BC Real Estate Trading Services Course Property Valuation — Questions and Answers
Question 1: What are the three traditional approaches to property valuation used in BC?
- Market approach, income approach, and cost approach (Correct answer)
- Assessed value approach, insurance value approach, and listing price approach
- Comparable sales approach, rental approach, and demolition approach
- Tax assessment approach, mortgage value approach, and appraisal approach
Correct answer: Market approach, income approach, and cost approach
The three traditional approaches are: (1) Market/Sales Comparison Approach — comparing to similar recently sold properties; (2) Income Approach — capitalizing the income the property can generate; (3) Cost Approach — estimating the cost to reproduce or replace the property minus depreciation plus land value.
Question 2: In the market comparison approach, what is an 'adjustment' and why is it necessary?
- It is a change to the listing price to attract buyers
- It is a modification to the sale price of a comparable property to account for differences between it and the subject property (Correct answer)
- It is a discount given by the seller during negotiations
- It is a fee charged by the appraiser
Correct answer: It is a modification to the sale price of a comparable property to account for differences between it and the subject property
Adjustments are made to comparable sale prices to account for differences between the comparable property and the subject property. If a comparable has a feature the subject lacks (e.g., a garage), a negative adjustment is made. If the subject has something the comparable lacks, a positive adjustment is made to the comparable's price.
Question 3: What is the 'capitalization rate' (cap rate) used in the income approach to valuation?
- The interest rate on the property's mortgage
- The rate of return an investor expects on the property, used to convert net operating income into an estimate of value (Correct answer)
- The rate at which the property depreciates
- The rate of property tax applied by the municipality
Correct answer: The rate of return an investor expects on the property, used to convert net operating income into an estimate of value
The capitalization rate represents the expected rate of return on a real estate investment. It is used to convert a property's net operating income (NOI) into an estimated value using the formula: Value = NOI / Cap Rate. A lower cap rate indicates lower risk and higher value; a higher cap rate indicates higher risk and lower value.
Question 4: What is 'highest and best use' in property valuation?
- The most expensive improvement that could be made to the property
- The reasonably probable use that is legally permissible, physically possible, financially feasible, and maximally productive (Correct answer)
- The use preferred by the current owner
- The use that generates the most rental income in the short term
Correct answer: The reasonably probable use that is legally permissible, physically possible, financially feasible, and maximally productive
Highest and best use is a fundamental appraisal concept. It must meet four criteria: legally permissible (allowed by zoning), physically possible (the site can support it), financially feasible (it will generate a positive return), and maximally productive (it produces the highest value among all feasible uses).
Question 5: What is the difference between 'market value' and 'assessed value' in BC?
- They are always the same amount
- Market value is the estimated price in an open market transaction, while assessed value is determined by BC Assessment for property tax purposes and may differ from market value (Correct answer)
- Assessed value is always higher than market value
- Market value is set by the government and assessed value is set by appraisers
Correct answer: Market value is the estimated price in an open market transaction, while assessed value is determined by BC Assessment for property tax purposes and may differ from market value
Market value is the estimated price a property would sell for in an arm's-length transaction between willing parties. Assessed value is determined by BC Assessment annually as of July 1 for property tax purposes. While BC Assessment aims to reflect market value, the assessed value may lag behind or differ from actual market conditions.
Question 6: What factors can cause 'depreciation' in the cost approach to valuation?
- Only the age of the building
- Physical deterioration, functional obsolescence, and external (economic) obsolescence (Correct answer)
- Increases in interest rates only
- Changes in the owner's financial situation
Correct answer: Physical deterioration, functional obsolescence, and external (economic) obsolescence
Three types of depreciation are considered: (1) Physical deterioration — wear and tear from age and use; (2) Functional obsolescence — outdated design, layout, or systems; (3) External obsolescence — factors outside the property such as neighbourhood decline, environmental contamination, or adverse zoning changes.
BC Real Estate Trading Services Course Property Valuation
What are the three traditional approaches to property valuation used in BC?