Property Valuation Flashcards
6 cards from real BC Real Estate Trading Services Course practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Property Valuation flashcards as text
What are the three traditional approaches to property valuation used in BC?
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.
In the market comparison approach, what is an 'adjustment' and why is it necessary?
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.
What is the 'capitalization rate' (cap rate) used in the income approach to valuation?
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.
What is 'highest and best use' in property valuation?
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).
What is the difference between 'market value' and 'assessed value' in BC?
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.
What factors can cause 'depreciation' in the cost approach to valuation?
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.