BC Real Estate Trading Services Course Property Valuation & Appraisal 2 — Questions and Answers
Question 1: In BC, the 'cost approach' to property valuation estimates value by:
- Calculating what it costs to acquire a comparable property
- Estimating land value plus the depreciated replacement cost of improvements (Correct answer)
- Multiplying net income by a capitalization rate
- Averaging the prices of nearby sold properties
Correct answer: Estimating land value plus the depreciated replacement cost of improvements
The cost approach estimates value as the land value (usually by comparison) plus the cost to replace the improvements at current prices, minus depreciation from all causes.
Question 2: In the cost approach, 'depreciation' for a building is defined as:
- The annual decrease in BC Assessment value
- The loss in value from all causes including physical deterioration, functional obsolescence, and external obsolescence (Correct answer)
- The mortgage principal repaid each year
- The difference between list price and sale price
Correct answer: The loss in value from all causes including physical deterioration, functional obsolescence, and external obsolescence
Depreciation in the cost approach is the total loss in value from physical deterioration (wear and tear), functional obsolescence (outdated features), and external obsolescence (factors outside the property).
Question 3: In a BC residential appraisal, 'external obsolescence' is caused by:
- Outdated kitchen appliances
- Physical wear and tear on the roof
- Factors outside the property such as proximity to a noisy highway or industrial area (Correct answer)
- An inefficient floor plan
Correct answer: Factors outside the property such as proximity to a noisy highway or industrial area
External (economic) obsolescence results from factors external to the property that reduce its value, such as proximity to undesirable land uses, changes in the neighbourhood, or broader economic conditions.
Question 4: In BC, 'capitalization rate' (cap rate) in the income approach refers to:
- The annual mortgage interest rate
- The rate at which net operating income is converted into an indication of value (Correct answer)
- The annual property tax rate
- The rate of appreciation of a property
Correct answer: The rate at which net operating income is converted into an indication of value
Cap rate is the ratio of Net Operating Income (NOI) to property value, used to convert income into value. Value = NOI ÷ Cap Rate. A higher cap rate indicates higher risk or lower value.
Question 5: In BC real estate, a Comparative Market Analysis (CMA) is typically prepared by:
- A certified appraiser for mortgage purposes
- A real estate licensee to help sellers price their property or buyers evaluate an offer price (Correct answer)
- BC Assessment for tax purposes
- A notary public for estate planning
Correct answer: A real estate licensee to help sellers price their property or buyers evaluate an offer price
A CMA is an informal valuation tool prepared by real estate licensees using sold and active comparable properties to assist clients in determining a reasonable list price or offer price. It is not a formal appraisal.
Question 6: Which of the following properties would MOST likely use the income approach as the primary valuation method in BC?
- A single-family home in Kelowna
- A 20-unit apartment building in Vancouver (Correct answer)
- A vacant residential lot in Surrey
- A newly built heritage-style home
Correct answer: A 20-unit apartment building in Vancouver
The income approach is most appropriate for income-producing properties like apartment buildings, where buyers are primarily motivated by the property's earning potential.
BC Real Estate Trading Services Course Property Valuation & Appraisal 2
In BC, the 'cost approach' to property valuation estimates value by: