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GOBC Real Estate • Mortgage Class Notes

“When you invest, you are buying a day that you don’t have to work.”

Aya Laraya

6.1
Appraisals
Introduction

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 6.1 Appraisals Intro
Real Estate is different than other assets:
Heterogenous
Ø it is Unique & Heterogenous
knowledge concerning one property cannot
Ø it has Low turnover - causes limited data sources available necessarily be applied to another property)
Ø it is Durable/Long-lasting (the life of a building depends on its NOT HOMOgeneous !!!

economic durability, not physical durability)

What does all this mean?
Ø it is Local/Immobile - fixed in place
Ø The complexity of real estate as a product
• This Immobility leads to positive and negative Externalities requires the involvement of an expert
• Real property markets are local by nature, due to the appraiser.
immobility of real property Ø Appraisals are needed because real estate is
unique - it’s difficult to find real properties
that are very much alike!
Who can conduct appraisal? ANYONE
Anyone may legally undertake appraisal work & charge a fee for the Who needs appraisal?
appraisal services
Formal (specific contract!) Appraisals:
BC has no licensing requirements BUT,
ü Mortgage finance
• Appraisal is self-regulating by professional association.
ü Expropriation Not for
• Require education programs, experience requirements,
code of ethics, insurance. ü Property Tax Assessment Strata
• Courts may conclude that even people without formal ü Insurance Council!
training as appraisers are responsible for their actions in ü Executor of an estate
the role of appraisal work. Informal (no specific contract!) Appraisals:
ü From Real estate agents
ü Any time properties are bought or sold
VALUATION PROCESS
Step 1: Defining the Valuation Problem - rights/ interest/
property to be appraised, why (purpose), intended use/ users,
effective date, limitations Appraiser Scope of Work
Step 2: Scope of Work Determination - inspection and research Appraiser MUST consider:
Ø Determine the scope of work and the level
Step 3: Data Collection - general and specific of information required to produce credible
Step 4: Data Analysis - demand, supply, markets, highest and and reliable results
Whyuse
best has the client has requested the appraisal? Ø Client’s intended use
Ø Effective date of the report - the specific
Step1.5: Selection
Statutoryofreason - expropriation
the Appropriate or taxation
Valuation purposes
Approach - date an evaluation is made
2. chosen
method Marketfromreason - buying,
direct, selling, leasing,
cost, income, residualor(hybrid)
developing Ø Limited detail may be acceptable if it falls
methods a property; where the appraiser may consider market within the requested scope of work
data and is not forced to follow government statutes Ø Reconciliation of Value - concluding a final
Step 6: Reconciliation of Value Indications - ends with a
opinion of value
conclusion of a final opinion of value after evaluating strengths
and weaknesses of the resulting value estimates from various Appraiser CANNOT:
approaches Ø Cannot rely on the client to identify and
resolve the problem (even it’s the client
Step 7: Communicate Findings - report to the client oral or who requesting info)
written in narrative, short form narrative, or form report (of the *** the registered owner is not the ultimate source
client’s) of data on the property.

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 6.1 Appraisals Intro Appraisers are LIABLE UNDER:
Contract Law (Formal - breach of contract)
• Contract with an appraiser
Why has the client has requested the appraisal? • Banks, other Lenders, Gov’t

1. Statutory reason - expropriation or taxation purposes, Tort Law (Informal - negligence)

highways • 3rd party can reasonably rely
2. Market reason - buying, selling, leasing, or developing a on the appraisal report
property; where the appraiser may consider market data • Buyers, Sellers
and is not forced to follow government statutes

An appraiser may be held Joan put an offer on a farm for $130,000, subject to financing.
liable for negligence if a She approached ABC Bank for pre-approval of a mortgage loan,
Legal Responsibilities
property is over-valued and ABC hired A & A Appraisers to determine the value of the
• Legal liability farm for mortgage purposes.

• No set limit of allowable error in appraisal work In A & A appraised the property at $135,000. ABC Bank
GENERAL (all property types mixed together)! approved a mortgage loan of $101,250 to Joan, who then went
T ahead with the purchase.
BU
The courts have recognized that a reasonable
margin of error exists when calculating Eleven months later the bank was forced to foreclose on the
damages resulting from a negligent appraisal. property and upon obtaining another appraisal, found that the
• Margin of error allowed for “normal/usual” market value of the property was only $70,000. It is found that
properties: PLUS AND MINUS 10 % A & A was negligent in its appraisal report.

Remember - No license is required Who can sue for Breach of Contract?

(having a license is not a legal responsibility)!!
ABC Bank
Who can sue under Tort Law?

Joan

RATIO METHOD

ü RANGE METHOD

OBJECTIVE VALUE: As Of the Date Of Appraisal

An appraiser can provide:
(how long the
OBJECTIVE ESTIMATE OF VALUE + “REASONABLE EXPOSURE TIME” property would
typically take to
= Reflects the MARKET EXPECTATION sell at that price)

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 6.1 Appraisals Intro
OBJECTIVE VALUES SUBJECTIVE VALUE

Ø Value in Exchange = Sale Price Ø Value to the owner

Ø Insurable value Ø ceiling and floor
Ø Actual / Assessed value prices
Ø Market value
Ø Taxable value What is Value? EXAMPLE 1

Ø Lending value - a long-term conservative CEILING PRICE: $500,000 - Subjective Value

estimate of the value of the interest in land Highest price the buyer will pay (value to the owner)
pledged as security Equal to or below asking price

What is Value? EXAMPLE 2 SALE PRICE: $425,000 - Objective Value

Will most likely be:
CEILING PRICE: $400,000 Ø equal to or less than the ceiling price
Highest price the buyer will pay Ø equal to or more than the floor price
A deal could be made because the ceiling is above the floor J
SALE PRICE: $??????
**In this situation, can a Price be FLOOR PRICE: $400,000 - Subjective Value
Negotiated between the buyer & Lowest price the seller will accept (value to the owner)
seller??
ASK: Is the ceiling above the floor? ASK: Is the ceiling above the floor?

FLOOR PRICE: $500,000

Lowest price the seller will accept MARKET VALUE

An estimate of what a property is likely to sell for in an

arms-length transaction between a buyer and a seller, if the
property is on the market for a reasonable period of time
when market conditions are unchanged.

Market Value Value to the Owner

2 Elements of Market value:
1. Rights of ownership
DATE OF VALUATION
2. The physical property in which those rights are vested
Appraiser estimate of value at* a specific date

“Effective date” is: LEGAL INTERESTS IN REAL ESTATE

the specific date an evaluation is made,
The “subject of appraisal” is:
considering the prevailing market forces
and conditions at that date. the legal rights of ownership vested in a particular piece
of real estate
*might use the phrase “as at” which means "on a
particular date or time” Legal Interests are:
air space, fee-simple ownership, leasehold estate, condominium ownership,
easements
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 6.1 Appraisals Intro
FACTORS EFFECTING VALUE
Short Term Trends General Economic Factors create a framework
in which real estate markets operate:
• Consumer pessimism or optimism
• Inflation
• Change in Interest rates (mortgage, bonds, loans)
• Unemployment
• Private/Gov’t demand for funds and BOC $$ policy
• Exchange rates Can be ignored
• Political stability
Long Term Trends
• Shift in age composition
• Government programs effecting Real Estate
• Supply and cost of raw materials Ø Physical: location, topography, soil fertility, climate,
community factors (transportation, schools, churches,
• Shift in government compositions
parks)

Longer-term trends are generally less influential. Ø Economic: interest rates, unemployment rates, wage
levels, price levels, taxes
Ø Political/government: zoning bylaws, building codes,
Demand for Real Property fire regulations, public health measures, rent controls,
government housing programs
Demand for real property will
decrease as prices increase. Ø Advertising
Ø Relationship between the parties to the sale
Quantity demanded is influenced by:
Ø Time allowed for sale (got promoted, must move)
• Changes in population, income, preferences and
tastes of consumers, transportation facilities Ø “Special Purchaser”
• Technological changes o Will greatly extend the range of possible bids
o Not about the person; it’s about the
• Government policies (e.g.: allowing homeowners to
property
deduct interest paid on a mortgage from their taxable
income)

Supply of Real Property (land and improvements)

Real Estate Market Supply increases as prices increase.
In an economic sense, the real estate market is an
Two Important Characteristics:
imperfect market.
1. Can be increased, decreased or altered by changing the
Imperfections are due to: use of a parcel of real property but NOT rapidly
ü a small number of buyers and sellers relative to 2. Supply is Fixed in location
the total number of properties
ü the uniqueness of each parcel of real property Factors affecting supply:
ü the lack of information readily available to buyers • Price of the property
and sellers • Price of alternative properties
ü not all buyers and sellers strive for the most • Technology
profitable bargain • Goals of the owner

Highest and Best USE

Helps the appraiser to:
that use of land which will
ü identify comparable properties
provide the maximum net return
ü identify the use on which the final opinion is based
during the foreseeable future
ü identify which appraisal approaches may be used
©Copyright 2024/2025 GOBC Training LTD ü interpret the market forces that affect the subject property 5
 6.1 Appraisals Intro Arm’s length transactions
no previous relationship by
Appraisals Methods the parties

Comparative
Cost Method Income (Investment) Residual (Hybrid)
Method
• aka Direct comparison • No income - not an • Commercial • Latent Value (not at the
• Residential, empty lots investment property • Rental best use)
• Principle of Substitution • Unique- nothing to • Rate of Return • Redevelopment potential
• Requires a minimum of compare • NO depreciation is • Value of the property
• Based on Replacement depends on the potential
subjective opinion from used!
cost use rather than on
the appraiser • NOT single-family current use
• Residential MLS • NOT on MLS residences • Higher value may result
through a change of use
• Empty lots (land), • Church, temple, mill, • Multi-unit apartment,
concrete plant warehouses, leashold • Residential house in the
residential houses
interests middle of business
district

Principle of Substitution “Similar” Recent Latent Value

a property’s value should be with respect to factors when the market Not at its highest and best use,
no more than the cost of judged important by buyers conditions (property good for redevelopment
purchasing a substitute and sellers values) remain stable
property that provides similar
utility

Questions
1). The flow of information concerning real property is limited and difficult to collect because:
(1) Every parcel of real property is homogeneous
(2) The turnover rate for real property is low

2). Which of the following statements regarding immobility and durability of land is FALSE?
(1) The physical durability of real property means that it has value as an investment and a source of shelter.
(2) When considering durability of structure, it is not important to distinguish between economical life and physical life of the
structure.

3). Real property is affected by external influences from neighbouring properties. What characteristic of real estate causes this?
(1) The supply of urban land is not fixed.
(2) Real property is immobile.
(3) Ownership of real property may be divided both physically and legally.
(4) Real property is durable.

4). Which of the following factors will NOT affect the value of land?
(1) The immobility of land
(2) Externalities affecting the land
(3) The development of surrounding areas
(4) The owner’s personal financial situation

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 6.1 Appraisals Intro
5). Of the following externalities, which would represent the BEST example of an externality that is both positive and negative?
(1) Parks
(2) Pollution
(3) Proximity to a transportation facility
(4) Golf course

6). Real Estate values are influenced by externalities. Which of the following below could be used to determine this principle?
(1) Markets suffer a significant drop in world oil prices and because of this, the supply of vacant office space increases in the
city.
(2) It’s being announced that a small residential area has been rezoned for a shopping center. The value of the houses in the
residential area will increase.
(3) Because of unemployment, real estate prices decline.
(4) All of the above.

7). A friend of yours has approached you and wants to know why the bank that may finance his purchase of a house requires an
appraisal. He claims that since an appraisal is not required for an investment in stocks, an appraisal should not be required for
an investment in real property.
Which of the following statements provides the BEST reasoning for your support of the bank’s requirement?
(1) The high turnover of real estate relative to stocks means that only an expert can keep up with changing values.
(2) The local nature of the real estate market implies that the flow of information will be unlimited and easy to assemble.
(3) It is difficult to find real properties that are very much alike.
(4) Real estate purchase decisions are generally less significant than decisions regarding an individual share purchase.

8). In developing a real property appraisal, which of the following statements concerning scope of work determination is/are
TRUE?
A. It is the appraiser/licensee's responsibility to determine the scope of work and the level of information required to
produce credible and reliable results.
B. An appraiser can rely on the client to identify and, to resolve the problem since it is the client who is requesting the
report.
C. A brief appraisal with limited detail may be acceptable if the appraisal is within the client's requested scope of work, and
the limitations are explicitly written in the report.
D. The appraiser need not know the report's intended use since the client is the one paying for the report and should know
its purpose.
(1) A and C
(2) A, B and D only
(3) B, C and D only
(4) All of the above

9). An appraiser must understand why the client has requested the appraisal. If the purpose is for property development, it would
be known as a :
(1) Market reason.
(2) Capital sum reason.
(3) Justified price reason.
(4) Statutory reason.

10). Which of the following statements is FALSE?

(1) The burden of proof is on the appraiser to explain an apparent over-valuation of a property.
(2) An appraiser may be responsible to any party who reasonably relies on the appraisal report for the purpose it was
conducted
(3) Form reports often meet the needs of financial institutions, insurance companies, and government agencies
(4) An appraisal mistake of $3,000 on a $276,000 house is beyond the margin of allowable error

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 6.1 Appraisals Intro
11). An appraiser has estimated the market value of a single family dwelling to be $410,000. On the day of the appraisal, the house
sold for $370,000. Given that there was sufficient evidence of recent sales, was the appraiser’s estimate of value reasonable?
(1) No, the estimate exceeds the maximum allowable error for the appraisal of market value of a residence.
(2) No, the appraiser’s estimate is a subjective “value to owner” and does not represent the market value.
(3) Yes, because appraisers have no maximum allowable error when calculating market value of a residence.
(4) Yes, it was within the maximum error allowed for appraisers in the calculation of market value of a residence.

12). Consider different appraisals as estimates, are subject to some acceptable error. Which of the followings is LEAST likely to be
considered an acceptable error for an appraiser between several recent sales?
(1) Appraised for $235,000 sells on the appraisal date for $250,000
(2) Appraised for $462,000 sells on the appraisal date for $410,200
(3) Appraised for $321,000 sells on the appraisal date for $343,500
(4) Appraised for $529,000 sells on the appraisal date for $487,000

14). Which of the following statements is TRUE?

(1) Latent value is most often defined as a short-term conservative estimate of market value.
(2) An estimate of value together with a reasonable exposure time reflects the market expectations as of the date of appraisal.
(3) A change in value after the effective date of appraisal invalidates the accuracy of the original appraisal.
(4) If there is sufficient evidence of recent sales, there is no allowable error in the appraisal of single-family residences.

15). A potential buyer is aware of the asking price for a particular house listed for sale. Which of the following statements is
normally FALSE?
(1) The probable sale price will be equal to or above the floor price.
(2) The probable sale price will be equal to or above the seller’s “value to owner”.
(3) The ceiling price will be equal to or below the asking price.
(4) The seller is likely to know the buyer’s ceiling price

16). The market value of a property is best defined as:

(1) A long term conservative estimate of the value of the property pledged as security for a loan, if the property is on the
market for a reasonable period of time when market conditions are unchanged.
(2) An estimate of what a property is likely to sell for in an arms-length transaction between a willing, informed and rational
average buyer and seller, if the property is on the market for a reasonable period of time when market conditions are
unchanged.

17). Which of the following is a key determinant of the value of a property?

(1) Vendor financing
(2) Cash-equivalent price
(3) Listing (asking) price
(4) Rights of ownership

18). Which of the following might be the subject of a real property appraisal?
(1) air space rights
(2) a life insurance policy
(3) a diamond
(4) all of the above

19). A real estate appraiser would NOT value:

(1) An existing rental agreement of a warehouse.
(2) The right to use airspace at the top of a high-rise office building.
(3) The legal interest in cattle on agricultural land.
(4) A fee simple interest in a two-bedroom apartment

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20). The "subject of an appraisal" is:
(1) The market value of the physical property.
(2) A fee simple estate on a cash or cash-to-first-mortgage basis.
(3) A subjective measure of value by an experienced appraiser.
(4) The value of the legal rights of ownership vested in a particular piece of real estate.

21). Which of the following factors is MOST likely to affect the value of residential real property in the short run?
(1) Consumer opinions relating to residential real estate values
(2) The supply and cost of raw materials
(3) Government programs effecting real estate
(4) Shift in age composition of the population

22). Which of the statements regarding the supply and demand of real property is/are TRUE?
A. As the price of real property increases, the supply increases.
B. The demand for real property will decrease as the price increases.
C. The absolute supply of real land is fixed, and therefore the supply of real property cannot be altered.
D. Real property is fixed in location.
(1) A and B only
(2) C and D only
(3) A, B and D only
(4) All of the above

23). Which of the following is NOT a reason the real estate market is an imperfect market?
(1) There is large number of buyers and sellers relative to the total number of properties.
(2) Each parcel of real property is unique.
(3) Information is not always readily available to buyers and sellers.
(4) Not all buyers and sellers strive for the most profitable bargain.

24). An appraiser has been asked to provide an estimate of the market value of a farmhouse and the surrounding property. Which
one of the following would NOT affect her estimate of market value?
(1) One of the pastures on the property has been leased for two years.
(2) The owner of the farmhouse is anxious to move and would like to sell as soon as possible.
(3) The farmhouse and its surrounding property are located between the main road and the next door neighbour’s property.
Therefore, the neighbour gets the benefit of access to his house by means of a road that runs through the farmhouse
property.
(4) ABC Finance Company recently loaned some money, at a below-market interest rate, to the owner of the farmhouse and
secured the debt with a mortgage on the farmhouse. This mortgage is assumable.

25). Which one of the following people would best fit the description to “special purchaser” as used in appraisal?
(1) A Former Prime Minister of Canada who is interested in purchasing a residential property in an upper middle class
neighbourhood.
(2) A famous Canadian painter who, in order receive creative inspiration, feels he must purchase a little abandoned church he
has located deep in the woods.
(3) A retail merchant who wants to purchase a store with a large window display along the main street in southern BC.
(4) A professional football player who wants to purchase an apartment to invest his stable income.

26). Two neighbours, Ms. Finch and Mr. Falcon, each sold their homes last week. Ms. Finch sold her house for $150,000, while
Mr. Falcon's house only sold for $132,000. Mr. Falcon can't understand why his house sold for less since both homes are
identical in all respects. Which of the following could account for the difference in selling price?
(1) Ms. Finch had already purchased another home and needed to sell this home immediately.
(2) Mr. Falcon had already purchased another home and needed to sell this home immediately.
(3) Mr. Falcon supplied a vendor take-back mortgage of 13% while the current market rate was 16%.
(4) All of the above factors could account for the difference in selling price.

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27). Two identical houses located next to one another in the same neighbourhood sell within one week of each other. Ms. Brown
sells hers for $112,000, while Mr. Fisher is only able to sell his for $100,000. Which of the following could account for the
difference in selling price?
(1) The listing brokerage representing Ms. Brown spent an extraordinary amount of money on advertising her property.
(2) Ms. Brown was promoted to a new position in Edmonton and her expertise was required immediately.

28). All other things being equal, a selling price less than the market value of a property is most likely to be obtained in a sale when:
(1) real estate prices are increasing very quickly.
(2) the seller is not in a hurry to sell.
(3) the buyer is in a hurry to buy.
(4) the property has been exposed to the market for more than two months.

29). In the context of appraisal, which one of the following properties is MOST likely to possess latent value?
(1) A 30-acre dairy farm in the Agricultural Land Reserve
(2) A recently constructed duplex unit in a single-family residential area of the city
(3) A bicycle store that is built on land zoned for commercial use
(4) A farmhouse situated on land zoned for commercial use

30). Consider the following four properties:

A. A pulp mill in Squamish
B. A small single-family house in the central business district of Vancouver
C. A multi-unit apartment complex in Burnaby
D. A residential condominium in Victoria
Which appraisal method would be most suitable to appraise each of these properties?
(1) A) market comparison; B) income; C) cost; D) residual
(2) A) cost; B) market comparison; C) residual; D) income
(3) A) income; B) residual; C) market comparison; D) cost
(4) A) cost; B) residual; C) income; D) market comparison

Q Answers: 1(2), 2(2), 3(2), 4(4), 5(3), 6(2), 7(3), 8(3), 9(1), 10(4), 11(4), 12(2), 14(2), 15(4), 16(2), 17(4),
18(1), 19(3), 20(4), 21(1), 22(3), 23(1), 24(2), 25(3), 26(2), 27(1), 28(1), 29(4), 30(4)

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