Licensing Education
STUDY GUIDE
The Manitoba Real Estate Association
NOTE: This Study Guide replaces the Assignment Booklet
referred to in the Appraisal workbook. It does not have to be
returned to the Association for marking as answers are provided.
PRINCIPLES OF APPRAISAL
Study Guide (2012 Edition)
1
CONTENTS
Page
Unit 5: The Cost Approach
Examination Study Tips
Exercises
3
3
4
Unit 6: The Direct Comparison Approach
Examination Study Tips
Exercises
19
19
20
Unit 7: The Income Approach
Examination Study Tips
Exercises
29
29
30
Answers to Exercises
The Cost Approach
The Direct Comparison Approach
The Income Approach
39
40
51
56
2
UNIT 5 – THE COST APPROACH
EXAMINATION STUDY TIPS
-
-
-
-
Advantages and disadvantages – page 50 of Canadian
Steps – page 168/169 of Canadian
Cost and Value equal – see Curiosity on page 5-13 of Workbook – LEARN AS IT
IS NOT IN ENCYCLOPEDIAS
Three types of depreciation: physical, functional, and external as in example on
page 18 of Canadian
See example of cost approach on page 170 of Canadian; and example of
depreciation on page 18 of Canadian
Problem on exam walks you through the steps in the Cost Approach:
STEP 1: Determine Site Value; this will involve determining time adjustment and
reconciling your findings; see COMPARATIVE SALES METHOD – SITE
VALUATION in Canadian
STEP 2:
Determine Reproduction Cost New of building – isolate building
cost of three examples and RECONCILE; may also be required to calculate based
on square footage and cost to build; see COMPARATIVE SQUARE
METRE/FOOT METHOD in Canadian
STEP 3: Calculate Depreciation: (may be in two parts – for building and other);
remember that formula is: Effective Age ÷ Economic Life (or total life
expectancy) x Reproduction Cost New = Depreciation; set up as in example on
page 18 of Canadian
TIP: if problem states that item is five years old and will last another 5 years, then
total life expectancy is 10 and formula is 5/10 x RCN
Subtract total depreciation from RCN and add site value to get value by cost
approach
3
EXERCISES
Task 1: Estimating Site Value
1. What are the five steps in the cost approach?
2. Explain the process of estimating the value of a site by the comparative sales method.
3. Why is it important for time to be adjusted for first?
4
4. For valuation purposes, sites are analyzed on the basis of units of comparison. What
unit of comparison is used to express values of residential lots? What unit of
comparison is used to value commercial or industrial sites?
5. The following time resales all occurred within the same neighbourhood. Based on this
information, what is the indicated percentage increase in value per month for the
neighbourhood?
Sale 1 sold 8 months ago for $124,000 and resold 4 months later for $128,000
Sale 2 sold 6 months ago for $126,000 and resold last month for $135,000
Sale 3 sold 10 months ago for $118,000 and resold this week for $136,640
5
6. Given the following MLS statistics relating to average sale prices in the area, what
percentage increases are indicated for each time period?
(a) Average sale price: 6 months ago for $192,800 – 2 months ago for $204,600
(b) Average sale price: 12 months ago $172,800 - 3 months ago for $198,500
(c) Average sale price: 14 months ago $163,500 – 5 months ago $186,400
7. You are analyzing market sales to derive a realistic time adjustment percentage factor
to apply to comparable sales sold within the last year. You locate the following sales:
Sale #1:
Sold February 1, 1997 for $40,000 and resold on June 1, 1997 for $42,400
Sale #2:
Sold March 30, 1997 for $52,000 and resold on September 1, 1997 for
$56,000
Sale #3:
Sold January 15, 1997 for $46,000 and resold on November 15, 1997 for
$53,500
What is the approximate percentage increase per month?
6
8. Estimate the value of a 15 m x 36 m residential lot by comparison to the following
residential lot sales and show your calculations and reconciliation. (Use plus or minus
percentage adjustments)
(a)
(b)
(c)
(d)
18 m x 36 m sold for $45,000
22 m x 36 m sold for $50,000
12 m x 36 m sold for $25,400
15 m x 36 m sold for $35,800
10% superior to subject
similar to subject
8% inferior to subject
5% superior to subject
7
9. Estimate the value of a commercial site 30 m x 61 m using the following comparable
sales and assuming that land has shown an increase in price by 10% per year. Make
the time adjustment first, and then make all other adjustments to the time adjusted
sale price.
Sale
1
2
3
Lot Size
Price
33 m x 61 m $46,000
30 m x 67 m $38,000
36 m x 58 m $45,000
Date of Sale
Current
6 months ago
1 year ago
Location
5% superior
10% inferior
8% superior
8
10. Given the following market sales data, find the land value for an industrial site 30 m
x 77 m. Use plus and minus percentage adjustments. Make the time adjustment first,
then make all other adjustments to the time adjusted price. Land values have
increased 10% in value during the past year. Show calculations and reconciliation.
Sale
1
2
3
4
Land Area
2,903 m2
2,090 m2
2,556 m2
2,185 m2
Price
$45,600
$33,000
$39,600
$42,500
Date of Sale
1 year ago
1 year ago
1 year ago
Current
Location
10% inferior
10% inferior
10% inferior
similar
9
11. In appraising a residential site 18 m x 30 m you locate the following comparable
sales:
Sale
1
2
3
4
Size
18 m x 30 m
15 m x 30 m
18 m x 30 m
18 m x 30 m
Price
$45,600
$33,000
$39,600
$41,400
Sale Date
1 year ago
½ year ago
½ year ago
1 year ago
Location
10% superior
10% inferior
10% inferior
equal to subject
Land has increased in value by 10% during the past year.
(a) What unit of comparison is indicated?
(b) What is the market value of this site? Show your calculations in tabular form.
10
TASK 2: ESTIMATING REPRODUCTION COST NEW
1. Under what circumstances are cost and value equal?
2. Mr. and Mrs. McGregor own a bungalow measuring 9.5 metres by 16 metres. Based
on the information provided, complete the following and calculate the reproduction
cost new of this bungalow.
Structure
Measurement
Total Sq. M
Repro. Cost/Sq. M
Repro Cost New
Main bldg
9.5 m x 16 m
__________
$550.00
_____________
Addition
4.5 m x 8.5 m
__________
$475.00
_____________
Garage
2.5 m x 7.2 m
__________
$215.00
_____________
Other Improvements:
Storage Shed
$9,000
Reproduction Cost New: __________________________________________
11
3. Based on the following comparables, estimate today's reproduction cost new of a 10
year old bungalow with outside measurements 11.3 m x 10.1 m at ground level. It has
no garage and the basement is unfinished.
Sale #1:
1050 Riverside Drive
This bungalow sold about one week ago for $136,000. The value of the
site on the date that this new property sold was estimated at $38,000. It
had a recreation room which accounted for $8,000 of the building cost. It
had no garage. It had an area of 118.24 square metres.
Sale #2:
1327 Braemar Road
A newly built 94.79 square metre bungalow sold three weeks ago for
$129,400. It had a finished recreation room which accounted for $8,000 of
the building cost. It had a frame detached garage, which cost $3,000 to
build. The estimated value of the site is $43,000.
Sale #3:
1296 Northside Drive
A new bungalow sold last week for $124,000. The estimated value of the
site at the time this new property sold was $35,000, and the other site
improvements were estimated at $1,500. Like the subject property, it did
not have a garage. It had an area of 114 square metres.
Estimate reproduction cost new of building here:
12
TASK 3: ESTIMATING ACCRUED DEPRECIATION
1. In measuring depreciation, describe the meaning of the following terms.
(a) Physical depreciation
(b) Functional obsolescence
(c) Locational obsolescence
(d) Curable
(e) Incurable
13
2. Describe what is meant by the following terms.
(a) Economic Life
(b) Remaining Economic Life
(c) Effective Age
(d) Actual or chronological Age
14
3. You are asked to appraise a 15 year old 6 room bungalow in a neighbourhood of
similar properties. You valued the site by the Direct Sales Comparison Method at
$__________
(See Task 1, Problem # 11) You estimated the reproduction cost
new of the bungalow at $________ by the quantity survey method (See Task 2,
Problem # 4).
On inspection you find that the interior requires repainting; the eaves and
downspouts need replacing, and some hardwood flooring requires replacing, sanding,
and refinishing.
In estimating the curable physical deterioration, you arrive at the following:
Item
Painting Interior
Eaves & Downspouts
Hardwood Flooring
RCNew
$1,600
500
$1,200
Cost to Cure
$1,750
650
400
You estimate the reproduction cost new, effective age, and normal life expectancy
of each of the following short lived items:
Item
Heating
Kitch Built-ins
Tiled Floor
Finished Floors
Exterior Painting
Roof Covering
Light Fixtures
Hot Water Heater
RCNew
1,400
1,500
400
800
1,000
1,000
600
350
Effective Age
15 years
15 years
9 years
15 years
1 year
15 years
15 years
15 years
Normal Life Expectancy
20 years
20 years
12 years
20 years
4 years
20 years
20 years
20 years
Assuming that the items of deferred maintenance were corrected, you estimate the
bungalow will have an effective age of 10 years and a remaining economic life of 40
years.
(a) Calculate the total accrued physical depreciation using the economic age-life
depreciation method (modified)
15
16
(b) Calculate the depreciated cost of other improvements as follows:
Estimated Reproduction Cost New of other improvements
$5,000
Estimate Accrued Depreciation:
Item
Driveway
Fencing
Wood Deck
Total
RCN
$1,000
$2,000
$2,000
$5,000
Eff.Age/Life Exp
15/20
10/25
5/15
Depreciated Cost of Other Improvements:
Deprec.
________
(c) Calculate the value of the building.
(d) Calculate the market value of the bungalow including the site by the cost
approach.
17
18
UNIT 6: DIRECT COMPARISON APPROACH
EXAMINATION STUDY TIPS
-
-
-
-
Advantages and disadvantages – page 50 of Canadian
Steps – page 195 of Canadian
Characteristics of a good comparable – page 195 of Canadian under Step 1
When plus and minus adjustments – page 196, 2nd paragraph under Preparing
Adjustments; all adjustments are made to the sale price of the comparable;
remember that if comparable is better or has something that subject does not have
– you subtract; if the comparable is inferior to the subject or the subject is better
than the comparable or the subject has something that the comparable does not
have – you add: you are trying to make the subject look like the comparable so
that you have an estimate of value for the subject since you now know the
adjusted value of the comparable which you made to look like the subject
Elements of Comparison: time, location, lot size, and physical as shown in
Example on page 197
In case study, if time adjustment is not given as a $ or % - you will have to
calculate it using formula:
o ((New or current – old) ÷ old) x 100 (to convert decimal to %) ÷ # of
months
o TIP (# of months): e.g., if sold in April and then in Sept, # of months is 5
(Sept is 9th month and April is 4th month: 9 – 4 = 5 months
If adjustments (other than time) are given in percentages do not convert to
dollars – just total the percentages and apply it to the TIME ADJUSTED
PRICE (per front metre)
If adjustments (including time) are given in dollars do not convert to
percentages – just add the dollars up
Remember: Reconcile – do not average results
Reconcile: pick best, state why and use adjusted $ to determine value
19
EXERCISES
Task 1: Review Questions
1. What basic principle of real property value is the Direct Comparison Approach based
on?
2. List the five steps in the Direct Comparison Approach.
3. List four items of importance in judging the quality of comparable sales data.
4. List and briefly describe the four main elements of comparison. What is the
recommended sequence of these adjustments and why?
20
5. What principle of value underlies the adjustment process?
6. Briefly describe the two commonly used methods of adjusting for differences
between the subject property and comparable properties.
7. Adjustments are made to comparable properties using several important rules and
guidelines. What are these rules and guidelines?
21
8. Why is "time" adjusted for first? What principle of value is involved here?
9. What situations would normally require an adjustment for "Location"?
10. List four advantages and four disadvantages of the Direct Comparison Approach.
22
Task 2: Case Studies
1. The subject property is being appraised as at December 15th, 200x. A comparable
property has been chosen which sold for $158,000 and is very similar to the subject
property except that it sold 8 months before. Prices have increased over the past year
and the appraiser needs to know the time adjustment factor to be applied to the
comparable property. The appraiser has found three properties which have sold
during the past year and has confirmed that no changes were made to the properties
between the sale and resale that affected their values. The details of the three
properties are as follows:
Sale #1:
Sold in April for
$153,000
Resold in September for
$160,500
Sale #2:
Sold in May for
$153,500
Resold in December
$164,200
Sale #3:
Sold in January for
$148,000
Resold in December for
$163,000
Based on the analysis of these three properties, what is the time adjustment factor
that the appraiser should use on the comparable property?
23
2. In estimating the market value of a single family dwelling, you analyze 8 sales and
you list the following features with respect to each property.
Sale #1 - Comparable in all respects to the subject property except that it has central
air conditioning. Sold recently for $137,500
Sale #2 - Same as Sale #1 except that it was sold a year ago. Selling price was
$136,100
Sale #3 - Same as Sale #1 except that it sold two years ago. Sale price was $134,400
Sale #4 - Same as Sale #1 except in a poorer location. Sold for $134,900.
Sale #5 - Same as Sale #1 except that it has no central air conditioning. Sold for
$136,600
Sale $6 - Similar to Sale #1 except that it has a detached garage whereas Sale #1 has
no garage. Sold for $139,300.
Sale #7 - Similar to Sale #1 except in the same poorer location as Sale #4. Sold for
$135,200
Sale #8 - Similar to Sale #1 except that it too had a detached garage. Sold for
$139,500.
On further investigation, you conclude that:
(a) A property with air conditioning is worth $1,000 more than one not having air
conditioning
(b) Prices have increased by $1,500 each year for the last two years.
(c) Properties in poorer locations sell for $2,500 less than those in better
locations.
(d) Properties with garages sell for $2,000 more than those having no garage.
Task:
Tabulate your analysis of these comparable sales showing all necessary adjustments
and estimate the value of the subject property by the Direct Comparison Approach.
24
.
25
3. You are appraising a 25 year old bungalow with an attached garage on a standard size
lot. It has a finished recreation room which adds about $8,500 to its value; the kitchen
has recently been modernized at a cost of $10,000, but the home still has the old
gravity type furnace which would cost about $6,000 to replace with a modern forced
air unit. Similar properties are now selling for $6,000 more than last year.
What is the indicated market value of the subject based on the following
comparables? (Show your calculations in tabular form.)
Sale #1 - This bungalow with attached garage sold a year ago for $135,500. Its age,
condition, construction, design, and lot size was the same as the subject,
but was located in a better area requiring an adjustment of $2,000. The
furnace is a modern forced air unit; however, the kitchen is obsolete. It has
a finished recreation room.
Sale #2 - Sold last month for $133,000. It was in the same location and had the
same size lot. Its condition was superior to the subject by $2,400 but its
age, construction, and design were the same. It was heated by a modern
forced hot air unit and it had an attached garage similar to that of the
subject which had been added just prior to sale at a cost of $6,600;
however, homes with an attached garage usually sell for $8,000 more on
this account. It had no recreation room and its original kitchen would be
considered functionally obsolete in terms of today's standards.
Sale #3 - Sold one month ago for $134,500. It was in the same location and its
condition, age, construction, design, and lot size was the same as the
subject. It had a private drive but no garage. The kitchen had been
modernized and a recreation room finished, but it too had an old obsolete
gravity type furnace similar to that in the subject property.
26
27
28
UNIT 7: THE INCOME APPROACH
EXAMINATION STUDY TIPS
-
-
Advantages and disadvantages – page 50 of Canadian
Steps – page 330 of Canadian
Based on theory that value of property is the present value of the future income
that the property is capable of producing
Two types of return: return OF investment and return ON investment – See
Capitalization: Overall Capitalization Rate on page 123 of Canadian; remember
when you yourself invest in something you want a return OF the money you
invested plus you want to earn money ON your investment
Factors of Production: page 245 of Canadian; understand why land is a residual
factor
Case Study is Reconstructed Operating Statement – page 555 of Canadian
o Reasons for reconstructing operating statement: page 556, right hand
column under Estimating Operating Expenses
o Items not included: Example on page 557 of Canadian
o How to treat certain items such as free suite to janitor, etc. : Example on
page 557 of Canadian and example on page 558
o Review example on page 558 of Canadian
o Calculating Capitalization Rate:
 Rate = NOI ÷ value (note that NOI is net operating income which
is income – expenses)
o When calculating gross income, remember that it is 100% occupancy at
market rent and remember that it is annual ( multiply by 12 if given as
monthly)
o When calculating net operating income, deduct any expenses that you do
not include such as depreciation and total the rest; make any other
adjustments or additions as explained in the problem
o Value is then: net operating income ÷ capitalization rate
29
Task 1: Review Questions
1. List the five steps in the Income Approach.
2. Define the following:
(a) Rehabilitation:
(b) Remodelling:
(c) Modernization:
3. What is potential gross income?
4. What is effective gross income?
30
5. What is net income?
6. Provide four reasons why an appraiser must reconstruct the owner's operating income
and expense statements before determining the value of a property by the income
approach.
7. In reconstructing the operating expense statement for appraisal purposes, certain
operating expenses which appear in the owner's income statement must be omitted.
Briefly describe four such items.
31
8. An investor in real estate is entitled to two types of return. What are they?
9. Define:
(a) Discount rate:
(b) Recapture rate:
(c) Overall rate:
10. If the net operating income before depreciation of a building is $56,000 annually and
the overall capitalization rate which is expected of this type of property is 12%, what
is the value of the property?
32
11. If an income producing property sell for $560,000 and the net operating income
before depreciation attributable to this property is known to be $50,000 annually,
what overall capitalization rate is indicated?
12. If an income producing property is offered for sale at a price of $825,000, what is the
annual net operating income before depreciation that the property must be producing
if an investor expects a 15% capitalization rate?
13. If an income property sells for $730,000 and the net operating income before
depreciation attributable to this property is known to be $68,000 annually, what
overall capitalization rate is indicated?
33
Task 2: Case Studies
1. Broker/Owner Johnson, of ABC Realty Inc., is undertaking an appraisal involving a
30-unit apartment building. While using several methods to establish a capitalization
rate, he has asked for your assistance in determining the cap rate based on comparable
sales. Following are six comparable properties that have sold in the past two months.
Johnson has provided the sale price and the net operating income (reconstructed) for
each.
Sale
#1
Sale Price
$2,100,000
NOI
$196,300
Cap Rate
__________
#2
1,980,000
193,450
__________
#3
1,700,000
164,050
__________
#4
1,863,000
172,550
__________
#5
1,986,000
184,490
__________
#6
2,150,000
183,600
__________
(a) In the space provided above, calculate the capitalization rate for all six
properties. Cap rates are typically rounded to two decimal places.
(b) If Sale #1 was judged the most comparable, what capitalization rate would
you select?
(c) If the subject property has a net operating income of $187,000, what is its
estimated value? Show all calculations.
34
2. A six storey office building contains 1200 square metres of total area on each floor.
Net rentable area on each floor is 80%. First floor space of a comparable type is
renting at $80.00 per square metre per year; top floor space in a comparable type is
renting for $75.00 per square metre per year. The space on floors 2 – 5 inclusive is
competitive with space renting at $60.00 per square metre on the market. An office
building survey just recently completed by the local Chamber of Commerce indicates
vacancy at 3% for top floors, 5% for middle floors, and 2% for ground floor space.
Annual service income on a net basis from lobby concessions is $50,600.
Required: Develop a forecast of Effective Gross Income.
35
3. You are employed by ABC Realty Inc. Broker/Owner Johnson has been asked to
estimate the value of 4261 Lakeshore Blvd. and felt it was an opportune chance to
expand your knowledge of the income approach. Basic details of the property being
appraised follow.
Income
An investor owns a recently constructed income property consisting of eight residential
units. The current rent is $84,361, but potential rental income is $85,000. Additional
income derived from extra parking spaces and coin-operated laundry facilities amounts to
$385 per month. Vacancy factor and credit losses total 5% of gross potential income.
Operating Expenses
The following expenses can be entered directly on the reconstructed worksheet.
Payment Type
Property Tax
Water
Fire Insurance
Repairs and Maintenance
Electricity for Common Areas
Landscaping Contract
Janitor's Salary
Annual Payment
$6,988
1,800
2,500
5,050
1,200
1,900
10,000
These expenses must be annualized:
- Every five years, halls are repainted at a cost of $3,000.
- Every seven years, exterior trim is repainted at a cost of $2,100
- Every four years, all suites are painted and decorated at a cost of $900 each
suite.
Capitalization Rate
Three highly comparable properties have been sold in the immediate area and you have
obtained net operating incomes.
Sale
Sale Price
NOI
Overall Cap Rate
#1
$527,860
$49,870
_______________
#2
499,329
47,500
_______________
#3
542,600
50,960
_______________
Task 1:
Calculate the cap rate that Broker/Owner Johnson should use.
36
Task 2:
Determine the market value of the subject property using the following format. Round
calculations to the nearest dollar.
Potential Rental Income
Plus: Other Income
Total Potential Gross Income
_____________
+ _____________
______________
Less: Vacancy and Credit Losses
- _____________
Effective Gross Income
= _____________
Operating Expenses
- _____________
Net Operating Income
= ____________
Indicated Value by the Income Approach
_________________
37
38
ANSWERS TO EXERCISES
39
THE COST APPROACH
Task 1: Estimating Site Value
1.
-
The five steps in the cost approach are:
Estimate the value of the site
Estimate the reproduction cost new
Estimate the accrued depreciation
Estimate the total depreciated cost
Add the value of the site to the total depreciated cost to arrive at an estimate of the
market value of the property
2. The Comparative Sales Method is based on a comparison of the property being
appraised with the most recent sales data available on similar properties, preferably in
the same neighbourhood. The steps are:
- select a sufficient number of good comparable sites that recently sold in the area
- gather all of the necessary data on these sales to be able to make a proper comparison
- compare each of the comparable sales with the subject for differences that may exist
- make the necessary adjustment to the sale price of each comparable for these
differences
- reconcile the adjusted sale prices of the comparables into an indication of the value of
the subject
3. Time is adjusted first to bring all sales to the same economic base as the subject and
then adjust for other differences
4. For valuation purposes, sites are analyzed on the basis of units of comparison:
Residential lots: price per front metre
Commercial or industrial sites: price per square metre
5. #1: 128,000 – 124,000 = 4,000  124,000 = 3.23%  4 = .81% per month
#2: 135,000 – 126,000 = 9,000  126,000 = 7.14%  5 = 1.43% per month
#3: 136,640 – 118,000 = 18,640  118,000 = 15.80%  10 = 1.58% per month
Use 1.5% or 1.4% per month because sale #2 was the most recent resale period.
6. a. 204,600 – 192,800 = 11,800  192,800 = 6.12%  4 = 1.53% per month
b. 198,500 – 172,800 = 25,700  172,800 = 14.87%  9 = 1.65% per month
c. 186,400 – 163,500 = 22,900  163,500 = 14.0%  9 = 1.55% per month
40
7. Sale #1: 42,400 – 40,000 = 2,400  40,000 = 6%  4 = 1.5% per month
Sale #2: 56,000 – 52,000 = 4,000  52,000 = 7.7%  5 = 1.54% per month
Sale #3: 53,500 – 46,000 = 7,500  46,000 = 16.3%  10 = 1.63% per month
What is the approximate percentage increase per month? 1.5%
8. Estimate the value of a 15 m x 36 m residential lot by comparison to the following
residential lot sales and show your calculations and reconciliation. (Use plus or minus
percentage adjustments)
a.
b.
c.
d.
18 m x 36 m sold for $45,000
22 m x 36 m sold for $50,000
12 m x 36 m sold for $25,400
15 m x 36 m sold for $35,800
10% superior to subject
similar to subject
8% inferior to subject
5% superior to subject
Answer:
NOTE: For residential properties, the unit of comparison is front metre.
Sale #
Front metre
Sale Price
Price per FM
Adjustment
Adj. Price/FM
(a)
18
45,000
2,500
- 10%
2,250
(b)
22
50,000
2,273
0
2,273
(c)
12
25,400
2,117
+ 8%
2,286
(d)
15
35,800
2,387
- 5%
2,268
Sale (b) required no adjustments and thus more weight is given to it. Therefore use
$2,273 per front metre x 15 = $34,095. Accordingly, the market value of the subject
site is $34,000.
41
9. Estimate the value of a commercial site 30 m x 61 m using the following comparable
sales and assuming that land has shown an increase in price by 10% per year. Make
the time adjustment first, and then make all other adjustments to the time adjusted
sale price.
Sale
1
2
3
Lot Size
Price
33 m x 61 m $46,000
30 m x 67 m $38,000
36 m x 58 m $45,000
Date of Sale
Current
6 months ago
1 year ago
Location
5% superior
10% inferior
8% superior
Answer:
NOTE: Commercial property – unit of comparison is square metres.
Sale
Sq. metres
Sale Price
Sale Price/sq.m
Time adjust
Time adj $
Loc. Adj.
Adj. $/sq. m
1
2,013
46,000
22.85
0
22.85
- 5%
21.71
2
2,010
38,000
18.91
+5%
19.86
+10%
21.85
3
2,088
45,000
21.55
+10%
23.71
- 8%
21.81
Most weight given to sale #1 since it was the most recent sale. This is supported by
sales #2 and #3. Therefore, use $21.71 per square metre. Applying this to the subject
site 30 x 61 = 1,830 sq. metres x $21.71 = $39,729, rounded to $39,700.
42
10. Given the following market sales data, find the land value for an industrial site 30 m
x 77 m. Use plus and minus percentage adjustments. Make the time adjustment first,
then make all other adjustments to the time adjusted price. Land values have
increased 10% in value during the past year. Show calculations and reconciliation.
Sale
1
2
3
4
Land Area
2,903 m2
2,090 m2
2,556 m2
2,185 m2
Price
$45,600
$33,000
$39,600
$42,500
Date of Sale
1 year ago
1 year ago
1 year ago
Current
Location
10% inferior
10% inferior
10% inferior
similar
Answer:
Sale #
1
2
3
4
Area
Sale Price
$ per sq. m
Time Adj.
Time Adj. $
Loc. Adj.
Adj. $ per sq. m
2,903
45,600
$15.71
+10%
$17.28
+10%
19.01
2,090
33,000
15.79
+10%
17.37
+10%
19.12
2,556
39,600
15.49
+10%
17.04
+10%
18.74
2,185
42,500
19.45
0
19.45
0
19.45
Sale #4 is best as it required no adjustments. Therefore, use $19.45 per square metre.
The value of the subject property is: 30 x 77 = 2,310 square metres x $19.45 =
$44,929.50 or $45,000 (rounded)
43
11. In appraising a residential site 18 m x 30 m you locate the following comparable
sales:
Sale
1
2
3
4
Size
18 m x 30 m
15 m x 30 m
18 m x 30 m
18 m x 30 m
Price
$45,600
$33,000
$39,600
$41,400
Sale Date
1 year ago
½ year ago
½ year ago
1 year ago
Location
10% superior
10% inferior
10% inferior
equal to subject
Land has increased in value by 10% during the past year.
(a) For residential property: – price per front metre
(b) The market value of this site is:
Sale #
Front metres
Sale Price
$ per FM
Time Adj.
Time adj $/FM
Loc. Adj
Adj. $/FM
1
18
$45,600
$2,533
+10%
2,786
-10%
$2,507
2
15
33,000
2,200
+5%
2,310
+10%
2,541
3
18
39,600
2,200
+5%
2,310
+10%
2,541
4
18
41,400
2,300
+10%
2,530
0
2,530
All sales suggest a sale price of around $2,500 per front metre. Based on sales 2 and
3, which were the most recent, use $2,541 per front metre. Therefore, value of the
subject is 18 x 2,541 = $45,738 or $45,700 rounded.
44
TASK 2: ESTIMATING REPRODUCTION COST NEW
1.
-
Circumstances are cost and value are equal when:
the improvement is new
the improvement must represent the highest and best use
the improvement is not affected by functional or locational obsolescence
the expected return from the improvement justifies its cost
2. Mr. and Mrs. McGregor own a bungalow measuring 9.5 metres by 16 metres. Based
on the information provided, complete the following and calculate the reproduction
cost new of this bungalow.
Structure
Measurement
Main bldg
9.5 m x 16 m
Addition
Garage
Total Sq. M
Repro. Cost/Sq. M
Repro Cost New
152
$550.00
$83,600
4.5 m x 8.5 m
38.25
$475.00
$18,168.75
2.5 m x 7.2 m
18
$215.00
$3,870
Other Improvements:
Storage Shed
$9,000
Reproduction Cost New:
$114,638.75
45
3. Based on the following comparables, estimate today's reproduction cost new of a 10
year old bungalow with outside measurements 11.3 m x 10.1 m at ground level. It has
no garage and the basement is unfinished.
Sale #1:
1050 Riverside Drive
This bungalow sold about one week ago for $136,000. The value of the
site on the date that this new property sold was estimated at $38,000. It
had a recreation room which accounted for $8,000 of the building cost. It
had no garage. It had an area of 118.24 square metres.
Sale #2:
1327 Braemar Road
A newly built 94.79 square metre bungalow sold three weeks ago for
$129,400. It had a finished recreation room which accounted for $8,000 of
the building cost. It had a frame detached garage, which cost $3,000 to
build. The estimated value of the site is $43,000.
Sale #3:
1296 Northside Drive
A new bungalow sold last week for $124,000. The estimated value of the
site at the time this new property sold was $35,000, and the other site
improvements were estimated at $1,500. Like the subject property, it did
not have a garage. It had an area of 114 square metres.
Estimate reproduction cost new of building here:
Answer:
Sale #
SP
1
136,000
2
129,400
3
124,000
Land
38,000
43,000
35,000
Bldg
98,000
86,400
89,000
Adj.
-8,000
-11,000
-1,500
Adj $
90,000
75,400
87,500
Area
118.24
94.79
114
$/sq. m
761.16
795.44
767.54
Area of subject building: 11.3 x 10.1 = 114.13 square metres
Use $767.54 per square metre as Sale #3 required the fewest adjustments and was
almost the same size as the subject property. Therefore, the RCN of the subject
property is 114.13 x $767.54 = $87,599.34 or $87,600 (rounded)
46
TASK 3: ESTIMATING ACCRUED DEPRECIATION
1. Physical depreciation: The impairment of the physical condition of an improvement
due to wear and tear, decay, and structural defects.
Functional obsolescence: The loss of utility and hence value due to poor design,
unacceptable style, etc.
Locational obsolescence: The loss of value due to negative influences from external
factors; e.g., railway tracks, commercial uses directly adjacent to the property, etc.
Curable: Refers to items that a typical buyer would repair or replace immediately
Incurable: Refers to those items that have suffered loss of value, but are not
economically sound to cure.
2. Economic Life: The period of time over which a new structure may reasonably be
expected to be competitive in the market for the use for which it was designed.
Remaining Economic Life: The period of time from the date of appraisal to the
expiration of the economic life of the structure.
Effective Age: The age of structure based on the use and care it has received.
Actual or chronological Age: The actual number of years that have passed since the
structure was built.
47
3. You are asked to appraise a 15 year old 6 room bungalow in a neighbourhood of
similar properties. You valued the site by the Direct Sales Comparison Method at
$__________
(See Task 1, Problem # 11) You estimated the reproduction cost
new of the bungalow at $________ by the quantity survey method (See Task 2,
Problem # 4).
On inspection you find that the interior requires repainting; the eaves and
downspouts need replacing, and some hardwood flooring requires replacing, sanding,
and refinishing.
In estimating the curable physical deterioration, you arrive at the following:
Item
Painting Interior
Eaves & Downspouts
Hardwood Flooring
RCNew
$1,600
500
$1,200
Cost to Cure
$1,750
650
400
You estimate the reproduction cost new, effective age, and normal life expectancy
of each of the following short lived items:
Item
Heating
Kitch Built-ins
Tiled Floor
Finished Floors
Exterior Painting
Roof Covering
Light Fixtures
Hot Water Heater
RCNew
1,400
1,500
400
800
1,000
1,000
600
350
Effective Age
15 years
15 years
9 years
15 years
1 year
15 years
15 years
15 years
Normal Life Expectancy
20 years
20 years
12 years
20 years
4 years
20 years
20 years
20 years
Assuming that the items of deferred maintenance were corrected, you estimate the
bungalow will have an effective age of 10 years and a remaining economic life of 40
years.
(a) Calculate the total accrued physical depreciation using the economic age-life
depreciation method (modified)
48
Answer:
Estimated Value of Site:
Estimated Reproduction Cost New of Improvements:
$45,700
$87,600
Estimate Accrued Depreciation:
1. Curable Physical Deterioration:
RCN
$1,500
500
$1,200
$3,300
Painting Interior
Eaves and downspouts
Hardwood Floors
C to C
$1,750
650
400
$2,800
$2,800
2. Incurable Physical Deterioration:
(a) Short Lived
Component
Heating
Kitchen Built-in
Tiled Floors
Finished Floors
Exterior Painting
Roof Covering
Light Fixtures
Hot Water Heater
RCN
1,400
1,500
400
800
1,000
1,000
600
350
EA.
15
15
9
15
1
15
15
15
LE
20
20
12
20
4
20
20
20
Dep %
75
75
75
75
25
75
75
75
7,050
Dep $
1,050
1,125
300
600
250
750
450
263
4,788
$4,788
(b) Long Lived
Reproduction Cost New of bungalow
Less RCN from:
Physical Curable
3,300
Physical Incurable
7,050
Total long lived
Effective Age = 10 years, REL = 40 years
10/50 x 77,250 =
Total Physical Deterioration:
87,600
10,350
77,250
$15,450
$23,038
49
(b) Calculate the depreciated cost of other improvements as follows:
Estimated Reproduction Cost New of other improvements
$5,000
Estimate Accrued Depreciation:
Item
Driveway
Fencing
Wood Deck
Total
RCN
$1,000
$2,000
$2,000
Eff.Age/Life Exp
15/20
10/25
5/15
Deprec.
750
800
667
$2,217
Depreciated Cost of Other Improvements:
(2,217)
$2,783
(c) Calculate the value of the building.
Depreciated Cost of Building: 87,600 – 23, 038 = $64,562
(d) Calculate the market value of the bungalow including the site by the cost approach.
Value of Site
Depreciated Cost of Building
Depreciated Cost of other Improvements
Market Value by the cost approach
$45,700
$64,562
$ 2,783
$113,045 or $113,000 (rounded)
50
THE DIRECT COMPARISON APPROACH
1. The Direct Comparison Approach is based on the Principle of Substitution
2. The five steps in the Direct Comparison Approach are:
 Locate and select all available comparable sales
 Collect pertinent information on each comparable
 Analyze all relevant data, including differences that exist between the comparable
and subject (e.g., time of sale, motivation, length of time on market, etc.)
 Compare each comparable to the subject and make the necessary adjustments
 Reconcile the data and arrive at a reasonable value estimate.
3. Four items of importance in judging the quality of comparable sales data are:
 Within the local market area
 At or near the date of the appraisal.
 Truly comparable in that it would appeal to the same type of purchaser who
would consider buying the subject property being appraised. For example, if the
appraisal is for a single family home, then a duplex or condominium would not
normally be a good comparable.
 A bona fide arm's length transaction.
4. The four main elements of comparison are: Time, location, lot dimensions, physical
characteristics, motivating forces.
Time is adjusted first to bring all comparable sales to same economic base as subject
5. The principle of contribution underlies the adjustment process.
6. The two commonly used methods of adjusting for differences between the subject
property and comparable properties:
Dollar Adjustments: the appraiser estimates the dollar amount allocated to each
factor of adjustment to indicate what a typical buyer would pay under the current
conditions for the items requiring adjustment.
Percentage Adjustments: factors such as time, location, and availability of views are
best handled by "+" or "-" percentage adjustments. With percentage adjustments, it
is important to remember to make the calculations on the time adjusted price, not
the sale price.
51
7. Adjustments are made to comparable properties using the following important rules
and guidelines.
a. Adjustments are usually shown in dollar amounts, but percentages are
permissible.
b. Adjustments are either a minus adjustment or a plus adjustment. If the feature
in the comparable is poorer than the subject property, a plus adjustment is
made. If the feature in the comparable property is better than the subject
property, a minus adjustment is made.
c. The adjusted amount represents the value of the item being adjusted, not its
cost.
d. The sum of all adjustments, when added or subtracted from the selling price,
determines the adjusted sale price.
8. "Time" is adjusted for first because the subject property is being appraised today and
the sale prices of all comparables must be adjusted to today's date – what would the
comparable sell for if offered for sale under current market conditions. Price changes
between the two dates must be taken into account. The Principle of Change is at work
here.
9. Location generally refers to the particular locale, but can also refer to specific
amenities within a particular area. For example, in some new subdivisions, lot values
are established on a per lot basis with added values based on selected features such as
adjacent to a park or golf course, river-front or lake-front property, or having a
particular view.
10. Four advantages and four disadvantages of the Direct Comparison Approach are:
Advantages:
- It reflects market behaviour.
- It is widely used and understood.
- It is accorded greatest weight by the courts.
- It requires least adjustment if sufficient data is available.
Disadvantages:
- If inadequate data is available, it may be impossible to apply.
- Adjustments must be made – no two properties are ever identical.
- Sales are always historical.
- Accuracy of the method depends upon the appraiser's ability to recognize
differences, and to make the proper adjustments.
- It is sometimes difficult to ascertain circumstances surrounding a sale.
52
Task 2: Case Studies
1. The subject property is being appraised as at December 15th, 200x. A comparable
property has been chosen which sold for $158,000 and is very similar to the subject
property except that it sold 8 months before. Prices have increased over the past year
and the appraiser needs to know the time adjustment factor to be applied to the
comparable property. The appraiser has found three properties which have sold
during the past year and has confirmed that no changes were made to the properties
between the sale and resale that affected their values. The details of the three
properties are as follows:
Sale #1:
Sold in April for
$153,000
Resold in September for
$160,500
Sale #2:
Sold in May for
$153,500
Resold in December
$164,200
Sale #3:
Sold in January for
$148,000
Resold in December for
$163,000
Based on the analysis of these three properties, what is the time adjustment factor
that the appraiser should use on the comparable property.
Answer:
(1) 160,500 – 153,000 = 7,500  153,000 = 4.90%  5 = .98%
(2) 164,200 – 153,500 = 10,700  153,500 = 6.97%  7 = .99%
(3) 163,000 – 148,000 = 15,000  148,000 = 10.12%  11 = .92%
Use 1% per month.
53
2. The value of the subject property is estimated as follows:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Sale Price
137,500
136,100
134,400 134,900
136,600 139,300 135,200
139,500
Sale Date
recent
1 yr ago
2 yr ago recent
recent
recent
Time Adj
0
1,500
3,000
137,600
137,400 134,900
Adjusted SP 137,500
0
recent
0
recent
0
0
136,600 139,300 135,200
0
139,500
Location
0
0
0
+2,500
0
0
+2,500 0
Garage
0
0
0
0
0
-2,000
0
-2,000
-1,000_
Air Condit
-1,000
-1,000
-1,000
-1,000
0
-1,000
-1,000
Total Adj
-1,000
-1,000
-1,000
+1,500
0
-3,000
+1,500 -3,000
Adj. SP
136,500
136,600 136,400 136,400
136,600
136,300 136,700 136,500
All sales were around $136,000. Therefore the value of the subject property by the Direct
Comparison Approach is $136,500
.
54
3. The market value of the subject is estimated as follows:
Sale #1
Sale #2
Sale #3
Sale Price
135,500
133,000
134,500
Sale Date
1 year ago
1 month ago
1 month ago
Time Adjust
+6,000
+500
+500
Location
-2,000
----
-----
Condition
-----
-2,400
-----
Rec Room
-----
+8,500
-----
Kitchen
+10,000
+10,000
-----
Garage
-----
------
+8,000
Furnace
-6,000
-6,000
-----
Total Adjustments
+8,000
+10,600
+8,500
Adj. Sale Price
$143,500
$143,600
$143,000
Reconciliation: Sale #3 required the fewest number of adjustments and was most
comparable to the subject property. The adjusted sale price for Sale #3 is supported by
the adjusted sale prices for Sales #1 and #2. Therefore, market value of subject property
is $143,000 or $143,500
55
THE INCOME APPROACH
1. The five steps in the Income Approach are:
-
Estimate the potential annual gross income at 100% occupancy and deduct an
allowance for vacancies and bad debts.
Estimate the total annual operating expenses
Calculate the net operating income
Select the appropriate capitalization rate
Using the appropriate method of capitalization, discount the net income into
value.
2. Definitions:
a. Rehabilitation: is restoration to good condition without changing plan,
form, or style
b. Remodelling: is changing the plan, form, or style to correct functional or
economic deficiencies
c. Modernization: is the replacement, in modern style, of outmoded aspects
of the structure and equipment.
3. Potential gross income is the income that a property will produce with 100%
occupancy at market rent, assuming typically competent and prudent management.
This income is generally derived by multiplying the rental value per unit by the
number of units in the building and adding any ancillary income such as from parking
or laundry.
4. Effective gross income is: Potential gross income – allowance for vacancies and bad
debts
5. Net income is: Effective Gross Income – operating expenses
6. Four reasons why an appraiser must reconstruct the owner's operating income and
expense statements before determining the value of a property by the income
approach are:
a. Expenses are most often recorded on a cash basis (i.e., recorded when paid),
whereas appraisers look at expenses on an accrual basis (i.e., recorded when
incurred).
b. The building may not have competent management and, therefore, the expenses
may not be typical.
c. The statements may include expenses that are not necessary to maintain the
income flow or may exclude expenses that are necessary.
d. The statements may show expenses that are incurred in some years but not in
others (e.g., painting). All such expenses should be analyzed so that typical buyers
are not misled when examining statements for years in which these expenses do
not occur.
56
7. In reconstructing the operating expense statement for appraisal purposes, the
following operating expenses which appear in the owner's income statement must be
omitted:
 Business Tax: This tax is levied on the business being conducted on the property,
and should be accounted for only when appraising the business and not when
appraising the real property, which is the case here.
 Depreciation or Capital Cost Allowance: CCA is an allowable expense for
income tax purposes and will invariably appear in the owner's expense statement.
This item is omitted in the appraiser's reconstructed statement but provision is
made in the capitalization rate to recapture the capital invested. To include it in
the expense statement as well would amount to double recovery.
 Interest on Mortgage or Loan: This is not a direct cost of calculating net
operating income. Though interest charges may be tax deductible, they benefit the
owner and not the property.
 Capital Improvements (Capital Outlays): These are expenditures that enhance
the value of the property and are designed to increase its income producing
potential. As such, they are not operating expenses necessary to maintain the
potential gross income.
8. An investor in real estate is entitled to two types of return:
- return OF investment
- return ON investment
9. Definitions:
a. Discount rate: the rate of return ON the invested capital
b. Recapture rate: the rate of return OF the invested capital
c. Overall rate: a blend of the discount rate and the recapture rate in the
same proportion as the ratio that the land value bears to the building value
10. If the net operating income before depreciation of a building is $56,000 annually and
the overall capitalization rate which is expected of this type of property is 12%, the
value of the property is:
V = I/R = 56,000 / 0.12 = $466,667
11. If an income producing property sell for $560,000 and the net operating income
before depreciation attributable to this property is known to be $50,000 annually, the
overall capitalization rate is:
R = I / V = 50,000 / 560,000 = 8.93%
12. If an income producing property is offered for sale at a price of $825,000, the annual
net operating income before depreciation that the property must be producing if an
investor expects a 15% capitalization rate is:
I = V x R = 825,000 x 15% = $123,750
57
13. If an income property sells for $730,000 and the net operating income before
depreciation attributable to this property is known to be $68,000 annually, the overall
capitalization rate is:
R = I / V = 68,000 / 730,000 = 9.32%
Task 2: Case Studies
1. (a) The capitalization rates for the six properties are:
Sale
#1
Sale Price
$2,100,000
NOI
$196,300
Cap Rate
.0935 or 9.35%
#2
1,980,000
193,450
.0977 or 9.77%
#3
1,700,000
164,050
.0965 or 9.65%
#4
1,863,000
172,550
.0926 or 9.26%
#5
1,986,000
184,490
.0929 or 9.29%
#6
2,150,000
183,600
.0854 or 8.54%
(b) If Sale #1 was judged the most comparable, the capitalization rate would be:
9.35%
(c) If the subject property has a net operating income of $187,000, its estimated value
is:
Value is $187,000  .0935 = $2,000,000
58
2. Net rentable area for each floor is: 1200 x 80% = 960 square metres
Potential Income:
1st Floor:
960 x $80.00
Less vacancy at 2%
Effective Income
=
=
=
76,800
1,536
75,264
2nd – 5th Floors:
4 x 960 x $60.00
Less vacancy at 5%
Effective Income
=
=
=
230,400
11,520
218,880
Top Floor:
960 x $75.00
Less vacancy at 3%
Effective Income
=
=
=
72,000
2,160
69,840
Total Effective Income
+ Annual Service Income
Effective Gross Income
=
=
=
$363,984
50,600
$414,584
59
3. You are employed by ABC Realty Inc. Broker/Owner Johnson has been asked to
estimate the value of 4261 Lakeshore Blvd. and felt it was an opportune chance to
expand your knowledge of the income approach. Basic details of the property being
appraised follow.
Income
An investor owns a recently constructed income property consisting of eight residential
units. The current rent is $84,361, but potential rental income is $85,000. Additional
income derived from extra parking spaces and coin-operated laundry facilities amounts to
$385 per month. Vacancy factor and credit losses total 5% of potential rental income.
Operating Expenses
The following expenses can be entered directly on the reconstructed worksheet.
Payment Type
Property Tax
Water
Fire Insurance
Repairs and Maintenance
Electricity for Common Areas
Landscaping Contract
Janitor's Salary
Annual Payment
$6,988
1,800
2,500
5,050
1,200
1,900
10,000
These expenses must be annualized:
- Every five years, halls are repainted at a cost of $3,000.
- Every seven years, exterior trim is repainted at a cost of $2,100
- Every four years, all suites are painted and decorated at a cost of $900 each
suite.
Capitalization Rate
Three highly comparable properties have been sold in the immediate area and you have
obtained net operating incomes.
Sale
Sale Price
NOI
Overall Cap Rate
#1
$527,860
$49,870
9.45%
#2
499,329
47,500
9.51%
#3
542,600
50,960
9.39%
Task 1:
Calculate the cap rate that Broker/Owner Johnson should use.
Answer:
See table above. Use cap rate of 9.45%
60
Task 2:
Determine the market value of the subject property using the following format. Round
calculations to the nearest dollar.
Potential Rental Income
Plus Other Income
Gross Potential Income
Less: vacancy and credit losses (5%)
Gross Operating Income
Less: Operating Expenses
Net Operating Income
$85,000
+ 4,620
$89,620
- 4,481
$85,139
- 32,138
$53,001
Indicated Value by the Income Approach:
(53,001 ÷ .0945 = $560,857) or $561,000 (rounded)
_____________________________________________________________________
where Operating Expenses are: (6 marks)
Property Tax
$6,988
Water
1,800
Fire Insurance
2,500
Repairs & Maint
5,050
Electricity
1,200
Landscaping
1,900
Janitor's salary
10,000
Hall repainting
600
Exterior Trim
300
Painting of Suites
1,800
32,138
61