Chapter 5
Controls and Encumbrances
On Ownership
Chapter 5: Objectives
• After completing this chapter, students will
be able to:
– Determine land controls and restrictions
set by the government.
– Determine financial interests in a property
through different types of liens.
Key Terms
• Ad valorem
• Appurtenant
Easement
• Assessed Value
• CC&Rs
• Condemnation
• Conditional Use
• Dominant Tenant
• Dominant Tenement
• Easement
•
•
•
•
•
•
•
•
•
Eminent Domain
Encroachment
Encumbrance
Escheat
General Lien
Involuntary Lien
License
Lien
Lis Pendens
Key Terms
•
•
•
•
•
•
•
•
•
Mills
Mortgage
Mortgagee
Mortgagor
Non-Conforming Use
Plat
Police Power
Restrictive Covenant
Rezoning
•
•
•
•
•
•
cont.
Servient Tenant
Servient Tenement
Special Assessment
Specific Lien
Spot Zoning
Subdivision
Regulations
• Variance
• Voluntary Lien
Public Sector Controls
• Government has four powers (PETE)
– Police power
– Eminent domain
– Taxation
– Escheat
Police Power
• The constitutional power of government to
enact and enforce laws that protect the
public’s health, safety, morals, and general
welfare
– Zoning laws
– Building codes
– Subdivision regulations
– Environmental protection laws
Zoning Laws
• Land use controls that impact real estate since
they may limit (or enhance) development and
likewise affect property values
• Early zoning laws established 4 categories:
–
–
–
–
Residential
Commercial
Industrial
Agricultural/rural
• Modern zoning has numerous subcategories:
– R-1—Single-family detached homes
– R-2—Row houses, duplexes, and single-family
detached
Zoning Laws
cont.
• Each type of zone has size and building
height limits and setback and side yard
rules
• Exceptions to zoning laws:
– Nonconforming uses
– Variances (use variance and area variance)
– Conditional uses
Zoning Laws
cont.
• Rezoning: A revision in zoning law,
usually changing an entire zone or area
from one type to another
• Spot zoning: Similar to rezoning, but
typically has small or individual land
parcels as its subject rather than an entire
zone or area
Case Study
Single-Family Dwelling with Garage
Converted to Living Area
Chris Carter, a residential appraiser, is performing a site
inspection of a residential dwelling. He has been engaged
by Quality Gear and Bearing Credit Union, which is
considering the owner’s application for a cash-out refinance
mortgage loan.
As he always does, Carter questions the property owner
about any recent improvements to the property. The owner
responds that “we converted the attached garage to a
family room about three months ago.” The owners are very
proud of the finished result, as they did the work
themselves over a period of several weekends.
Case Study
Single-Family Dwelling with Garage
Converted to Living Area
Point Break
What should this information prompt the
appraiser to question?
• Was a building permit obtained?
• Did the property owner check zoning compliance?
Case Study
Single-Family Dwelling with Garage
Converted to Living Area
While performing the zoning analysis of the subject property, Carter
determines the location of the property within a medium-density
residential district. The use of the property conforms to that
designation. However, the site requirements of the zoning
designation indicate a minimum six-foot side yard set back for an
accessory use, such as an attached garage. A residential dwelling
however, must provide at least an eight-foot side yard set back from
the property line. Appraiser Carter finds that the side wall of the new
family room (formally the garage) is only six feet from (what appears
to be) the property line and is no longer in compliance. In the course
of performing the inspection, he asks the property owner if they
acquired a building permit for the work. The owner tells Chris Carter
that they did not obtain a permit.
Case Study
Single-Family Dwelling with Garage
Converted to Living Area
Point Break
How would this information impact the property’s
complying with zoning? What could eliminate the
problem? What should appraiser Carter do with this
information?
• Being two feet over the side yard setback would make the property
an illegal use
• Obtaining a zoning variance (The property would then be
designated as a legal non-conforming use)
• Disclose the circumstance in the report
• Analyze the impact on value of the circumstance
• An extraordinary assumption might be used if such use would still
lead to credible results
Building Codes
• Establish standards for construction, which
require builders to use particular methods and
materials
• Mainly enforced through the permit system
• Americans with Disabilities Act (ADA)
– Applies to public buildings as well as commercial and
professional facilities
– Implements building standards regarding parking,
ramps, accessibility, and elevators
Subdivision Regulations
• State and local laws that must be complied
with before land can be subdivided
– Size of lots in a subdivision
– Location of streets, sidewalks, and sewer and
water lines
• Plat—A detailed survey map of the
subdivision, which shows the boundaries
for the lots, streets, etc.
Environmental
Protection Laws
• State and federal laws
• May involve blocking or restricting the use
of land where there are environmental
concerns
• Laws that affect real property include:
– Clean Air Act
– Clean Water Act
– National Environmental Policy Act (NEPA)
Eminent Domain
• The government’s constitutional power or
right to take, appropriate, or condemn
private property for public use
– Condemnation is the action of taking private
property for public use, with just
compensation, through the government’s
power of domain (also called appropriation)
Taxation
• Real property is taxed by state and local
governments
• Real estate taxation is also known as ad
valorem tax
– “According to value”
– Tax rate is most frequently stated in terms of mills
(dollars per thousand of assessed value)
• Additional levies may be present (e.g., school,
libraries, police and fire protection)
• Special assessments
Practice Problems
appraised value of a property is $156,000,
1. The
the assessment ratio is 35%, and the mills are
51.75. What are the semi-annual taxes?
The answer is $1,412.78. First, determine the
assessed value: $156,000 x 0.35 = $54,600.
Divide by 1,000 and multiply by the mills to
determine the annual taxes: $54,600 / 1,000 = 54.6
x 51.75 Mills = $2,825.55 Annual Tax / 2 =
$1,412.78 Semi-Annual Tax.
Practice Problems
taxes for a property are $8,574.51. What
2. Annual
is the tax assessor’s appraised value if mills are
57, and the assessment ratio is 35%?
The answer is $429,800. First, divide the annual taxes by the
mills and multiply by 1,000 to determine the Assessed
Value: $8,574.51 / 57 = $150.43 x 1,000 = $150,430.
Next, divide the assessed value by the assessment ratio to
determine the tax assessor’s appraised value:
$150,430 / 0.35 = $429,800 Appraised Value.
Practice Problems
annual tax for a property is $5,568.00. If the
3. The
assessor’s appraised value of the property is
$290,000 and the assessment ratio is 40%, what
is the tax rate per thousand dollars of value?
The answer is 48 Mills. First, multiply the appraised value
by the assessment ratio: $290,000 x 0.40 = $116,000
Assessed Value. Next, divide the assessed value by 1,000:
$116,000 / 1,000 = 116. Finally, divide the annual tax by
116 to determine the tax rate per thousand dollars of value
(mills): $5,568 / 116 = 48 Mills.
Escheat
• The governmental power that provides for
property ownership to pass on to the state
when a property owner dies intestate and
with no living heirs
– Intestate means the decedent did not have a
last will and testament
Encumbrances
• Non-possessory interest in real property
– Non-financial encumbrances
– Financial encumbrances (liens)
Non-Financial Encumbrances
• Restrictive covenants
– A binding promise (to do or not do something)
concerning the use of real property
– CC&Rs
– May be terminated by termination date,
release, abandonment, or changed
circumstances
• Easements
– A right to use another’s real property for a
particular purpose
Easements vs. Licenses
• A license is revocable permission to use
another’s land and not a right
• Easements are normally for an indefinite
period of time; licenses are usually
temporary
• Easements are created by written
agreement or action of law; licenses may
be created orally
• Easements must run with the land;
licenses do not have to run with the land
Classifications of Easements
• Appurtenant easement
– Burden one parcel of land (servient tenement)
for the benefit of another parcel of land
(dominant tenement)
• Easement in gross
– Benefits a person or entity only and not a
parcel of land
– There is no dominant tenement in this
scenario, only a dominant tenant
Creation of Easements
•
•
•
•
•
Easements by express reservation
Easements by express grant
Easements by implication
Easements by necessity
Easements by prescription
– Open and notorious use of the land, hostile
and adverse use of the land, and continuous
use for a specified number of years
Termination of Easements
•
•
•
•
Release
Merger
Abandonment
Failure of purpose
Financial
Encumbrances—Liens
• Liens provide security for a debt, giving
the creditor (lien holder) the right to
foreclose on the debtors property, if the
debt is not paid
• Liens may be:
– Voluntary (e.g., a mortgage) or involuntary
– General (attaches to all property owned by
the debtor) or specific (attaches to specific
property)
Involuntary Liens
•
•
•
•
Vendor’s liens (specific)
Mechanic’s liens (specific)
Judgment liens (general)
Tax liens (specific)
– Special assessments
• Attachment liens
Lien Priority
• As a general rule, liens are given priority
according to the order in which they
attached to the property
• Note: Real property taxes always have
the highest lien priority and are paid before
any other lien
Classification of Liens
Voluntary Involuntary
General Specific
Property Tax Lien
X
X
Special Assessment
X
X
Mortgage
X
X
Vendor’s Lien
X
X
Mechanic’s Lien
X
X
IRS Lien
X
X
Judgment Lien
X
X
Chapter 5 Quiz
1. The basis for governmental
regulation of the use of private
property is
a.
b.
c.
d.
eminent domain.
the National Environmental Policy Act.
police power.
the zoning clause.
Chapter 5 Quiz
2. A section of the neighborhood has recently
been rezoned for residential use only.
Zachary’s store is located in this section.
Because the property was used as a store
prior to the zoning, he will be allowed to
continue to use his property as a store. This
is known as a
a.
b.
c.
d.
conditional use.
nonconforming use.
spot zone.
variance.
Chapter 5 Quiz
3. An easement allows the present and
any future owner of “Lot D” to drive
across a neighbor’s property “Lot S”
to reach her own property. This is an
example of a(n)
a.
b.
c.
d.
appurtenant easement.
defeasible easement.
easement in gross.
encroachment.
Chapter 5 Quiz
4. Ben’s property has an easement in
gross that allows Ben to hunt on his
neighbor’s land. When the neighbor
sells his land to Ben, the easement
terminates through
a.
b.
c.
d.
abandonment.
destruction of the dominant tenement.
failure of purpose.
merger.
Chapter 5 Quiz
5. If a tax assessor estimated the
market value of a property to be
$340,000, what are the annual real
property taxes if the assessment
ratio is 35% and mills are 51.7?
a.
b.
c.
d.
$5,932.60
$6,152.30
$6,847.21
$7,166.55
Chapter 5 Quiz
6. Which is NOT a power of
government?
a.
b.
c.
d.
deed restrictions
eminent domain
escheat
police power
Chapter 5 Quiz
7. A cost for an improvement that is
divided among several property
owners on a street and billed by a
jurisdiction would be an example of
a.
b.
c.
d.
escheat.
improvement burden.
special assessment.
special tax bill.
Chapter 5 Quiz
8. The county is taking part of Bill’s
land for a new park. What is this
process called?
a.
b.
c.
d.
annexation
condemnation
eminent domain
involuntary takeover
Chapter 5 Quiz
9. Which established power to the
government for taking private
property with the payment of just
compensation?
a.
b.
c.
d.
allodial system
comprehensive plan
covenants, conditions, and restrictions
Fifth Amendment of the U.S. Constitution
Chapter 5 Quiz
10. If semi-annual taxes for a property
are $1,260, what is the assessed
value of the property if the tax rate
is 48 mills?
a.
b.
c.
d.
$37,000
$41,600
$52,500
$63,900
Chapter 5 Quiz
11. Which statement is FALSE regarding
a gross easement?
a. A dominant tenant’s rights can be
assigned but do not automatically run
with the land.
b. If the servient property is transferred, the
easement terminates.
c. It always has both a dominant tenant
and a servient tenant.
d. There is no dominant tenement.
Chapter 5 Quiz
12. A non-possessory interest in real
property is also called a(n)
a.
b.
c.
d.
encumbrance.
leasehold estate.
license.
servient tenement.
Chapter 5 Quiz
13. Which is an involuntary, specific
lien?
a. easement created by an express
agreement
b. IRS lien
c. mechanic’s lien
d. mortgage
Chapter 5 Quiz
14. When liens are paid off out of the
proceeds of a foreclosure sale,
a. a judgment lien generally has lowest
priority.
b. a lien for real property taxes always
has highest priority.
c. a mortgage always has highest priority.
d. priority depends on the amount of the
lien.
Chapter 5 Quiz
15. Which would most likely result in
a general lien?
a.
b.
c.
d.
IRS lien
mechanic’s lien
mortgage
real estate tax lien
Chapter 6
Transfer of Interests—
Instruments and Agreements
Chapter 6: Objectives
• After completing this chapter, students will
be able to:
Recognize various legal instruments and
documents used to transfer or convey various
types of property.
Key Terms
•
•
•
•
•
•
•
•
Accession
Accretion
Adverse Possession
Alienation
Alluvion
Assignment
Avulsion
Breach of Contract
•
•
•
•
•
•
•
•
Breakpoint Rent
Consideration
Contract
Deed
Descent
Devise
Earnest Money
Equitable
Key Terms
•
•
•
•
•
Grantee
Grantor
Gross Lease
Habendum Clause
Installment Sales
Contract
• Lease
• Net Lease
•
•
•
•
•
•
Novation
Option
Overage Rent
Power of Attorney
Reliction
Right of First
Refusal
• Vendee
• Vendor
cont.
Deeds
• Instruments that convey a grantor’s
interest, if any, in real property to a
grantee
– Grantee: Party receiving the interest
– Grantor: Party conveying the interest
• Also called conveyance
Title
• Title: The actual lawful ownership of real
property and refers to holding the bundle of
rights conveyed
– Not a document, but a theory pertaining to ownership
• Equitable Title: An interest in property created
on the execution of a valid sales contract or an
installment sales contract, where actual title will
be transferred by deed at a future date (e.g.,
closing)
Essential Elements
of a Valid Deed
• Competent grantor
• Identifiable grantee
• Act (words) of
conveyance (granting
clause)
• Consideration
• Legal description
• Habendum clause
• Limitations
• Exceptions and
reservations
• Signatures
• Delivery and
acceptance
Deed Recording—
Placement on Public Record
• After delivery and acceptance, the
document should be filed in the
appropriate county office where the
property is located
– Constructive notice: Something that could
be known because it is on record, even if it
might not have been actually seen
– Actual notice: Direct knowledge of the
conveyance
Types of Deeds
•
•
•
•
•
General warranty deed
Full covenant and warranty deed
Special warranty deed
Bargain and sale deed
Quitclaim deed
General Warranty Deeds
• Deeds in which the grantor warrants the title
against defects that might have arisen before or
during the grantor’s period of ownership
• Also called standard warranty deeds or simply
warranty deeds
• Warranties:
– Covenant of seizen, covenant against encumbrances,
covenant of quiet enjoyment, covenant of warranty
forever
Full Covenant
and Warranty Deeds
• Contain the strongest and broadest form
of guarantee of title of any type of deed
and provide the greatest protection of any
deed to the grantee
• In addition to the covenants common to
the general warranty deed:
– Covenant of right to convey
– Covenant of further assurances
Special Warranty Deeds
• Used when the grantor warrants the title
only against defects arising during the time
the grantor owned the property, but not
before that time
• Grantor:
– Guarantees there aren’t any encumbrances
he created
– Promises to defend title against anyone
claiming under him
Bargain and Sale Deeds
• Implies that the grantor has a right to convey the
property, but there are no warranties with it
• Other types of similar non-warranty deeds
(judicial deeds):
–
–
–
–
–
Executor’s deed
Administrator’s deed
Guardian’s deed
Sheriff’s deed
Referee’s deed
Quitclaim Deeds
• Makes no warranties regarding the title, if
any, held by the grantor.
• Conveys interest in land the grantor has at
the time the deed is executed
• Often used to remedy clouds on a title
• Also called deed of release
Methods of
Transferring Ownership
• Alienation: The process of transferring
ownership interests in property
– Voluntary alienation (free will transfer)
– Involuntary alienation (transfer against the
will of the owner—e.g., eminent domain,
foreclosure)
– Devise (death with a will) or descent (death
without a will)
Contracts
• An agreement between two or more
parties to do, or not do, something
Contracts
cont.
Contracts
cont.
Essential Elements
of a Contract
•
•
•
•
•
•
Competent parties
Lawful and possible objective
Consideration
Description
Mutual agreement (meeting of the minds)
Written format and signatures
Breach of Contract
• When one party to a contract fails to
perform with no legal cause
– Substantial performance: Promisor does not
perform all contractual obligations but does
enough so that the promisee is required to
fulfill her obligation
– Material breach: A breach of contract
important enough to excuse the nonbreaching party from performing any
contractual obligations
Contract Clauses
• Time is of the essence
• Conditions
Remedies for
Breach of Contract
•
•
•
•
•
•
•
Cancellation
Compensatory damages
Injunction
Liquidated damages
Reformation
Rescission
Specific performance
Discharge of Contracts
•
•
•
•
•
Agreement of parties
Partial performance
Full performance
Impossibility of performance
Operation of law
– Alteration of contract
– Bankruptcy
– Statute of limitations
Assignment and Novation
• Assignment
– One of the parties (assignor) transfers rights
or interests under a contract to another
person (assignee)
• Novation
– The substitution of a new contract for an
earlier contract
Real Estate Sales Contracts
• Contracts in which a seller (vendor)
promises to convey title to real property to
a buyer (vendee) in exchange for the
purchase price
• Serves three purposes:
– Buyer’s initial offer
– Receipt for any earnest money deposit
– Contract between the buyer and seller
The Offer
• Must have intent to contract
• Must have definite terms
• Earnest money is an inducement to have
the offer accepted and is a means of
showing the seller the buyer is serious and
able to follow through with the necessary
financing
Termination of an Offer
• Lapse of time
• Death or incapacity
• Revocation
Requirements for
Acceptance of an Offer
• Acceptance must be communicated to the
offeror
• Acceptance must be made in the manner
specified
• Acceptance must not vary the terms of the
offer
Essential Elements
of a Sales Contract
•
•
•
•
•
Names and signatures of all parties
Specific property to be sold
Interest in the property to be sold
Terms of the sale as clearly as possible
Total purchase price and method of
payment
Other Contract Provisions
•
•
•
•
As-is clause
Escape clause
Contingencies
Disclosures
Options
• Contracts that give one party the right to
do something without obligating him to do
so
• Unilateral contract
• Most common type is a lease with an
option to purchase
• The optionee pays the optionor for the
option right (option money)
Right of First Refusal
• A right to have the first chance to buy or
lease property if the owner decides to sell
or lease it
• Also called first right of refusal or right
of redemption
• No money involved and no predetermined
price
• Could go on for many years
Installment Sales Contract
• An agreement in which the buyer (vendee)
makes payments to the seller (vendor) in
exchange for the right to occupy and use
the property, but no deed or title is
transferred until all, or a specified portion
of, payments have been made
• Also called a land contract or a contract
for deed
Leases
• Contracts in which one party pays the
other rent in exchange for possession of
real estate
• Must:
– Contain all elements necessary for a valid
contract in order to be legal and enforceable
– Be in writing if the term will last for more than
(usually) one year
Structures of Leases
• Gross lease: Landlord pays for all
expenses related to the ownership of the
property
• Net lease: The lessee pays some or all of
the expenses that are typically paid by the
lessor
– Single net, double net, triple net, absolute net
Types of Leases
•
•
•
•
•
•
Flat
Variable
Step
Revaluation
Annual increase
Percentage
Flat Lease
• An arrangement where the rent payments
to the lessor are consistent throughout the
duration of the lease term
• Most common type of lease in short-term
residential situations
• Also called level lease or level payment
lease
Variable Lease
• A lease with rental payments made at
regular intervals, but payment amounts
may change
• Common mechanisms that trigger a
change include Consumer Price Index, or
variations in the owner’s expenses in net
lease scenarios
• Also called an index lease
Step Lease
• Provides for the rent amount to change
over time, usually at a predetermined
percentage at a predetermined interval
• Any interval can be specified, but annual
increases (or decreases) are the most
common
• Also called a step-up lease, step-down
lease, or graduated rental lease
Revaluation Lease
• Has rental payments that change over time at a
set interval
– The amount of the change is determined usually by a
revaluation of the market rent, allowing the owner to
maintain rents at market rates based on the current
market
• Rarely, if ever, seen with residential properties
• Most often found in long-term scenarios, or
short-term leases where there are renewal
options
Annual Increase Lease
• Operates similarly to a step-up lease with
one major exception:
– Rather than a percentage increase, the
periodic increase specified in the lease is a
specific dollar amount
• Could be found with any type of property
Percentage Lease
• Lessees pay a base or guaranteed
minimum (breakpoint rent), plus a
percentage of the sales their business has
generated (overage rent)
– Rent may also be purely based on a
percentage of the sales volume
• Most common to retail lessees and most
high-profile retail environments (e.g.,
malls, shopping complexes)
Lease Terms of
Interest to the Appraiser
• Amount of agreed-upon rent
• Term of lease (e.g., month-to-month or defined
term, such as one year)
• Provisions for rent or terms to change
• Beginning and ending date of the lease
• Personal property included in the lease
• Expenses paid by the landlord and those paid by
the tenant
• Other services or amenities provided by the
landlord
Chapter 6 Quiz
1. In a real estate transaction, the
grantor is the ________ and the
grantee is the ________.
a.
b.
c.
d.
buyer / seller
lender / buyer
seller / buyer
seller / lender
Chapter 6 Quiz
2. All are essential elements for a
valid deed EXCEPT
a.
b.
c.
d.
competent grantor.
delivery and acceptance.
grantee’s signature.
legal description.
Chapter 6 Quiz
3. Which clause includes the words
“to have and to hold”?
a.
b.
c.
d.
conveyance
granting
habendum
recital
Chapter 6 Quiz
4. When a party signs a document
before a notary public stating it
was signed voluntarily, it is an
a.
b.
c.
d.
accreditation.
acknowledgment.
alliance.
appurtenance.
Chapter 6 Quiz
5. Which is an example of voluntary
alienation?
a.
b.
c.
d.
avulsion
condemnation
dedication
foreclosure
Chapter 6 Quiz
6. When someone dies without a
will, he is said to have died
a.
b.
c.
d.
devise.
escheat.
intestate.
testate.
Chapter 6 Quiz
7. If one party to a contract fails to
perform his contractual obligations
without a legal excuse, it is a(n)
a.
b.
c.
d.
assignment.
breach of contract.
lack of substantial performance.
novation.
Chapter 6 Quiz
8. Where applicable, a particular
jurisdiction’s statute of frauds
requires contracts conveying real
estate to be
a.
b.
c.
d.
recorded.
reviewed by an attorney.
verbal.
written.
Chapter 6 Quiz
9. Kim signs a contract agreeing to
buy a property from Bob, but Bob
does not actually own the property.
This contract is
a.
b.
c.
d.
unenforceable.
valid.
void.
voidable.
Chapter 6 Quiz
10. Lyle contracts to buy Julia’s
house, but only if he can sell his
house. This type of provision
written into a sales contract is
called
a.
b.
c.
d.
a contingency clause.
good consideration.
right of specific performance.
time is of the essence clause.
Chapter 6 Quiz
11. Carol and Leslie enter into a contract stating
that Carol will pay Leslie $650 per month for
the next 20 years. Carol will live in the
house and pay all expenses including
property taxes, insurance, and maintenance
costs. Leslie will continue to hold the title
until the property is paid off by Carol. What
kind of contract do they have?
a.
b.
c.
d.
installment sales contract
land lease
lease purchase agreement
option agreement
Chapter 6 Quiz
12. A contract clearly states that
$5,000 would be kept by the seller
should the buyer breach the
contract. The $5,000 is considered
a.
b.
c.
d.
the broker’s commission.
the down payment.
earnest money.
liquidated damages.
Chapter 6 Quiz
13. A contract written for the
exchange of illegal substances
would be void because
a.
b.
c.
d.
consideration was not listed.
incompetent parties.
legality of object.
no signatures.
Chapter 6 Quiz
14. When a new person takes the place
of one of the parties to a contract
and the withdrawing party is
relieved of all liability, it is called
a.
b.
c.
d.
accord and satisfaction.
assignment.
novation.
substantial performance.
Chapter 6 Quiz
15. Sam offers to sell his house to Brenda for
$200,000 if Brenda will pay $45,000 in
cash and give Sam a 15-year mortgage
for the balance at 11% interest. Brenda
responds, “I accept your offer, provided
that I have to pay only $40,000 down.”
This is a
a.
b.
c.
d.
counteroffer.
defeasible offer.
partial acceptance.
unilateral acceptance.
Chapter 6 Quiz
16. When a contract is terminated and
each party returns whatever
consideration the other had
provided, it is called
a.
b.
c.
d.
cancellation.
repudiation.
rescission.
a tender offer.
Chapter 6 Quiz
17. An option agreement is
a. bilateral in nature.
b. not a contract.
c. the same concept as a right of first
redemption.
d. supported by consideration.
Chapter 6 Quiz
18. Which type of lease would provide
the lessee with the least expense
and risk?
a.
b.
c.
d.
absolute net—annual increase
gross—flat
Net—variable
triple net—flat
Chapter 6 Quiz
19. A month-to-month lease gives the
lessor
a. greater control when it comes to
adjusting the rent.
b. less chance of risk that the tenant will
leave.
c. a lower rate of rent in short term
situations.
d. no opportunity to change the terms of
the lease.
Chapter 6 Quiz
20. In a percentage lease, the amount
of rent that is the base or
guaranteed minimum the lessee
will pay is called
a.
b.
c.
d.
breakpoint rent.
market rent.
overage rent.
starting rent.
Chapter 6 Quiz
21. Christopher is leasing property from
Patricia via an annual increase lease.
Which is a characteristic of an annual
increase lease?
a. Adjustments to rent are based on fluctuation of
market rental rates and owner’s expenses.
b. Annual increase leases only are used with
gross leases and reflect change in the
Consumer Price Index.
c. Rent increases are a predetermined dollar
amount at specified periodic intervals.
d. Rental rate is adjusted by a specified
percentage with each adjustment.
Chapter 6 Quiz
22. In a triple-net lease scenario, which
is NOT a typical expense of the
lessee?
a.
b.
c.
d.
fire insurance on the building
property taxes
repairing a leaky faucet
replacing the roof on the structure
Chapter 6 Quiz
23. Phillip is leasing an office suite from
National Office Properties, Inc., the
property owner, via a net/net lease.
In this arrangement, the lessor has
a. been granted a leasehold estate.
b. conveyed a temporary possessory
interest.
c. no remaining property rights.
d. permanently surrendered the leased
fee estate.
Chapter 6 Quiz
24. Which is an advantage to the lessee in a
percentage lease?
a. If the specified sales volume is not reached, the
lease is automatically terminated.
b. Lessor is conveying all property rights during the
lease period.
c. Overage rent will always increase at a specified
percent each year.
d. Owner of the leased facility is motivated to
promote and maintain the property.
Chapter 6 Quiz
25. Why would an appraiser be interested
in expenses being paid by the landlord
when reviewing a lease agreement?
a. Clarifies, if in fact, the landlord possesses the
leased fee estate
b. defines whether the lease is flat or variable
c. determines the breakpoint rent from
overage rent
d. indicates operating expenses for
estimating net operating income
Chapter 7
Concepts and
Types of Value
Chapter 7: Objectives
• After completing this chapter, students will
be able to:
Identify various concepts and types of value.
Key Terms
• Arm’s Length
Transaction
• Assessed Value
• Cost
• Going Concern Value
• Insurance Value
• Investment Value
• Liquidation Value
•
•
•
•
•
•
•
Loan Value
Market Price
Market Value
Price
Salvage Value
Value
Value in Use
Value—A Broad Concept
Take a moment and consider how value
is defined in terms of real property.
• Common responses to the term “value”
– Price someone paid
– Total invested cost
– Reproduction or replacement cost
– Income potential based on a particular
investor’s expectations
Cost, Price, and, Value
• Cost
– The amount required to create, produce, or
obtain a property (a fact or estimate of fact)
• Price
– The amount asked, offered, or paid for a
property
• Value
– The monetary relationship between properties
and those who buy, sell, or use those
properties
Market Value
• What a typical buyer would be willing to
pay (the most probable selling price) as of
a certain date under certain conditions
• Also called value in exchange
• “Certain date” refers to the effective date
of the appraisal
– Most commonly a current date
– May also be retrospective or prospective
Specific Conditions of an
Arm’s Length Transaction
1.
2.
3.
4.
5.
6.
Typical terms and financing
No unusual concessions
Parties are not related
Parties are acting in their own best interest
Parties are not under undue haste or duress
Parties are reasonably informed and/or
knowledgeable
7. Property has been exposes, typically, for a
reasonable period of time
1.
2.
3.
4.
Diagnose the Condition
Typical terms and financing 6. Parties are reasonably
informed/knowledgeable
No unusual concessions
7. Property has been exposed,
Parties are not related
typically, for a reasonable
Parties are acting in their own
period of time
best interest
5. Parties are not under undue
haste or duress
In each of the following scenarios, it appears the
property is selling or has sold above or below market
value. In the blank, insert the number of the
condition affecting it.
Diagnose the Condition
1.
2.
3.
4.
Typical terms and financing
No unusual concessions
Parties are not related
Parties are acting in their own best
interest
5. Parties are not under undue haste or
duress
6. Parties are reasonably
informed/knowledgeable
7. Property has been exposed, typically, for
a reasonable period of time
1. ____
5 The property is selling because the sellers are getting a
divorce.
2. ____ The parties to the transaction are parents selling to their
3
child.
3. ____
2 The seller paid a large amount in points and closing costs.
4. ____
1 The seller is taking a first mortgage back for the buyer who
filed bankruptcy six months ago.
Diagnose the Condition
1.
2.
3.
4.
Typical terms and financing
No unusual concessions
Parties are not related
Parties are acting in their own best
interest
5. Parties are not under undue haste or
duress
6. Parties are reasonably
informed/knowledgeable
7. Property has been exposed, typically, for
a reasonable period of time
5. ____
6 The seller is selling a property without a real estate broker
and set the asking price without an appraisal or independent
value opinion.
6. ____
7 The property sold today and was just listed yesterday.
7. ____
4 The seller had two offers but took the lower one because it
was from their favorite non-profit organization.
Other Types of Value
• Loan value
• Insurance value
– Replacement cost (functional equivalent)
– Reproduction cost (exact replica)
• Investment value
• Assessed value
Other Types of Value
•
•
•
•
Liquidation value
Value in use
Going concern value
Salvage value
cont.
Case Study 7.1
Single-Family Priced and Selling Below Market Value
Challenge: Market Price versus Market Value
Appraiser Brett Weller is engaged by Allied-Gulf Mortgage
Company to appraise a single-family dwelling in a residential
neighborhood. The house is owned by an elderly gentleman,
George Cline. He lives in another state and is selling the house
on his own, without a real estate broker.
The property is under contract to sell to Lisa Wells for $28,000. In
reviewing the transaction documents accompanying the
appraisal engagement, appraiser Weller becomes curious. He
knows that the subject area is a highly desired established
market, typically comprised of houses in the $100,000 to
$200,000 price range. An appointment to inspect the property is
arranged for the following day. On arrival, the property appears
to be well maintained, which is consistent with the other
properties in the neighborhood.
Case Study 7.1
Point Break
What question(s) should appraiser Weller be
prompted to ask the owner?
• What was the asking price?
• How was that price established?
• Is the seller related to the buyer in any
way?
• Are there any other conditions to the
transaction, making it something other
than an arm's length transaction?
Case Study 7.1
Appraiser Weller interviews Mr. Cline who reveals he has owned
the home for many years, purchasing it for his sister to live in.
She has recently died and, having no further use for the property,
he is disposing of it. Mr. Cline has never had the property
appraised and has relied on the county auditor’s tax appraisal for
pricing the property. From that information, he interprets that
$28,000 is the auditor’s market value of the property. Ms. Wells
is the first potential buyer who looked at the property.
Case Study 7.1
Point Break
This information implies that what should be
investigated?
• How was the property marketed?
• How long has the property been
on the market?
• When the contract terms were agreed
upon, how long had the property been
marketed?
cont.
Case Study 7.1
It was learned from the interview with Mr. Cline that the property
was advertised in the local newspaper, with the price, property
address, and a photo included. The buyer, Lisa Wells, made an
appointment and viewed the property within one hour of the
newspaper hitting the newsstands. She wrote a full-price offer on
the spot. It was at this point that appraiser Weller looked in his
appraisal work file and noticed that $28,000 was the county
auditor’s assessed value.
Case Study 7.1
cont.
Point Break
What can appraiser Weller discuss with Mr.
Cline about the transaction and the sale price??
• Nothing, without client consent.
Case Study 7.2
Single-Family Dwelling Selling for More-than-Market Value
Due to Buyer’s Motivation
Challenge: Market Price versus Market Value
Residential appraiser Betty Conrad has accepted a new appraisal
assignment. The subject of the appraisal is a single-family dwelling, listed
for approximately 90 days now with a reputable broker at a price of
$120,000. Per the sales agreement, which was furnished by the
lender/client, the sale price is $118,000. Other than window coverings, no
other chattel items are included with the sale. There are no seller
concessions. The buyers, John and Carol Patrice, are represented by a
buyer’s agent.
On inspecting the property, appraiser Conrad finds the subject to be a
well maintained three-year-old ranch-style dwelling that contains
approximately 1,200 square feet. It has three bedrooms, two baths, and
an attached two-car garage. The house is built on a crawl space and
located in a suburban subdivision with predominately similar ranch
homes. Conrad has noticed a new dwelling, nearly identical to the
subject, listed next to the subject.
Case Study 7.2
Point Break
Identify the conditions of an arm’s length transaction
that are evident so far. What else should Conrad do?
•
•
•
•
There are no untypical terms
There are no untypical concessions
There is no relationship between the parties
The buyer is represented by a buyer's agent; the
buyer should be informed and knowledgeable
• The property has been exposed to the market for a
reasonable time period
• Conrad should check the data for the listed house
next door
Case Study 7.2
Returning to her office following the site inspection, appraiser
Conrad begins her research for similar comparable properties.
Two comparables are immediately located. The first is located on
the same street as the subject and sold nine months ago for
$92,000. Conrad had driven past this comparable on her way to
the inspection and noted that it was inferior to the subject property
in age, location, condition, and amenities, due to having only a
one-car attached garage. The second comparable is similar in all
ways to the subject property except age, which is ten years. It sold
30 days ago for $102,500. Stored data did not reveal any other
properties sold in this subdivision within the past 12 months.
Case Study 7.2
cont.
Point Break
An exhaustive research of the stored data reveals no
other ranch-style comparables in the past twelve
months within the immediate subdivision, what should
happen now??
• Go out in distance*
• Go out in time*
* These options could present a
problem for the secondary mortgage
market)
Case Study 7.2
Appraiser Conrad moves out to the next subdivision to locate a
comparable property. This subdivision has houses of a very similar
style and age to the subject; however, it is in a different and
somewhat superior, market-preferred school district. A similar style
dwelling is located, which sold forty-five days ago for $115,000.
Further research of the property data indicates this comparable
was new and solid brick, as opposed to the subject’s frame
construction—and it was built on a full basement.
Case Study 7.2
Point Break
What does the data appear to indicate?
• The indicated value range is
somewhere below $115,000 and
somewhere above $102,500—the
buyer may have overpaid
cont.
Case Study 7.2
Realizing the data does not support the sales price and, in at least
one case, adjustments are somewhat excessive, appraiser Conrad
begins a survey of local brokers for very recent sales that have not
yet been submitted to the MLS. She recalls the listing next door to
the subject. The MLS indicates it is being offered at $109,000.
Since it is new, the landscaping is minimal and the driveway is
gravel, as opposed to the subject’s paved driveway. However, it is
an identical design and floor plan and is being built by the same
builder. Asking the listing broker, she finds this property closed just
yesterday at $105,000.
Case Study 7.2
Point Break
What is/are the appraiser’s next step(s)?
• Determine if the transaction next door
was arm’s length
• Determine the circumstances of the
subject's transaction with someone
familiar, such as the broker, lender,
etc.
cont.
Case Study 7.2
Appraiser Conrad decides to call the buyer’s agent and ask about
any unusual circumstances of their offer. The buyer’s agent tells
her that he performed a CMA for the buyers, which indicated that
a reasonable offering range was between $102,000 and $106,000.
However, the buyers had lost two other properties by making low
offers in the negotiation and insulting the sellers. Having already
sold their present home, they need to quickly secure another
property. The couple ignored the agent’s recommendation and
submitted an offer of $118,000, which is nearer the listing price of
$120,000.
Case Study 7.2
cont.
Point Break
What considerations of an arm’s length
transaction are influenced in this transaction?
• Duress
• Influenced by the fear of losing this
property is they offered too far
below the listing price, and the
need to purchase a home quickly
Case Study 7.2
The final opinion of value indicated by the analyzed data was
$105,000. As the buyers were only seeking a 50% LTV mortgage,
their loan was approved, and the transaction closed.
Case Study 7.2
Point Break
cont.
What does this transaction represent? Should this
transaction be stored in sales data? What would happen if
another appraiser found this data in public record and used
it as a comparable sale in another appraisal assignment?
•
•
•
•
•
It is not an arm’s length transaction
It should not be stored as an arm’s length transaction
The appraiser should document the transaction and retain so
that if another property is appraised in which this sale might
appear to be a comparable, the appraiser can discuss in that
report the reason for not utilizing the sale
USPAP would likely be violated if the appraiser did not verify the
sale as representing an arm’s length transaction
Using this transaction as a comparable could skew the market
unless an adjustment could be supported for the purchaser's
motivation, which would be difficult
Chapter 7 Quiz
1. If the client is using an appraisal to
determine what a property would be
worth in a less than typical
marketing period, the appropriate
type of value would likely be
a.
b.
c.
d.
duress value.
investment value.
liquidation value.
time-adjusted market value.
Chapter 7 Quiz
2. Which is NOT a condition of a
typical arm’s length transaction?
a. no atypical concessions
b. no marketing
c. no relationship of the parties to the
transaction
d. no unusual terms
Chapter 7 Quiz
3. Market price is what the
a. appraiser thinks the property should
sell for.
b. property is listed for.
c. property should have sold for.
d. property sold for.
Chapter 7 Quiz
4. An appraiser identifies the definition of
market value to be used in an assignment
during problem identification and must
additionally
a. cite the source of the definition in the appraisal
report.
b. document the author of the definition in the
work file.
c. obtain permission from the client to use the
specific definition.
d. use the specific USPAP definition of market
value for financing transactions.
Chapter 7 Quiz
5. A property that sold below market
value due to a pending foreclosure
is influenced mostly by
a.
b.
c.
d.
acceleration and depression.
cash equivalency.
haste and duress.
relationship to the lender.
Chapter 7 Quiz
6. A transaction with no atypical
conditions is best described as
a.
b.
c.
d.
arm’s length.
established market value.
liquidated.
sterile.
Chapter 7 Quiz
7. The amount to create, produce, or
obtain a property is known as
a.
b.
c.
d.
cost.
price.
reproduction.
value.
Chapter 7 Quiz
8. An appraiser is appraising a
structure built and used as a special
use property. Since the value
opinion is to reflect the property’s
special use for the particular owner,
the appropriate type of value is
a.
b.
c.
d.
going concern.
market.
reproduction.
value in use.
Chapter 7 Quiz
9. Going concern value is most
accurately described as a valuation
of the
a.
b.
c.
d.
business assets.
liquid and solid assets.
real and personal property.
tangible and intangible assets.
Chapter 7 Quiz
10. The highest and best use for a parcel of
land that is improved with an old building
has changed, and it has been determined
the improvements should be razed. The
building has many ornate stained glass
windows and extensive black walnut wood
trim. What value type would be an
appropriate in this assignment?
a.
b.
c.
d.
liquidation
replacement
reproduction
salvage