Reg. No….
KIGALI INSTITUTE OF SCIENCE AND TECHNOLOGY
INSTITUT DES SCIENCES ET TECHNOLOGY DE KIGALI
Avenue de l’Armée, B.P. 3900 Kigali - Rwanda
INSTITUTE EXAMINATIONS – ACADEMIC YEAR 2013
FACULTY OF ARCHITECTURE AND ENVIRONMENTAL DESIGN (FAED)
END OF SEMESTER MAIN EXAMINATION
DEPARTMENT OF ESTATE MANAGEMENT AND VALUATION
YEAR: ONE
SEMESTER 2
SUBJECT: EMV 3122; REAL ESTATE VALUATION I
DATE:
/
/2013
DURATION: 2 HRS
MAXIMUM MARKS: 60
INSTRUCTIONS
This paper has two sections; A and B
Section A is compulsory.
Marks are indicated against each question
Do not forget to write your registration number
Do not write any answer on this question paper
SECTION A (COMPULSORY)
QUESTION 1 (30 MARKS)
(a) Define functional utility and state some of its standard general considerations in real estate
by the appraisers. (4marks)
(b) Illustrate the relationship between Utility and Scarcity as pre-requisite components of value.
(4marks)
(c) What do you understand by an “Open Market Value” as used in valuation.(3marks)
(d) Differentiate between the following terms:
(i) Price and Value (2marks)
(ii) Use Value and Investment Value (2marks)
(e) Write short notes on:
(i) Cost (2marks)
(ii) Appropriation (3marks)
(iii) Transferability (3marks)
(iv) Yield for landed property (2marks)
(f) State any five unique characteristics of real estate market that distinguishes it from other
markets. (5marks)
SECTION B (CHOOSE ANY TWO)
QUESTION 2 (15 MARKS)
(a) What do you understand by investment in a broad category.(3marks).
(b) Classify the forms of investments that exist in a standard market.(12marks)
QUESTION 3 (15 MARKS)
(a) Which are the different rates used in developing mathematical valuation tables (6marks).
(b) Write short notes on the following mathematical Tables as used in Investment Method of
Valuation:
(i) Amount of 1/- Table (2marks)
(ii) Year’s Purchase or Present Value of 1/- per annum Table (3marks)
(iii) Present Value of 1/- Table (2marks)
(iv) Annual Sinking Fund Table (2marks)
QUESTION 4 (15 MARKS)
In our complex society, the words “appraiser” and “appraisal” can take on many meanings. It is
therefore very important to distinguish the individuals and organizations involved in the
valuation process. Discuss. (15marks)
GOOD LUCK
REAL ESTATE VALUATION I MAIN EXAMINATION MARKING GUIDE
SECTION A (COMPULSORY)
QUESTION 1 (30 MARKS)
(a) This is the ability of a property or building to be useful and to perform the function which it
is intended according to current market tastes and standards which include; efficiency of the
building use in terms of architectural style, traffic patterns and the size of rooms.(2marks)
Some general standards of functional utility considered by appraisers include; (4points needed
each half a mark)-2marks
-Compatibility of the property and its use and environment.
-Suitability
-Comfort level
-Safety
-Security
-Accessibility
-Ease and cost of maintenance
-Market standards
-Attractiveness
(b) Utility is the ability of a product to satisfy a human want, need or desire (1mark) whereas
Scarcity is the present or anticipated supply of an item relative to the demand, if the demand
is constant, the scarcity of a commodity makes it more valuable.(1mark). No object
including real property can have value unless scarcity coupled with utility. For example air,
which has a high value of utility has no definable economic value because of its abundance.
(2marks).
(c) Open Market Value is the estimated amount for which a property should exchange hands at
the date of valuation between a willing buyer and a willing seller in an arm’s length
transaction after proper marketing wherein the parties had each acted knowledgably,
prudently and without compulsion. (3marks)
(d) (i)Price is the financial reward for providing a good or service whereas value is what one
perceives as the monetary worth of a product, good or service. (2marks)
(ii)Use value is the value of a specific property for a specific use. In estimating the use value,
the appraiser focuses on that particular and disregards the highest and best use of that
property, whereas the Investment value is the value of a specific property to a particular
investor. It considers the value of that specific to a particular investor based on that person’s
investment requirements. (2marks)
(e) (i)Cost is the amount for producing a product, good or service. Cost is used by appraisers in
relation to production, not exchange therefore cost may be either an accomplished fact or a
current estimate. (2marks)
(ii) Appropriation is when a person or group of persons that have possession and control over
the commodity that exclude others from having possession and control. The party that is
excluded from possession and control must be willing to acquire the commodity because of
its utility. (2marks)
(iii) Transferability is a kind of situation where the party in possession and control should be
able to transfer the commodity to the party excluded. The party excluded should be able to
acquire fully or partially the possession and control from the initial owner so that he can
benefit from it. This other party excluded must be ready to compensate the initial owner
usually in monetary terms (2marks)
(iv) Yield for landed property is the actual return from a property investment. (1mark) Yield
is then the basis for measuring investment performance not nominal rate of interest.(1mark)
The formula is Yield=(Net Income/Capital Value)x100
(f) The unique characteristics of real estate market from other markets are stated below;(5points
needed each 1mark)
-Real estate market is heterogeneous.
-Real estate market is immobile.
-Real estate market tends to be a localized market.
-Real estate market tends to be highly segmented.
-Real estate market involves very high transaction costs.
-Real estate market is highly illiquid.
-Real estate market involves several problems of management.
-Real estate market is so vulnerable to too many legislation.
SECTION B (CHOOSE ANY TWO)
QUESTION 2 (15 MARKS)
(a) Investment is the outlay of valuable resources in the expectation of future gain (1mark).
These valuable resources can be either in form of a capital sum or something of value
(1mark). Future gain can be either in the form an income flow or a capital gain (1mark).
(b) The forms of investments that exist in a standard market include.(4well explained points
each 3marks)-(12marks)
Investment can be broadly classified into financial and real assets:
Investment in financial assets include:
(i)
Bank Deposits: The simplest form of investment in bank deposit is deposit in
saving account. The owner of a deposit is entitled to a return in form of interest
on the money deposited. The other form of deposit form account investment is
fixed deposit where normally the period term is agreed upon.
(ii)
Fixed Interest Securities (Bonds): As the name implies, they provide fixed annual
payment of interest to the holder for the term of the security. They are usually
created to raise fund for development purpose by both government and private
organizations. There is usually a date of redemption in which the bond holders
will be paid the initial money invested in the bonds at per face value.
(iii)
Variable Interest Securities (Ordinary Shares): Shares in business organization are
normally referred to as equity stock. They are normally referred to as variable
interest securities because the returns or dividends given to the share holders at a
given period of time depend on the profit generated and the proportion of the
profit that is shared.
(iv)
Unit Trusts: This can be referred to as hybrid securities because the unit holders
hold shares in a combination of various underlying investment media.
The objective of unit trust is to reduce variability of returns on investment to the
unit holders by investing funds in ordinary shares of various companies, bonds of
different kinds, property. The idea is that a decrease from one investment medium
will be offset by an increase in return from another investment medium.
Investment in real assets include:
(v)
Investment in Real Property
Direct investment in real property involves acquisition of interest in land, land
and buildings with the aim of receiving annual returns in form of rent or capital
gain on outright sale of the property.
Investment in real property can have a wide range of choice of the type of
property to invest their capital. The types of property vary from residential,
commercial, industrial and agricultural properties.
QUESTION 3 (15 MARKS)
(a) -Single Rate tables: The formula in these tables uses only one rate of interest or yield.
(2marks)
-Dual Rate Tables: The formula uses two rates in its construction i.e renumerative rate
and accumulative rate. (2marks)
-Dual Rate Adjusted for tax tables: These tables use two rates and in addition tax
adjustment is incorporated in their formulae. (2marks)
(b) (i) Amount of 1/- Table (2marks)
Amount of 1/- Table shows the sum to which 1/- invested today will accumulate if it
earns compound interest at a specified rate of interest over a specified term (n)
usually number of years(n), Formula is A=(1+i)n.
(ii) Year’s Purchase or Present Value of 1/- per annum Table (3marks)
This is the capital value with the right to receive an annual income of 1/- at a given
rate of interest,(i) over a given number of years(n). It considers capitalization which
involves converting future income cash flows into capital values or present values.
Formula is YP=1/(i+ASF), Where S=Sinking Fund
(iii) Present Value of 1/- Table (2marks)
This is amount of money that should be invested now so as to accumulate 1/- after a
given period of time usually years (n) at a specified rate of interest (i). Formula is
Vn=1/(1+i)n or 1/A
(iv) Annual Sinking Fund Table (2marks)
This is amount of money that should be invested annually at the end of year so as to
accumulate 1/- at the end of the investment period if earns an compound interest (i)
Formula is A.S.F=(A-1)/i
QUESTION 4 (15 MARKS)
Valuation is the art or science of ascertaining property values. (1mark).
The following are individuals and organizations that are involved in the valuation/appraisal
process; (14marks)-(7 well explained points needed each 2marks)
-Buyers and sellers: These sell and purchase real estate and make decisions basing on real estate
matters. Home buyers often have little or no background in real estate and must rely on others to
make their decisions. The only appraisal they make is an evaluation of the conditions they
observe or the facts that are made known to them.
-Real estate sales people: These are licensed to sell real estate. They have training in their field
but may or may not have extensive appraisal training. They are generally familiar with properties
in a given locale and have market information.
-Real estate financial officers and executives: These include loan officers, closing agents, agents
at little companies. This group also includes government officials who deal with land or land
values. These professionals vary in their ability in understanding market forces, develop opinions
of values and appraisal concepts.
-Licensed and certified real estate appraisers: These meet educational, experience and testing
requirements set by the state and can perform appraisal in the jurisdiction covered by their
licenses or certification. The types of properties that can be appraised are dependent on the type
of license.
-Full time professional real estate appraisers: These are often licensed and certified in more than
one state and spend the majority of their time appraising. These individuals have extensive
training and experience and are committed to the profession.
-Insurance Companies: The Insurers generally handle appraisals for properties for insurance
purposes. They generally have knowledge about the insurance policies and procedures. They
further have some general knowledge on properties but are not vast with the ample capacity to
technically appraise property.
-Auctioneers: These auction real estate and make decisions basing on real estate matters.
Auctioneers buyers have training in their field but may or may not have extensive appraisal
training. They are generally familiar with legal procedures of an auction and have backing of
some legal knowledge.