Real Property and the Nature of Value

Question 1

An appraiser has obligations to what five stakeholder groups?

Answer 1

1. Clients : to provide an unbiased, objective analysis to help in decision-making and to reduce risk.
2. Third Parties: such as lending institution, investors in lending institutions, government agencies that underwrite lending institution losses, and other unidentified parties that are removed from the initial transaction.
3. Society in general: by the valuation process, appraisers can help to promote the wise and efficient use of a scarce and limited resource, that is, land and land-related resources. Appraisers can be important in guiding sound real estate decisions, thereby helping society to avoid wasting resources that can cause urban problems.
4. The appraisal profession: by providing valuable analysis, the appraiser reinforces the value of the profession to the above three entities.
5. Peers: by adhering to professional standards in the delivery of appraisal services, the appraiser represents all appraisers in how services are delivered and in establishing a positive rapport and trust between all appraisers and members of the other four groups.

Question 2

A professional is defined by what three traits?

Answer 2

1. Integrity: absolute honesty and conduct above reproach must prevail. There is a prescribed duty to both the profession and the public not to misrepresent his/her ability by accepting an assignment for which he/she is not qualified. The professional must comply with the member organization’s code of ethics and rules of professional conduct. The professional organization must deal with an violation by the members quickly and fairly in the eyes of the profession and the public.
2. Competence: possessing thorough theoretical and practical training along with sufficient work experience. There must be a recognized set of standards enforced as a condition of membership, which can accurately be measured (i.e. examinations that demonstrate competency)
3. Quality Work: the professional’s work must be thorough, painstakingly meticulous, impartial, and based upon sound judgment. All work must be carefully prepared, thoroughly checked, and reports expertly written.

Question 3

What three general categories can appraisers be grouped into?

Answer 3

1. Fee appraisers - completes specific assignments for clients on a fee-for-service basis
2. Institutional appraisers- includes single corporations or institutions. Institutional appraisers have only one client and are employed by that organization, usually on a fixed salary.
3. Government appraisers- various levels of government (federal, provincial, and municipal) are the third category of employment for appraisers. All levels of government require a variety of real estate services and often hire a contingent of full-time appraisers.

Question 4

What are the five First Principles of Value?

Answer 4

1. Problem Identification
   - Purpose, Intended Use, Definition of Value
2. Property Content
   - Physical, Legal, Financial, Location Understanding
3. Legal Considerations
   - Property Rights, Land Use Regulations
   - Legislation and the Courts
4. highest and Best Use
5. Economic Analysis

Question 5

What are the five professional competencies?

Answer 5

1. Analytical thinking
2. Conceptual thinking
3. Decisiveness
4. Focus on quality and details
5. Client service orientation

Question 6

What are the four forces affecting land valuation?

Answer 6

1. Physical -Geographic and Environmental
   Values can fluctuate due to weather and climatic conditions: eg. excessive rains or long hot dry spells that can affect both urban and rural land uses. New road patterns can open up lands that previously had little value and affect the value of existing land eg. many cities and towns that have new shopping malls constructed on the outskirts of their city limits, etc
2. Economic
   sluggish income growth combined with a low interest rate environment has led to dangerously high household-debt levels. Consider how this affects real estate in your are and others.

3. Government and Legal
Government activities (federal, provincial, municipal, and First Nations) can affect real estate values in your area, either positively or negatively. (tariffs, legislations enacted to protect certain lands)

4. Social
   An appraiser needs to understand how and why people desire things and how they apply a value to them. What are their motivations? you need to be aware of external forces that affect property values.

Question 7

What is real estate?

Answer 7

A physical entity that is immobile and tangible, such as land or improvements. Examples of natural improvements found on a property include trees and minerals. Improvements made by humans include buildings and landscaping, things we can see and touch.

Physical assets, like land and buildings

Question 8

What is real property?

Answer 8

Real property refers to the rights attached to real estate that are intangible and which we cannot see or touch, but can be appraised and sold.
(lease, easement, air rights)

Question 9

What is personal property?

Answer 9

Tangible, but not affixed to the real estate

Question 10

What is the “bundle of rights”?

Answer 10

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

Question 11

What are the significant characteristics of improved land?

Answer 11

1. Immobility
   immobility of land means that the amount of land, in terms of the surface of the earth, is fixed within any community
2. Durability of its improvements
   indestructibility of space and the durability of structures
3. Indivisibility of the services
   The value of a parcel of real property ultimately depends on its usefulness. this usefulness is based on the land and improvements such as buildings, sidewalks, landscaping, underground, and above-ground utilities. The offsite improvements, including transportation amenities, utility systems, adjacent land uses, and views also help to determine the usefulness of land. Elements of value cannot be separated into those derived from the land, the buildings, or the landscaping, since users regard the site as a single unit. (Law of real property, which “land” includes the surface of the earth and all permanent improvements attached to it). However, in some cases, land and improvements are considered separately (taxes).
4. Divisibility of ownership
   Ownership of a single parcel of real estate may be divided both physically and legally. Ownership of real property can be physically divided by creating separate interests in land. (single detached residential is one example of horizontal division of ownership). Legal ownership of property may also be divided. For example, in strata developments, owners have exclusive rights to their own condominium suite but share the ownership of common areas with all others in the development.

Question 12

What is a fixture?

Answer 12

Fixture is part of the real estate

Question 13

What is a chattel?

Answer 13

Chattel is personal property, not affixed to the real estate.

Question 14

What does the general two-part test to decide whether an item is a fixture or chattel consist of?

Answer 14

The first aspect of the test has to do with the degree of affixation. Articles attached to the land merely by their own weight will, in the first instance, be considered chattels unless circumstances show that they were intended to be part of the land. On the other hand, articles that are affixed, even slightly, will be considered to fixtures unless circumstances show that they were intended to be chattels.

The second aspect of the test concerns the purpose of affixation. Where an object is affixed for the better use or enjoyment of the object as an object, it will be considered a chattel Where the object is affixed in order to enhance the land to which it is affixed, the object will probably be considered to be a fixture.

Question 15

What are the two types appraisal reporting options?

Answer 15

1. Oral
   limited circumstances where an oral reporting of value is considered appropriate
2. Written
   three types of written appraisal reports: narrative ( comprehensive and detailed reports), short narrative, or form

Question 16

Every appraisal must state what two items?

Answer 16

Every appraisal must state the purpose of the appraisal and the type of value to be found by the appraiser. This will dictate the type of research that the appraiser must undertake to arrive at this value.

The use of the appraisal is determined the client’s needs and the appraiser must be aware of these before undertaking the appraisal, as this will determine the type and amount of work and the fee to be charged.

Question 17

What are the four factors of value?

Answer 17

1. Utility
   the ability of a product to satisfy a human want, need, or desire.
2. Scarcity
   refers to the present or anticipated undersupply of an item relative to the demand for it
3. Desire
   relates to a purchaser’s wish for an item to satisfy human needs or individual wants
4. Effective purchasing power
   ability of an individual or a group to participate in the market, to acquire goods or services with cash or its equivalent

Question 18

What is “market value”?

Answer 18

the amount of money or goods for which a thing can be exchanged in the open market

Question 19

What is the owner’s minimum price called?

Answer 19

floor price

-the lowest sum of money that they are prepared to accept to sell the house

Question 20

What is the a prospective buyer’s maximum price that they are prepared to pay for the house called?

Answer 20

ceiling price

Question 21

What is the eventual price agreed on referred to as?

Answer 21

sale price or value in exchange
- for a sale to occur, there must be at least one potential buyer who is prepared to make an offer (ceiling price) equal to or greater than the present owner’s floor price

Question 22

What is “value to the owner”?

Answer 22

floor and ceiling prices where “owner” is used to also include a prospective owner. value to the owner, which includes floor and ceiling prices, is a subjective measure of value.

Question 23

What kind of objective value are appraisers typically called upon to estimate?

Answer 23

market value

Question 24

If an appraiser is called upon to find a subjective investment value for one particular investor how is the justified investment price calculated?

Answer 24

the appraiser will account for the specific owner’s tax status and the financing position to calculate a justified investment price.

Question 25

What are the two types of subjective values that may be requested in appraisal reports?

Answer 25

Investment value
-an entity-specific basis of value. Investment value reflects the circumstances and financial objectives of the specific entity for which the valuation is being produced. It is often used for measuring investment performance. Differences between the investment value of an asset and its market value often provide the motivation for buyers or sellers to enter or exit the market place.

Special value
-an amount that reflects the particular attributes of a real property asset that are only of value to a special purchaser

Question 26

Explain the objectivity principle?

Answer 26

objectivity principle states that accounting will be recorded on the basis of objective evidence. objective evidence means that different people looking at the evidence will arrive at the same values for the transaction. simply put, this means that accounting entries will be based on fact and not on personal opinion or feelings (GAAP- Generally Accepted Accounting Principles)

Question 27

What is assessed value?

Answer 27

based on real estate and personal property by a government as a basis for levying taxes. The specifics of this value are usually defined in provincial or civic legislation and varies significantly in different jurisdictions. Some jurisdictions use market value, while others may use a historic value or historic cost.

Question 28

What is book value?

Answer 28

accountants list assets at their purchase price or cost of construction, with separate values shown for land and buildings.

Question 29

What is broker price opinion?

Answer 29

opinion of value from a broker, where a lender believes the time and expense of an appraisal is not warranted.

Question 30

What is fair value?

Answer 30

estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that properly reflects the respective interests of those parties.

Question 31

What is going concern value?

Answer 31

tied to the business operation itself. For instance, a building specifically designed for a franchise drive-through restaurant may have little or no value to another company that wants the site for a different franchise operation or different use.

Question 32

What is the hypothetical value?

Answer 32

may be used when required for legal purposes, for purposes of reasonable analysis, or for purposes of comparison. when appraising improvements “as if complete” that are proposed. Probable time of completion of the proposed improvements.

Question 33

What is insurable value?

Answer 33

typically, this refers to the undepreciated cost of replacement of the subject properties, required for property insurance ( or claims of loss) purposes.

Question 34

What is lending value?

Answer 34

value established to support the mortgage financing of property. often, the lending value is expressed as a percentage of market value, and establishes the upper limit of funds that mortgagee would be prepared to lend.

Question 35

What is limited-market and special-use properties?

Answer 35

an example of a limited market is crown land that a government wishes to sell or lease. Often it is isolated land, possibly without good road access, but highly desirable for recreational use, either residential or commercial.

Question 36

What is liquidation value?

Answer 36

the most probable price that a specified interest in real property is likely to bring under all of the following conditions:

• consummation of a sale will occur within a severely limited future marketing period specified by the client
• the actual market conditions currently prevailing are those to which the appraised property interest is subject
• the buyer is acting prudently and knowledgeably
• the seller is under extreme compulsion to sell
• the buyer is typically motivated
• the buyer is acting in what he or she considers his or her best interest
• limited marketing effort and time will be allowed for the completion of a sale
• payment will be made in cash or in terms of financial arrangement comparable thereto
• price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale

Question 37

What is a quick sale/forced sale value?

Answer 37

value resulting from a sale under compulsion, often involving a mortgage holder under a foreclosure, where the marketing period is abnormally short.

Question 38

What is synergistic value?

Answer 38

additional element of value created by the combination of two or more interests where the value of the combined interest is worth more than the sum of the original interests

Question 39

What is taxable value?

Answer 39

established and defined by governments for tax situations, such as for estate, capital gains or gift tax purposes.

Question 40

What is value in use/use value?

Answer 40

the value of a property as it is currently used, not its value considering alternative uses.

Question 41

What is the difference between market value and sale price?

Answer 41

market value refers to a sale that may or will occur, while sale price refers to a sale that already occurred.

Question 42

What is market value?

Answer 42

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.

the amount that would have been paid for the interest if, at the time of its taking, it had been sold in the open market by a willing seller to a willing buyer.

Question 43

What major elements need to be satisfied under CUSPAP for market value?

Answer 43

1) Value is related to a certain, specified point in time
2) Value is the price which might reasonably and probably be expected. Value is the expectation of someone who has sufficient knowledge of the real estate market to form an opinion.
3) Willing seller and willing buyer. This means that both buyer and seller are prepared to enter into a contract at the going market price and are negotiating at arm’s length. Neither party is exerting undue influence, either is under any duress to complete the transaction, nor is there any special relationship between them, which would affect the price.
4) Adequate time and exposure to the market.
5) Price represents normal consideration. (mortgage interest rate is typical for the subject property type)

Question 44

Any definition of value is critically linked to an exposure period. Define exposure period

Answer 44

estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale, at market value , on the effective date of the appraisal; a retrospective estimate based upon an analysis of past events assuming a competitive and open market.

Question 45

What is a an ethical infraction?

Answer 45

concern about determining value under a value concept that lacks an associated recognized definition is that the conclusion is capable of misleading.

ie. quick sale value means a sale within two weeks; it is generally lower than market value.