2022 EDITION

Basic
Appraisal
Principles

McKissock.com
1.800.328.2008
 Additional Information

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Course Description

The Basic Appraisal Principles course provides an overview of real property

concepts and characteristics, legal considerations, value influences, real estate
finance, types of value, economic principles, real estate markets and analysis,
and ethics in appraisal. Through theory, case studies, and examples, this course
offers practical application of appraisal principles. Drill problems and a short
case study allow students to put into practice the techniques presented in the
course. An exam is given at the completion of the course for students requesting
pre-certification credit.

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 Course Objectives

• Discover Uniform Standard of Professional Appraisal Practice (USPAP)

• Understand the opportunities available in the appraisal profession
• Understand the meaning of appraisal
• Recognize step one of the appraisal process, problem identification
• Understand how problem identification help the appraiser establish the scope of work
• Recognize ethics and competency issues with the appraisal profession
• Understand what credible results means
• Know the difference between real property versus real estate
• List and explain the physical components of real property
• Explain the four tests used by the courts to determine if an item is a fixture

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Course Objectives, Continued

• Distinguish between real and personal property

• Describe the bundle of rights associated with real property ownership
• Understand improvements to land
• Summarize value characteristics
• Understand the physical characteristics of real estate
• Describe the purpose for legal descriptions
• Explain and distinguish among the three types of legal descriptions
• Describe the process of creating a legal description using the metes and bounds
method
• Locate a township by tier and range
• Locate a particular section within a township
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 Course Objectives, Continued

• Understand how to subdivide a section

• Calculate the number of acres in a parcel based on the legal description, and convert
to square feet
• Explain the use of assessor’s parcel numbers
• Apply the measurements associated with townships and sections
• List the principal types of estates (tenancies)
• Describe Estate characteristics.
• Understand the difference of freehold and leasehold estates
• Explain the three types of fee simple estates
• Understand what a life estate and a life estate pur autre vie is
• Understand the different types of leasehold estates

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Course Objectives, Continued

• Understand the difference between ownership in severalty, corporations, and REITS

• Explain the differences of co-ownership
• Distinguish between cooperatives, condominiums, and timeshares
• Describe the main documents associated with condominiums
• Distinguish between the four public sector controls
• Describe the composition and authority of the local planning agency
• Explain the purpose of land-use controls and the role of zoning ordinances
• Distinguish among the general zoning classifications
• Distinguish among zoning ordinances, building codes, and health ordinances
• Explain the purpose of a variance, special exception, and a nonconforming use
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 Course Objectives, Continued

• Calculate the number of lots available for development given the total number
of acres contained in a parcel, the percentage of land reserved for streets and
other facilities, and the minimum number of square feet per lot.
• Describe the characteristics of a planned unit development (PUD)
• Compute the property tax on a specific parcel, given the current tax rate,
assessed value, eligible exemptions, and transfer of assessment
• Explain special assessments and the impact they may have
• Understand the encumbrances that can burden a property
• Understand the different types of easements and how they can influence value
• Explain financial encumbrances – Liens.

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Course Objectives, Continued

• Distinguish between actual notice and constructive notice

• Describe the parts of a deed and the requirements of a valid deed
• List and describe the four basic types of deeds and the legal requirements for deeds
• Differentiate between voluntary and involuntary alienation
• Explain the various methods of acquiring title to real property
• Describe the conditions necessary to acquire real property by adverse possession
• Distinguish between formal vs. informal (parol), bilateral vs. unilateral, implied vs.
express, and executory vs. executed contracts
• List and describe the essential elements of a valid contract
• Describe the various ways in which an offer is terminated
• Describe the various methods of terminating a contract
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 Course Objectives, Continued

• Explain the remedies for breach of a contract

• Explain and describe the various disclosures required in a real estate contract
• Describe the effect of the statute of frauds and the statute of limitations
• Describe the elements of an option
• Distinguish among the various types of leases
• Distinguish among value, price, and cost
• Describe the four characteristics of value
• Distinguish among the principles of value
• Identify the economic and physical characteristics of real estate that affect market
value
• Distinguish among the various types of value
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Course Objectives, Continued

• Define market value and describe its underlying assumptions

• Understand what an arm’s length transaction is
• Describe the physical characteristics of real estate
• Describe the economic characteristics of real estate
• Identify the factors that influence supply and demand
• Distinguish among different ways of interpreting market conditions
• Demonstrate understanding of the different market indicators
• Identify the provisions of Florida’s comprehensive plan and the Growth Management
Act
• Understand the basic provisions of the national flood insurance program
• Describe the impact of the Comprehensive Environmental Response Compensation
and Liability Act (CERCLA)

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 Course Objectives, Continued

• Explain the various environmental hazards associated with real estate

• List and describe the various types of governmental and private restrictions on
ownership of real property
• Understand what a nuisance is and the impact on quiet enjoyment
• Understand how governmental forces can impact real estate
• Understand how social forces can impact real estate
• Explain what a stigmatized property is
• Understand the four agents of production
• Understand economic principles are how they influence value
• Explain the highest and Best use
• Understand the fours test of the highest and best use

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Course Objectives, Continued

• Differentiate between command economy and market economy

• Understand the money supply and deficit spending
• Understand monetary policy and the Federal Reserve Board
• Explain sources of capital
• Distinguish among the various types of mortgages
• Explain market analysis and marketability analysis
• Differentiate between market, neighborhood, and district
• Understand the neighborhood life cycle
• Distinguish between market disaggregation and market segmentation

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 Contents

• Chapter 1: Overview of Appraisal

• Chapter 2: Real Property Concepts and Characteristics
• Chapter 3: Estates in Real Property
• Chapter 4: Real Property Ownership
• Chapter 5: Controls and Encumbrances on Ownership
• Chapter 6: Transfer of interests—Instruments and Agreements
• Chapter 7: Concepts and Types of Value
• Chapter 8: Influences on Real Estate Values
• Chapter 9: Economic Principles and Applications
• Chapter 10: Overview of Market Fundamentals
• Chapter 11: Overview of Real Estate Market Analysis
• Chapter 12: Application of Ethical Principles
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Instruction Method

Lecture / Text / Group Participation

Case Study

Attendance:
Mandatory to receive credit!

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 Chapter 1
Overview of Appraisal

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Chapter 1: Objectives

• After completing this chapter, students will be able to:

• Explain the appraisal process, who is an appraiser, and what is an appraisal.

• Recognize ETHICS and COMPETENCY standards set by USPAP.

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 Key Terms

• Uniform Standards of • Appraiser

Professional Appraisal Practice • Client
(USPAP)
• Confidential Information
• Financial Institutions Reform,
Recovery and Enforcement Act • Credible
(FIRREA) • Intended Use
• Appraisal Review • Intended User
• Appraisal • Scope of Work
• Appraisal Practice • Valuation Services

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Uniform Standards of Professional Appraisal Practice

(USPAP)

• Sets forth the minimum standards of appraisal practice for appraisers

• Some states may have greater requirements
• Although it is not law:
• All jurisdictions that issue licensing and/or certification credentials require
compliance with USPAP
• Many individuals require USPAP compliance
• Contains DEFINITIONS and RULES

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 The Appraisal Profession

• USPAP was created in the 1980s

• Before this, practice among appraisers was often inconsistent and public
trust of appraisers could be diminished
• USPAP’s purpose: To promote and preserve public trust in professional
appraisal practice
• The Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA) was passed in 1989

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Appraisal Opportunities

• Civil Lawsuits • Eminent domain valuations

• Divorces • Feasibility studies
• Bankruptcies • Insurance claims
• Estates • Dispute resolution
• Trusts • Impact studies
• Zoning changes • Consulting
• Tax matters (donations or property exchanges)
• Determining construction or remodeling costs
Note: This list is not all inclusive.

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 Defining Appraiser
and Appraisal
• USPAP DEFINITIONS:
• Appraiser: “one who is expected to perform valuation services competently and in
a manner that is independent, impartial, and objective.”
• Appraisal: “(noun) the act or process of developing an opinion of value; an opinion
of value. (adjective) of or pertaining to appraising and related functions such as
appraisal practice or appraisal services.”

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The Appraisal Process

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 The Appraisal Process cont.

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Elements of Problem Identification

• Client and any other intended users

• Intended use of the appraiser’s opinions and conclusions
• Type and definition of value
• Effective date of the appraiser’s opinions and conclusions
• Subject of the assignment and its relevant characteristics
• Assignment conditions

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 Poll Question 1

Who or what is responsible for determining the scope of work in an

appraisal assignment?

A. The appraiser B. The client C. The intended user D. USPAP

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Determining Scope of Work

• Appraiser decides:
• Extent to which a property is identified
• Extent of property inspection
• Type of data to be researched and to what extent
• Type and extent of analysis applied in order to reach opinions or conclusions

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 Obligations of Ethics and Competency

• Valuation services are performed by a variety of individuals and professionals

in addition to appraisers
• Appraisal practice is a valuation service provided by an appraiser
• When an appraiser is acting in the role of an appraiser, there are certain
USPAP obligations

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The ETHICS RULE

• Sets forth foundational obligations when acting in the role of an appraiser

• Amplifies that an appraiser is required to observe the highest standards of
professional ethics
• An appraiser “must not misrepresent his or her role when providing valuation
services that are outside of appraisal practice”

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 The ETHICS RULE cont.

• Appraisers must not communicate in a misleading or fraudulent manner

• Appraisers must promote and preserve the public trust inherent in appraisal
practice
• Appraiser must comply with USPAP when obligated by law/regulation or
agreement, or when performing service as an appraiser

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The ETHICS RULE cont.

• Appraisers must not engage in criminal conduct

• Appraisers must always be impartial, objective, and independent
• Appraisers must not advertise for or solicit assignments in a manner that is
false, misleading, or exaggerated

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 The ETHICS RULE cont.

• Regarding obligations for performance in an appraisal assignment:

• Appraisers must not perform an assignment with bias or advocate the cause or
interest of any party/issue
• Appraisers must not agree to perform assignments conditioned on the reporting of
predetermined opinions or conclusions
• Appraisers must not perform assignments in a grossly negligent manner

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The ETHICS RULE cont.

• “Appraisers must not use or rely on unsupported conclusions relating to

characteristics such as race, color, religion, national origin, gender, marital
status, familial status, age, receipt of public assistance income, handicap, or an
unsupported conclusion that homogeneity of such characteristics is necessary
to maximize value.”

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 Poll Question 2

An appraiser must disclose any prior services provided regarding the

subject property within the _____ period immediately preceding the
agreement to perform the assignment.
A. Six-month B. One-year C. Three-year D. Five-year

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The ETHICS RULE cont.

• Appraisers must disclose:

• Any current or prospective interest regarding the subject property or
the parties involved
• Any services regarding the subject property performed by the
appraiser, as an appraiser or in any other capacity, within the three-
year period immediately preceding the agreement to perform the
assignment
• Payment of fees, commissions, or things of value paid in connection
with the procurement of an assignment

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 The ETHICS RULE cont.

• An appraiser must not agree to perform an assignment, or have a compensation

arrangement for an assignment, that is contingent on any of the following:
• the reporting of a predetermined result (e.g., opinion of value);
• a direction in assignment results that favors the cause of the client;
• the amount of a value opinion;
• the attainment of a stipulated result (e.g., that the loan closes, or taxes are
reduced); or
• the occurrence of a subsequent event directly related to the appraiser’s
opinions and specific to the assignment’s purpose.

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The ETHICS RULE cont.

• An appraiser must not disclose (1) confidential information or (2) assignment

results to anyone other than:
• the client;
• parties specifically authorized by the client;
• state appraiser regulatory agencies;
• third parties as may be authorized by due process of law; or
• a duly authorized professional peer review committee except when such
disclosure to a committee would violate applicable law or regulation.

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 The ETHICS RULE cont.

• An appraiser must take reasonable steps to safeguard access to

confidential information and assignment results by unauthorized individuals,
whether such information or results are in physical or electronic form.
• An appraiser must ensure that employees, co-workers, sub-contractors, or
others who may have access to confidential information or assignment
results, are aware of the prohibitions on disclosure of such information or
results.
• A member of a duly authorized professional peer review committee must
not disclose confidential information presented to the committee.

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The COMPETENCY RULE

• Competency could apply to the appraiser’s knowledge and experience

regarding:
• A specific type of property or asset
• A market
• A geographic area
• An intended use
• Specific laws and regulations
• An analytical method

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 The COMPETENCY RULE

• The COMPETENCY RULE establishes these requirements:

• the ability to properly identify the problem to be addressed;
• the knowledge and experience to complete the assignment competently; and
• recognition of, and compliance with, laws and regulations that apply to the
appraiser or to the assignment.

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The COMPETENCY RULE

• For an appraiser who lacks competency at the onset but would like
to perform an assignment, the appraiser must:
• disclose the lack of knowledge and/or experience to the client before
agreeing to perform the assignment;
• take all steps necessary or appropriate to complete the assignment
competently; and
• describe, in the report, the lack of knowledge and/or experience and
the steps taken to complete the assignment competently.

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 The COMPETENCY RULE

• If during the course of an assignment, facts or conditions are

discovered that cause the appraiser to realize that he lacks the
required knowledge and experience to competently complete the
assignment, the appraiser must:
• notify the client,
• take all steps necessary or appropriate to complete the assignment
competently, and
• describe, in the report, the lack of knowledge and/or experience and
the steps taken to complete the assignment competently.

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Chapter 1 Quiz

1. Paramount within USPAP is an appraiser’s obligation to promote and

preserve
a. adequate compensation for appraisers.
b. appraisal as an honorable profession.
c. his right to advocate for his client.
d. public trust in appraisal practice.

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 Chapter 1 Quiz

The Financial Institutions Reform, Recovery, and Enforcement Act

(FIRREA) recognizes which as the current industry standards for
appraisals?
a. appraisal organizations
b. Fannie Mae
c. state regulatory agencies
d. USPAP

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Chapter 1 Quiz and Poll Question 3

3. The act or process limited to the development of an opinion regarding

the quality of another appraiser’s work is an
a. appraisal review.
b. appraisal within an appraisal review.
c. example of advocacy within appraisal practice.
d. unacceptable appraisal practice.

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 Chapter 1 Quiz

4. Within the definition of an appraiser, which is NOT one of the

expectations of an appraiser’s performance?
a. advocacy
b. impartiality
c. independence
d. objectivity

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Chapter 1 Quiz

5. The appraisal process begins with problem identification and concludes

with
a. compensating the appraiser.
b. determining the appropriate scope of work.
c. reconciliation of the appraiser’s conclusions.
d. reporting of the appraiser’s conclusions.

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 Chapter 1 Quiz

6. Which is required in order to establish a person or entity as the

appraiser’s client in an assignment?
a. employment contract signed by all parties
b. engagement of the appraiser’s services
c. exchange of confidential information
d. payment for the appraiser’s services

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Chapter 1 Quiz

7. At what point in the assignment must other intended users be

identified by the client?
a. anytime during or after the conclusion of the appraisal process
b. at the time of the assignment
c. during the scope of work decision
d. within a reasonable time after completion

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 Chapter 1 Quiz

8. The scope of work in an assignment must include the research and

analysis necessary to produce ____________ results.
a. conclusive
b. credible
c. indisputable
d. reasonable

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Chapter 1 Quiz

9. When an individual offers both appraisal and real estate

brokerage services, which statement is TRUE in
circumstances when he is acting as a real estate broker?
a. The appraiser is acting contrary to the ETHICS RULE of USPAP.
b. He can perform in that capacity provided he does not misrepresent his
role.
c. He must always choose to act in the role of an appraiser when providing
any valuation service.
d. Regardless, the service would be considered appraisal practice.

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 Chapter 1 Quiz

10. Which is an obligation of the COMPETENCY RULE of

USPAP?
a. decline all assignments for which the appraiser does not initially
possess competency
b. disclose the lack of competency to the client prior to agreeing to
perform the assignment
c. keep the lack of knowledge and experience confidential in the
appraisal report
d. refer the assignment to an appraiser who possesses competency

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Chapter 2
Real Property Concepts
and Characteristics

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 Chapter 2: Learning Objectives

• After completing this chapter, students will be able to:

• Interpret basic property concepts.

• Determine characteristics of real estate.

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Key Terms

• Annexation • Fixture
• Appropriative Rights • Fructus Industriales
• Appurtenance
• Fructus Naturales
• Attachments
• Government Survey System
• Bundle of Rights
• Immobility
• Demand
• Doctrine of Emblements • Indestructibility

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 Key Terms cont.

• Littoral Rights • Real Property

• Lot and Block • Riparian Rights
• Metes and Bounds • Rule of Capture
• Personal Property • Scarcity
• Property • Trade Fixtures
• Real Estate • Transferability
• Utility

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Basic Real Property Concepts

• Real Property: Things attached to the land, rights that go with ownership of the
land, and limitations on the use of the land
• Tangible property: Items that can be held or touched (either real property or
personal property)
• Intangible Property: Personal property that has value, yet cannot be
physically touched or seen

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 Poll Question 4

The primary difference between the terms real estate and real
property is that:

A. Real property B. Real property C. Real estate does D. Real estate

refers to the rights includes anything that not include tangible includes land but not
inherent in ownership is tangible property improvements

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Real Estate vs. Real Property

• Real estate: The actual physical land and everything, both natural and
manmade, attached (or appurtenant) to it
• Real property: Refers to not only the physical land and everything attached to
it, but also the rights of ownership in the real estate

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 Real Property vs. Personal Property

• Real property
• Not only the physical land and everything attached to it, but also the rights of
ownership (bundle of rights) in real estate
• Personal property
• Tangible items that (usually) are not permanently attached to, or part of, the real
estate
• Also called personalty or chattel

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Annexation

• Conversion of personal property to real property—most often by attaching or

affixing personal property to real property
• If an item is securely attached to real property, it is considered a fixture
• Physical attachment is not always decisive
• Items closely associated with the house (e.g., keys, garage door remote
control) become real property items

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 When Does Personal Property Become a Fixture? Cont.

• Did the person intend for the item to become part of the real estate?
• Does the item complement the property or is it necessary for the acceptable
function of the property?
• Could the item be removed without causing irreparable damage to the real
estate?
• Would there be economic loss to the property if the item were removed?

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Natural Attachments

• Natural attachments
• Fructus naturales (“fruits of nature”)—Naturally occurring plants
• Fructus industriales (“fruits of industry”)—Plants planted and cultivated by
people
• Emblements: A tenant farmer’s crops
• Doctrine of emblements: A tenant farmer is allowed to re-enter the
land to harvest crops that were planted by the tenant farmer even
after the tenancy has ended

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 Trade Fixtures

• Any equipment or items a tenant installs for business purposes

• Always considered to be personal property and not fixtures
• Generally, tenants are allowed to remove trade fixtures before a lease ends,
unless the lease terms or other agreement prohibit removal

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Class Work Problem

Place the following items in the correct column:
•Door Key •In-ground pool •Built-in range
• Portable dishwasher •Above-ground pool •Window air conditioner
•Garage door remote •Furnace •Light bulbs
•Tacked-down hallway runner over oak floor •Storage shed (if on a permanent •Mirror over bathroom sink
•Hot tub on patio foundation)

Fixture Chattel
• Door key • Portable dishwasher
• Garage door remote • Hot tub unit on patio
• In-ground pool • Window air-conditioner
• Mirror over bathroom sink • Above ground pool
• Built-in range • Light bulb
• Storage shed (if no permanent foundation) • Tacked down hallway runner over
• Furnace oak floor

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 Bundle of Rights

• Real property rights that come with one’s interest or ownership in real property
• Right of use
• Right of enjoyment
• Right of disposal

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Poll Question 5

Another term for air rights is:

A. Sky rights B. Suprasurface rights C. Atmospheric rights D. Aviation right of

way

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 Land Rights

• Air rights
• Also called suprasurface rights
• Surface rights
• Riparian rights
• Littoral rights
• Appropriative rights
• Subsurface rights
• Mineral rights

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Land Rights, Cont.

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 Improvements to the Land

• Land: The surface of the earth—actual dirt on the ground, part of a waterway
that is owned, or even a swampy marsh
• Site: Refers to the land with enhancements that make it ready for a building or
structure
• Site improvements: Manmade items added to the land to make it useable for
a particular purpose

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Improvements on the Land

• Attachments and improvements that have legally become part of the real
property by virtue of their attachment to or close association with it
• Market value is a reflection of the “typical buyer’s” actions, not just any one
person

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 Real Property Value Characteristics

• DUST:
• Demand
• Utility
• Scarcity
• Transferability

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Real Property Physical Characteristics

• The three unique physical characteristics of real estate are:

• Uniqueness
• Immobility
• Indestructibility

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 Legal Descriptions

• The three basic legal descriptions that can distinguish between properties so
there can be no mistake in identifying one property from another are:
• Government survey system
• Lot and block system
• Metes and bounds system

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Government Survey System

• A legal description for land, referencing principal meridians and base lines
designated throughout the country
• Uses north-south lines (ranges or range lines) and east-west lines (township
lines)
• A township has 36 square miles divided into 36 sections of one-square-mile
(640 acres) each

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 Government Survey System cont.

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Poll Question 6

In the Government Rectangular Survey System, a section contains:

A. 36 square miles B. 640 acres C. 160 acres D. 40 acres

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 Township Divided into Sections

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Legal Description

For Example
• The NW 1/4 is shaded like this:
• The NE 1/4 of NW 1/4 is shaded like this:
• The N 1/2 of the NE 1/4 of the NW 1/4 is shaded like this:

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 Dimensions in Legal Description

1. The section is 5,280 (linear) feet × 5,280 (linear) feet

2: The NW 1/4 of the section is 2,640 feet × 2,640 feet
3. The NE 1/4 of NW 1/4 is 1,320 feet × 1,320 feet
4. The N 1/4 of the NE 1/4 of the NW 1/4 is 1,320 feet × 660 feet
The subject parcel (N 1/2 of the NE 1/4 of the NW 1/4) is 1,320 feet × 660 feet.
To find the square footage of the land area, the dimension is multiplied:
1,320 × 660 = 871,200 square feet
There are 43,560 square feet in 1 acre. To convert square feet to acres, the
square footage in our example (871,200) is divided by 43,560:

871,200 ÷ 43,560 = 20 acres

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Work Problem

1. A parcel is described as a SW ¼ of the SW ¼ of the NE ¼ of a section. Draw

the illustration.

660
660 x 330 = 217,800 = 5 acres
330

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 Work Problem

2.How many acres are in a parcel described as the S 1/2 of the NE 1/4 of a
section?

80 acres

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Work Problem

3.What is the description for the illustration at right?

SE 1/4 of the NE 1/4 of the SW 1/4

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 Work Problem

4.What are the dimensions of a property

660 feet × 660 feet

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Lot and Block System

• A legal description for platted property

• Any property that has been subdivided from a large tract into smaller lots as
referenced on a plat map

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 Metes and Bounds Systems

• A legal description that:

• Starts at an easily identifiable point of beginning (POB)
• Then describes the property’s boundaries in terms of courses or metes (compass
directions) and intermediate points (changes in direction)
• Ultimately returns to the POB
• May also refer to monuments (markers) or pins

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Metes and Bounds System cont.

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 Chapter 2 Quiz

1.The term describing the conversion of personal property to real property

is
a. annexation.
b. appropriation.
c. capture.
d. platting.

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Chapter 2 Quiz

2. Which would most likely be considered real property?

a. area rug
b. built-in window seat
c. lawn furniture
d. sleeper sofa

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 Chapter 2 Quiz

3. Which would be a natural attachment that would be classified as

fructus industriales?
a. grass
b. ornamental tree
c. perennial flowers
d. wheat

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Chapter 2 Quiz

4. Which concept elaborates on tenant crops?

a. appropriative rights
b. bundle of rights
c. doctrine of emblements
d. rule of capture

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 Chapter 2 Quiz

5. Air rights of land ownership are limited by the federal government

relating to
the
a. horizontal distance to which a building may
be constructed.
b. ownership of gasses contained in the air.
c. prevention of interference with air traffic.
d. prohibition of transfer of air rights to others.

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Chapter 2 Quiz

6. Water rights dealing primarily with the shoreline of a non-flowing body

of water are known as
a. annexation rights.
b. appropriative rights.
c. capture rights.
d. littoral rights.

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 Chapter 2 Quiz and Poll Question 7

7. For a landowner possessing riparian rights, which is typically an

accompanying right?
a. Building a dam to stop or divert the water flow.
b. Releasing sewage in reasonable amounts into the water flow.
c. Taking water from the property to irrigate non-riparian property the riparian
owner also owns.
d. Using water in reasonable amounts to irrigate crops on the riparian property.

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Chapter 2 Quiz

8. According to the rule of capture, a property owner

a. is permitted to drain oil or gas from under his own property or from under a
neighboring property.
b. may not extract oil or gas that came from under a neighbor’s land.
c. must surrender all of the minerals found under the ground to the federal
government.
d. owns none of the oil or gas that was produced on his property.

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 Chapter 2 Quiz

9. Which is NOT a physical characteristic of real property?

a. immobility
b. indestructibility
c. transferability
d. uniqueness

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Chapter 2 Quiz

10. If a site is 152′ x 169′, it contains how many acres?

a. 0.51
b. 0.57
c. 0.59
d. 0.90

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 Chapter 2 Quiz

11. If a property is legally described using the terms “rod” or “pole,”

what is the distance being referenced?
a. 3 yards
b. 12 feet
c. 16.5 feet
d. 66 feet

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Chapter 2 Quiz

12. How many linear feet are along one side of the NE ¼ of a township
section?
a. 330
b. 660
c. 1,320
d. 2,640

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 Chapter 3
Estates in Real Property

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Chapter 3: Learning Objectives

• After completing this chapter, students will be able to:

• Identify the various interests or ownership rights associated with real property.

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 Key Terms

• Estate • Leasehold Estate

• Estate for Years • Lessee
• Fee Simple Absolute • Lessor
• Fee Simple Conditional • Life Estate
(Defeasible)
• Life Tenant
• Fee Simple Determinable
• Fee Simple Estate
• Periodic Tenancy
• Fee Simple Subject to a Condition • Remainderman
Subsequent • Tenancy at Sufferance
• Freehold • Tenancy at Will

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Poll Question 8

An estate in a property for an indefinite period of time is known as:

A. Freehold estate B. Leasehold estate C. Life estate D. Estate for years

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 Estates

• An estate is an interest or a right in property

• Present interest: A right to immediate possession
• Future interest: A right to possession in the future
• An estate may be classified as a:
• Freehold estate (indefinite period of time)
• Leasehold estate (specific duration)

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Estates

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 Freehold Estates

• Possession either immediately or in the future

• Indefinite duration of possession
• Property ownership
• Two main categories:
• Fee simple estates
• Life estates

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Fee Simple Estates

• Implies that the property owner possesses the full bundle of rights
• Three types:
• Fee simple absolute
• Fee simple defeasible
• Leased fee interest

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 Fee Simple Absolute

• The fullest freehold estate that can exist in real property

• Implies there are no conditions on the property title—it is inheritable,
transferable, and perpetual
• The right to possess the property for an unlimited/indefinite period of time will
pass to the owner’s heirs after death

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Fee Simple Defeasible

• Could indicate a possible future interest or possession

• Real property ownership may be defeated or undone if certain events occur or
certain conditions are not met

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 Fee Simple Defeasible

• Could be categorized as:

• Fee simple determinable: Estate terminated automatically if certain conditions
occur; former owner has a contingent future interest in the land, called a
possibility of reverter
• Fee simple subject to a condition subsequent: There is no automatic reversion
of title upon breaking the condition; the former owner has power of termination

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Poll Question 9

The landlord’s interest in a leased property is known as:

A. Fee simple interest B. Leasehold interest C. Life estate D. Leased fee interest

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 Fee Simple – Leased Fee Interest

• Leased fee interest

• The lessor’s (landlord’s) interest in leased property
• Lessor generally has the enjoyment of rent generated under the lease terms and
the right to sell, mortgage, or leave the property to another party while the lease is
still in effect

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Life Estate

• Freehold estate that lasts only as long as a specified person lives

• The holder of a life estate is the life tenant
• Owns an interest in the land that can be sold, mortgaged, or leased
• May be based on the lifetime of someone other than the life tenant
• This is called a life estate pur autre vie

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 Life Estate cont.

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Life Estate cont.

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 Life Estate cont.

• A life tenant may not use the property in any way that would permanently
damage it or reduce its market value
• Such abuse is called waste
• A life tenant has a severely restricted right of use

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Leasehold Estates

• Interests that give the holder a temporary right to possession of the estate,
without title
• Also called tenancy and less-than-freehold estate
• Involves two parties:
• The holder of a leasehold estate (lessee)
• An owner who leases property to a tenant (lessor)

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 Leasehold Estates cont.

• The four main types of leasehold estates are:

• Estate for years
• Periodic tenancy
(estate from period to period)
• Tenancy at will
(estate at will)
• Tenancy at sufferance
(estate at sufferance)

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Estate for Years

• Any leasehold estate for a fixed time period

• Term does not have to be a period of years
• Sometimes called term tenancies
• Terminates automatically at the end of the specified rental period
• Both parties may mutually consent to ending it sooner (surrender)

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 Periodic Tenancy

• A leasehold estate for a duration of time, not a specific date

• Month-to-month tenancies are most common
• Sometimes called estate from period to period
• Continues from period to period until landlord or tenant gives the other party
notice of termination

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Poll Question 10

A leasehold estate for an indeterminate period that has no specified

termination date is:

A. Tenancy by the B. Tenancy for years C. Joint tenancy D. Tenancy at will

entireties

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 Tenancy at Will

• A leasehold estate with no specified termination date or specified period of time

• Either party can end it at any time
• Cannot be assigned to someone else
• Automatically ends on the death of either the landlord or tenant

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Tenancy at Sufferance

• Possession of property by a holdover tenant

• Someone who came into possession of property under a valid lease, but stays on
after the lease expires, without the landlord’s permission
• Not very different from a trespasser, except that a tenant at sufferance originally
had a right to be on the property

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 Chapter 3 Quiz

1. If Joe leases property that he owns to Susan, what type of ownership

interest is held by Joe due to the lease?
a. fee simple absolute
b. fee simple defeasible
c. leased fee
d. leasehold

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Chapter 3 Quiz

2. Which is a characteristic of a fee

simple defeasible estate?
a. The estate is subject to the termination of a lease.
b. The owner possesses the full bundle of rights with no conditions on
ownership.
c. Ownership could be forfeited if certain events occur.
d. Possession terminates upon death of the life tenant.

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 Chapter 3 Quiz

If Stephanie conveyed the fee simple estate subject to a

condition subsequent to Larry, Stephanie has
a. created a life estate that is conditioned on the duration of the life
tenant.
b. forfeited any rights to a potential future interest in the estate which was
conveyed.
c. power of termination to re-enter and possibly begin proceedings to
recover the real estate.
d. retained the entire bundle of rights until certain conditions have been
satisfied.

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Chapter 3 Quiz

4. If Jerry conveys property subject to a life estate to Samuel, who will

gain title in fee simple when the party holding the life estate passes
away, Samuel is known as the
a. life tenant.
b. measuring life.
c. remainderman.
d. reverter.

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 Chapter 3 Quiz

5. Which characteristic is common to all freehold estates?

a. Freehold estates do not include future rights of possession.
b. No party possesses the full bundle of rights.
c. Ownership could revert to the previous owner if certain conditions are not
met.
d. Possessory interest is of an uncertain duration.

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Chapter 3 Quiz

6. Surrender is the action of

a. forfeiting title in a fee simple estate subject to a condition subsequent.
b. nullifying a life estate.
c. passing title to a remainderman in a life estate.
d. terminating a lease by mutual consent.

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 Chapter 3 Quiz

7. Which is a characteristic of a tenancy at will that is NOT common to

other types of leasehold estates?
a. It automatically terminates at the death of either the landlord or tenant.
b. The landlord must use force to regain possession of the property.
c. Leases are fully assignable.
d. The tenant is a holdover without the landlord’s permission.

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Chapter 3 Quiz

8. Felicia has entered into an agreement with her mother allowing her
mother to occupy a property owned by Felicia for a specified duration
of six months. What type of estate was created?
a. estate for years
b. life estate
c. periodic tenancy
d. tenancy at will

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 Chapter 3 Quiz

9. Christine has a one-year lease with the property owner, William. When
the lease expires, Christine continues to pay rent to William at the
beginning of each month. What type of arrangement was created when
William accepted rent in this manner?
a. estate for years
b. periodic tenancy
c. tenancy at sufferance
d. tenancy at will

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Chapter 3 Quiz

10. Craig holds a life estate in a property owned by his stepfather,

Charles. Craig may occupy the property for as long as his mother,
Charles’ wife, is alive. When Craig’s mother dies, possession of the
property goes back to Charles. What type of arrangement is
illustrated?
a. life estate pur autre vie
b. life estate with the possibility of reverter
c. life estate with power of termination
d. ordinary life estate

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 Chapter 4
Real Property Ownership

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Chapter 4: Learning Objectives

• After completing this chapter, students will be able to:

• Recognize the different ways that ownership in real property can be held.

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 Key Terms

• Beneficiary • General Partnership

• Community Property Rights • Joint Tenancy
• Condominium • Limited Liability Corporation
• Cooperative (LLC)
• Co-Ownership • Limited Partnership
• Corporation • Ownership in Severalty
• Curtesy • Planned Unit Development (PUD)
• Dower

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Key Terms cont.

• Real Estate Investment Trust • Trust

(REIT) • Trustee
• Survivorship • Trustor
• Syndicate • Undivided Interest
• Tenancy by the Entireties • Unity of Interest
• Tenancy in Common • Unity of Possession
• Timeshare • Unity of Time
• Title • Unity of Title

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 Poll Question 11

Ownership in severalty is defined as:

A. Ownership by B. Ownership by one C. Ownership by D. Ownership by

spouses person or entity family members who multiple individuals or
are not married entities

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Ownership in Severalty
• Ownership by one person or entity:
• Corporations
• Real Estate Investment Trust (REIT)

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 Co-Ownership

• Form of ownership where 2 or more people share title to real property with
each person having an undivided interest in ownership
• Also known as a fractional interest
• Four types:
• Tenancy in common
• Joint tenancy
• Tenancy by the entireties
• Marital property rights

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Survivorship and the Four Unities

• Survivorship
• Allows the fractional interest of one co-owner, when they die, to automatically pass
their interest on to the other co-owner or co-owner(s) without going through the
probate process for that interest
• The four unities (PITT)
• Possession
• Interest
• Time
• Title

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 Tenancy in Common

• The most basic form of co-ownership

• If the type of co-ownership is unspecified, this is the form of co-ownership that
is presumed
• Unless the co-owners are husband and wife
• Does not include the right of survivorship
• Each co-owner has the ability to do as they wish with their fractional interest

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Joint Tenancy

• A form of co-ownership that can be formed only when all four unities are
present:
• Possession
• Interest (all parties have the same estate and an equal fractional share in the
property)
• Time (interest must be acquired at the same time)
• Title (conveyed to joint tenants by a single instrument)
• Includes survivorship

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 Tenancy by the Entireties

• An option only for a couple who is married

• Each spouse owns an undivided one-half interest in the property with right of
survivorship
• Neither spouse may convey his or her interest without the other’s consent
• Recognized be about half the states in the U.S.

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Marital Property Rights

• Some state laws provide certain legal rights to surviving spouses

• Community property rights
• Curtesy
• Dower

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 Community Property Rights

• Separate property: Real or personal property that was owned by either

husband or wife before marriage
• Can be transferred without the consent and signature of the spouse)
• Community property: Property acquired by one of the spouses during the
marriage
• Consent and signature of spouse is required to transfer
• Surviving spouse is automatically entitled to one half, the remaining half is
distributed according to the deceased’s will)

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Curtesy and Dower

• The law entitles a surviving spouse a one-third or more right of use of real
property owned by the other spouse when the other spouse dies
• The surviving spouse can use the entire property for as long as he or she lives

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 Trusts

• Used for holding and controlling property on behalf of someone else

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Trusts cont.

• Living trusts (assets and real property)

• Property owner establishes the trust while the owner is still alive
• Testamentary trusts (assets and real property)
• Property owner establishes the trust via a will that takes effect after the property
owner’s death
• Land trusts (may address only real estate)
• The trustor is also the beneficiary

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 Limited Liability Corporation (LLC)

• A special type of corporation that may be formed in some states

• Enjoy limited liability of a corporation and (usually) the pass-through benefits of
a sub-chapter “S” corporation (thus, avoiding double taxation)
• Have fewer restrictions

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General Partnership

• An association of two or more individuals as co-owners of a business run for

profit
• Does not have to be formally organized like a corporation
• All partners share in the financial liability for actions of the other partners
• Usually, partnerships are held as tenants in common
• Partners may also own partnership property as tenants in partnership

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 Limited Partnership

• An association of two or more persons as co-owners of a business

• Has one or more general partners, plus one or more limited partners
• Limited partners have no say in partnership matters
• Partners’ liability is limited to their original investment

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Syndicates

• An informal organization usually formed to accomplish limited or even a single

task
• Not a recognized legal entity
• Can refer to almost any form of business

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 Poll Question 12

A form of property ownership in which a person owns the dwelling

unit and an undivided interest in common areas is known as:

A. Condominium B. Co-operative C. PUD D. Timeshare

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Condominiums

• Properties developed for co-ownership, with each co-owner having a separate

interest in an individual unit and an undivided interest in the common areas of
the property
• Residents must follow declarations
• Most are designed for residential use
• Owners typically have exclusive ownership of their units

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 Planned Unit Development (PUD)

• A development concept
• Groups houses in high density clusters that are surrounded by larger open spaces,
which are shared by other residents of the PUD
• Land conservation and land use efficiency
• Created through covenants in a deed
• Owners own the entire structure and the land underlying their house

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Cooperatives

• Buildings owned by a corporation, with the residents as shareholders who each

receive a proprietary lease on an individual unit and the right to use common
areas
• Title is held by a corporation formed for that purpose
• Residents are given a proprietary lease
• Cooperative shareholders pay a prorated share of the building’s expenses

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 Timeshares

• A form of ownership or the right to use property for a specified period of time
• May be either:
• Fee timeshares: A specific condominium or similar property in a resort setting
where numerous co-owners had an undivided interest in a particular unit
• Non-fee timeshares: There is no real property co-ownership but only the right to
use and enjoy property

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Chapter 4 Quiz

1. John and Suzanne, a married couple, form a corporation in which to

hold title of their real estate assets with no provision for survivorship.
How is title to the property being held?
a. joint tenants
b. severalty
c. tenancy in common
d. tenants by the entireties

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 Chapter 4 Quiz

2. In co-ownership, reference to an undivided interest emphasizes that

the
a. co-ownership provides for survivorship when one of the co-owners dies.
b. exact fractional component of ownership cannot be determined.
c. party holding ownership is an entity rather than an individual.
d. property is not physically divided according to co-owners.

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Chapter 4 Quiz

3. Which is NOT one of the four unities of property ownership?

a. investment
b. possession
c. time
d. title

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 Chapter 4 Quiz

4. Which is a true statement regarding tenancy in common?

a. Only one of the four unities is always present.
b. The ownership includes right of survivorship.
c. Ownership interests cannot be unequal.
d. There may be one or more co-owners.

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Chapter 4 Quiz

5. Joseph owns property with his wife, Cassandra, in joint tenancy.

Joseph’s will specifies that his undivided interest in the property will
go to his children, who are Cassandra’s stepchildren. Which is a true
statement?
a. Cassandra will continue to be a joint tenant after Joseph’s death.
b. Joseph’s children will become joint tenants with Cassandra.
c. The property will be physically divided upon Joseph’s death automatically.
d. Survivorship will override Joseph’s will.

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 Chapter 4 Quiz

6. The primary intent of marital property rights is to protect the rights of a

surviving spouse when
a. both spouses are named as joint tenants.
b. property ownership is held as tenants by the entireties.
c. the surviving spouse is not specified in the property title.
d. survivorship is specified in the particular ownership.

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Chapter 4 Quiz

7. Fred has conveyed his property to a trust. His attorney will hold the
asset on behalf of Fred’s children, who will receive net proceeds from
the property. What participant in the trust is Fred’s attorney?
a. beneficiary
b. guardian
c. trustee
d. trustor

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 Chapter 4 Quiz

8. How many investors, at a minimum, are required to form a REIT?

a. 30
b. 50
c. 100
d. 300

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Chapter 4 Quiz and Poll Question 13

9. Craig, Jason, and Hugh own real estate as joint tenants. If Craig and
Jason die simultaneously, Hugh will
a. become a joint tenant with Craig and Jason’s heirs.
b. hold the entire property interest in severalty.
c. own an undivided one-third interest.
d. take title individually as a tenant in common.

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 Chapter 4 Quiz

10. If Paula has the right to use and enjoy a timeshare, which is owned in
fee by a hotel corporation, Paula has
a. co-ownership with other timeshare owners.
b. a non-fee ownership of the timeshare.
c. ownership in severalty in the timeshare.
d. a proprietary lease for the specified unit.

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Chapter 5
Controls and Encumbrances On Ownership

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 Chapter 5: Learning Objectives

• After completing this chapter, students will be able to:

• Determine land controls and restrictions set by the government.
• Determine financial interests in a property through different types of liens.

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Key Terms

• Ad valorem • Eminent Domain

• Appurtenant Easement • Encroachment
• Assessed Value • Encumbrance
• CC&Rs • Escheat
• Condemnation • General Lien
• Conditional Use • Involuntary Lien
• Dominant Tenant • License
• Dominant Tenement • Lien
• Easement • Lis Pendens

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 Key Terms cont.

• Mills • Servient Tenant

• Mortgage • Servient Tenement
• Mortgagee • Special Assessment
• Mortgagor • Specific Lien
• Non-Conforming Use • Spot Zoning
• Plat • Subdivision Regulations
• Police Power • Variance
• Restrictive Covenant • Voluntary Lien
• Rezoning

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Poll Question 14

Which of these is not a governmental power over real estate?

A. Taxation B. Escheat C. Assemblage D. Eminent domain

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 Public Sector Controls

• Government has four powers (PETE)

• Police power
• Eminent domain
• Taxation
• Escheat

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Police Power

• The constitutional power of government to enact and enforce laws that protect
the public’s health, safety, morals, and general welfare
• Zoning laws
• Building codes
• Subdivision regulations
• Environmental protection laws

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 Zoning Laws

• Land use controls that impact real estate since they may limit (or enhance)
development and likewise affect property values
• Early zoning laws established 4 categories:
• Residential
• Commercial
• Industrial
• Agricultural/rural
• Modern zoning has numerous subcategories:
• R-1—Single-family detached homes
• R-2—Row houses, duplexes, and single-family detached

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Zoning Laws cont.

• Each type of zone has size and building height limits and setback and side
yard rules
• Exceptions to zoning laws:
• Nonconforming uses
• Variances (use variance and area variance)
• Conditional uses

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 Zoning Laws cont.

• Rezoning: A revision in zoning law, usually changing an entire zone or area

from one type to another
• Spot zoning: Similar to rezoning, but typically has small or individual land
parcels as its subject rather than an entire zone or area

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Case Study
Single-Family Dwelling with Garage Converted to Living Area

Chris Carter, a residential appraiser, is performing a site inspection of a

residential dwelling. He has been engaged by Quality Gear and Bearing Credit
Union, which is considering the owner’s application for a cash-out refinance
mortgage loan.
As he always does, Carter questions the property owner about any recent
improvements to the property. The owner responds that “we converted the
attached garage to a family room about three months ago.” The owners are very
proud of the finished result, as they did the work themselves over a period of
several weekends.

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 Case Study
Single-Family Dwelling with Garage Converted to Living Area

Point Break
What should this information prompt the appraiser to question?

• Was a building permit obtained?

• Did the property owner check zoning compliance?

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Case Study
Single-Family Dwelling with Garage Converted to Living Area

• While performing the zoning analysis of the subject property, Carter determines
the location of the property within a medium-density residential district. The use
of the property conforms to that designation. However, the site requirements of
the zoning designation indicate a minimum six-foot side yard set back for an
accessory use, such as an attached garage. A residential dwelling however,
must provide at least an eight-foot side yard set back from the property line.
Appraiser Carter finds that the side wall of the new family room (formally the
garage) is only six feet from (what appears to be) the property line and is no
longer in compliance. In the course of performing the inspection, he asks the
property owner if they acquired a building permit for the work. The owner tells
Chris Carter that they did not obtain a permit.

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 Case Study
Single-Family Dwelling with Garage Converted to Living Area

Point Break
How would this information impact the property’s complying with zoning?
What could eliminate the problem? What should appraiser Carter do with
this information?

• Being two feet over the side yard setback would make the property an illegal use
• Obtaining a zoning variance (The property would then be designated as a legal
non-conforming use)
• Disclose the circumstance in the report
• Analyze the impact on value of the circumstance
• An extraordinary assumption might be used if such use would still lead to credible
results.
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Building Codes

• Establish standards for construction, which require builders to use particular

methods and materials
• Mainly enforced through the permit system
• Americans with Disabilities Act (ADA)
• Applies to public buildings as well as commercial and professional facilities
• Implements building standards regarding parking, ramps, accessibility, and
elevators

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 Subdivision Regulations

• State and local laws that must be complied with before land can be subdivided
• Size of lots in a subdivision
• Location of streets, sidewalks, and sewer and water lines
• Plat—A detailed survey map of the subdivision, which shows the boundaries
for the lots, streets, etc.

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Environmental Protection Laws

• State and federal laws

• May involve blocking or restricting the use of land where there are
environmental concerns
• Laws that affect real property include:
• Clean Air Act
• Clean Water Act
• National Environmental Policy Act (NEPA)

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 Poll Question 15

Eminent domain is the government’s power to take private property.

What is name for the action (process) of taking a property?

A. Assemblage B. Escheat C. Plottage D. Condemnation

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Eminent Domain

• The government’s constitutional power or right to take, appropriate, or

condemn private property for public use
• Condemnation is the action of taking private property for public use, with just
compensation, through the government’s power of domain (also called
appropriation)

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 Taxation

• Real property is taxed by state and local governments

• Real estate taxation is also known as ad valorem tax
• “According to value”
• Tax rate is most frequently stated in terms of mills (dollars per thousand of
assessed value)
• Additional levies may be present (e.g., school, libraries, police and fire
protection)
• Special assessments

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Practice Problems

1. The appraised value of a property is $156,000, the assessment ratio is

35%, and the mills are 51.75. What are the semi-annual taxes?

The answer is $1,412.78. First, determine the assessed value: $156,000 x

0.35 = $54,600. Divide by 1,000 and multiply by the mills to determine the
annual taxes: $54,600 / 1,000 = 54.6 x 51.75 Mills = $2,825.55 Annual Tax
/ 2 = $1,412.78 Semi-Annual Tax.

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 Practice Problems

2. Annual taxes for a property are $8,574.51. What is the tax assessor’s
appraised value if mills are 57, and the assessment ratio is 35%?

The answer is $429,800. First, divide the annual taxes by the mills and
multiply by 1,000 to determine the Assessed Value: $8,574.51 / 57 =
$150.43 x 1,000 = $150,430.
Next, divide the assessed value by the assessment ratio to determine the
tax assessor’s appraised value:

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Practice Problems

3. The annual tax for a property is $5,568.00. If the assessor’s appraised

value of the property is $290,000 and the assessment ratio is 40%, what is
the tax rate per thousand dollars of value?

The answer is 48 Mills. First, multiply the appraised value by the

assessment ratio: $290,000 x 0.40 = $116,000 Assessed Value. Next,
divide the assessed value by 1,000: $116,000 / 1,000 = 116. Finally, divide
the annual tax by 116 to determine the tax rate per thousand dollars of
value (mills): $5,568 / 116 = 48 Mills.

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 Escheat

• The governmental power that provides for property ownership to pass on to the
state when a property owner dies intestate and with no living heirs
• Intestate means the decedent did not have a last will and testament

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Encumbrances

• Non-possessory interest in real property

• Non-financial encumbrances
• Financial encumbrances (liens)

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 Non-Financial Encumbrances

• Restrictive covenants
• A binding promise (to do or not do something) concerning the use of real property
• CC&Rs
• May be terminated by termination date, release, abandonment, or changed
circumstances
• Easements
• A right to use another’s real property for a particular purpose

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Easements vs. Licenses

• A license is revocable permission to use another’s land and not a right

• Easements are normally for an indefinite period of time; licenses are usually
temporary
• Easements are created by written agreement or action of law; licenses may be
created orally
• Easements must run with the land; licenses do not have to run with the land

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 Poll Question 16

An easement that benefits a particular property (referred to as the

dominant tenement) is:

A. An easement B. An easement by C. An easement in D. A negative

appurtenant prescription gross easement

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Classifications of Easements

• Appurtenant easement
• Burden one parcel of land (servient tenement) for the benefit of another parcel of
land (dominant tenement)
• Easement in gross
• Benefits a person or entity only and not a parcel of land
• There is no dominant tenement in this scenario, only a dominant tenant

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 Creation of Easements

• Easements by express reservation

• Easements by express grant
• Easements by implication
• Easements by necessity
• Easements by prescription
• Open and notorious use of the land, hostile and adverse use of the land, and
continuous use for a specified number of years

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Termination of Easements

• Release
• Merger
• Abandonment
• Failure of purpose

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 Financial Encumbrances - Liens

• Liens provide security for a debt, giving the creditor (lien holder) the right to
foreclose on the debtors property, if the debt is not paid
• Liens may be:
• Voluntary (e.g., a mortgage) or involuntary
• General (attaches to all property owned by the debtor) or specific (attaches to
specific property)

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Involuntary Liens

• Vendor’s liens (specific)

• Mechanic’s liens (specific)
• Judgment liens (general)
• Tax liens (specific)
• Special assessments
• Attachment liens

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 Lien Priority

• As a general rule, liens are given priority according to the order in which they
attached to the property
• Note: Real property taxes always have the highest lien priority and are paid
before any other lien

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Classification of Liens

Voluntary Involuntary General Specific

Property Tax Lien X X

Special Assessment X X

Mortgage X X

Vendor’s Lien X X

Mechanic’s Lien X X

IRS Lien X X

Judgment Lien X X
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 Chapter 5 Quiz

1. The basis for governmental regulation of the use of private property is

a. eminent domain.
b. the National Environmental Policy Act.
c. police power.
d. the zoning clause.

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Chapter 5 Quiz and Poll Question 17

2. A section of the neighborhood has recently been rezoned for

residential use only. Zachary’s store is located in this section. Because
the property was used as a store prior to the zoning, he will be allowed
to continue to use his property as a store. This is known as a
a. conditional use.
b. nonconforming use.
c. spot zone.
d. variance.

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 Chapter 5 Quiz

3. An easement allows the present and any future owner of “Lot D” to

drive across a neighbor’s property “Lot S” to reach her own property.
This is an example of a(n)
a. appurtenant easement.
b. defeasible easement.
c. easement in gross.
d. encroachment.

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Chapter 5 Quiz

4. Ben’s property has an easement in gross that allows Ben to hunt on

his neighbor’s land. When the neighbor sells his land to Ben, the
easement terminates through
a. abandonment.
b. destruction of the dominant tenement.
c. failure of purpose.
d. merger.

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 Chapter 5 Quiz

5. If a tax assessor estimated the market value of a property to be

$340,000, what are the annual real property taxes if the assessment
ratio is 35% and mills are 51.7?
a. $5,932.60
b. $6,152.30
c. $6,847.21
d. $7,166.55

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Chapter 5 Quiz

6. Which is NOT a power of government?

a. deed restrictions
b. eminent domain
c. escheat
d. police power

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 Chapter 5 Quiz

7. A cost for an improvement that is divided among several property

owners on a street and billed by a jurisdiction would be an example of
a. escheat.
b. improvement burden.
c. special assessment.
d. special tax bill.

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Chapter 5 Quiz

8. The county is taking part of Bill’s land for a new park. What is this
process called?
a. annexation
b. condemnation
c. eminent domain
d. involuntary takeover

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 Chapter 5 Quiz

9. Which established power to the government for taking private property

with the payment of just compensation?
a. allodial system
b. comprehensive plan
c. covenants, conditions, and restrictions
d. Fifth Amendment of the U.S. Constitution

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Chapter 5 Quiz

10. If semi-annual taxes for a property are $1,260, what is the assessed
value of the property if the tax rate is 48 mills?
a. $37,000
b. $41,600
c. $52,500
d. $63,900

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 Chapter 5 Quiz

11. Which statement is FALSE regarding a gross easement?

a. A dominant tenant’s rights can be assigned but do not automatically run with
the land.
b. If the servient property is transferred, the easement terminates.
c. It always has both a dominant tenant and a servient tenant.
d. There is no dominant tenement.

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Chapter 5 Quiz

12. A non-possessory interest in real property is also called a(n)

a. encumbrance.
b. leasehold estate.
c. license.
d. servient tenement.

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 Chapter 5 Quiz

13. Which is an involuntary, specific lien?

a. easement created by an express agreement
b. IRS lien
c. mechanic’s lien
d. mortgage

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Chapter 5 Quiz and Poll Question 18

14. When liens are paid off out of the proceeds of a foreclosure sale,
a. a judgment lien generally has lowest priority.
b. a lien for real property taxes always has highest priority.
c. a mortgage always has highest priority.
d. priority depends on the amount of the lien.

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 Chapter 5 Quiz

15. Which would most likely result in a general lien?

a. IRS lien
b. mechanic’s lien
c. mortgage
d. real estate tax lien

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Chapter 6
Transfer of Interests—Instruments and Agreements

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 Chapter 6: Learning Objectives

• After completing this chapter, students will be able to:

• Recognize various legal instruments and documents used to transfer or
convey various types of property.

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Key Terms

• Accession • Breakpoint Rent

• Accretion • Consideration
• Adverse Possession • Contract
• Alienation • Deed
• Alluvion • Descent
• Assignment • Devise
• Avulsion • Earnest Money
• Breach of Contract • Equitable

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 Key Terms cont.

• Grantee • Novation
• Grantor • Option
• Gross Lease • Overage Rent
• Habendum Clause • Power of Attorney
• Installment Sales Contract • Reliction
• Lease • Right of First Refusal
• Net Lease • Vendee
• Vendor

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Deeds

• Instruments that convey a grantor’s interest, if any, in real property to a grantee

• Grantee: Party receiving the interest
• Grantor: Party conveying the interest
• Also called conveyance

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 Title

• Title: The actual lawful ownership of real property and refers to holding the
bundle of rights conveyed
• Not a document, but a theory pertaining to ownership
• Equitable Title: An interest in property created on the execution of a valid sales
contract or an installment sales contract, where actual title will be transferred by
deed at a future date (e.g., closing)

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Essential Elements of a Valid Deed

• Competent grantor • Habendum clause

• Identifiable grantee • Limitations
• Act (words) of conveyance (granting • Exceptions and reservations
clause) • Signatures
• Consideration • Delivery and acceptance
• Legal description

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 Poll Question 19

After a property is deeded to a new owner, it is usually filed with the

city or county recorder of deeds. The act of recording the deed for a
property is intended to provide:
A. Title insurance B. Constructive notice C. Actual notice D. Lien notice

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Deed Recording - Placement on Public Record

• After delivery and acceptance, the document should be filed in the appropriate
county office where the property is located
• Constructive notice: Something that could be known because it is on record,
even if it might not have been actually seen
• Actual notice: Direct knowledge of the conveyance

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 Types of Deeds

• General warranty deed

• Full covenant and warranty deed
• Special warranty deed
• Bargain and sale deed
• Quitclaim deed

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General Warranty Deeds

• Deeds in which the grantor warrants the title against defects that might have
arisen before or during the grantor’s period of ownership
• Also called standard warranty deeds or simply warranty deeds
• Warranties:
• Covenant of seizen, covenant against encumbrances, covenant of quiet
enjoyment, covenant of warranty forever

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 Full Covenant and Warranty Deeds

• Contain the strongest and broadest form of guarantee of title of any type of
deed and provide the greatest protection of any deed to the grantee
• In addition to the covenants common to the general warranty deed:
• Covenant of right to convey
• Covenant of further assurances

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Special Warranty Deeds

• Used when the grantor warrants the title only against defects arising during the
time the grantor owned the property, but not before that time
• Grantor:
• Guarantees there aren’t any encumbrances he created
• Promises to defend title against anyone claiming under him

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 Bargain and Sale Deeds

• Implies that the grantor has a right to convey the property, but there are no
warranties with it
• Other types of similar non-warranty deeds (judicial deeds):
• Executor’s deed
• Administrator’s deed
• Guardian’s deed
• Sheriff’s deed
• Referee’s deed

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Quitclaim Deeds

• Makes no warranties regarding the title, if any, held by the grantor.

• Conveys interest in land the grantor has at the time the deed is executed
• Often used to remedy clouds on a title
• Also called deed of release

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 Poll Question 20

An individual transfers ownership of a property to another person, of

their own free will. This transfer is referred to as:

A. Involuntary B. Bargain and sale C. Voluntary D. Lien release

alienation alienation

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Methods of Transferring Ownership

• Alienation: The process of transferring ownership interests in property

• Voluntary alienation (free will transfer)
• Involuntary alienation (transfer against the will of the owner—e.g., eminent
domain, foreclosure)
• Devise (death with a will) or descent (death without a will)

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 Contracts

• An agreement between two or more parties to do, or not do, something

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Contracts cont.

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 Contracts cont.

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Essential Elements of a Contract

• Competent parties
• Lawful and possible objective
• Consideration
• Description
• Mutual agreement (meeting of the minds)
• Written format and signatures

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 Breach of Contract

• When one party to a contract fails to perform with no legal cause

• Substantial performance: Promisor does not perform all contractual obligations
but does enough so that the promisee is required to fulfill her obligation
• Material breach: A breach of contract important enough to excuse the non-
breaching party from performing any contractual obligations

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Contract Clauses

• Time is of the essence

• Conditions

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 Remedies for Breach of Contract

• Cancellation
• Compensatory damages
• Injunction
• Liquidated damages
• Reformation
• Rescission
• Specific performance

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Discharge of Contracts

• Agreement of parties
• Partial performance
• Full performance
• Impossibility of performance
• Operation of law
• Alteration of contract
• Bankruptcy
• Statute of limitations

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 Poll Question 21

A substitution of a new contract for an earlier contact is called:

A. Novation B. Assignment C. Alienation D. Recission

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Assignment and Novation

• Assignment
• One of the parties (assignor) transfers rights or interests under a contract to
another person (assignee)
• Novation
• The substitution of a new contract for an earlier contract

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 Real Estate Sales Contracts

• Contracts in which a seller (vendor) promises to convey title to real property to

a buyer (vendee) in exchange for the purchase price
• Serves three purposes:
• Buyer’s initial offer
• Receipt for any earnest money deposit
• Contract between the buyer and seller

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The Offer

• Must have intent to contract

• Must have definite terms
• Earnest money is an inducement to have the offer accepted and is a means of
showing the seller the buyer is serious and able to follow through with the
necessary financing

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 Termination of an Offer

• Lapse of time
• Death or incapacity
• Revocation

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Requirements for Acceptance of an Offer

• Acceptance must be communicated to the offeror

• Acceptance must be made in the manner specified
• Acceptance must not vary the terms of the offer

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 Essential Elements of a Sales Contract

• Names and signatures of all parties

• Specific property to be sold
• Interest in the property to be sold
• Terms of the sale as clearly as possible
• Total purchase price and method of payment

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Other Contract Provisions

• As-is clause
• Escape clause
• Contingencies
• Disclosures

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 Poll Question 22

Which of these is an example of a unilateral contract that is commonly

used in real estate?

A. A standard B. A lease C. An option D. A mortgage

agreement of sale

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Options

• Contracts that give one party the right to do something without obligating him to
do so
• Unilateral contract
• Most common type is a lease with an option to purchase
• The optionee pays the optionor for the option right (option money)

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 Right of First Refusal

• A right to have the first chance to buy or lease property if the owner decides to
sell or lease it
• Also called first right of refusal or right of redemption
• No money involved and no predetermined price
• Could go on for many years

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Installment Sales Contract

• An agreement in which the buyer (vendee) makes payments to the seller

(vendor) in exchange for the right to occupy and use the property, but no deed
or title is transferred until all, or a specified portion of, payments have been
made
• Also called a land contract or a contract for deed

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 Leases

• Contracts in which one party pays the other rent in exchange for possession of
real estate
• Must:
• Contain all elements necessary for a valid contract in order to be legal and
enforceable
• Be in writing if the term will last for more than (usually) one year

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Structures of Leases

• Gross lease: Landlord pays for all expenses related to the ownership of the
property
• Net lease: The lessee pays some or all of the expenses that are typically paid
by the lessor
• Single net, double net, triple net, absolute net

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 Types of Leases

• Flat
• Variable
• Step
• Revaluation
• Annual increase
• Percentage

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Flat Lease

• An arrangement where the rent payments to the lessor are consistent

throughout the duration of the lease term
• Most common type of lease in short-term residential situations
• Also called level lease or level payment lease

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 Variable Lease

• A lease with rental payments made at regular intervals, but payment amounts
may change
• Common mechanisms that trigger a change include Consumer Price Index, or
variations in the owner’s expenses in net lease scenarios
• Also called an index lease

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Step Lease

• Provides for the rent amount to change over time, usually at a predetermined
percentage at a predetermined interval
• Any interval can be specified, but annual increases (or decreases) are the most
common
• Also called a step-up lease, step-down lease, or graduated rental lease

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 Revaluation Lease

• Has rental payments that change over time at a set interval

• The amount of the change is determined usually by a revaluation of the market
rent, allowing the owner to maintain rents at market rates based on the current
market
• Rarely, if ever, seen with residential properties
• Most often found in long-term scenarios, or short-term leases where there are
renewal options

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Annual Increase Lease

• Operates similarly to a step-up lease with one major exception:

• Rather than a percentage increase, the periodic increase specified in the lease is a
specific dollar amount
• Could be found with any type of property

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 Poll Question 23

In which type of lease does a commercial tenant pay a fixed rent

amount plus additional rent that is based on a percentage of the sales
generated by their business?
A. Step-up lease B. Percentage lease C. Revaluation lease D. Graduated payment
lease

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Percentage Lease

• Lessees pay a base or guaranteed minimum (breakpoint rent), plus a

percentage of the sales their business has generated (overage rent)
• Rent may also be purely based on a percentage of the sales volume
• Most common to retail lessees and most high-profile retail environments (e.g.,
malls, shopping complexes)

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 Lease Terms of Interest to the Appraiser

• Amount of agreed-upon rent

• Term of lease (e.g., month-to-month or defined term, such as one year)
• Provisions for rent or terms to change
• Beginning and ending date of the lease
• Personal property included in the lease
• Expenses paid by the landlord and those paid by the tenant
• Other services or amenities provided by the landlord

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Chapter 6 Quiz

1. In a real estate transaction, the grantor is the ________ and the grantee
is the ________.
a. buyer / seller
b. lender / buyer
c. seller / buyer
d. seller / lender

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 Chapter 6 Quiz

2. All are essential elements for a valid deed EXCEPT

a. competent grantor.
b. delivery and acceptance.
c. grantee’s signature.
d. legal description.

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Chapter 6 Quiz

3. Which clause includes the words “to have and to hold”?

a. conveyance
b. granting
c. habendum
d. recital

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 Chapter 6 Quiz

4. When a party signs a document before a notary public stating it was

signed voluntarily, it is an
a. accreditation.
b. acknowledgment.
c. alliance.
d. appurtenance.

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Chapter 6 Quiz and Poll Question 24

5. Which is an example of voluntary alienation?

a. avulsion
b. condemnation
c. dedication
d. foreclosure

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135
 Chapter 6 Quiz

6. When someone dies without a will, he is said to have died

a. devise.
b. escheat.
c. intestate.
d. testate.

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Chapter 6 Quiz

7. If one party to a contract fails to perform his contractual obligations

without a legal excuse, it is a(n)
a. assignment.
b. breach of contract.
c. lack of substantial performance.
d. novation.

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 Chapter 6 Quiz

8. Where applicable, a particular jurisdiction’s statute of frauds requires

contracts conveying real estate to be
a. recorded.
b. reviewed by an attorney.
c. verbal.
d. written.

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Chapter 6 Quiz

9. Kim signs a contract agreeing to buy a property from Bob, but Bob
does not actually own the property. This contract is
a. unenforceable.
b. valid.
c. void.
d. voidable.

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 Chapter 6 Quiz

10. Lyle contracts to buy Julia’s house, but only if he can sell his house.
This type of provision written into a sales contract is called
a. a contingency clause.
b. good consideration.
c. right of specific performance.
d. time is of the essence clause.

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Chapter 6 Quiz

11. Carol and Leslie enter into a contract stating that Carol will pay Leslie
$650 per month for the next 20 years. Carol will live in the house and
pay all expenses including property taxes, insurance, and maintenance
costs. Leslie will continue to hold the title until the property is paid off
by Carol. What kind of contract do they have?
a. installment sales contract
b. land lease
c. lease purchase agreement
d. option agreement

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 Chapter 6 Quiz

12. A contract clearly states that $5,000 would be kept by the seller should
the buyer breach the contract. The $5,000 is considered
a. the broker’s commission.
b. the down payment.
c. earnest money.
d. liquidated damages.

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Chapter 6 Quiz

13. A contract written for the exchange of illegal substances would be void
because
a. consideration was not listed.
b. incompetent parties.
c. legality of object.
d. no signatures.

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 Chapter 6 Quiz

14. When a new person takes the place of one of the parties to a contract
and the withdrawing party is relieved of all liability, it is called
a. accord and satisfaction.
b. assignment.
c. novation.
d. substantial performance.

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Chapter 6 Quiz

15. Sam offers to sell his house to Brenda for $200,000 if Brenda will pay
$45,000 in cash and give Sam a 15-year mortgage for the balance at
11% interest. Brenda responds, “I accept your offer, provided that I
have to pay only $40,000 down.” This is a
a. counteroffer.
b. defeasible offer.
c. partial acceptance.
d. unilateral acceptance.

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 Chapter 6 Quiz

16. When a contract is terminated and each party returns whatever

consideration the other had provided, it is called
a. cancellation.
b. repudiation.
c. rescission.
d. a tender offer.

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Chapter 6 Quiz

17. An option agreement is

a. bilateral in nature.
b. not a contract.
c. the same concept as a right of first redemption.
d. supported by consideration.

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 Chapter 6 Quiz

18. Which type of lease would provide the lessee with the least expense
and risk?
a. absolute net—annual increase
b. gross—flat
c. Net—variable
d. triple net—flat

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Chapter 6 Quiz

19. A month-to-month lease gives the lessor

a. greater control when it comes to adjusting the rent.
b. less chance of risk that the tenant will leave.
c. a lower rate of rent in short term situations.
d. no opportunity to change the terms of the lease.

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 Chapter 6 Quiz

20. In a percentage lease, the amount of rent that is the base or

guaranteed minimum the lessee will pay is called
a. breakpoint rent.
b. market rent.
c. overage rent.
d. starting rent.

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Chapter 6 Quiz

21. Christopher is leasing property from Patricia via an annual increase

lease. Which is a characteristic of an annual increase lease?
a. Adjustments to rent are based on fluctuation of market rental rates and
owner’s expenses.
b. Annual increase leases only are used with gross leases and reflect change in
the Consumer Price Index.
c. Rent increases are a predetermined dollar amount at specified periodic
intervals.
d. Rental rate is adjusted by a specified percentage with each adjustment.

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 Chapter 6 Quiz

22. In a triple-net lease scenario, which is NOT a typical expense of the

lessee?
a. fire insurance on the building
b. property taxes
c. repairing a leaky faucet
d. replacing the roof on the structure

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Chapter 6 Quiz

23. Phillip is leasing an office suite from National Office Properties, Inc.,
the property owner, via a net/net lease. In this arrangement, the
lessor has
a. been granted a leasehold estate.
b. conveyed a temporary possessory interest.
c. no remaining property rights.
d. permanently surrendered the leased fee estate.

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 Chapter 6 Quiz

24. Which is an advantage to the lessee in a percentage lease?

a. If the specified sales volume is not reached, the lease is automatically
terminated.
b. Lessor is conveying all property rights during the lease period.
c. Overage rent will always increase at a specified percent each year.
d. Owner of the leased facility is motivated to promote and maintain the
property.

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Chapter 6 Quiz and Poll Question 25

25. Why would an appraiser be interested in expenses being paid by the

landlord when reviewing a lease agreement?
a. Clarifies, if in fact, the landlord possesses the leased fee estate
b. defines whether the lease is flat or variable
c. determines the breakpoint rent from overage rent
d. indicates operating expenses for estimating net operating income

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 Chapter 7
Concepts and Types of Value

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Chapter 7: Learning Objectives

• After completing this chapter, students will be able to:

• Identify various concepts and types of value.

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 Key Terms

• Arm’s Length Transaction • Loan Value

• Assessed Value • Market Price
• Cost • Market Value
• Going Concern Value • Price
• Insurance Value • Salvage Value
• Investment Value • Value
• Liquidation Value • Value in Use

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Value—A Broad Concept

Take a moment and consider how value is defined in terms of real property.

• Common responses to the term “value”

• Price someone paid
• Total invested cost
• Reproduction or replacement cost
• Income potential based on a particular investor’s expectations

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 Cost, Price, and, Value

• Cost
• The actual or estimated amount required to create, produce, or obtain a property
(a fact or estimate of fact)
• Price
• The amount asked, offered, or paid for a property
• Value
• The monetary relationship between properties and those who buy, sell, or use
those properties, expressed as an opinion of the worth of a property at a given time

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Market Value

• What a typical buyer would be willing to pay (the most probable selling price) as
of a certain date under certain conditions
• Also called value in exchange
• “Certain date” refers to the effective date of the appraisal
• Most commonly a current date
• May also be retrospective or prospective

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 Specific Conditions of an Arm’s Length Transaction at
Market Value

1. Typical terms and financing

2. No unusual concessions
3. Parties are not related
4. Parties are acting in their own best interest
5. Parties are not under undue haste or duress
6. Parties are reasonably informed and/or knowledgeable
7. Property has been exposes, typically, for a reasonable period of time

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Diagnose the Condition

1. Typical terms and financing

2. No unusual concessions
3. Parties are not related
4. Parties are acting in their own best interest
5. Parties are not under undue haste or duress
6. Parties are reasonably informed/knowledgeable
7. Property has been exposed, typically, for a reasonable period of time

In each of the following scenarios, it appears the property is selling or

has sold above or below market value. In the blank, insert the number of
the condition affecting it.
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 Diagnose the Condition

1. Typical terms and financing

2. No unusual concessions
3. Parties are not related
4. Parties are acting in their own best interest
5. Parties are not under undue haste or duress
6. Parties are reasonably informed/knowledgeable
7. Property has been exposed, typically, for a reasonable period of time

1. ____
5 The property is selling because the sellers are getting a divorce.
3 The parties to the transaction are parents selling to their child.
2. ____
3. ____
2 The seller paid a large amount in points and closing costs.
1 The seller is taking a first mortgage back for the buyer who filed bankruptcy six
4. ____
months ago.
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Diagnose the Condition

1. Typical terms and financing

2. No unusual concessions
3. Parties are not related
4. Parties are acting in their own best interest
5. Parties are not under undue haste or duress
6. Parties are reasonably informed/knowledgeable
7. Property has been exposed, typically, for a reasonable period of time

5. ____
6 The seller is selling a property without a real estate broker and set the
asking price without an appraisal or independent value opinion.
6. ____
7 The property sold today and was just listed yesterday.
4 The seller had two offers but took the lower one because it was from
7. ____
their favorite non-profit organization.
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 Other Types of Value

• Loan value
• Insurance value
• Replacement cost (functional equivalent)
• Reproduction cost (exact replica)
• Investment value
• Assessed value

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Poll Question 26

A sale of a property by a highly motivated seller with a less-than-

typical marketing time would be indicative of what type of value?

A. Market value B. Investment value C. Revaluation lease D. Liquidation value

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 Other Types of Value cont.

• Liquidation value
• Value in use
• Going concern value
• Salvage value

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Case Study 7.1

Single-Family Priced and Selling Below Market Value

Challenge: Market Price versus Market Value

Appraiser Brett Weller is engaged by Allied-Gulf Mortgage Company to appraise
a single-family dwelling in a residential neighborhood. The house is owned by an
elderly gentleman, George Cline. He lives in another state and is selling the
house on his own, without a real estate broker.
The property is under contract to sell to Lisa Wells for $28,000. In reviewing the
transaction documents accompanying the appraisal engagement, appraiser
Weller becomes curious. He knows that the subject area is a highly desired
established market, typically comprised of houses in the $100,000 to $200,000
price range. An appointment to inspect the property is arranged for the following
day. On arrival, the property appears to be well maintained, which is consistent
with the other properties in the neighborhood.
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 Case Study 7.1

Point Break
What question(s) should appraiser Weller be prompted to ask the owner?

• What was the asking price?

• How was that price established?
• Is the seller related to the buyer in any way?
• Are there any other conditions to the
transaction, making it something other than an arm's length
transaction?

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Case Study 7.1

Appraiser Weller interviews Mr. Cline who reveals he has owned the home for
many years, purchasing it for his sister to live in. She has recently died and,
having no further use for the property, he is disposing of it. Mr. Cline has never
had the property appraised and has relied on the county auditor’s tax appraisal
for pricing the property. From that information, he interprets that $28,000 is the
auditor’s market value of the property. Ms. Wells is the first potential buyer who
looked at the property.

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 Case Study 7.1 cont.

Point Break
This information implies that what should be investigated?

• How was the property marketed?

• How long has the property been
on the market?
• When the contract terms were agreed upon, how long had the property
been marketed?

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Case Study 7.1

• It was learned from the interview with Mr. Cline that the property was advertised
in the local newspaper, with the price, property address, and a photo included.
The buyer, Lisa Wells, made an appointment and viewed the property within
one hour of the newspaper hitting the newsstands. She wrote a full-price offer
on the spot. It was at this point that appraiser Weller looked in his appraisal
work file and noticed that $28,000 was the county auditor’s assessed value.

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 Case Study 7.1 cont.

Point Break
What can appraiser Weller discuss with Mr. Cline about the transaction and
sale price??

• Nothing, without client consent

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Poll Question 27

Would the sale of the property from Mr. Cline to Ms. Wells, as
described in Case Study 7.1, be indicative of market value?

A. Yes, because it was B. No, because the C. Yes, because the D. No, but it could still be
exposed to the open market seller was not buyer and seller were used as a comparable sale in
when it was advertised in knowledgeable unrelated other appraisals in the
the newspaper neighborhood
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 Case Study 7.2
Single-Family Dwelling Selling for More-than-Market Value Due to Buyer’s Motivation

Challenge: Market Price versus Market Value

Residential appraiser Betty Conrad has agreed to perform a new appraisal assignment.
The subject of the appraisal is a single-family dwelling, listed for approximately 90 days
now with a reputable broker at a price of $120,000. Per the sales agreement, which was
furnished by the lender/client, the sale price is $118,000. Other than window coverings,
no other chattel items are included with the sale. There are no seller concessions. The
buyers, John and Carol Patrice, are represented by a buyer’s agent.
On inspecting the property, appraiser Conrad finds the subject to be a well maintained
three-year-old ranch-style dwelling that contains approximately 1,200 square feet. It has
three bedrooms, two baths, and an attached two-car garage. The house is built on a
crawl space and located in a suburban subdivision with predominately similar ranch
homes. Conrad has noticed a new dwelling, nearly identical to the subject, listed next to
the subject.
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Case Study 7.2

Point Break
Identify the conditions of an arm’s length transaction that are evident so far.
What else should Conrad do?

• There are no untypical terms

• There are no untypical concessions
• There is no relationship between the parties
• The buyer is represented by a buyer's agent; the buyer should be
informed and knowledgeable
• The property has been exposed to the market for a reasonable time
period
• Conrad should check the data for the listed house next door

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 Case Study 7.2

• Returning to her office following the site inspection, appraiser Conrad begins
her research for similar comparable properties. Two comparables are
immediately located. The first is located on the same street as the subject and
sold nine months ago for $92,000. Conrad had driven past this comparable on
her way to the inspection and noted that it was inferior to the subject property in
age, location, condition, and amenities, due to having only a one-car attached
garage. The second comparable is similar in all ways to the subject property
except age, which is ten years. It sold 30 days ago for $102,500. Stored data
did not reveal any other properties sold in this subdivision within the past 12
months.

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Case Study 7.2

Point Break
An exhaustive research of the stored data reveals no other ranch-style
comparables in the past twelve months within the immediate subdivision,
what should happen now??

• Go out in distance*
• Go out in time*

* These options could present a problem for the secondary mortgage

market)

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 Case Study 7.2

• Appraiser Conrad moves out to the next subdivision to locate a comparable

property. This subdivision has houses of a very similar style and age to the
subject; however, it is in a different and somewhat superior, market-preferred
school district. A similar style dwelling is located, which sold forty-five days ago
for $115,000. Further research of the property data indicates this comparable
was new and solid brick, as opposed to the subject’s frame construction—and it
was built on a full basement.

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Poll Question 28

The sale of the subject property as described in Case Study 7.2, 1, be

indicative of market value?

A. Market value B. Investment value C. Revaluation lease D. Liquidation value

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 Case Study 7.2 cont.

Point Break
What does the data appear to indicate?

• The indicated value range is somewhere below $115,000 and

somewhere above $102,500—the buyer may have overpaid

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Case Study 7.2

• Realizing the data does not support the sales price and, in at least one case,
adjustments are somewhat excessive, appraiser Conrad begins a survey of
local brokers for very recent sales that have not yet been submitted to the MLS.
She recalls the listing next door to the subject. The MLS indicates it is being
offered at $109,000. Since it is new, the landscaping is minimal and the
driveway is gravel, as opposed to the subject’s paved driveway. However, it is
an identical design and floor plan and is being built by the same builder. Asking
the listing broker, she finds this property closed just yesterday at $105,000.

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 Case Study 7.2 cont.

Point Break
What is/are the appraiser’s next step(s)?

• Determine if the transaction next door was arm’s length

• Determine the circumstances of the subject's transaction with
someone familiar, such as the broker, lender, etc.

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Case Study 7.2

• Appraiser Conrad decides to call the buyer’s agent and ask about any unusual
circumstances of their offer. The buyer’s agent tells her that he performed a
CMA for the buyers, which indicated that a reasonable offering range was
between $102,000 and $106,000. However, the buyers had lost two other
properties by making low offers in the negotiation and insulting the sellers.
Having already sold their present home, they need to quickly secure another
property. The couple ignored the agent’s recommendation and submitted an
offer of $118,000, which is nearer the listing price of $120,000.

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 Case Study 7.2 cont.

Point Break
What considerations of an arm’s length transaction are influenced in this
transaction?
• Duress
• Influenced by the fear of losing this property is they offered too far
below the listing price, and the need to purchase a home quickly

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Case Study 7.2

• The final opinion of value indicated by the analyzed data was $105,000. As the
buyers were only seeking a 50% LTV mortgage, their loan was approved, and
the transaction closed.

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 Case Study 7.2 cont.

Point Break
What does this transaction represent? Should this transaction be stored in
sales data? What would happen if another appraiser found this data in
public record and used it as a comparable sale in another appraisal
assignment?
• It is not an arm’s length transaction
• It should not be stored as an arm’s length transaction
• The appraiser should document the transaction and retain so that if another
property is appraised in which this sale might appear to be a comparable, the
appraiser can discuss in that report the reason for not utilizing the sale
• USPAP would likely be violated if the appraiser did not verify the sale as
representing an arm’s length transaction
• Using this transaction as a comparable could skew the market unless an
adjustment could be supported for the purchaser's motivation, which would
be difficult
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Chapter 7 Quiz

1. If the client is using an appraisal to determine what a property would

be worth in a less than typical marketing period, the appropriate type
of value would likely be
a. duress value.
b. investment value.
c. liquidation value.
d. time-adjusted market value.

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 Chapter 7 Quiz

2. Which is NOT a condition of a typical arm’s length transaction at

market value?
a. no atypical concessions
b. no marketing
c. no relationship of the parties to the transaction
d. no unusual terms

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Chapter 7 Quiz

3. Market price is what the

a. appraiser thinks the property should sell for.
b. property is listed for.
c. property should have sold for.
d. property sold for.

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 Chapter 7 Quiz

4. An appraiser identifies the definition of market value to be used in an

assignment during problem identification and must additionally
a. cite the source of the definition in the appraisal report.
b. document the author of the definition in the work file.
c. obtain permission from the client to use the specific definition.
d. use the specific USPAP definition of market value for financing transactions.

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Chapter 7 Quiz

5. A property that sold below market value due to a pending foreclosure

is influenced mostly by
a. acceleration and depression.
b. cash equivalency.
c. haste and duress.
d. relationship to the lender.

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 Chapter 7 Quiz

6. A transaction with no atypical conditions is best described as

a. arm’s length at market value.
b. established market value.
c. liquidated.
d. sterile.

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Chapter 7 Quiz

7. The amount to create, produce, or obtain a property is known as

a. cost.
b. price.
c. reproduction.
d. value.

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 Chapter 7 Quiz

8. An appraiser is appraising a structure built and used as a special use

property. Since the value opinion is to reflect the property’s special
use for the particular owner, the appropriate type of value is
a. going concern.
b. market.
c. reproduction.
d. value in use.

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Chapter 7 Quiz and Poll Question 29

9. Going concern value is most accurately described as a valuation of the

a. business assets.
b. liquid and solid assets.
c. real and personal property.
d. tangible and intangible assets.

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 Chapter 7 Quiz

10. The highest and best use for a parcel of land that is improved with an
old building has changed, and it has been determined the
improvements should be razed. The building has many ornate stained
glass windows and extensive black walnut wood trim. What value type
would be an appropriate in this assignment?
a. liquidation
b. replacement
c. reproduction
d. salvage

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Chapter 8
Influences on Real Estate Values

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 Chapter 8: Objectives

• After completing this chapter, students will be able to:

• Identify the differences between the four broad forces and how these forces and
perceptions affect the value of real estate

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Key Terms

• Asbestos • Electromagnetic Fields (EMFs)

• Clean Air Act • Environmental Hazard
• Clean Water Act • Environmental Protection Agency
• Comprehensive Environmental (EPA)
Response, Compensation, and
Liability Act (CERCLA)

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 Key Terms cont.

• External Environmental Hazards • Lead-Based Paint Hazard

• External Obsolescence Reduction Act (Title X)
• Internal Environmental Hazards • Linkages
• Methamphetamine
• Mold
• National Environmental Policy Act
(NEPA)
• Nuisance
• Radon

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Key Terms cont.

• Resource Conservation and • Stigmatized Property

Recovery Act (RCRA) • Underground Storage Tanks
• Safe Drinking Water Act (SDWA) (USTs)
• Sick Building Syndrome • Urea-Formaldehyde
• Urea-Formaldehyde Foam
Insulation (UFFI)
• Wetlands

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 Four Forces Influencing Real Estate Values

• PEGS:
• Physical forces
• Economic forces
• Governmental forces
• Social forces

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Physical Forces

• May also be referred to as environmental and geographic forces

• May include conditions:
• On a property (specific)
• External to the property (broad)

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 (Physical) Environmental Forces

• Many are controlled at the federal level through federal laws and regulations
• Other environmental issues are controlled at the state or local level
• Certain inspections and/or disclosures may be required

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Environmental Protection at the Federal Level

• National Environmental Policy Act (NEPA)

• Environmental Protection Agency (EPA)
• Clean Air Act (CAA)
• Clean Water Act (CWA)
• Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA)
• Superfund Amendments and Reauthorization Act (SARA)
Resource Conservation and Recovery Act (RCRA)
• Safe Drinking Water Act (SDWA)

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 Environmental Protection—Wetlands

• Ecosystems where the land is permeated with water, and are commonly
referred to as swamps, bogs, and marshes
• Protected under the federal Clean Water Act
• Enforced by the U.S. Army Corps of Engineers
• Some activities are prohibited and require a permit if they could permanently
change or destroy the wetland habitat

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Environmental Protection—Property Hazards

• Internal and external hazards

• Nuisance: Anything emitting from the outside of the property that interferes
with the owner’s right of quiet enjoyment
• If a nuisance is permanent, it is an external obsolescence
• Environmental hazard: A situation that exists with potential for harm to
persons or property from conditions that exist outside or within a property

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 Poll Question 30

Environmental issues that could affect the value of real property

include:

A. Methamphetamine B. Mold C. Underground D. Any or all of these

storage tanks

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Common Environmental Hazards

• Asbestos
• Electromagnetic fields (EMFs)
• Lead
• Methamphetamine
• Poor air quality (sick building syndrome)
• Underground storage tanks (USTs)
• Urea-formaldehyde
• Mold
• Radon

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 (Physical) Geographic Forces

• Characteristics related to the environment surrounding the property that either

can contribute or detract from value
• Topography
• Soil conditions
• Water
• Location and view (linkages)
• Climate
• Natural features and barriers

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Work Problem

• What are some uses or locations where various types of natural features and
barriers can either be a benefit or a hindrance to property value?

Possible examples include (but are not limited to):

• Ski slopes
• Mountain resorts
• Waterfront businesses and housing sites
• Nature preservations and resorts

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 Economic Forces

• World events • Employment levels

• Energy costs • Availability of employment
• War • Earnings levels
• Terrorist activities • Taxes
• Cost and availability of credit • Inflation

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Government Forces

• Government services
• Revenue generating law (right of taxation)
• Right to regulate laws (police power)
• Governmental fiscal and monetary policies
• Secondary mortgage markets and government mortgage programs

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 Social Forces

• Demographic changes
• Migrations of the population
• Social trends
• Buyers tastes and standards

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Stigmatized Properties

• Properties held to be undesirable by most people because of a past event or

condition
• Crime, murder, suicide, drug activity, past environmental hazards
(methamphetamine, fire, chemical spill)
• Determining value influence can be time intensive and require significant
knowledge of market reaction
• Being objective is ultimately important

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 Chapter 8 Quiz

1. Radon gas
a. can indicate the presence of a toxic uranium dump close to the property.
b. can present a problem indoors if allowed to build up to dangerous levels.
c. is a man-made waste byproduct.
d. makes a house worthless because it must be condemned by the EPA.

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Chapter 8 Quiz

2. What statement about electromagnetic fields is FALSE?

a. They are created by moving electrical currents.
b. They can affect other charged objects.
c. They can be produced by high-tension power lines.
d. They have been proven to cause cancer.

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 Chapter 8 Quiz

3. It is well known that a murder took place in a house 40 years ago. This
could be an example of
a. an internal obsolescence.
b. neighborhood decline.
c. a stigmatism.
d. social force.

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Chapter 8 Quiz

4. A trend of moving to a new suburban area is an example of

a. economic forces
b. locational forces
c. physical forces
d. social forces

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 Chapter 8 Quiz and Poll Question 31

5. The state’s housing finance authority has just issued a low-interest,

first-time homebuyer mortgage program. Sales are spurred as a result
of this
a. governmental force.
b. physical force.
c. social force.
d. supply and demand.

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Chapter 8 Quiz

6. Which is an example of the governmental force of revenue generating

laws?
a. cost of credit
b. earnings levels
c. permissibility of zoning
d. specific tax policies

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 Chapter 8 Quiz

7. Wetlands are protected under what federal Act?

a. Clean Water Act
b. Federal Wetlands Protection and Wildlife Act
c. SARA
d. U.S. Army Corps Act

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Chapter 8 Quiz

8. Sick building syndrome is a result of

a. a former traumatic act.
b. inadequate soil composition.
c. linkages to toxic waste dumps.
d. poor air quality.

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 Chapter 8 Quiz

9. The Comprehensive Environmental Response, Compensation, and

Liability Act primarily addresses
a. abandoned waste sites.
b. air quality in public buildings.
c. properties ridden with mold.
d. safe drinking water.

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Chapter 8 Quiz

10. Which is an example of linkages?

a. estimated driving time from populated areas to major interstate highways
b. known relationship of environmental concerns and terminal illness
c. proximity of hazardous substances to populated areas
d. relationship of household members when analyzing social forces

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 CHAPTER 9
Economic Principles and Applications

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Chapter 9: Objectives

• After completing this chapter, students will be able to:

• Apply economic principles when forming value opinions

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 Key Terms

• Amenity • Four Agents of Production

• Anticipation • Highest and Best Use
• Balance • Interim Use
• Buyer’s Market • Law of Diminishing Returns
• Change • Law of Increasing Returns
• Competition • Market Equilibrium
• Conformity
• Contribution
• Excess Land

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Key Terms cont.

• Market-Use Property • Single-Use Property

• Opportunity Cost • Special-Use Property
• Principle of Consistent Use • Substitution
• Progression • Supply and Demand
• Regression • Surplus Land
• Seller’s Market • Surplus Productivity

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 Four Agents of Production

• CELL
• Capital
• Entrepreneurship
• Land
• Labor

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Fundamental Economic Principles

• Anticipation • Competition
• Change • Balance
• Supply and demand • Contribution
• Substitution • Conformity
• Externalities

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 Economic Principles Exercises

1. Value constantly fluctuates due to the

principle of _______.
chang
2. When demand exceeds supply, prices
will _____.
rise
3. Property uses that compliment each other are evidence of the theory of
__________.
conformity
4. Value is created through the expectation
of future benefits according to the theory
of ____________.
anticipation

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Economic Principles Exercises

. True or False

5. To an investor, the greater the expectation of benefits from a property, the less
valuable it is to the investor.
FALSE

6. Surplus productivity is realized after various agents of productivity have been

satisfied.
TRUE

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 Economic Principles Exercises

7. Contribution, whether more or less than cost, is measured by the law of

__________
increasing and __________
decreasing returns.
8. Name the four agents of production (hint: C-E-L-L):
a. Capital
b. Entrepreneurship
c. Land
d. Labor

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Highest and Best Use

• There is only one highest and best use for land at a given point in time.
• Land not devoted to highest and best use results in a loss of income.
• Highest and best use gives the owner maximum economic advantage.

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 Highest and Best Use cont.

• Highest and best use allocates land resources efficiently; maximizing economic
return.
• Highest and best use gives economic benefits to surrounding land (conformity).
• Highest and best use gives economic benefits to the community (conserves a
scarce resource—land).

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Poll Question 32

Which of these is NOT one of the four tests of highest and best use?

A. Physically possible B. Maximally C. Socially D. Financially feasible

productive acceptable

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 Four Tests of Highest and Best Use

1. Is the ideal use legally permitted?

2. Is it physically possible for the ideal structure to be built on the property?
3. Is the ideal use economically (financially) feasible on the property?
4. Is the ideal use the maximally productive use for the property?

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Value of a Vacant Site or As If the Land Were Vacant

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 Value of the Land as Improved

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Application Illustration 1

A corner lot with commercial zoning currently is improved with a residential

dwelling. Determine the appropriate highest and best use recommendation if
demand for the commercial site is recognized immediately.
Improved value—$185,000
As vacant—$205,000
Demolition cost—$12,000
Recommendation: Raise the dwelling to make the site vacant.
$205,000 - $12,000 (demolition cost) = $193,000
$193,000 - $185,000 = $8,000 higher value

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 Application Illustration

A single-family residence is currently valued at $58,000. The majority of properties

within close proximity to the subject are duplexes with typical values in the range of
$79,000. If the cost of converting the subject’s single-family residence into a duplex
has been estimated at $20,000, and the interior demolition is estimated to be
$1,000, what is the highest and best use conclusion?

Conclusion: The highest and best use of the property remains as a single-family
residence, since there is no entrepreneurial reward for the owner upon
completion of the conversion
$58,000 + $20,000 + $1,000 = $79,000

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Application Illustration 3

A real property appraiser is performing a highest and best use analysis for a
vacant parcel. The appraiser has determined that the highest and best use of the
parcel is for a two to four unit apartment building with (per maximum lot
coverage) exterior dimensions of 4,000. Which improvement should the
appraiser suggest?
• Two, four-bedroom, three-bath units which could each rent for $1,250 per month.
Indicated value by the income approach is $42.50 per square foot and cost of the
4,000 square foot building will be $67.00 per square foot.
• Three, three-bedroom, two-bath units which could each rent for $950 per month.
Indicated value by the income approach is $50.59 per square foot and cost of the
4,000 square foot building will be $49.00 per square foot.
• Four, two-bedroom, two-bath units which could each rent for $750 per month.
Indicated value by the income approach is $44.25 per square foot and cost of the
4,000 square foot building will be $45 per square foot.

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 Application Illustration 3

• Suggested unit type and mix: Three three-bedroom, two-bath units

Two, four-bedroom, three-bath units
4,000 × $42.50 = $170,000
4,000 × $67.00 = $268,000

Three, three-bedroom, two-bath units

4,000 × $50.59 = $202,360
4,000 × $49.00 = $196,000

Four, two-bedroom, two-bath units

4,000 × $44.25 = $177,000
4,000 × $45.00 = $180,000
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Application Illustration 4

A 20,000 square foot residential lot zoned for single-family or two-family use is
the subject of an appraisal assignment. The lot is currently improved with a 1,800
square foot single-family residence. What is the indicated highest and best use?
• Vacant land value—$0.75 per square foot
• Razing cost—$8,000
• Present value of single-family dwelling from paired data—$80 per square foot.
• Potential monthly rent if converted to two-family—$800 each
• Indicated value by the income approach per square foot—$96
• Conversion cost to two-family—$28,000

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 Application Illustration 4 cont.

Indicated highest and best use: Converted to two-units

Vacant: 20,000 square feet × $0.75 per square foot = $15,000

Razing cost: $8,000
$15,000 – $8,000 = $7,000

“As is”: 1,800 square feet × $80 = $144,000

Converted: 1,800 square feet × $96 =

$172,800 – $28,000 conversion = $144,800
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Application Illustration 5

A single-family dwelling contains 1,860 square feet and is situated on a

commercially zoned lot that is 155’ x 220’.
If, through paired-data, the improved property has a per square foot value of $58
and the commercial land value in this area is $150,000 per acre, what is the
highest and best use if the razing cost is estimated to be $20,000?

Highest and best use conclusion: as-improved

As-improved: 1,860 × $58 = $107,880

Vacant: 155 × 220 = 34,100 ÷ 43,560 = 0.7828 acre
0.7828 × $150,000 = $117,424 – $20,000 = $97,424

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 Poll Question 33

A temporary use to which a property is put until it is ready for

development to its ultimate highest and best use is best described as:

A. Physically possible use B. Interim use C. Value in use D. Special purpose use

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Interim Use

• A temporary use of property while it awaits conversion to its highest and best
use
• E.g., waiting for a zoning change or accumulation of investment dollars
• Appraiser must observe the principle of consistent use:
• Land cannot be valued for one use while the improvements are valued for another
use

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 Final Determination of Highest and Best Use

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Special Uses

• Single-use property
• Multiple-use property
• Special-use property

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 Surplus and Excess Land

• Surplus land
• Portion over and above what is necessary for the highest and best use of the
subject property and does not have a stand-alone highest and best use
• Excess land
• Land (or site) area that is not necessary to support the use of the existing
improvements situated on the subject property. Excess land may have a separate
highest and best use and may be sold separately.

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Highest and Best Use Application Exercise

1. For an improved property, highest and best use analyzes whether the current
improvements should be razed, converted, or left “as is”

2. Zoning is one consideration of legally permissible

3. Highest and best use gives the property owner maximum economic advantage
4. As a(n) interim use, the property could be held for future development.
5. 5. The four tests of highest and best use are:
1. Legally permissible
2. Physically possible
3. Financially feasible
4. Maximally productive
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 Case Study 9.1
Corner Commercial Site with Use and Non‐Compete Restrictions

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Case Study 9.1

• Certified general appraiser, Max Riley, was performing a highest and best use analysis of a
high-visibility corner commercial site that is located on Hightown’s primary commercial strip.
Three major shopping malls and strip centers are across the street from the subject. Another is
located adjacent to it on the same side of the street.
• The subject parcel contains approximately one acre and is improved with a 1960’s automotive
service station that has not operated for a number of years. The site has been rented
throughout recent years to various vendors selling flowers, fruits and vegetables, and other
seasonal products. The fuel storage tanks have been removed from the site and the property
has been certified to be environmentally sound. The property owner, a private individual,
realizes the property is too valuable to continue its present use and has asked appraiser Riley
to determine its value for marketing purposes.
• Appraiser Riley surveys the area and the market and has found no other sites immediately
available in this highly desirable area. His research has revealed that the last similar
comparable one-acre parcel sold approximately two years ago for $850,000. The comparable
parcel—an interior lot without the corner influence—was located approximately 1,000 feet from
the subject. On inquiry with the broker facilitating that transaction, he found the comparable
property went under contract to a restaurant enterprise, soon after being offered to the market.
The broker also noted that he received two additional backup offers for the property. One was
for $850,000, and the other was for $900,000. Both of these offers were from similar restaurant
developers.
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 Case Study 9.1 cont.

Point Break
Of the characteristics effecting value, which characteristics have been identified?

• Demand
• Utility
• Scarcity

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Case Study 9.1 cont.

• Further information obtained from the real estate broker indicated that all offers
for the comparable parcel were from restaurants that required a site for which a
liquor license could be obtained. The broker also had interest from other non-
liquor food service users including fast-food facilities. But, none of these non-
liquor vendors would be willing to pay as much as those requiring a liquor
license. Appraiser Riley’s research confirms this trend with non-liquor
restaurants paying up to 50% less than those requiring a liquor license.
Additionally, appraiser Riley confirms with the state liquor control board that a
liquor license would be available for the site.

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 Case Study 9.1 cont.

Point Break
From this information, what conclusion could be drawn about the highest and
best use of the subject property?

• Restaurant desiring to sell alcohol

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Case Study 9.1 cont.

• After performing a highest and best use analysis of the property, appraiser Riley has
determined that a restaurant use that requires a liquor license would be the highest
and best use of the property. The use as a site for a non-alcohol restaurant was
analyzed; after considering they typically pay substantially less for a commercial site
that option was eliminated. Alternative users, such as most retail, typically pay up to
50% less than a non-alcohol product restaurant. After considering supply and demand
patterns, historic sales data, and the physical characteristics of the subject parcel, the
appraiser’s value opinion is a range of $1,200,000 to $1,500,000.
• Appraiser Riley holds a meeting with the property owner. After a presentation of the
marketability and value opinion of the property, the property owner offers that there
may be a problem. The property owner inherited the property from his mother, a
conservative lady who was strongly opposed to alcohol. He believes there may be
some restriction relating to alcohol and the use of the property. Following up on this
information, appraiser Riley finds a deed restriction stating “the property may never be
used for the sale or consumption of alcohol.”
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 Case Study 9.1 cont.

Point Break

How does this deed restriction impact the use and value of the property?

• The number of interested users has been affected by the restriction.

• Based on the data given, the property's value diminishes by at least 50%.

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Case Study 9.1 cont.

Point Break

Are there potential remedies or alternatives?

• Since the owner inherited the property and the restriction, he might be
able to file for a court action to have the restriction removed

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 Case Study 9.1 cont.

• Appraiser Riley suggests that the property owner seek legal counsel to discuss
the restriction and any potential solutions. Legal counsel suggests that, in this
particular case, a court action could be filed to seek removal of the restriction
claiming it is unreasonable and has a significant and unreasonable impact on
the property value as alternative highest and best uses could result in up to a
50% downward impact on it.
• After deep consideration, the property owner was not willing to challenge his
mother’s request.

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Poll Question 34

The owner is unwilling to challenge the deed restriction that prohibits

the sale of alcohol on the property. How does this affect the highest
and best use of the property?
A. Changes it to a B. Changes it to a C. Makes the D. It doesn’t affect it at all
restaurant that does not non-restaurant use, property unsuitable
serve alcohol, e.g., fast such as retail or office for any buildings
food
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 Case Study 9.1 cont.

Point Break

How does this information affect the highest and best use?

• Changes the highest and best use to an establishment that does not sell
liquor, such as fast food

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Case Study 9.1 cont.

• With this decision, the appraiser now deems the highest and best use to be as
a food service facility that does not sell liquor. At this point, the property owner
tells appraiser Riley that he also owns the land and building immediately next
door to the subject. It was built for and leased to a fast-food facility specializing
in roast beef sandwiches about 25 years ago. He also inherited this property.
The restaurant has been a good tenant and is currently engaged in a lease with
10 years remaining. Appraiser Riley asks to review the fast-food restaurant’s
lease.

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 Case Study 9.1 cont.

Point Break

What type of information is appraiser Riley looking for?

• A non-compete agreement

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Case Study 9.1 cont.

• In the course of reviewing the lease, appraiser Riley finds what he suspected—
the non-compete agreement. The agreement states that “during the term of this
lease, no property owned by the lessor, within a three mile radius, shall be sold
or leased for the sale or consumption of roast beef, hamburgers, chicken, and
fish.”

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 Case Study 9.1 cont.

Point Break
How has the information impacted highest and best use and the value of the
property? What vital characteristic of value is at issue, or not present?

• Eliminates most fast food users

• As the uses of a property diminish, so does the property’s value

The property was sold to chain of doughnut shops. They paid $375,000 for
the site.

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Chapter 9 Quiz

1. Highest and best use

a. allocates land resources efficiently.
b. always considers the intended use of the owner.
c. can be several different uses at any given time.
d. results in a minimal loss of income.

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 Chapter 9 Quiz

2. Externalities can be a positive or negative influence on value, primarily

due to the property characteristic of
a. balance.
b. immobility.
c. level benefits.
d. surplus productivity.

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Chapter 9 Quiz

3. An interim use might be determined when

a. the appraiser is unable to make a determination due to limited data.
b. the owner cannot make up his mind on what to do.
c. a reasonable and probable change in circumstances is forthcoming.
d. waiting for a volatile market to settle before deciding.

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 Chapter 9 Quiz

4. Regarding “physically possible,” which would NOT be considered?

a. building materials
b. building set back lines
c. parking requirements
d. size of the building

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Chapter 9 Quiz

5. A school building might be an example of a(n) __________ property.

a. commercial-use
b. multiple-use
c. special-use
d. utility-use

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 Chapter 9 Quiz

6. When the highest and best use of the property is “vacant,” the current
improvements are
a. in a state of equilibrium.
b. lending no value to the vacant site.
c. taking away from the value of the vacant site.
d. taking away from the vacant site value by more than the cost to raze the
improvements.

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Chapter 9 Quiz

7. When a buyer will not pay more for something than its cost, the buyer
is influenced by
a. contribution.
b. opportunity cost.
c. substitution.
d. supply and demand.

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 Chapter 9 Quiz

8. Which is NOT one of the four agents of production?

a. capital
b. gross profit
c. labor
d. land

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Chapter 9 Quiz

9. The law of diminishing returns is most directly linked to which

economic principle?
a. change
b. competition
c. contribution
d. substitution

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 Chapter 9 Quiz and Poll Question 35

10. When properties are listed at a certain price in the neighborhood, that
price tends to set the limits of value for other properties around it,
according to the concept of
a. balance.
b. competition.
c. contribution.
d. Substitution.

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Chapter 9 Quiz

11. Which economic principle suggests that value is created through

expectation of future benefits?
a. anticipation
b. balance
c. contribution
d. surplus productivity

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 Chapter 9 Quiz

12. Which of the following is likely to contribute the most value?

a. adding 500 square feet to a 1,200 square feet house, where 1,200 square feet
is the predominant square footage
b. adding a fence where fences are prohibited
c. adding a second bath to a three-bedroom house, where three bedrooms, two
baths is the norm
d. changing granite countertops to laminate

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Chapter 9 Quiz

13. The largest and most expensive house in the neighborhood could
likely be experiencing regression through which economic
principle?
a. anticipation
b. conformity
c. substitution
d. surplus productivity

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 Chapter 9 Quiz

14. When might a residual physical segment of a land parcel be

considered surplus site?
a. if it is needed for future expansion of the subject’s improvements
b. if it would be legally permissible to have another house built on it
c. when it cannot be legally sold separately from the subject property
d. when it could freely transfer and be made available to the open market

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Chapter 9 Quiz

15. Which is included within the test of “legally permissible”?

a. allowable to zoning
b. hazard insurance could be obtained
c. police protection is available
d. title is free of encumbrances

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 Chapter 10
Overview of Market Fundamentals

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Chapter 10: Objectives

• After completing this chapter, students will be able to:

• Identify supply and demand model as part governmental and part economic
• Describe the role of money and capital markets

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 Key Terms

• Adjustable Rate Mortgages • Debt

(ARMs) • Deficit Spending
• Amortization • Discount Rates
• Amortized Loans • Economics
• Balloon Mortgage • Equity
• Command Economic System • Federal Budget Deficit
• Conforming Loan • Fed Funds Rate
• Conventional Loan

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Key Terms cont.

• Federal Home Loan Mortgage • Federal Reserve Board

Corporation (Freddie Mac) • Fiscal Policy
• Federal National Mortgage • Government Loan
Association (Fannie Mae)
• Government National Mortgage
• Federal Open Market Committee Association (Ginnie Mae)
(FOMC)
• Inflation
• Federal Reserve Banks
• Monetary Policy
• Moral Suasion

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 Key Terms cont.

• Mortgage • Private Mortgage Insurance (PMI)

• Mortgagee • Purchase Money Mortgage
• Mortgagor • Reserve Requirements
• Nonconforming Loan • Secondary Mortgage Markets
• Open Market Operations • U.S. Treasury Department
• Portfolio Lenders
• Primary Mortgage Markets

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Broad Economic Concepts

• Economics: The study of how resources are allocated

• Fiscal policy
• Monetary policy

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 Poll Question 36

In a __________ economic system, individual people and business are

free to make their own decisions about production and distribution.

A. Centralized B. Command C. Market D. Fundamental

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Command Economy vs. Market Economy

• Command economic system

• Government or other central authority makes all decisions about production and
distribution
• Market economic system
• Individual people and businesses are free to make their own decisions about
production and distribution

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 Supply-Side vs. Demand-Side Economics

• Supply-side economics
• Seeks to create economic activity by having the government lower taxes
• Allow market forces to determine where the most productive investment and job
creation should take place
• Demand-site economics
• Seeks to create economic activity through government spending aimed at job
creation
• Keynesian economics

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Money Supply

• Fiscal policy
• U.S. Treasury Department, IRS
• Deficit spending, taxation
• Monetary policy
• Federal Reserve Board
• Prices, interest rates, financial markets

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 Monetary Policy Implementation

• Four tools used by the FED (D O R M)

• Discount rates
• Open market operations
• Reserve requirements
• Moral suasion

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Role of Money and Capital Markets

• Competing investments
• Debt investors: Conservative and passive; favor bonds and mortgages with a
certain return and repayment of principal
• Equity investors: Aggressive and open to more risk; venture capital
• Sources of capital
• Debt and equity
• Cash, REITs, partnerships, syndications, joint ventures, pension funds, insurance
companies

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 Mortgage Markets

• Primary mortgage markets

• Lenders who make mortgage loans directly to borrowers
• Portfolio lenders
• Secondary mortgage markets
• Private investors and government agencies that buy and sell real estate mortgages

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Function of Secondary Mortgage Markets

• Buy and sell mortgages from primary market lenders

• The primary lenders (e.g., local banks) then have more money to lend to other
potential borrowers
• Local banks invest surplus funds in real estate investments from other
regions—real estate cycles are then moderated by stable investments from
areas going through different phases of the cycle
• Standardization loan criteria

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 The Agencies of Secondary Mortgage Market

• Federal National Mortgage Association (Fannie Mae)

• Government National Mortgage Association (Ginnie Mae)
• Federal Home Loan Mortgage Corporation (Freddie Mac)

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Conforming vs. Nonconforming Loan

• Conforming loan
• General terms of the mortgage loan application meet the requirements of the
secondary market’s underwriting guidelines or a private investor’s lending policy
• Considered low risk for the investor
• Nonconforming loan
• Have one or more underwriting indicators that fall outside the acceptable range of
guidelines
• Considered higher risk for the originating lender

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 Underwriting Standards

• Loan-to-value (LTV) ratios

• Income-expense ratios
• In order to sell mortgages on the secondary market, lenders must conform to
underwriting guidelines
• Implements quality control
• Increases quality of the loans lenders make

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Overview of Mortgages

• First mortgage
• A security instrument that has a first mortgage lien position; has priority over all
other mortgages
• Second mortgage
• A security instrument in second lien position
• Also called junior mortgages
• Amortization
• The principal and interest of a loan is repaid in installments

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 Poll Question 37

A borrower obtains a conventional mortgage loan with a 95% loan-to-

value ratio. This loan is most likely to include:

A. VA mortgage guarantee B. Private mortgage C. FHA mortgage D. Any or all of these

insurance insurance

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Types of Mortgages

• Conventional loans
• May have private mortgage insurance (PMI)
• Government loans
• FHA loans, VA loans
• Adjustable rate mortgages (ARMs)
• Purchase money mortgages
• Balloon mortgages

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 Chapter 10 Quiz

1. The federal government influences the money supply through

a. fiscal and monetary policy.
b. physical and social factors.
c. rules of equilibrium.
d. supply and demand.

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Chapter 10 Quiz

2. The Treasury Department is NOT responsible for

a. federal spending.
b. managing the federal deficit.
c. tax collection.
d. secondary mortgage markets.

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 Chapter 10 Quiz

3. The Federal Reserve System has how many regional Federal Reserve
Banks?
a. 6
b. 8
c. 12
d. 14

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Chapter 10 Quiz

4. Tools used by the Fed to implement monetary policy include

a. Congressional Acts.
b. discount rates and reserve requirements.
c. fiscal assertiveness.
d. prime rates and subprime rates.

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 Chapter 10 Quiz

5. The U.S. Treasury is responsible for __________ policy.

a. economic
b. fiscal
c. monetary
d. social

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Chapter 10 Quiz

6. The amount a commercial bank must keep on deposit is known as

a. equilibrium.
b. monetary policy.
c. reserve requirements.
d. supply and demand.

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 Chapter 10 Quiz

7. If the federal government spends

less money than revenue, which would likely occur?
a. Interest rates would rise sharply for mortgage loans.
b. Federal Reserve Board would not meet.
c. Market equilibrium would occur in the Federal Reserve.
d. More funds would be available for real estate loans.

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Chapter 10 Quiz

8. Tax credits, such as those created through the American Recovery and
Reinvestment Act of 2009, are an example of which force influencing
the value of real property?
a. economic
b. governmental
c. physical
d. social

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 Chapter 10 Quiz

9. Which is NOT a source of equity used as capital for acquisition of

investment real estate?
a. joint ventures
b. mortgages
c. partnerships
d. pensions funds

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Chapter 10 Quiz

10. What is the lump-sum remaining principle balance referred to that is

payable when a mortgage loan is not fully amortized?
a. balloon balance
b. deficit balance
c. discount balance
d. passive balance

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 Chapter 10 Quiz

11. In general, conforming conventional mortgage loans represent

a. less risk of loss to the lender.
b. a loan avenue for borrowers who have a high debt to income ratio.
c. loans that are insured or guaranteed by the government.
d. an opportunity to charge a higher interest rate.

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Chapter 10 Quiz and Poll Question 38

12. Which is an advantage of the secondary mortgage market?

a. Lenders can sell existing lower interest rate loans to free-up money.
b. The lender is only lending funds from their institutions deposits.
c. Secondary market loans are only for home equity loans, so there is less
risk.
d. There are no national requirements for the secondary market.

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 Chapter 11
Overview of Real Estate Market Analysis

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Chapter 11: Objectives

• After completing this chapter, students will be able to:

• Identify effective real estate market analyses.

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 Key Terms

• Absorption Analysis Amortization • Market Analysis

• Base Companies • Market Area
• Competitive Supply • Market Disaggregation
• District • Market Segmentation
• Economic Base Analysis • Marketability Analysis
• Feasibility Study • Neighborhood
• Gentrification • Service Companies
• Household • Transition

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Market Areas and Market Analysis

• Market area: a specified geographic area or location for a specific type of

property.
• An appraiser cannot use unsupported conclusions by defining a neighborhood:
• Race • Handicap
• Color • Receipt of public
• Religion assistance
• National origin income
• Marital status • Gender
• Age • Familial status

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 Market and Marketability Analysis

• Market analysis: a study of supply, demand and other economic conditions in

an area.

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Sub-Markets

• Sub-markets: delineating a market further using subcategories.

• Subcategories, or sub-markets of a market area are:
• Neighborhoods
• Districts

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 Defining Real Estate Market Areas

• Market Analysis:
• Define
• Delineate

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Defining Market Areas by Location

• Defining location, examples:

• Geographic boundaries
• School districts
• Comparable sales
• These should come from the same neighborhood, when possible.

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 Defining Markets by Property Type

• Examples of property type:

• Single-family homes
• Multi-unit rental properties

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Analysis of Market Conditions

• Neighborhood Life Cycle

• Four Forces (P-E-G-S):
• Physical forces
• Economic forces
• Governmental forces
• Social forces

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 Poll Question 39

In the neighborhood life cycle, the stability stage is also known as:

A. Gentrification B. Equilibrium C. Novation D. Ascendancy

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Analysis of Market Conditions

• Four phases of a neighborhood life cycle:

• Growth
• Stability
• Decline
• Revitalization
• Gentrification: a form of revitalization with displacement of current residents
that takes place in a more natural fashion and is not driven by any public
movement.

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 Business Cycles

• The four phases of the business cycle are (remember the acronym
EPCoT):
• Expansion
• Peak
• Contraction
• Trough

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Economic Base Analysis

• Economic base analysis examines the present business and employment

climate in an area to determine the likelihood of continued stability, growth, or
decline.
• Base companies are only those that bring new business and jobs to the area.
• Service companies are the remainder of the companies and businesses in the
area act as service companies to those base companies and industries.

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 Real Estate Cycles

• Real estate cycles are general swings in real estate activity that result in
increasing or decreasing activity and property values during different phases of
the cycle.

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Supply-Side and Demand-Side Analysis

• Buyer’s Market:
• Homes are on the market longer (days on market) due to high supply and low
demand
• Home prices and values decline
• Buyers become price sensitive and fear paying too much for a property
• Sellers and homebuilders may provide incentives to buyers to purchase their
homes which may include offering better loan rates, no closing costs, bonuses,
free options, etc.

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 Supply-Side and Demand-Side Analysis

• Seller’s Market
• A limited supply or no homes for sale in an area
• Homes sell quickly—some may not even make it on the market before they are
sold
• Selling prices rapidly increase
• Multiple buyers compete for a particular home or property for sale
• Homes may sell for more than the asking price

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Market Disaggregation

• Market disaggregation: A supply analysis that identifies properties by type,

features, and use, which are similar and likely to compete with the subject
property.
• Competitive supply: Properties available in the marketplace that a buyer
would accept as ready substitutes for the subject property.

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 Final Supply and Demand Analysis

• Absorption Analysis: A supply and demand study of the number of property

units that will be sold (or rented) in the marketplace during a certain period of
time.
• Forecasting: Estimating future supply and demand trends.
• Demographics
• Competition

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Other Types of Analysis

• Productivity Analysis: A means of determining the current position of a

property in relation to the marketplace.
• Feasibility Study: A study of the cost-benefit relationship of an economic
endeavor.

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 Chapter 11 Quiz

1. __________ factors are NOT a force influencing housing cycles.

a. Economic
b. Social
c. Structure
d. Supply

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Chapter 11 Quiz and Poll Question 40

2. When housing prices fall due to the relocation of a major employer, it

is an example of a(n) __________ force influencing value.
a. economic
b. governmental
c. physical
d. social

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 Chapter 11 Quiz

3. A neighborhood is undergoing much rehabilitation and property

improvement. The movement is not part of any public movement or
initiative but rather from a general trend toward people desiring to live
there. What phase of the neighborhood life cycle is being evidenced?
a. expansion
b. gentrification
c. growth
d. transition

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Chapter 11 Quiz

4. The point in a business cycle when prices fall and production slows
until demand catches up with supply is most likely a period of
a. contraction.
b. expansion.
c. peak.
d. trough.

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 Chapter 11 Quiz

5. During the course of a market analysis, an appraiser notes that a

particular area, which has been predominately residential properties,
is rapidly undergoing a complete change of use to commercial due to
the widening of a street and increasingly higher traffic counts. What is
the appraiser observing?
a. decline
b. equilibrium
c. gentrification
d. transition

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Chapter 11 Quiz

6. The various complimentary land uses present in an area are being

examined as part of a larger market. What component of a market area
is being analyzed?
a. district
b. neighborhood
c. quadrant
d. zone

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 Chapter 11 Quiz

7. An appraiser primarily considers general data concerning the overall

conditions of the real estate marketplace when performing a
a. economic base analysis.
b. household study.
c. market analysis.
d. productivity analysis.

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Chapter 11 Quiz

8. Existing inventory of houses and planned new construction are

elements of what type of analysis?
a. competitive supply analysis
b. economic base analysis
c. market segmentation
d. productivity analysis

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 Chapter 11 Quiz

9. Analysis indicates that 170 residential lots are needed for sale in the
next four years based on projected demographics. There are currently
80 residential lots available with another 28 soon to be completed. If
50% of the demand will come in year one and 30% of the demand will
come in year two, how many lots are projected to be needed to satisfy
demand in year three?
a. 27
b. 31
c. 34
d. 51

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Chapter 11 Quiz

10. A study is being performed that will examine the benefit of a proposed
real estate project in relation to the project’s cost. What type of
analysis is being performed?
a. absorption study
b. feasibility study
c. marketability study
d. productivity analysis

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 Chapter 12
Application of Ethical Principles

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Chapter 12: Learning Objectives

• After completing this chapter, students will be able to:

• Interpret USPAP concepts and acceptable standards of appraisal practices.

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 Poll Question 41

An appraiser values a property under a condition that is known to be

contrary to what actually exists. In this appraisal, the appraiser has
used:
A. An extraordinary B. An unethical C. An unacceptable D. A hypothetical condition
assumption contingency assignment
condition

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Key Terms

• Extraordinary Assumption

• Hypothetical Condition

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 Appraisal Principles in Action

• Review of the subject property

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The Appraisal Assignement

• The lender has initially provided the appraiser with following information:
• Property address
• Seller’s name (owner of record)
• Purchaser’s name
• Type of value in the assignment—market value
• Pending contract price—$300,000
• Appraised value needed—$375,000
• Requirement for the appraisal report to be completed and submitted to the
lender within 48 hours of inspection

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 The Appraisal Assignment

Point Break
Do you see any problems with this scenario?

• Do the assignment conditions conflict with the appraiser’s independence?

• Is the inclusion of the “appraisal value needed” with the appraisal order an
issue?
• Is the information provided by the lender enough to properly identify the
problem?
• Why is the appraisal value needed greater than the pending contract price in
context of economic principles in a market value assignment?
• Is the transaction of the property likely “arm’s length”?

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The Appraisal Assignment

• Other specific data as noted by appraiser:

• Year built—approximately 1930
• Total gross living area of each unit—
2,200 square feet
• Exterior—wood lap siding
• The appraiser concluded the following:
• Indicated value by the income approach—$180,000
• Indicated value by the sales comparison approach—$385,000
• Appraiser’s final conclusion of market value—$385,000

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 The Appraisal Assignment

Point Break
Who is the intended user(s) in the assignment?

• The company with which the loan originator was affiliated, as the company
engaged the appraiser and was not evidently acting as a designated agent for
any other entity. No other intended users have been identified at the time the
appraiser agreed to perform the assignment.

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Poll Question 42

What is the intended use of the appraiser’s opinions and

conclusions?

A. To ensure the borrower B. To provide an C. To assist in a D. To promote home

qualifies for a loan impartial opinion of mortgage finance ownership in the local
the quality of another transaction market
appraiser’s work
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 The Appraisal Assignment

Point Break
What is the intended use of the appraiser’s opinions and conclusions?

• To assist in a mortgage finance transaction.

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Review of Appraisal

• In summary, the review appraiser reported the following:

• Economic characteristics of the subject neighborhood
were faulty.
• Highest and best use of the property was misstated.
• Physical characteristics of the property were misstated.
• Sales data selected for the sales comparison approach represented characteristics
of a different market, which was not addressed by adjustments or commentary as
to why adjustments were not warranted.
• Significant differences between the subject and the selected comparable sales
data were improperly addressed.
• Final opinion of value was not supported by a rational and logical reconciliation
regarding the quality of the indications produced by the two approaches that were
developed. This led to a final opinion of value that was more than double of that
concluded by the review appraiser.
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 Findings of Regulatory Investigation

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Findings of Regulatory Investigation

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 Findings of Regulatory Investigation

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Findings of Regulatory Investigation

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 Findings of Regulatory Investigation

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Findings of Regulatory Investigation

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 Findings of Regulatory Investigation

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Findings of Regulatory Investigation

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 Findings of Regulatory Investigation

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Findings of Regulatory Investigation

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 Findings of Regulatory Investigation

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Findings of Regulatory Investigation

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 Findings of Regulatory Investigation

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Findings of Regulatory Investigation

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 Findings of Regulatory Investigation

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Findings of Regulatory Investigation

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 Highlighted USPAP Concepts and Obligations

• Hypothetical Conditions and Extraordinary Assumptions

• A hypothetical condition is something that the appraiser knows to be false but he
is considering it as being true for the purpose of his analysis and obtaining credible
results.
• An extraordinary assumption is used in a specific assignment when the
appraiser has a reasonable basis for his belief, but something about which the
appraiser is not certain.

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Hypothetical Conditions and Extraordinary Assumptions

(Supplement)

• The USPAP definitions for extraordinary assumption and hypothetical condition are:
• EXTRAORDINARY ASSUMPTION: an assignment-specific assumption as of the
effective date regarding uncertain information used in an analysis which, if
found to be false, could alter the appraiser’s opinions or conclusions.
• Comment: Uncertain information might include physical, legal, or economic characteristics
of the subject property; or conditions external to the property, such as market conditions or
trends; or the integrity of data used in an analysis.
• HYPOTHETICAL CONDITION: a condition, directly related to a specific
assignment, which is contrary to what is known by the appraiser to exist on the
effective date of the assignment results but is used for the purpose of analysis.
• Comment: Hypothetical conditions assume conditions contrary to known facts about
physical, legal, or economic characteristics of the subject property, or about conditions
external to the property, such as market conditions or trends, or about the integrity of data
used in an analysis.

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 Poll Question 43

Which of these is required by USPAP to be in an appraiser’s workfile?

A. True copies of written B. Name of the client C. Identity of D. All of these

reports intended users

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Workfile Requirements

• USPAP has very specific workfile requirements. Items that must be

included in the workfile for a written appraisal include, but are not
limited to:
• Name of the client and the identity, by name or type, of any other intended users
• True copies of all written reports, documented on any type of media
• All other data, information, and documentation necessary to support the
appraiser’s opinions
and conclusions and to show compliance with USPAP or references to the
location(s) of such
other data, information, and documentation.

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 Misleading Report

• Communicating a misleading or fraudulent report is a violation of professional

ethics.

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Valuation Methods

• The appraiser in the case study employed the sales comparison method and
the income method in his development. USPAP has very basic and broad
obligations for development of the approaches to value.

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 Reconciliation

• Appraisal development standards of USPAP require the appraiser to

address reconciliation as a two-part process. An appraiser must:
• Reconcile the quality and quantity of data available and analyzed within the
approaches.
• Reconcile the applicability and relevance of the approaches, methods, and
techniques used to arrive at the value conclusion(s).

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Definition and Source of Definition of Market Value

• The appraiser must identify the type of value and the specific definition of value
during problem identification. In the case scenario, the appraiser did state that
the purpose of the appraisal (type of value in the assignment) was market
value.

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 Analyzing Agreements of Sale

• Appraisal development standards require, in market value assignment, for the

appraiser to analyze all agreements of sale, options, and listings of the subject
property current as of the effective date of the appraisal, if available in the
normal course of business.

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Unacceptable Assignment Conditions

• USPAP prohibits appraisers from performing assignments with unacceptable

assignment conditions.
• USPAP does not specifically identify a “value needed” as an unacceptable
assignment condition.

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 Highest and Best Use Analysis

• Depending on the reporting option chosen for the appraisal report (Appraisal
Report or Restricted Appraisal Report) the highest and best use of the property
must be:
• summarized, or
• stated.

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Appraising a Physical Segment

• Appraising a physical segment of a property that has differing ownership of the

segments is not a violation of professional ethics and is not at all uncommon for
some properties in some locations. However, specialized methodology and
technique must be applied to determine the affect of the multiple ownerships.

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 Poll Question 44

Which of these is required by USPAP to be in an appraiser’s workfile?

A. True copies of written B. Name of the client C. Identity of D. All of these

reports intended users

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Prior Sales History

• USPAP requires the analysis and disclosure of all sales of the subject property
that occurred within the three years prior to the effective date of the appraisal.

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 Reporting the Scope of Work

• For reporting the scope of work, professional standards require that the scope
of work actually performed in the assignment be (depending on the reporting
option chosen) summarized or stated.

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Chapter 12 Quiz

1. Jack appraised a residential dwelling located across the street from a

factory that he determined is negatively affecting the value of the
subject property. Jack applied a location adjustment in his sales
comparison approach; however, the client asked that the factory not
be discussed in the appraisal report. Since Jack addressed the
condition with an adjustment, has he complied with USPAP?
a. No, because USPAP requires an explanation for each adjustment.
b. No, omitting the discussion could produce a misleading report.
c. Yes, since an adjustment was included.
d. Yes, since the client requested the omission.

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 Chapter 12 Quiz

2. If a property is known by the appraiser, on the effective date of the

appraisal, to have an inoperative mechanical system component, but
the appraiser is considering the component as if it were operating
properly on that date for the purpose of his analysis, what is the
appraiser basing his opinions and conclusions on?
a. anticipated condition
b. extraordinary assumption
c. hypothetical condition
d. hypothetical exception

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Chapter 12 Quiz

3. Josh received an appraisal request from a lender-client who told him

to immediately call if the value on the property is less than the amount
stipulated by the lender, as he doesn’t intend to pay for an appraisal
that won’t benefit his position. Will performance of this assignment be
in compliance with USPAP?
a. Yes, it is permissible for a client to call the client with the value prior to
adequately supporting the opinion.
b. Yes, this would be a hypothetical condition, which is acceptable.
c. No, an appraiser may not agree to perform an assignment with unacceptable
assignment conditions.
d. No, it is not permissible unless Josh discloses this fact in the report.

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 Chapter 12 Quiz

4. What information is NOT required to be in an appraisal workfile?

a. copy of the bill sent to the client
b. documentation to support the appraiser’s opinions and conclusions
c. references to the location of other documentation not in the workfile
d. true copies of all written reports

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Chapter 12 Quiz and Poll Question 45

5. The scope of work disclosed in an appraisal report must include the

a. appraiser’s final conclusions and value opinion.
b. initially planned scope of work at the onset of the assignment.
c. intended use in the assignment.
d. scope of work that was actually performed.

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 Chapter 12 Quiz

6. Appraisers must analyze agreements of sale, options, and listings of

the subject property current as of the effective date of an appraisal, in
a market value assignment, if it is
a. available in the normal course of business.
b. a matter of public record.
c. not deemed confidential information.
d. required by the client.

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Chapter 12 Quiz

7. While appraising a property, Lydia could not check the furnace to see if
it is in good working order due to the utilities being off at the time of
the inspection. Since the home is relatively new and the components
appear to be in good condition, Lydia has a reasonable basis to believe
that the furnace is in satisfactory operating condition, but she is
uncertain. Therefore, Lydia bases her conclusion on a(n)
a. expected condition.
b. extraordinary assumption.
c. hypothetical assumption.
d. hypothetical condition.

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 Chapter 12 Quiz

8. For reconciliation, in addition to reconciling the quality and quantity of

data available within the approaches used, USPAP also requires an
appraiser to ________ the approaches, methods, and techniques used
to arrive at the value conclusion.
a. mathematically average the results of
b. not rely solely on
c. reconcile the applicability and relevance of
d. report the conclusions individually of

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Chapter 12 Quiz

9. In an appraisal report, sufficient information regarding the scope of

work includes disclosure of research and analyses performed and
might also include disclosure of
a. the client’s objectives for the assignment’s results.
b. confidential information used in development.
c. fees and things of value paid to the appraiser.
d. research and analyses not performed.

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 Chapter 12 Quiz

10. An appraiser determines the appropriate definition of market

value to be used in the assignment
during
a. market analysis.
b. problem identification.
c. reconciliation.
d. valuation analysis.

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The End
Thank you for being a McKissock customer.
Please fill out the evaluation form. We value your input.

We hope you enjoyed the course, and if you have any questions, please
don’t hesitate to call us at
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McKissock, LLC P.O. Box 1673, Warren, PA 16365 | P: 800.328.2008 | F: 814.723.7289 | mckissock.com

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