property values.
Highest and Best Use- consider whether the current use reflects the most profitable, legal use of the land, and if not, must consider the value of potential alternative uses.
- Site Value Opinion
- Land can be a major component of the value of the total property - Application of the Approaches to Value
Three traditional approaches to value– direct comparison, cost, and income– are interrelated
the nature and use of the property will determine the most appropriate method(s) for that situation
Direct Comparison Approach
Direct Comparison Approach
-value of a property should be no more than the cost of purchasing another property that provides similar utility
Cost Approach
-cost approach is that no purchaser should be willing to pay more for a new property than the cost of buying a similar parcel of land and constructing a new building that provides similar utility.
Income Approach
-income capitalization is a method of determining the value of an income-producing asset that takes the annual net operating income the property earns and divides it by a market-derived yield rate (capitalization rate)
- Reconciliation of Value Indications and Final Opinion of Value
- evaluate the strength and weaknesses of each of the estimates of value obtained from the various approaches that were applied in the analysis and to justify and conclude a final opinion of value. - Report of Defined Value
- preparation and delivery of the appraisal report
Define the “appraisal problem”
Identification of the “appraisal problem”:
- identify the client and intended users of the appraisal
- identify the intended use of the appraisal
- type of value and definition
- effective data of the value opinion
- identify the relevant characteristics of the property
- assignment conditions
- extraordinary assumptions and hypothetical conditions
- limiting conditions
List the main steps in the cost approach
cost approach is that no purchaser should be willing to pay more for a new property than the cost of buying a similar parcel of land and constructing a new building that provides similar utility
1) Estimate the value of land as if vacant (note: the land’s current use must be its highest and best use in order to use this method)
2) Estimate; the reproduction/replacement cost new;
3) Estimate the accrued depreciation from all causes;
4) Subtract the depreciation from the reproduction/replacement cost to arrive at depreciated cost;
5) Estimate the reproduction/replacement cost of outside/other improvements (deduct depreciation for these items);
6) Add the depreciated value of the outside/other improvements
7) Add the value of the land; and
8) Adjust the value if an interest less than fee simple is being appraised
List the main steps in the direct comparison approach
Direct comparison approach to value is that the value of a property should be no more than the cost of purchasing another property that provides similar utility.
1) Identify characteristics of the subject and find comparable sales or other relevant market data;
2) Ascertain and verify details of comparable sales;
3) Analyze the characteristics of comparable sales for time on the market, advertising, terms of sale, and motivation of buyer and seller
4) Measure and adjust the comparable to make them more similar to the subject; and
5) Reconcile the comparable’s values to arrive at market value
List the main steps in the income approach
Income capitalization is a method of determining the value of an income-producing asset that takes the annual net operating income the property earns and divides it by market-derived yield rate (capitalization rate).
1) Estimate the gross annual potential income based on full occupancy at market rents;
2) Deduct an allowance for vacancy and bad debts to arrive at effective gross income;
3) Estimate the annual operating expenses
4) Deduct the operating expenses from effective gross income to arrive at net operating income;
5) Select the appropriate method of capitalization;
6) Select the appropriate capitalization rate; and
7) Convert the net income into an indication of the capital value
Explain the real property ownership and its limitations
Real property includes the intangible “rights” that you obtain when you own a piece of property. The packaging of all these rights of ownership attributable to a property is called the “bundle of rights”. These rights may have limitations on their use, and this can affect property values if some of them are not present or are present in a diminished capacity. The limitations can be the result of public or private restrictions.
The government may impose limitations on the use of land. For example, municipalities have the right to impose land use controls via zoning, or to require a person subdividing land to provide for, or to dedicate a portion of the site for public purposes, such as a park
Limitations:
Public
Police power, expropriation, taxation, Escheat
Private- Voluntary Covenants Easements Leases Mortgages
Private - Involuntary
Liens
Encroachment
Prescriptive Easements
Distinguish the types of interests in real property ownership
Fee-simple ownership
-The greatest bundle of rights and responsibilities that an individual can hold in land is a fee simple interest.
Leasehold estate
-Right to exclusive possession of land, but only for a limited period of time, A leasehold estate is created between a landlord (lessor) and a tenant (lessee) under a lease.
Condominium/Strata ownership (a combination of fee-simple ownership of a unit and interest in a cooperative ownership of real property)
-Condominium or strata ownership is regulated by government legislation. The legislation is similar in most provinces and sets out how condominiums or strata corporations are created and managed. All bylaws are filed and registered in the local land title office and are available for public viewing.
Co-Operative Ownership
-Co-operative ownership can be of two types: private, and government funded or subsidized. One title. Other type of co-op is a government or public co-op where a non-profit society is formed, and individuals joint the society by making a minimum deposit.
Life Estates
The owner of a life estate is called the life tenant. The life tenant’s ownership of the land is limited to the period of his or her lifetime. At the death of the life tenant, title to the land reverts to either the original owner or to a designated party.
Rights in the Land of Another
-When an owner grants an interest in his or her land to another party, the right of the owner and future owners to use the land is subject to this grant. Interests in land granted by owners to another party include easements, restrictive covenants, and profits a prendre
Easements
- a privilege acquired by a landowner for the benefit of his or her land over the land of another. The land receiving the benefit is called the dominant tenement and the land over which the right is exercisable is called the servient tenement.
Restrictive Convenant
- imposes a restriction on the use of one person’s land for the benefit of another piece of land. The person who imposes the restriction is called the convenantee and the person who agrees to be bound by the restriction is called the covenantor.
- building scheme is a group of restrictive convenants attaching to two or ore lots within a particular development. A developer may place a restrictive covenant on all the lots of a subdivision requiring all roofs to be cedar and all exterior house finishes to be wood siding painted (main conformity)
- profit a prendre: a right to enter on the land of another person and to take some profit of the soil ( minerals, oil, stones, trees, fish or game, etc)
Air space: at common law, a landowner’s rights were said to extend down to the centre of the earth and up to the heavens
Subsurface rights: provincial governments reserve rights to most of the minerals, precious metals, and petroleum products for their own use.
Fixture and Chattels: the appraiser must distinguish between fixtures and chattels. Fixtures got with the land and will belong to subsequent purchasers, while chattels remain the personal property of the owner. Items affixed for the better use or enjoyment of the object as an object are considered chattels, while fixtures are affixed in order to enhance the real estate
Co-ownership of Real property
Ownership of real property among multiple persons (co-ownership) can be achieved through joint tenancy or as tenants in common
Timesharing: Timesharing is a form of ownership based on a time period. Timeshares are often used in recreational areas. Owners may also have the option of trading their time-share resort for another time-share resort elsewhere in the world.
Any combination of these separate interests
Describe the data collection process and the sources of data
When collecting property specific data, it is best to have a prepared checklist when inspecting the subject so that no important areas are missed or forgotten. This list will also assist you when making comparisons between the subject and comparables. Always ask if any chattels or special financing were included in the sale price, as this will not be apparent during the initial research. Establish market range in advance can make it easier to collect data, since the appraiser knows what and where to look for comparables. As much data as possible should be gathered and then reviewed to find the best three to six comparables. There must be at least a reasonable amount of research in order to collect sufficient data to address the identified problem.
Sources of data could be: Municipal office, Land Titles, Statistics Canada, Real Estate Boards, Canada Mortgage and Housing Corporationn Land surveor, Assessment Office, Property Owners, Tenants, Local Builders, Contractors, Developers, Real Estate Brokers, MLS Reports, Lenders, Banks, etc.
