BC Real Estate Trading Services Course Property Valuation 2 — Questions and Answers
Question 1: What is 'gross rent multiplier' (GRM) and how is it used in BC real estate?
- A formula used to calculate property taxes
- A simplified valuation tool that estimates property value by multiplying the gross annual rent by a factor derived from comparable sales (Correct answer)
- A method for calculating rental increases under BC's Residential Tenancy Act
- A ratio used to determine mortgage eligibility
Correct answer: A simplified valuation tool that estimates property value by multiplying the gross annual rent by a factor derived from comparable sales
The Gross Rent Multiplier is a quick valuation tool: Value = Gross Annual Rent × GRM. The GRM is derived from comparable properties by dividing their sale price by their gross annual rent. While simpler than a full income approach, GRM does not account for operating expenses and is best used as a preliminary screening tool.
Question 2: In BC, who can perform a property appraisal for mortgage lending purposes?
- Any licensed real estate agent
- A member of the Appraisal Institute of Canada (AIC) with the appropriate designation (AACI or CRA) (Correct answer)
- The property owner
- Any person with a business licence
Correct answer: A member of the Appraisal Institute of Canada (AIC) with the appropriate designation (AACI or CRA)
For mortgage lending purposes, appraisals must be performed by qualified members of the Appraisal Institute of Canada (AIC). The two main designations are AACI (Accredited Appraiser Canadian Institute) for all property types and CRA (Canadian Residential Appraiser) for residential properties. Lenders require these qualifications for risk management.
Question 3: What is a 'Comparative Market Analysis' (CMA) and how does it differ from a formal appraisal?
- A CMA and an appraisal are the same thing
- A CMA is an estimate of market value prepared by a real estate licensee using comparable sales, while a formal appraisal is a more rigorous analysis by a designated appraiser (Correct answer)
- A CMA is only used for commercial properties
- A CMA is a government assessment
Correct answer: A CMA is an estimate of market value prepared by a real estate licensee using comparable sales, while a formal appraisal is a more rigorous analysis by a designated appraiser
A CMA is prepared by a real estate licensee to help clients determine a listing or offer price. It uses comparable sales but is less rigorous than a formal appraisal. An appraisal follows strict professional standards (CUSPAP), is performed by a designated appraiser, and is typically required by lenders. A CMA cannot be used in place of a formal appraisal for lending.
Question 4: What is 'functional obsolescence' in property valuation?
- When a property is physically falling apart
- A loss in value due to outdated design features, poor layout, or inadequate systems that reduce the property's utility compared to modern standards (Correct answer)
- When a property is located in a declining neighbourhood
- When a property has outstanding liens
Correct answer: A loss in value due to outdated design features, poor layout, or inadequate systems that reduce the property's utility compared to modern standards
Functional obsolescence is a loss in value caused by the property's design or features being outdated or inadequate by current standards. Examples include insufficient electrical capacity, single bathroom in a large home, outdated kitchen layout, or lack of parking. It can be curable (cost-effective to fix) or incurable (too expensive relative to the value gained).
Question 5: How does BC Assessment determine property values for tax purposes?
- By hiring private appraisers for each property annually
- By using mass appraisal techniques based on market data, considering property characteristics, location, and recent sales as of July 1 each year (Correct answer)
- By accepting the owner's declared value
- By using the original purchase price adjusted for inflation
Correct answer: By using mass appraisal techniques based on market data, considering property characteristics, location, and recent sales as of July 1 each year
BC Assessment uses mass appraisal techniques to value all properties in BC annually. Values are based on market conditions as of July 1 (the valuation date) and reflect the property's physical condition as of October 31. The process considers comparable sales, property characteristics, location, and market trends to estimate fair market value.
Question 6: What is 'stigma' in property valuation and how does it affect value in BC?
- A structural defect that reduces value
- A non-physical factor that negatively affects a property's value, such as a history of crime, death, or contamination, even after the cause has been remediated (Correct answer)
- A legal restriction placed by the municipality
- A type of building code violation
Correct answer: A non-physical factor that negatively affects a property's value, such as a history of crime, death, or contamination, even after the cause has been remediated
Stigma is a value reduction caused by events or conditions associated with a property that are not physical in nature. In BC, this can include properties where a violent crime occurred, former grow-ops (even after remediation), or proximity to environmental contamination. Stigma can persist long after the underlying issue is resolved, making it challenging to quantify.
BC Real Estate Trading Services Course Property Valuation 2
What is 'gross rent multiplier' (GRM) and how is it used in BC real estate?