Mixed Lesson

Question 1

Define market value

Answer 1

Define market value
Market value is by far the most important concept in real estate appraising. It is defined at:
“The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.” (USPAP 1994 edition)

Question 2

Discuss four basic criteria of a market value definition

Answer 2

Discuss four basic criteria of a market value definition

1. Buyer and seller are typically motivated
2. Both parties are well informed or well advised, and are acting in what they consider their best interests; a reasonable time is allowed for exposure in the open market
3. Payment is made in terms of cash in Canadian dollars or in terms of financial arrangements consistent with the standards of behaviour in the market; and
4. The price represents the normal consideration for the property sold unaffected by special considerations such as creative financing or sale concessions.

Question 3

Explain the difference between the “physical life” and the “economic life” of the improvement on a property. Why the economic life of a real estate asset usually shorter that its physical life?

Answer 3

Economic life is the period over which the property remains economically useful and viable, while physical life is the period which the structure is in existence until it becomes physically unstable.

Economic life and physical life can differ greatly.
The economic life is the period of time over which property may be reasonably expected to perform the function for which it was designed.
Many structures are built with the intent of having a specific life, regardless of the actual period of the building may stand. This can be due to a number of reasons such as increasing technology demands, change the city planning, superior higher and better uses of the land parcel. A property economic life cannot exceed its physical life; typically it is shorter.

Question 4

Define the principle of substitution and explain how it helps establish value.

Answer 4

“the appraisal principle that 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. This principle assumes rational, prudent market behaviour with no undue cost due to delay. According to the principle, a buyer will not pay more for one property than for another that is equally desirable. This is the primary basic for the cost and direct comparison approaches.

This principle helps establish property values because these tend to be set by the cost of acquiring an  equally desirable substitute property. The principle of substitution recognized that buyers and sellers of real property usually have option because various properties are available for similar uses.

Question 5

Explain the Bundle of right and describe one of the public limitations.

Answer 5

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.

Question 6

Name the four Agents in Production in the proper order.

Answer 6

Name the four Agents in Production in the proper order.

• LAND
• LABOR
• CAPITAL
• ENTREPRENEURIAL COORDINATION

Question 7

Define and illustrate by example three of the five principle listed

Answer 7

• Anticipation
The perception that the expectation of future benefits creates value.

• Balance
The principle that real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium.

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

• Supply and Demand
In economic theory, the principle that state that the price of a commodity, good, or service varies directly, but not necessarily proportionately, with demand, and inversely, but not necessarily proportionately, with supply.
In a real estate appraisal context, the principle of supply and demand states that the price of real property varies directly, but not necessarily proportionately, with demand and inversely, but not necessarily proportionately with supply.

• Surplus Productivity
The net income that remains after paying the cost of various agents of production.

Question 8

Define and distinguish between market value, market price and cost.

Answer 8

Market VALUE:
The most probable price as if a specific date, in cash, or in term equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all condition requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that nether is under undue duress.

Market PRICE:
The term price represents the amount a particular purchaser agrees to pay and a particular seller agrees to accept under the circumstances surrounding their transaction.

COST:
Either actual construction cost or overall development cost. Construction cost normally includes the direct costs of labor and materials, as well as indirect costs. Development cost is the cost to create a property, including the land, and bring it to an efficient operating state.

Question 9

Discuss the differences between value, price, and cost. In your answer, ensure you explain how price and cost are (or are not) liked to value

Answer 9

COST : is the price paid to create the market commodity. It is the outlay of capital for supervision, land, materials, and labour sufficient to bring an improvement into existence. Under some conditions, cost can be an appropriate measure of value, but in many cases the cost to produce something will be different than its value or “worth’ in the market.

PRICE : is the amount actually paid for a property in a particular transaction. It is an historic fact, representing the amount that the buyers and sellers determined that the particular property was worth to them based on their personal needs and desires. Price in a given transaction may not represent “market value”. Eg. if the parties were not acting rationally, experienced undue influence, were not at arm’s lenght, there was unique financing, etc

VALUE : is an estimate of the price a property sold should sell for in a typical transaction in a given market. It is a subjective amount, based upon what the appraiser estimates the property is “worth” given the expectations of how the market as a whole might act. It is less objective that estimating cost, but is also less subjective than trying to estimate the exact price that a property will sell for (rather it is the price it would most likely sell for, given typical market conditions).