REAL ESTATE Appraisal

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PROJECTS

SAGAR GARIKIPATI

Projects.1

PROJECTS In this course, you will be required to prepare and submit two written project assignments that are intended to synthesize your understanding of the course content. You will be presented with challenging, stimulating, and thought-provoking work that requires you to go beyond the course manual in applying this content in a practical context. These projects are also worth a significant portion of your final course grade.

Aspects of the projects are field assignments designed to give you practical experience in the tasks performed by real estate appraisers. You will, in effect, do what appraisers do in valuing real property.

Expectations for Your Reports In general, your reports are expected to provide the level of detail that the intended reader would require in a practical context. This means that you need to report in a clear manner any informa- tion that will be helpful to the reader in making their decision, for example, deciding whether or not to provide a loan or purchase a property. Therefore, your report must cover all pertinent information, be well-organized, and be professionally presented.

Please keep in mind that the intent of these projects is to simulate the type of report that you would actually deliver to someone in a real-world context. You should assume that your report will be read by someone who has knowledge in general business matters, but has no specific knowledge of real estate practice. You must write your report specifically to address the infor- mation needs of this person so that he or she can understand and apply your work. It is your job to focus the reader and provide him/her with the relevant information needed to make an informed decision, ensuring that the report is neither excessively long, nor too short. As such, brevity would be considered a positive point by the reviewer of your report. You will need to exercise some judgment as to what is and is not relevant and what should be included or omitted. If you are in doubt, you may wish to contact the course tutor or your fellow students on the course discussion forum in order to discuss what they are doing and get their advice.

Finally, students are also reminded that, in addition to a practical demonstration of appraisal and consulting processes, this is also an examination of the underlying theory. You must ensure that you provide sufficient explanations of the processes and procedures in order to demonstrate your knowledge of the material.

Report Specifications Below are some specific guidelines for preparing and submitting your projects:

• font must be of 11 point or larger, 12 point preferred; • preferred line spacing is 1.5 (not required on forms on Project 2); • preferred margins are 1 inch margins, maximum 1.5 inches (not required on forms on

Project 2); • pages must be numbered consecutively in the top right corner or bottom of page, separately

numbered for the report body and appendix; and • all sources of information relied upon in producing your submission should be carefully

documented in a bibliography or list of references (references used should be acknowledged). The suggested pages for each project are specified below. An appendix should provide necessary supporting documentation. Note that these are only rough limits; you should provide all pertinent information, i.e., anything that you used to substantiate your decisions. Note also that a well-written and organized report could require fewer pages.

Project 1 Project 2

Report Appendix Report Appendix

Suggested 10-15 pages 10-15 pages 25-30 pages 15-20 pages

Maximum 25 pages 25 pages 40 pages 30 pages

Projects.2 Foundations of Real Estate Appraisal

Under no circumstances should you need more than the stated maximum number of pages for your report. If your submission exceeds these limits, EITHER: 1) you will be requested to resubmit within the page length requirements before the project is graded; OR 2) the additional pages will not be read by the marker and marks will be deducted for their inclusion.

Submitting Your Projects The project due dates can be found on the BUSI 330 Course Resources website under Important Dates and Deadlines. Projects must be submitted electronically using Turnitin, a web service that checks for content originality. Turnitin accepts Microsoft Word and PDF formats. Any supplemental files that cannot be inserted into your word processed file must be emailed to your tutor. You can find your assigned course tutor’s email address on the “Tutorial Assistance” webpage. Please include your course name, last name, and student number in the subject line of your email. You can find additional information for project submission under Submit Projects on your Course Resources website.

Project Grading and Return Your tutor will make a concerted effort to return your marked project in a timely fashion. The target turnaround time for marking is one week from the date of receipt. However, please keep in mind that the Real Estate Division’s tutors are generally full-time professionals who do tutoring on a part-time basis, and sometimes business pressures make it difficult to attain this target date (e.g., up to one additional week may be required). The tutors have been instructed to give priority to students who are working on time according to the course schedule. This means that if your project is submitted on time, it will receive top priority. If your project is submitted late, then your project will be marked after those on time are graded and other duties, such as tutoring, are taken care of.

This is particularly important towards the end of the course, when projects and exam preparation require a lot of the tutor’s time. You are best advised to keep to the course schedule and to submit your work on time. All projects submitted on time should be returned before the final exam. Those submitted late may not be returned before the date of the exam.

If you wish to view your project grades on the Assignment History webpage or the project answer guides, Project 1 is listed as “Assignment 12” and Project 2 is listed as “Assignment 13”.

Tips from the Tutor: The Details … Communicating Your Results Effectively

The projects simulate the type of report that you would actually deliver to someone who is paying you to prepare it. You should assume that your report will be read by someone who has some general real estate knowledge, but who does not have your familiarity with real estate valuation. You must write your report specifically to address the information needs of your client.

But also keep in mind that, in addition to a practical demonstration of an appraisal analysis, the projects are also an examination of the underlying theory. You must ensure that you provide sufficient explanation of the process and procedures in order to demonstrate your mastery of the learning objectives.

Ensure that your project is logically organized and presented professionally. There will be marks allocated for presentation. Reports may be failed if spelling or grammatical errors are excessive, or if they are extremely poor in composition. The report must flow logically, whereby the reader is led to the conclusions reached by the student. A demonstration of professional report-writing skills within the context of a structured format is expected.

Also ensure you do not overwhelm your reader with excessive details. The supporting documentation and photographs in the appendices should be limited to that which helps you to build your case regarding the property; i.e., you should not include every single piece of information you find on the property, you have to exercise judgment on what you believe is relevant to the reader of the report. A very well-written and organized report could require significantly less than the maximum number of pages and this brevity would be considered a positive point by the reviewer of your report. If you are in doubt, you may wish to contact the course tutor or your fellow students on the course discussion forum to discuss what they are doing and get their advice.

Projects.3

Individual Work Requirements The projects count for significant credit towards completion of this course, which is an educational requirement in a degree credit program and for accreditation by professional real estate associations. Because of these important consequences, it is vital that students produce and submit work that is entirely their own. Completing the projects in a group is NOT allowed – answers must be produced on an individual basis. The marker of this project must be able to certify that each individual student has a reasonable understanding of the concepts and techniques taught in this course.

Any recognized academic misconduct, including copying other students’ work or plagiarism from any source, will result in academic consequences as specified in the “Program Regulations” section of the Real Estate Division Student Handbook.

Projects.4 Foundations of Real Estate Appraisal

PROJECT 1: Appraisal Research Exercises

This first of two projects will provide you with practical applications of the appraisal concepts presented in the first four lessons in this course. You will answer some specific questions on the theories underlying real property appraisal and then complete a field project. This project is designed to delve deeply into the theories and concepts you have learned so far in this course, providing you with an in-depth look at how these theories and concepts apply to appraisal.

Total Marks for Project 1: 100 10% of course grade

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Learning Objectives After completing this project, the student should be able to:

1. Make connections between the appraisal theory covered so far in this course, seeing how the components blend together in practice

2. Discuss the nature of value and its various categories and definitions 3. Explain the forces that affect the determination of value(s) and how these forces interact 4. Describe the nature of real property and its various components, such as ownership rights,

property rights, and types of ownership 5. Recognize the basic social and economic principles that affect the market value of property and

how these various principles must be analyzed and applied in the appraisal of a subject property 6. Explain the principle of highest and best use and demonstrate how it is applied in appraising

residential properties

Project Grading Your grade on this project will be based upon:

1. Part A: Selected questions on Lessons 1-4 (50%) 2. Part B: Field project (50%)

PART A – Questions on Lessons 1-4 (50 marks) The following questions should be answered in paragraph format. It is expected that students will provide a suitable discussion, and therefore short answers and point-form are not acceptable.

1. Discuss two examples from your own personal experience when you found yourself assigning or justifying a “value” for something. What category or definition of value were you applying? What factors influenced your final decision to buy and pay the price you did for the item? (6 marks)

2. Consider the following list of possible land use controls: • zoning • planning • municipal/community plan • building standards • development controls • subdivision controls • rent controls • land preservation legislation • environmental legislation

Research ONE of the above controls that is prevalent in your community (or another land use control not listed above if it is relevant in your community). Provide a brief report (1-2 paragraphs) on how this affects the market value of land in your area. (4 marks)

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3. A client has hired you to appraise his home for refinancing purposes. He has asked you to conclude a value that is approximately 10% higher than its market value.

Write a letter to respond to the client’s request, making reference to the ethical standards of an appraisal organization of your choosing. Your letter should be in business format and should include the name of your professional association, the title of the standards, and their guidelines to follow when completing a valuation assignment.

The Online Readings webpage provides links to various appraisal standards. A recommended reference is the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). (6 marks)

4. Externalities can have a significant positive or negative effect on a property’s value. Find an example of an externality in your neighbourhood and discuss how it affects (or affected) the adjacent land(s) value, either positively or negatively, and can it be corrected or adjusted to reduce the impact on property values? (4 marks)

5. The Appraisal Institute of Canada’s First Principles of Value break down the valuation process into fundamental considerations that are universally applicable to any value-related situation:

a. Problem Identification b. Purpose and Intended Use c. Property Content d. Property Rights e. Land Use Regulations f. Legal Considerations: Legislation and Litigation g. Highest and Best Use h. Economic Variables i. Research

Outline a situation from your work or personal experience where property value was a consideration and briefly explain the relevance of any five of the First Principles in this situation. The situation you focus on could be related to real estate practice (e.g., appraisal, assessment, consulting, etc.) or it could simply be establishing a price in your own real estate purchase or sale. (5 marks)

6. The following questions refer to the Nygard et al v. District of Surrey case included at the end of Lesson 4. Also included with this case was a summary and site plan.

a. How does the principle of contribution relate to the existing improvements? (2 marks)

b. Explain how the following factors affect the highest and best use of the site in this case. Use the facts in the case to support your answers: (7 marks)

i. present use ii. future use iii. legal use iv. physically possible v. financially feasible vi. demand vii. maximally productive use

c. In this case, what factors did each of the appraisers examine when considering the probability of a change in zoning? (4 marks)

Projects.6 Foundations of Real Estate Appraisal

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d. The claimant’s and respondent’s appraisers were both accredited appraisers with considerable experience. Why did the Board disagree with both appraisers? Discuss the rationale of the board in determining market value. In your answer, ensure you state and discuss the final market value as estimated by: (6 marks)

i. the Claimant Appraiser ii. the Respondent Appraiser iii. the Compensation Board

e. Discuss three legal or appraisal principles flowing from this case and briefly explain the relevance of each to appraisal practice. In other words, outline lessons learned that may be useful for real estate appraisers in resolving future disputes over other properties? (6 marks)

PART B – Field Project (50 marks) You are required to complete a physical inspection of a residential property and inventory its characteristics. The purpose of this assignment is to acquaint you with the methodology used in residential property inspection by having you actually carry out your own analysis. Note that aspects of this analysis may be useful in completing Project 2.

You may choose any residential property for this assignment. Condominiums are acceptable, although a single-family house is recommended. Physical access will be an important consideration in your choice of property – to carry out this assignment effectively, you will need to inspect all parts of the building/ property, including some that may not be publicly accessible, such as mechanical rooms and the roof in a condominium building. It is recommended that students choose their own place of residence or another property they are familiar with as the subject property for this project. This will allow the greatest freedom of access for inspection and may also mean that some of the research requirements are taken care of, e.g., site sketch, photos of house, etc.

You are to report your inspection results using the first two pages of the Appraisal Institute of Canada’s “Full” Residential Appraisal Report form. A fillable PDF version of this form is found on the Online Readings webpage. Note that some of the characteristics on the forms will not be answerable for all properties.

In addition to this form, you are required to complete on separate pages the following specific questions and items. For (b), (c), and (e), the separate report can be completed in lieu of the Comments section of the report (i.e., your report replaces the Comments sections).

a. Photographs of Subject:

i. Provide one front that shows depth of the property, one rear, and one street scene with other dwellings.

ii. Your appendix should contain additional photographs, if necessary, to assist the reader in understanding the report – such as the site, the surrounding area/neighbourhood, and in particular any defects noted (within reason). The photographs and all other supporting

Property Selection / BUSI 398 Property Registration

Students who plan to continue on to the BUSI 398 Residential Guided Case Study course may want to consider using the same property for this BUSI 330 project and for BUSI 398. If so, you may wish to confirm now that you are choosing a property that is suitable for BUSI 398. The Online Readings webpage provides a checklist from BUSI 398, which outlines mandatory and recommended conditions for property approval. For example: condominiums are NOT acceptable in BUSI 398.

You may also pre-register your subject for BUSI 398 by submitting the ASubject Property Form@ from the BUSI 330 website. The subject property must be approved by a BUSI 398 course tutor before it is officially accepted; pre-registration here DOES NOT guarantee this approval, it simply holds the property for your use later (for up to five years).

Projects.7

PROJECT 1, continued

Project 1 continues on the following page

documentation in the appendix must be clearly labelled and referenced within the report in the relevant sections. Note that a table of contents may be helpful for you in organizing your work and for the tutor in grading it.

b. Neighbourhood Analysis: the form requires you to identify a number of neighbourhood features. The Comments section requires analysis of these neighbourhood features as to how they ultimately affect housing prices in that location. You do not need to fill out the Comments section of the form; instead, discuss the Comments section’s requirements in your associated report:

i. provide the neighbourhood name and a two-three paragraph description of the major characteristics that define the neighbourhood, such as its historical significance, the socioeconomic mix of residents, employment and amenities, and the form of boundaries that distinguishes it from other neighbourhoods.

ii. discuss the neighbourhood’s growth and life cycle, the value influences within it (i.e., economic, governmental, environmental, and social issues, both positive and negative), value trends, and market appeal.

iii. provide a city map showing the neighbourhood boundaries and the subject’s location. c. Site Analysis: similar to above, you do not need to complete the Comments section; instead,

discuss this section’s requirements in your associated report:

i. discuss in two-three paragraphs how the positive and negative features of the property ultimately impact its value: e.g., its orientation, appropriateness for surrounding uses, environmental issues, etc.

ii. provide a plot/site plan showing the dimensions of the lot, the siting of the building and all setbacks and any easements. (If you have instead been provided with pre-produced site plans, you must evaluate them in detail and comment on their accuracy).

iii. note any improvements on the site such as hedges, rock walls, garage, or driveway, and adjoining streets and lanes.

d. Land Use Controls and Zoning: in addition to the requirements on the form:

i. detail the subject property’s zoning designation: stated uses, maxima and minima defined by the zoning. Present a comparison table that summarizes the zoning criteria and subject’s data.

ii. explain the reasoning for your conclusion on the form as to whether or not the subject property conforms to the land use controls.

iii. comment on how strictly the zoning requirements are enforced and your opinion on the likelihood of any zoning changes in the foreseeable future (e.g., review Official Community Plan, recent redevelopment permits in the area, granting of variances, etc).

iv. discuss any other related legal issues that may affect the subject’s site, such as title restrictions, oil tanks, environmental or heritage laws, etc.).

e. Improvements Description: in addition to the requirements on the form:

i. provide a floor plan or rough sketch of the building that shows the exterior dimensions of the improvements; locations of windows, doors, and other openings; and any other prominent features of the improvements (if you have instead been provided with pre-produced floor plans, you must evaluate them in detail and comment on their accuracy).

ii. note the measurements for various walls and calculate the areas for the various component parts: e.g., gross floor area; ground floor area; garage; patio; basement; finished basement, etc. Ensure the floor areas are based on the external measurements of the home.

iii. similar to above, you do not need to complete the Comments section; instead, discuss this section’s requirements in your associated report. In 2-3 paragraphs, analyze the value impact of the improvement features.

Projects.8 Foundations of Real Estate Appraisal

End of Project 1

PROJECT 1, continued

f. Assessment and Property Tax: the assessment and property taxation information is summarized in the Subject section of the form; in addition to this requirement:

i. identify the assessment authority and explain how the assessed value is derived. State the effective date of the assessed value.

ii. briefly discuss your opinion of the accuracy and equity (consistency, fairness) of the subject’s assessment. Comment on the likelihood of a change in assessed value in the foreseeable future.

iii. explain how the tax rate is derived in the local municipality. Show the subject’s tax calculation, explaining all elements of the current tax amount. Comment on past trends in tax amounts and its expected future level.

Submitting Projects

Please note that the projects must be submitted directly to your course tutor by Turnitin.com, a web service that checks for content originality. See the “Submitting Written Assignments” link on your Course Resources webpage for details.

Note that Turnitin accepts only one submission per assignment/project so all relevant information must be in one Word or PDF file when submitting your project. Suggestions for including this project in a single file:

1. Complete the report in MS Word; for the 2-page form, copy a “screen capture” and paste it into the document. You can also insert or paste photographs into this document.

2. Complete the report in Adobe Professional (if you have access to this program): fill out the PDF form, complete the rest of report in Word and save it as a PDF, then combine the two PDF files.

If you have technical problems with incorporating the form report required in Part B, you may email this directly to your tutor.

Projects.9

PROJECT 2: Residential Property Appraisal

Project 2 requires you to analyze and appraise a residential property. The purpose of this assignment is to acquaint you with the methodology used in residential property appraisal by having you actually carry out your own analysis. You will be required to gather and analyze information from a variety of external sources. This could include interviews with appraisers, internet searches, visits to local government offices, and so on. The goal is to make this exercise as realistic as possible.

Total Marks for Project 2: 100 25% of course grade

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Learning Objectives There are two major, implicit learning objectives for this project. After completing this project, you should be able to:

1. logically analyze an appraisal situation, determine what information needs to be gathered, and gather this information systematically and effectively; and

2. apply your research skills to better understand the market and to become very familiar with all aspects of a specific property and sub-market.

Client Expectations (Purpose and Intended Use)

Brendan and Lena Fanella have made an offer to purchase a residential property. As a part of their mortgage financing application, the Jordan River Credit Union has commissioned you to prepare an appraisal report. The client has requested that your appraisal report follow the format described below in “Report Specifications”. The effective date of this appraisal is today. You are to find the market value of this property for sale purposes, assuming there is clear title, with no mortgage or other encumbrances against the property, such as easements or restrictive covenants.

Tips from Your Tutor: Tackling Project 2

Project 2 is a big part of this course and can be intimidating to start. Here are some tips to help you ease into the process:

Keep it in perspective: This project offers a practical introduction to some of the issues confronted by real estate appraisers. Although it requires more effort, simulating what real estate practitioners do in practice is a much more effective learning exercise than just reading about appraisal. You will not be expected to get everything right the first time, but you will learn more than just reading about the subject. Hopefully, you can achieve a rewarding balance by both reading and doing.

Benefits of networking: In completing this project, you may wish to establish a relationship with a knowledgeable industry practitioner, e.g., appraiser, analyst, or broker. Such relationships may lend valuable assistance in completing the project, in terms of accessing the required sales data. A secondary benefit is that it may also lead to future networking benefits for your career! A good place to start may be with local real estate offices or by contacting some of the following sampling of real estate institutes and associations:

• Appraisal Institute of Canada (www.aicanada.org) • Real Estate Institute of BC (www.reibc.org) • Canadian Real Estate Association (www.crea.ca)

All members of these organizations have had to go through extensive education similar to what you are doing in this course, and should be willing to devote some time to helping out someone new to the profession. However, these are generally very busy people, so be advised that you may have to knock on more than one door in order to find someone who will help you and, when you do establish contact with someone who will help you, you will have to be very well- organized in order to take up as little of their time as possible.

Grading worksheet: The tutors for this course have prepared a grading worksheet that is used to mark your project. For your reference, it has been posted to “Online Readings” on the Course Resources webpage. We hope that this extra guidance will help you in preparing your Project 2 submission.

Projects.10 Foundations of Real Estate Appraisal

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Choosing Your Subject Property

You may choose any residential property for this assignment (including carrying on with the property researched in Project 1). You will be required to research market data on this property, so you want a choose one that allows for adequate information. You ideally want to select the simplest, most standard subject property available in your market. In particular, you probably do not want to tackle the additional research and analysis required for a property that is ripe for redevelopment!

Condominiums are acceptable, although a single-family house is recommended. Condominiums pose difficult challenges for appraisers in the cost approach, particularly in land valuation and in estimating costs for common property. If you choose to value a condominium, you MUST still carry out a land valuation, even if there are hypothetical assumptions required. You can ignore the value of common property, but must attempt to estimate the cost of the improvements. Contact your tutor for assistance before proceeding (Also note again: condominiums cannot be used in BUSI 398, should you wish to carry on to that course with the property studied here).

Report Specifications

This project is to be completed using the formatted template document found on the Online Readings webpage. The document is prepared in Microsoft Word format, though you may use any compatible word processing program. Provided below are explanations for what is required in each section of the report. The document’s page numbers are provided in brackets. Note that your explanations do not have to always fit into the boxes given, as it is suitable to attach extra pages if needed. Keep in mind that this project is a learning exercise and there are many aspects of this exercise that do not conform to the more stringent requirements of a demonstration report or a “real” appraisal.

Letter of Transmittal (BUSI 330.2)

This is a letter to the person who initiated the preparation of the report, summarizing your understanding of the scope of the work that was to be completed and the conclusions of the report. It should be the first page of the report. This letter should be in business format and include the following:

• Full property address and legal description. • Who the report has been prepared for and the date of the letter. • The purpose of the appraisal and type of value estimate. • The final estimate of value, effective date of appraisal, and estimated exposure time that would be

required to market the property at the final estimate of value. • Your signature. If you have scanned image of your signature, you can insert this; otherwise, you

may simply type this in.

Photographs of Subject (BUSI 330.3)

You should provide one front photograph that shows depth of the property, one rear, and one street scene with other dwellings. Your appendix should contain additional photographs, as outlined below.

Table of Contents (BUSI 330.4)

Once the report is completed, number each page in the report, except the Addenda, in numerical sequence in the space provided in the upper right corner. Include appropriate page references in the Table of Contents. Note that only the first page number needs to be shown for each section. The required schedules must be titled and be listed either by letter (A, B, C, etc) if included in the Addenda, or by page number if inserted into the body of the report.

Summary of Salient Facts (BUSI 330.5)

This is effectively an “executive summary”, summarizing the general conclusions of each section of the report. Information required includes the type of dwelling, complete address, effective date of appraisal,

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dimensions and area of the site and improvements, assessments and taxes, highest and best use, estimate of vacant land value, estimate of value by the cost approach, estimate of value by the direct approach, and the final estimate of value.

Definition of the Problem (BUSI 330.6)

Discuss under the following headings: • Purpose and function of the appraisal • Registered owner • Past sales history for the past five years • Legal description • Any encumbrances – mortgages, easements, or rights of way • Definition of market value • Effective date of appraisal

Encumbrances and rights of way can be found by searching the title at your local Land Title or Registry Office. You are NOT required to search the property’s title in this course; this is optional.

Assumptions and Limiting Conditions (BUSI 330.7)

You must set forth all assumptions and limiting conditions that affect the analyses, opinions, and conclusions. Note, those limiting conditions pre-printed in the formatted report are only a guide, with the expectation that you will provide the necessary limiting conditions.

One mandatory condition is to state that this is a project in a course and not a “real” appraisal, and the inherent limitations of this exercise; e.g., you likely have made some assumptions for data rather than full market evaluation; have not carried out a full inspection; etc.

Conditions should be added for such factors as: • declaring if you have a personal interest in the property being appraised; or, • assumptions that affect the value conclusion must be stated here and in the certification.

Description of Improvements: Observed Depreciation (BUSI 330.8-10)

Describe any defects or deficiencies found in the inspection. You are required to describe each of the types of depreciation in the breakdown method and provide at least one example from the property for each. Where there are no examples in the property, you must at least provide hypothetical examples. Note that at this point, you are simply describing depreciation, not attaching dollar figures to it.

Notes on the depreciation that must be described: • Condition of Building: describe the condition of components of the house under the appropriate

depreciation headings. If there are no negative factors under a certain heading, describe what aspects of the property were considered in reaching that conclusion.

• Long-Lived: estimate and justify effective age and economic life. You must explain the basis for any large discrepancy between the actual and effective age. Provide an estimate of remaining economic life; note that the economic life usually differs from the physical life expectancy. Justify the effective age you have chosen, as this will be a key consideration in determining the depreciation for the property.

• Physical depreciation: The distinction between curable and incurable depreciation is not necessary for this assignment.

• Functional obsolescence: explain this by comparing to other similar homes in that age group, to establish how the subject varies from the market standard. Be careful that you always compare like to like.

• External obsolescence: ensure this is described.

Projects.12 Foundations of Real Estate Appraisal

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Highest and Best Use (BUSI 330.11)

You are expected to discuss this section under the three areas mentioned below.

a. Provide an analysis and concluding statement as to the Highest and Best Use of the site as if vacant. Consideration must be given to all uses permissible under the current zoning and to the likelihood of zoning change. Factors such as supply and demand and other principles that might affect the value of the subject must be taken into account. Explain how the principle of conformity applies – it should be possible to reach a conclusion that describes the style(s) and area (range) of house that would be constructed on the site if it were vacant.

b. Having reached a conclusion for the site as if vacant, discuss the adequacy of the existing improvements in light of that conclusion. Ideally, the subject property will satisfy the conclusion for the site as if vacant (with the style and area within the parameters established for the site as if vacant); and have sufficient remaining life to warrant retention of the existing building. It may be necessary to discuss the options of renovating, rehabilitating, or adding on to the building.

c. Clearly state your conclusion as to the Highest and Best Use of the property as improved.

Cost Approach: Land Value, Adjustment Chart, Adjustment Analysis, and Reconciliation (BUSI 330.12-15)

You must estimate the land value of your subject property, so that you are able to complete the cost approach to value. This site is to be valued consistent with its determined highest & best use as if vacant. Students should ideally make an attempt to justify the land value using some market data and show their analysis as to how they arrived at the adjustments. However, in this section of this project, you are allowed to make some assumptions that would not be allowed in a “real” appraisal report or demonstration report. To estimate land value, you are to complete ONE of the following three options. Whichever option you choose, you are expected to describe your reasoning and analysis, in order to demonstrate that you have done some degree of research S it is not sufficient to simply give a number. Also, whichever option is completed, you must fill in the “Subject” column on the “Cost Approach - Land Value” pages.

COMPLETE ONE OF THE FOLLOWING LAND VALUATION OPTIONS:

1. Use the land value data for the subject property from your local property tax assessment office, if this information is available. Summarize your findings on the “Cost Approach - Land Value, Reconciliation” page. Discuss the appropriateness of using assessed value as a proxy for the site’s market value in an appraisal, commenting on the basis for assessed values and how current these assessed values are. In commenting on this, you should discuss how assessments are carried out, the title of local Assessment Act, what type of “value” is found, etc.

Tip from the Tutor: Justifying Economic Life

For the purposes of this exercise, a rough estimate of economic life is sufficient with a basic explanation of your reasoning; market evidence makes your case stronger, but is not a mandatory requirement. Your task in this assignment is to determine the typical economic life cycle that affects the single-family residential property market. In a “real” appraisal, the estimate of economic life must be supported by, at a minimum, of conversations with contractors specializing in renovations, building inspectors, municipal records, review of demolition, and renovation permits, etc.

Tip from the Tutor: Redevelopment Potential

If there is a chance of any major zoning change, then you will have to do extensive research to justify the changes. If you have chosen a subject property with limited redevelopment potential and where the zoning is not likely to change in the near future, this section will not require much discussion and investigation.

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OR 2. Estimate land value based on discussions with real estate appraisers, brokers, or developers in

your area. Summarize your findings on the “Cost Approach - Land Value, Reconciliation” page. You MUST explain who you talked to, their area of expertise, and what evidence they used to come up with this estimate, e.g., justify why their opinion is valid and reliable. Discuss the appropriateness (strengths and weaknesses) of estimating the site’s market value in this manner.

OR 3. Estimate land value by finding and analyzing three land sales comparables. If you are unable

to find sufficient land sales, then you can rely on listings or you can assume some data based on your local market. You are NOT expected to extract land values from improved sales. You should fill in the Data Chart and Adjustment Chart pages with this real or assumed data. To complete this section, you must develop unit(s) of comparison for each comparable sale, using those unit(s) appropriate to your market, e.g., $ per square foot/metre, $ per frontage foot/metre, etc. Where more than one unit of comparison is used, you must reconcile these into a single estimate of land value. You are required to discuss and justify your adjustments to land value. You are allowed to make assumptions as to reasonable adjustments, rather than requiring in-depth market evidence for all adjustments.1 OPTIONAL: you may demonstrate the process for adjustments, using assumed data if necessary. For example, you may wish to show how you would use paired sales analysis to determine an adjustment for location or size. OPTIONAL: If you wish to carry out a simple residual analysis to extract the land value of improved sales, you may do so:

i. find three to five comparable improved property sales (these can be the same comparables as used in the Direct Comparison Approach).

ii. determine depreciated value of improvements of comparable (a simple analysis will suffice). iii. subtract depreciated improvement value from sale price to obtain the residual land sale price.

Cost Approach: Cost Analysis of Improvements (BUSI 330.16)

You must analyze the costs of the improvements of the subject property using either replacement OR reproduction cost. BUSI 330.16 must be completed regardless of whether you are calculating reproduc- tion or replacement cost. Students may gather this data using ONE of the following methods:

1. A contractor’s estimate. Include the name and address of the contractor, as well as the cost new estimate they provided. A written estimate is ideal, but not required.

OR 2. The comparative method, using recently constructed buildings similar to the subject. Include

the address and the source of the cost information. Appropriate adjustments must be provided to address any dissimilarities between the properties that impact the cost estimate.

OR 3. An online cost estimating program or cost manual. You must explain the provider of the cost

data. A cost summary sheet showing detailed calculations must be included in the addenda of the report. If computer services are used, include both the input and output forms.

1 In a demonstration report or “real” appraisal, justification must be based on an analysis of relevant market data, providing the reader with appropriate information leading to the reason for and magnitude of the adjustment. Wherever possible, at least two independent market indicators are to be provided in support of the adjustment. In actual appraisals the unsubstantiated opinions of others are not acceptable support for adjustments.

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If you choose to use two sources of costing, then these two figures must be reconciled into one final cost. Any extra items not included in the overall basic cost should be calculated separately and added to the above basic cost.

Site improvements: for the purposes of this course, the estimate of the reproduction/replacement cost new of site improvements can be a rough estimate, unsupported by market data. You must estimate the age/life of site improvements in order to provide their depreciated value.

Cost Approach: Depreciation; Summary of the Cost Approach (BUSI 330.17-18)

To estimate depreciation for the subject property, you are required to apply the age-life method using the table on page BUSI 330.17. You are not allowed to simply use the estimate provided by the Residential Estimator software or other costing services. You must describe the process applied in the age-life procedure and a justification for its application. Ignore any issues related to short-lived versus long-lived items.

For the cost summary, you must summarize all previous calculations to conclude an estimated value by the cost approach. Ensure that your figures match the previous sections.

Direct Comparison Approach, Adjustment Chart, and Analysis (BUSI 330.19-23)

This is the most important section of this project; the direct comparison approach is in most cases the primary approach relied upon in residential appraisals.

Selecting Comparables: You are required to find at least three independent, comparable sales representing transactions for different properties, which provide evidence for the market value of the subject property. IT IS MANDATORY that students find market evidence in this section S failure to do so will result in a failing grade on this section.

The best source of evidence is recent sales of similar properties. Sales comparables are best found through access to your local Multiple Listing Service (MLS), which will require you to make contact with a local real estate broker or appraiser. If there are insufficient comparable sales locally or you cannot obtain access to sales information, then listings can instead be used as evidence by stating your assumption of what is the reasonable selling price (ensure you discuss the limitations of relying on listings instead of sales in the appropriate sections of the appraisal report; i.e., this is NOT generally accepted appraisal practice).

Summarizing Comparables: The data for the comparables must be summarized in the Data Comparison Chart. Your appendix must contain photographs of the comparables and a neighbourhood/city map that shows the location of these comparables and the subject property’s location.

Adjustments: You will need to adjust the comparables to account for differences with the subject property. There must be at least TWO quantitative adjustments made and justified, with at least one being time.

Tip from the Tutor: Estimating Costs

For sources of costing information, see the “Online Cost Calculations” link in Lesson 8’s Online Readings. There is a small fee for most online cost estimating services (e.g., $10-25 per estimate). Cost manuals may be accessed from most appraisal offices. Note that regional/local cost providers are acceptable for this project, but may not be acceptable for practical appraisals or guided case study reports.

Tip from the Tutor: Researching Comparables

Reviewing sales and listings in MLS is only the starting point in an appraisal analysis. Further research will strengthen your analysis: e.g., you could contact the broker or other parties involved to learn more about the circumstances and conditions of the sale. This additional research is particularly important if it is a listing, since a price hasn’t yet been market-tested: confirm if it is still for sale or if it has it sold, find out details about pricing strategy, you could visit the property in an open house, etc.

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You will have to provide detailed support for these adjustments justifying why the adjustment is required together with market evidence for the magnitude of the adjustment, e.g., one set of paired sales, supporting statistical data, depreciated value of component, etc. Many students use adjustment figures or percentages without any market support and their discussion is limited to a few sentences - this is not sufficient.

For further adjustments beyond the two that require detailed support, you have two options:

a. quantitative analysis: you can state your assumption as to what you consider a reasonable amount (“guesstimates”), describing why you chose this amount and any market-related information relied upon. At the very least, for these additional adjustments you must provide explanation that justifies the need for all adjustments, even if you do not have market support for the magnitude of them. Ensure you use the correct order of adjustments, as shown on the analysis form. OR

b. qualitative analysis: analyze the differences between the comparables and the subject using a relative comparison grid, plus an associated explanation that explains the similarities and differences compared to the subject. The grid on BUSI330.20 may be used for this and the associated explanation provided on BUSI 330.22-23.

Direct Comparison Reconciliation: This is the final step in the direct comparison approach. You are required to review the adjusted values found in the previous steps and reconcile these to come up with a market value estimate under the direct comparison approach. In doing so, you will need to discuss which comparables were the best indications of market value, how reliable your adjustments are, and so on. DO NOT simply take an average of the adjusted sales prices!

Reconciliation of Value Indications and Final Estimate of Value (BUSI 330.24)

This is the final step in the appraisal process - do not confuse this with the reconciliation in the direct comparison approach. The final reconciliation examines the values found in the cost and direct comparison approaches, and comes up with one final market value estimate. This is the place that you critically evaluate the strengths and weaknesses of the approaches, both in general terms and specific to the analysis you have just carried out. This is a key section of the appraisal report, as the analysis described will highlight to the reader how well you grasp the principles of appraisal. It is NOT acceptable to simply provide a number without justification or analysis.

This page requires you to summarize, review, and explain the relative importance of the estimates developed by each of the applicable approaches. Any wide discrepancies must be explained. For example, if the two approaches have a wide range, then you should rationalize this in your discussion. Are there inherent flaws in the approach? Are the limitations of data and analysis in this particular project limiting the approach’s capability to come up with an accurate value? At this point, if you come up with dramatically different value estimates in the two approaches, then you may want to review your calculations and assumptions to ensure that you do not have errors. A professional report should be thoroughly reviewed by the student/appraiser, and any wide divergence in values should be explained such that the reader knows why this is the case.

If the subject has sold recently (e.g., in the last year), then you should discuss here any implications this might have regarding the value estimate you have come up with. Furthermore, any current listing of the subject property must also be considered and analyzed.

Tips from the Tutor: Adjustments

Traditionally, adjustments are an area of weakness for students. Ideally, you should try to prove all of your adjustments with market evidence, showing how you arrived at the adjusted figure – this is much stronger analysis than simply saying “I talked to a real estate agent”. An appraiser must represent themselves as the most knowledgeable person regarding this property and be able to back up and support all findings. At minimum, the reader must be convinced as to the need for the adjustment and as to its magnitude.

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PROJECT 2, continued

If applicable, consider any impact of the highest and best use analysis, i.e., if the subject improvements represent an over-or under-improvement of the highest and best use of the site as if vacant.

This section should demonstrate by sound logical reasoning the facts and steps leading to the final conclusion of value, discussing the findings of the approaches, concentrating on the strengths and weaknesses of each approach and the general validity thereof in light of the value estimates from the appraisal approaches.

State the final estimate of value, the effective date of the appraisal, and the estimated exposure time that it would take to market the property at the estimated value.

Certification (BUSI 330.25)

State the date of inspection (if any), effective date of appraisal, value conclusion, signature, and date of signature. Make sure not to state any accreditation you do not yet have!

You should modify this page as required. For example, if you, as a student, have an interest in the subject property, you must declare that interest here.

Addenda

Addenda pages must be numbered or lettered, e.g., A, B, C, etc. If you have addenda pages, you MUST refer to them in the body of the report, to explain to the reader what they are for. Otherwise these pages will appear to be “filler”, with no apparent purpose.

The report must include the following schedules, either in the Addenda or in the body of the report. All maps and plot plans must show north direction.

a. City or regional map showing subject property.

b. Neighbourhood map showing boundaries, subject and other pertinent points of interest such as schools, shopping areas, churches, and playgrounds.

c. A site sketch showing location of improvements on lot, dimensions, setbacks, sideyards, easements, major site improvements, etc. OPTIONAL

d. A sketch of floor plans showing dimensions, variations, etc. If the subject basement is partially or fully finished, a basement floor plan must also be included. OPTIONAL

e. Cost calculations details. If a computerized costing service is used, include both the input and output forms. If you used a cost manual, present a summary sheet showing details of the cost manual calculations. If you have a written estimate from a contractor, include that instead.

f. Map showing the location of the comparables in relation to the subject property; it is preferred to use the neighbourhood map for this purpose.

g. Photographs of the comparables used.

h. Additional photographs of subject as necessary (but do not include excessive photographs). i. Neighbourhood photographs, if necessary.

j. Other material such as tables, graphs, easement agreements, lengthy legal descriptions, and lengthy zoning bylaws that you consider necessary or helpful to assist the reader in visualizing the property and/or understanding your conclusions.