Phase 3, Assignment 1
PROPERTY VALUATION
Real Estate as a Professional Career
The Manitoba Real Estate Association
2011 Edition
All Rights Reserved
ASSIGNMENT INSTRUCTIONS
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The answers to questions contained in this Assignment booklet may be found in the
Phase 3 workbook or the Canadian or Manitoba Real Estate Encyclopedias, or be
based upon your understanding and interpretation of that material or of material
covered in Phases 1 and 2.
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Assignment 1: Property Valuation
Task 1.
Site Valuation
Mr. and Mrs. Jones want to proceed with the purchase of a lot in Assiniboine Heights
which is owned by Mr. Thompson. They intend to construct a home on the property. Mr.
Jones has asked you to estimate the value of the site, based on other comparable sales
in the area. You elect to estimate site value using the Comparative Sales Method (Step
One in the Cost Approach).
Assume that site values have been increasing by 0.5% per month during the past
year. All selected sites are comparable to the subject property and are located in the
same general locale. Sale #4 is judged most comparable to the subject property. Provide
an estimate of site value, including reasons in support of your estimate, based on the
following information:
Sale
Sale Date
Sale Price
Time Adjustment
1
10 months ago
$104,600
________________ ________________
2
6 months ago
$105,450
________________ ________________
3
3 months ago
$108,275
________________ ________________
4
2 months ago
$109,250
________________ ________________
Estimate of Value: _____________________________________
Adjusted Sale Price
Task 2:
Replacement cost -- The Cost Approach
Mr. and Mrs. Jones intend to construct a much larger single storey residence once a
rural lot is purchased. As a preliminary step, they want to estimate the cost of the main
building, along with a detached garage and a large workshop. To assist, a local builder
has provided you with replacement cost figures for homes of equal quality to the one
contemplated by the Jones'. Calculate the replacement cost (Step Two in the Cost
Approach), based on the following information.
Structure
Measurement
(metres)
Total
Sq. m
Rep Cost
/sq. m
Rep Cost
Main Bldg
9.15 x 18.29
_______
$692.50
______________
Garage
7.32 x 12.19
_______
$343.25
______________
Workshop
6.10 x 6.10
_______
$322.50
______________
Replacement cost: _______________________________
Task 3.
Replacement Cost/Accrued Depreciation
Anne Appraiser has been asked to estimate the current market value of a property
located at 392 Langford Drive in Anycity using the cost approach. This detached home
has an effective age of approximately 20 years with a total life expectancy of 50 years.
Five years ago, the Jones' built an addition, garage, and deck. All these improvements
have an effective age of five years. The life expectancy of the addition is 30 years, the
garage is 20 years, and the deck is 10 years.
(a)
Determine the Replacement cost (RC)
Structure
Measurement
(metres)
Total
Sq. m
Rep Cost
/sq. m
Rep Cost
Main Bldg
6.33 x 13.46
_________
$562.50
________________
Addition
4.95 x 10.50
_________
$495.60
________________
Garage
7.05 x 7.45
_________
$395.00
________________
Deck
4.50 x 5.50
_________
$190.00
________________
Total Replacement cost: _____________________________
(b)
Based on the effective age and life expectancies provided, determine the
depreciation due to incurable physical deterioration for the main building,
addition, garage, and deck.
Structure
Eff. Age/Econ. Life
RC
Accum. Deprec.
Main Bldg
__________
_________
______________
Addition
__________
_________
______________
Garage
__________
_________
______________
Deck
__________
_________
______________
Total Accumulated Depreciation: _________________________
Task 4.
The Direct Comparison Approach
The subject property is a three-bedroom bungalow, approximately 2 years old, in a good
location on 154 Oak Street in Assiniboine Heights. It has a single-car, attached garage
and 1 4-piece bathroom. The lot size is 60' x 110', building size is 114 square metres.
There is a finished recreation room in the basement and an inground pool in the
backyard. You have researched the following comparables that range in age from 1 to 4
years. Determine the estimated market value based on the following information using
the direct sales comparison approach:
Sale #1:
Three-bedroom bungalow with inground pool in a good location, 1/2 block
from the subject property at 113 Oak Street. It has a 2-car, attached
garage, 1 4-piece bathroom and 1 2-piece bathroom, but no finished
recreation room. Lot size is 63' x 110' and the building size is 120 square
metres. Same as subject in all other respects. Sold 3 months ago for
$167,500.
Sale #2:
Three-bedroom bungalow in a good location, 2 blocks from the subject
property at 786 Charles Court. There is a recreation room, however, there
is no pool and no garage. Lot size is 64' x 105', building size is 112
square metres. Same as subject in all others respects. Sold last week for
$155,500.
Sale #3:
Three-bedroom bungalow in a poor location 4 blocks from the subject
property at 1764 Westworth Avenue. It has no pool and no recreation
room. Lot size is 62' x 115' and building size is 118 square metres. Same
as subject in all other respects. Sold yesterday for $151,000.
Note the following:
 Prices increased by 6% over the previous year, on an even monthly basis.
 Good locations are worth $5,000 more than poor locations.
 Single garages cost $6,000 to build, but only add $5,000 to value. Double garages
add $9,000 to value.
 Lots sell for $850 per front foot in this area.
 Construction costs are $475 per square metre.
 2-piece bathrooms add $2,500 to value.
 Finished recreation rooms add $5,000 to value.
 Inground pools add $6,000 to value
Use the Market Data Analysis form on the next page to complete Task 4.
Task 5.
Fill in the Blanks
a. A house has an economic life of 40 years, a remaining economic life of 20 years and
an actual age of 25 years. The effective age of this structure is
__________________.
b. A house has an economic life of 35 years, an effective age of 15 years, an actual
age of 20 years, and a replacement cost of $143,500. The amount of depreciation is
___________________________________________.
c. A loss of value indicating the difference between the replacement cost (or
replacement cost) of the improvements and the present worth of those improvements
is called _________________________________________________.
d. A loss of value experienced by a structure due to negative environmental problems
beyond the boundaries of the property is called ___________________________.
Task 6: Multiple Choice Questions
1. Which of the following might be the subject of a real property appraisal?
(a)
(b)
(c)
(d)
air space rights
a life insurance policy
a diamond
all of the above
2. In using the cost approach to appraisal, the MAJOR difficulty is experienced in
calculating:
(a)
(b)
(c)
(d)
curable physical depreciation
curable functional depreciation
incurable physical depreciation
replacement cost new of the building
3. Which one of the following is NOT a method of appraisal?
(a)
(b)
(c)
(d)
the comparative sales method
the cost method
the income method
the depreciation method
4. Consider the following four properties:
(i) a warehouse in North Winnipeg
(ii) a single family home in Linden Woods
(iii) a multi-unit apartment complex in Brandon
(iv) a residential condominium unit in downtown Winnipeg
Which appraisal approach would be most suitable to appraise each of these
properties?
(a) (i) comparison (ii) income (iii) cost (iv) income
(b) (i) comparison (ii) cost (iii) comparison (iv) income
(c) (i) cost (ii) income (iii) comparison (iv) cost
(d) (i) cost (ii) comparison (iii) income (iv) comparison
5. Using the cost approach, what will be the market value of a property with a 50,000
square foot building if construction costs new are $48 per square foot, land value is
$900,000, and total depreciation on the structure to date is estimated to be 10%?
(a)
(b)
(c)
(d)
$3,105,000
$3,060,000
$3,000,000
$3,300,000
6. The principle of substitution in the direct comparison approach states that:
(a)
(b)
(c)
(d)
"market value" equals "value to owner"
similar properties which have recently sold are comparable
properties have to be identical in order to be comparable
the market value of land plus the cost of a newly constructed building equals
the market value of a property
7. Which of the following factors will affect the value of land?
(a)
(b)
(c)
(d)
immobility
diversification
externalities
both (1) and (3)
8. When using the cost method, the cost of improvements where building materials are
no longer available is determined by utilizing:
(a)
(b)
(c)
(d)
current replacement cost
current reproduction cost
current value based on historic cost
actual cost
9. Which one of the following factors is MOST likely to affect the value of residential
real property in the short run?
(a)
(b)
(c)
(d)
shifts in age composition of the population
a change in mortgage interest rates
a shift in the balance of trade between countries
the supply and cost of raw materials and energy
10. In applying the cost method of appraisal to the valuation of a single family residence
built in 1954, the value of improvements is determined by:
(a) the actual construction costs, or if unavailable, historic construction cost date
(b) the current costs of constructing a modern equivalent of the subject property
(c) the current costs of constructing an exact replica of the property being
appraised
(d) the construction costs for a builder of average efficiency measured in 1954
standards
11. Under which one of the following conditions is the direct comparison approach of
appraisal most applicable?
(a)
(b)
(c)
(d)
where the volume of sales transactions is very low
where buyers and sellers are well informed about current sales transactions
where the property has redevelopment potential
where the property is unique
12. Sophisticated investors will ultimately determine the value of undeveloped land by:
(a) estimating the value of the land when improved and subtracting the costs of
undertaking such a development
(b) consulting with the owner of the undeveloped land as to his estimate of the
land's value
(c) asking the advice of a mortgage broker as to the availability of debt financing
(d) considering the proximity of the property to positive externalities
13. The direct comparison approach of appraisal is based on an analysis of recent sale
prices for similar properties. Which of the following BEST defines the word "recent"?
(a) a period of time during which at least four properties have sold in the subject
property's neighbourhood
(b) a period of time of no less than one week and no more than six months
(c) a period of time during which supply and demand conditions have not
changed
(d) a period of time during which the prime interest rate has been stable
14. A real estate appraiser would NOT value:
(a)
(b)
(c)
(d)
the existing rental agreement of a warehouse
the right to use airspace at the top of a highrise office building
the legal interest in cattle on agricultural land
a fee simple interest in a two-bedroom apartment
15. The next four questions are based on the following information:
Sales Price
# Bedrooms
# Bathrooms
Air Conditioner
Square Footage
Vendor Mortgage
Subject
Comp A
Comp B
Comp C
$126,500
4
3
no
2,100
no
$134,000
4
4
yes
2,000
no
$121,000
3
2
yes
2,000
no
0
+ $2,700
+ $4,500
- $5,000
0
0
+ $2,700
0
- $10,000
- $ 700
Adjustments
Bedrooms
Bathrooms
Air Conditioner
Square Footage
Vendor Mortgage
The market value of:
1 bedroom is $3,200;
1 bathroom is $2,700
an air conditioner is $4,500
each 100 square feet over 1800 sq. ft is $5,000
(1) From the information provided, it can be concluded that Comparable B has:
(a)
(b)
(c)
(d)
4 bedrooms, 3 bathrooms, and no air conditioner
3 bedrooms, 3 bathrooms, and an air conditioner
4 bedrooms, 3 bathrooms, and an air conditioner
3 bedrooms, 4 bathrooms, and no air conditioner
(2) Comparable C will have to be adjusted for bedrooms and bathrooms by:
(a)
(b)
(c)
(d)
+$3,000 and -$2,700 respectively
+$3,200 and +$5,400 respectively
Nothing and -$5,400 respectively
-$3,200 and +$5,400 respectively
(3) From the information provided, it can be concluded that the Adjusted Sales
Prices for Properties A, B, and C are:
(a)
(b)
(c)
(d)
$128,700, $126,000, and $129,600 respectively
$126,500, $134,000, and $121,000 respectively
$128,700, $134,000, and $112,400 respectively
$128,700, $126,000, and $126,900 respectively
(4) Given the above facts, the market value of the subject property is approximately:
(a) $123,000
(b) $124,500
(c) $128,100
(d) $132,300
16. Of the following methods, which one must be used to determine the market value of
an unused vacant site:
(a)
(b)
(c)
(d)
the cost method
the comparative sales method
the income method
the depreciation method
17. In using the comparative method of appraisal, the appraiser estimates the value from
the evidence afforded by the sales price of similar properties which have recently
been sold. Which of the following BEST describes what is meant by "similar"?
(a)
(b)
(c)
(d)
similar in replacement cost
similar in price bracket
similar with respect to the dominant architectural features
similar with respect to those factors which are likely to have a material
influence on the behaviour of buyers and sellers
18. Which of the following people may require an appraisal of real property?
(i) the executor of an estate
(ii) a property assessment appellant
(iii) a mortgagee
(iv) an expropriation authority
(a)
(b)
(c)
(d)
(iii) only
(i) and (iii) only
(i), (ii), and (iv) only
(i), (ii), (iii), and (iv)
19. Using the cost approach, determine the market value of a property with a 37,000
square foot building if construction costs new are $62 per square foot, land value is
estimated to be $1,200,000 and total depreciation on the building to date is
estimated to be 8%?
(a)
(b)
(c)
(d)
$2,294,000
$3,310,480
$3,494,000
$3,214,480
20. Which one of the following statements is FALSE?
(a) The principle on which the direct comparison approach of appraisal rests is
that the price paid for a commodity will be equal to the cost of acquiring a
substitute in the same circumstances
(b) In the direct comparison approach, "recent" refers to the period immediately
preceding the appraisal date during which values have remained stable.
(c) If a comparable which has seller take-back financing at below market rates is
used in the direct comparison approach, the value of the below-market
financing will be added to the sale price of the comparable to determine the
adjusted sale price.
(d) If the adjusted sale prices of five comparables are $100,000; $95,000;
$98,000; $100,000; and $100,000, the appraiser could estimate the market
value of the subject property to be $100,000
21. An appraiser is using the market data approach for his appraisal of a single family
house. By proper adjustment he can use sales prices of all the following properties
for comparison purposes, EXCEPT:
(a)
(b)
(c)
(d)
houses in different neighbourhoods
houses with different square footage
houses recently sold between related parties
houses sold over six months ago
22. In the direct comparison approach, it is MOST important that the subject building and
the comparable buildings be:
(a)
(b)
(c)
(d)
recently constructed of average quality construction
of the same general architectural style
similar with respect to factors judged important by buyers and sellers
inclusive of similar types and quality of fixtures
23. Which of the following are determinants for the value of a property?
(i) listing price
(ii) rights of ownership
(iii) physical property
(a)
(b)
(c)
(d)
(i) only
(iii) only
(i) and (ii)
(ii) and (iii)
24. Which one of the following BEST describes curable functional depreciation?
(a)
(b)
(c)
(d)
general wear and tear which is easily repaired
an outdated design which can be correctly easily
damage to the interior of a building which can be repaired economically
an outdated design which cannot be corrected easily
25. 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?
(a) Ms. Finch had already purchased another home and needed to sell this home
immediately
(b) Mr. Falcon had already purchased another home and needed to sell this
home immediately.
(c) Mr. Falcon supplied a seller take-back mortgage of 13% while the current
market rate was 16%.
(d) All of the above factors could account for the differences in selling price.
26. Which of the following properties would be most suitable for an appraisal by the
direct comparison approach?
(a) A penitentiary located just outside the municipal boundary of a town inhabited
by a population of 83,000.
(b) A 2-bedroom unit in a 4 year old condominium. The building is a concrete hirise and is in an area where an abundance of similar units are marketed.
(c) A 30-year old house designed by the famous architect, Earl Wright, to the
owner's specifications. The house is situated in an exclusive area in
Winnipeg.
(d) A large office building in downtown Winnipeg, owned by a forestry company
which has been placed on the market because the first mortgage holder has
commenced foreclosure action.
27. Wally Walters wants to determine the market value of his property. Unfortunately, he
lives in a sparsely inhabited region where there are no recently sold, similar
properties. However, he does know that the replacement cost (new) of his 2,600
square foot house is $42.50 per square foot. The land value estimate using the
comparative sales method is $41,500. Mr. Walters has not taken adequate care of
his house; it has depreciated in value. There has been $16,300 of curable physical
depreciation. In addition, the bathroom and kitchen fixtures are outdated; their
replacement cost is $13,200. Based on this information, what is the market value of
Mr. Walter's property?
(a)
(b)
(c)
(d)
$122,500
$81,000
$152,000
$135,700