BC Real Estate Trading Services Course Property Valuation

Question 1

What are the three traditional approaches to property valuation used in BC?

Accepted Answer

Market approach, income approach, and cost approach

Answer

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?

Accepted Answer

It is a modification to the sale price of a comparable property to account for differences between it and the subject property

Answer

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?

Accepted Answer

The rate of return an investor expects on the property, used to convert net operating income into an estimate of value

Answer

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?

Accepted Answer

The reasonably probable use that is legally permissible, physically possible, financially feasible, and maximally productive

Answer

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?

Accepted 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

Answer

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.

BC Real Estate Practice Test

BC Real Estate Practice Test

BC Real Estate Trading Services Course Property Valuation