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Lesson 1 BUSI330 > Lesson 2: Principles of Appraisal > Flashcards

Lesson 2: Principles of Appraisal Flashcards

1
Q

The production of all goods and services, including real estate, depends upon the combined effects of four economic ingredients, known as what?

A

Agents of Production (four agents are combined to create real estate, and the sum of their associated costs to develop a property is one of the basic measures of real property value)

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2
Q

What are the four agents of production?

A
  1. Land
  2. Labour
  3. Capital
  4. Entrepreneurial Coordination
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3
Q

In simple terms, property value may be determined as:

A
  1. the cost of acquiring a site (land)
  2. plus the costs of wages, material, and development fees (labour)
  3. plus costs of equipment and borrowing costs (capital)
  4. plus costs of project leadership and profit (entrepreneurial coordination)
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4
Q

What is “return “on” capital”?

A

a market rate of return (%) on the money invested in the land and buildings.

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5
Q

What is “return “of” capital”?

A

an additional return to account for the fact that the improvements are depreciating and the investor wants to recoup that amount over the economic life of the improvements (economic life means the period over which the property remains economically useful)

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6
Q

Money recaptured each year is invested in a sinking fund, which pays a return that will grow to supply funds to rebuild that building in the future. So, in effect, the return an investor earns is made up of what rates?

A

the market rate plus an additional recapture rate

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7
Q

Return on the land is the remaining income after the three expenses are paid. Therefore, the value of land is based on the surplus income, or residual, after the other factors have been accounted for. What is phenomenon know as?

A

The principle of surplus productivity.

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8
Q

What are the principles impacting real property value? (11)

A 
Anticipation
Supply
Competition
Balance
Surplus productivity
Externalities
Change
Demand
Substitution
Contribution
Conformity
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9
Q

What is “anticipation”?

A

-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.

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10
Q

As the benefits from using real estate may be received long into the future, the value of an interest in real property will be the dollar amount that is justified to be invested today given the anticipated benefits, risk, and current investment conditions.

A

this is called capitalized value.

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11
Q

What is “change”?

A

change is evident the dynamic nature of the social, economic, government, and environmental forces that influence real property value. Shifts in market preferences and demographics directly impact residential properties and their values.

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12
Q

What is “supply”?

A

Supply measure the quantity of property that will be supplied at any given price. In contrast to demand, the supply of real property increases as price increase.

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13
Q

What are the two important characteristics of the supply of real property have on a significant impact on the value of real property?

A
  1. the supply of real property cannot be increased or decreased rapidly
  2. the supply of real property is fixed in location
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14
Q

What are current prices of properties determined mainly by?

A

It takes time to determine the type of property in demand, acquire land, arrange financing, build the improvements, and sell the interest. The fact that the supply of real property cannot be changed rapidly means that the current prices of properties are determined mainly by the demand for property. This does not imply that the supply of real property never changes, just that these changes take place slowly.

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15
Q

What is “demand”?

A

demand measures the quantity of property that the market would like to purchase at any given price. a basic economic hypothesis is that the demand for real property will decrease as price increases.

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16
Q

The quantity demanded for any particular property is influenced by what eight factors?

A
  • changes in population
  • changes in income
  • changes in the preferences and tastes of consumers
  • the cost of alternatives
  • technological changes
  • changes in transportation facilities
  • government policies
  • foreign investments and immigration
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17
Q

How will appraisers be able to predict how buyers and sellers will be influenced by market conditions in determining the sale price a specific properties?

A

this prediction will be based on the appraiser’s perception of past behaviour of market participants and his or her knowledge of market conditions

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18
Q

What is “competition”?

A

competition exists between two or more buyers or tenants to purchase or lease a property, or between two or more owners marketing their properties. Competition is fundamental to dynamics of supply and demand in a free enterprise, market-driven, profit-maximizing economic system.

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19
Q

What is “substitution”?

A

the principle of 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. A buyer will not pay more for a property than for another that is equally desirable.

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20
Q

What are the three approaches to value & principle of substitution?

A
  • direct comparison approach
  • cost approach
  • income approach
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21
Q

What is “direct comparison approach”?

A

buy an existing property as an alternative

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22
Q

What is “cost approach”?

A

build a substitute

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23
Q

What is “income approach”?

A

buy an alternative property with the same income

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24
Q

What is “balance”?

A

the principle of balance states that real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium. Economic balance is achieved when the combination of land and improvement is optimal– when there is no additional marginal benefit or utility from investing more capital. (ex. building a forth bedroom if the cost to build exceeds the value added to the property)

A proper mix of various types and locations of land uses in an area creates and sustains value. A residence near other residences has much more market appeal than a residence next to a commercial or industrial uses. An over-abundance of one form of land use in a particular area may mean that land values will begin to decline.

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25
Q

What is “contribution”?

A

A value of a particular component of real estate is measured in terms of its contribution to the value of the whole property. The appraiser’s knowledge of the market is important in determining how an item contributes to the overall value of a property. (remodelled/renovating the kitchen)

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26
Q

What is a “green building”?

A

Green building is one that is energy-efficient, water-efficient, designed for healthy living, constructed of low-impact materials that do not compromise the building’s durability of performance, is accessible to amenities, and is protective of the local ecosystems.

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27
Q

A fundamental economic concept for valuation is that the creation of any product requires what four agents of production that must be satisfied with an appropriate return?

A

labour, coordination (operating expenses), capital (investment), and land.

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28
Q

What is “labour”?

A

Labour is the cost of paying wages to employees who contribute to a project.

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29
Q

What is “surplus productivity”?

A

Surplus productivity is the net income to the land remaining after the other agents of production have been paid.

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30
Q

What is “conformity”?

A

Conformity holds that real property value is created and sustained when the characteristics of a property conform to the demands of its market.

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31
Q

In examining the effect of a property conforming or not conforming to surrounding uses, the principles of what may determine how value is affected?

A

regression and progression

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32
Q

What is “externalities”?

A

property and its value are immediately affected by changes that take place beyond its borders. The immobility of real property means that land is subject to external effects, or externalities, which are enjoyed or suffered by people other than those who produce them. When you are appraising a property, you must investigate the market to see how outside actions by governments or private companies could affect the property you are appraising.

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33
Q

What are the four broad categories of forces affecting real property values?

A
  • social
  • economic
  • governmental
  • environmental
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34
Q

What does social factors help explain?

A

social factors help explain patterns of land use as well as demand and price.

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35
Q

What are desires manifested in people near urban centres and in variations in the use of land called?

A

clustering

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36
Q

What is “prestige”?

A

Prestige plays a major role in real property use, as individuals and groups seek particular locations for social and economic reasons.

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37
Q

What is “invasion”?

A

invasion occurs as one population, for example, affluent retirees seeking waterfront homes, seeks to expand its territory and improve its position.

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38
Q

What is “succession”?

A

Succession occurs as the new population displaces the old

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39
Q

What are two way that social forces can create value?

A

1) public through its demand for certain facilities
2) by developers seeking out investment opportunities

ex. automalls where all car dealers are grouped in one large auto mall.
large entertainment complexes built on the fringes of existing cities

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40
Q

What is “economic forces”?

A

Macroeconomic factors like national and international market factors exert an indirect influence on the value of any given property, with their effects often (although not always) felt in the long run. The appraiser needs to be aware of current events and their effect when completing appraisal assignments.

ex. expected changes in tax laws, government programs affecting real estate, supply and cost of raw materials and energy, interest rates.

If macroeconomic forces are market-wide in nature, microeconomics focuses on decisions by individuals or single firms.

ex. cash to keeping the real property interest

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41
Q

What are “governmental forces”?

A

legal, governmental, and political policies can increase or decrease the demand for real estate. Developers may work with local governments to amend zoning bylaws to allow certain developments or to change what is allowed in certain areas.

42
Q

What is “environmental forces”?

A

Site attributes of a given parcel of land include its area, topography, and other physical features. Situation attributes, or linkages, focus on the location of the parcel relative to other places, such as the central business district, freeway access, shopping, schools, the ocean, or a dump. Site attributes affect land values because owners can use the land’s inherent resources; situation attributes affect value because of nearness or accessibility to other resources.

43
Q

Why must the appraiser describe in detail the physical and legal components of the property being appraised?

A

If property rights are not properly analyzed and explained, then the value estimate will be incorrect.

44
Q

Real property rights are understood in what two terms?

A

estates in land and interests in land

45
Q

What is “estate in land”?

A

Estate in land includes the right to absolute possession of the land

46
Q

What are the estates in existence today?

A

fee simple estates, life estates, and leasehold estates.

47
Q

What is “fee simple estate”?

A

fee simple estate is the greatest estate an owner other than the Crown can have in land. The owner of the fee simple estate has the right to possess the land for an indefinite period of time and, subject to legislative restrictions, to use the land in any manner he or she may wish. The owner of a life estate or a leasehold estate is also entitled to absolute possession of the land, but only a limited period of time.

48
Q

What is “partial interests” in land?

A

Ownership interests in land that are less than the full fee simple.

49
Q

What does the legal concept of land refer to?

A

The legal concept of land refers to the unrestricted use of the earth’s surface and everything above and below

50
Q

What does the term real estate refer to?

A

Tangible improvements, things one can see and touch, such as buildings, trees, and site improvements.

51
Q

What is “real property”?

A

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.

52
Q

What is “expropriation”?

A

Expropriation is the right of government to take private property for public use upon payment of just compensation.

53
Q

What is “partial interests”?

A

Partial interests are those various interests in land that are only a part of the fee simple interest. These may be created economically, legally, physically and/or financially.

54
Q

What is a “leasehold estate”?

A

a leasehold estate has the 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. The tenant is the owner of the leasehold estate and is entitled to possess the land for the term of the lease.

55
Q

What is a “leased fee estate”?

A

once the landlord’s ownership of land is subject to a lease granted to a tenant, the landlord’s estate is called a leased fee estate.

56
Q

Who is the condominium or strata ownership regulated by?

A

government legislation. the legislation is similar inmost provinces and sets out how condominiums or strata corporations are created and managed.

57
Q

What are the important things to understand in condominiums or strata ownership?

A

understand how a strata complex is set up and operated when carrying out an appraisal. Important questions to consider include how unit size and common areas are defined, the amount of the strata fees, the size of the contingency reserve fund, and whether or not copies of the council minutes are available for reading ( minutes of the strata council meetings can be a wealth of information on the condition of the individual units, the whole complex, the common areas, and the financial health of the strata corporation).

58
Q

where can the bylaws be located?

A

all bylaws are filed and registered in the local land title office and are available for public viewing

59
Q

condominiums are sometimes built on leased land or on leased waterlots. What are “leased waterlots”?

A

waterlots are areas of water leased from the government.

60
Q

What are the two types of co-operative ownership?

A

private and government funded or subsidized

61
Q

what is the owner of a life estate called?

A

life tenant

62
Q

what is the life tenant’s ownership of the land limited to?

A

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.

63
Q

an owner of an estate in land can give away interests in his or her land without giving up ownership or possession. What is this called?

A

“interests in land”

can sometimes be referred to as “rights in the land of another”

64
Q

Give three examples of interests in land granted by owners to another party.

A
  • easements
  • restrictive covenants
  • profits a prendre
65
Q

What is an “easement”?

A

a privilege acquired by a landowner for the benefit of his or her land over the land of another.

66
Q

What is the land receiving the benefit in an easement called?

A

dominant tenement

67
Q

What is the land over which the right is exercisable is called?

A

servient tenement

68
Q

What is “restrictive covenant”?

A

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.

69
Q

What is a “building scheme”?

A

a group of restrictive covenants attaching to two or more 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 only with certain prescribed colours. A building scheme is often used to maintain conformity of appearance within a subdivision.

70
Q

what is “profit a prendre”?

A

a right to enter on the land of another person and to take some profit of the soil. ( minerals, oil, stones, trees, fish, etc)

71
Q

what is the largest interest a person can have in land?

A

a fee simple estate

72
Q

what is airspace?

A

at common law, a landowner’s rights were said to extend down to the centre of the earth and up to the heavens

73
Q

what is subsurface rights?

A

provincial governments reserve rights to most of the minerals, precious metals, and petroleum products for their own use

74
Q

what is fixtures and chattels?

A

the appraiser must distinguish between fixtures and chattels. Items that are fixtures go with the land will belong to subsequent purchasers, while chattels remain the personal property of the owner. Items attached to the land merely by their own weight will generally be considered chattels. 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.

75
Q

Ownership of real property among multiple persons (co-ownership) can be achieved through what?

A

joint tenancy or as tenants in common

76
Q

what happens upon the death of the other party for “joint tenancy”?

A

in a joint tenancy, the survivor always has a right of survivorship, whereby the survivor obtains full ownership upon the death of the other party.

77
Q

what is “tenancy in common”?

A

individuals can hold different ownership interests in the property.

78
Q

what is “timesharing”?

A

a form of ownership based on a time period

79
Q

where are timeshares often used in?

A

recreational areas. Owners may also have the option of trading their time-share resort for another time-share resort elsewhere in the world.

80
Q

what is “joint tenants”?

A

property isn’t physically split, but each is considered an equal owner in the eyes of the law the property cannot be sold or mortgaged without the consent of both parties.

81
Q

what is “tenants in common”?

A

multiple ownership interests exist

82
Q

why must the appraiser determine precisely the nature and extent of the ownership rights that are to be appraised.

A

-different ownership rights will affect the value of property

83
Q

property valuation is carried out by following a series of steps. An appraisal is fundamentally a research project hat starts by what two things?

A

defining the problem and continues by developing a plan of action leading to the collection and analysis of the data.

84
Q

What are the 8 steps in the valuation process?

A
  1. Identification of the Appraisal Problem
  2. Scope of Work Determination
  3. Data Collection and Property Determination
  4. Data Analysis (market Analysis, highest and best use)
  5. Site Value Opinion
  6. Application of the Approaches to Value (direct comparison approach, cost approach, income approach)
  7. Reconciliation of Value Indications and Final Opinion of Value
  8. Report of Define Value
85
Q

What is “Identification of the Appraisal Problem”?

A
  • Identify the client(s) and the intended use
  • type of value
  • effective date of value opinion
  • identify the relevant characteristics of the property
  • assignment conditions (ie. leaky condominium)
  • extraordinary assumptions and hypothetical conditions (assess the damage)
  • limited conditions
86
Q

What is “scope of Work Determination”?

A

Scope of work refers to the amount and type of information researched, and the analysis applied in the valuation assignment. Scope includes, but is not limited to, the extent of:

  • identification and inspection of the subject property
  • research into physical and economic factors that could affect the subject property
  • data research, verification, and inspection of comparable
  • type and extent of analysis applied

Must be sufficient to result in opinions and conclusions. Limitations are specifically noted in the report

87
Q

What is “data collection and property description”?

A

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 relates to the property and its rights.

88
Q

what is “data analysis”?

A

-Market Analysis
appraiser must be aware of what is happening in the local, national, and international markets

-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

89
Q

what is “site value opinion”?

A

-land can be a major component of the value of the total property. appraisers often develop an opinion of land value even if the land is improved with buildings

90
Q

what is “application of the approaches to value”?

A

three traditional approaches to value– direct comparison approach, cost approach, and income approach are interrelated. the nature and use of the property will determine the most appropriate method(s) for that situation.

91
Q

what is “direct comparison approach”?

A

direct comparison approach to value is the value of a property should be no more than the cost of purchasing another property that provides similar utility. The direct comparison approach is most applicable when good reliable sales data exists at the the date of the appraisal. (listings being offered). The direct comparison approach is most applicable when good reliable sales data exists at the date of the appraisal.

92
Q

what is “cost approach”?

A

the 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.

93
Q

What is the “Income Approach”?

A

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)

94
Q

What is “Reconciliation of Value Indications and Final Opinion of Value”?

A

The final analytical step in the valuation process is to evaluate the strengths 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.

95
Q

What is “report of defined value”?

A

preparation and delivery of the appraisal report is generally the last step in the valuation process. The report can be communicated to the client orally, but most reports are written as written reports are the best way to record limiting conditions, critical assumptions and scope in order to establish due diligence in the undertaking of the valuation assignment.

96
Q

why should you always ask if any chattels or special financing were included in the sale price?

A

This will not be apparent during the initial research

97
Q

why is it ideal to investigate the motivation behind the sale or purchase to confirm it is a market value or arms-length transaction?

A

confirm it is a market value or arm-length transaction

98
Q

Is quality of data more vital or quantity?

A

Quality of data

99
Q

what should you do if data cannot be verified at the time?

A

make a reference in the report as to its validity and its source

100
Q

why should you build good relations with the front-line industry people?

A

Will pay dividends in the future

101
Q

What is the key distinction between the terms “real estate” and “real property”?

A

real estate refers to the tangible aspects of land, building, and other site improvements, whereas real property focuses on the legal aspects of ownership of real property – the interests and rights inherent in the real estate that create value.

Lesson 1 BUSI330 (6 decks)

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