Estimate the Replacement Cost of the Improvements, Essay Example

#20. Which component is among those an appraiser would use in preparing a cost-approach appraisal?

(Correct answer is) A. Estimate the replacement cost of the improvements.

“The cost approach method, quite simply, is an estimate of the replacement value of a property that’s determined by the cost of its components – land and improvements. Based on the principle of substitution, the cost approach method in essence says, you shouldn’t pay more for a property than the cost of a comparable site and building.” (The Cost Approach, 2008) Essentially this means that the property is values by different variables and not as a whole. First an appraiser would consider the value of the land if it were vacant. The building or land needs to be valued based on depreciation. The value of the property is determined by calculating the projected land value with the building depreciation. Determine the cost to replace the building. And lastly, take away the depreciation value of the building to the estimated cost to replace.

An appraiser would use the cost-approach appraisal method in cases that market data is not easily accessible, the value of the property is far greater than the cost to replace, surging prices resulting from shortages of housing with demand increasing, and the property has specific or unique one-of-a-kind attributes. Some markets the demands for housing outweighs the availability. This is a specific challenge that appraisers have to face when valuing properties because the value will decrease when the demand decreases as well. In order to estimate property value in this and other difficult environments using the market-based approach can create a fraud to clients leading them to believe that a market is in fact sustainable. Utilizing the cost approach allows appraisers a cost-based vision of the market and the clients a true accurate picture of the value of the property. Using the cost approach appraisal method can add validation to an appraisal.

#65. After an offer is accepted, the seller finds that the broker was the undisclosed agent for the buyer as well as the agent for the seller. The seller may (Correct answer is) A. withdraw without obligation to the broker or the buyer

“Licensees often accidentally create dual agencies, being unaware that, by their action, and illegal undisclosed dual agency has come into being. Implied or inadvertent agencies can be created when agents lead customers to believe that they are acting in the customer’s behalf or ‘doing the dealings’ of the customers. Under the law of agency, such an inadvertent agency is a clear break of an agent’s fiduciary obligation to the principal and generally is viewed to be an act of fraud. An undisclosed dual agent can be liable for damages and forfeiture of compensation as well as loss of a real estate license. Furthermore, any transaction procured by the dual agent can be rescinded without any showing of injury to the principle or bad faith by the agent.” (Blaze, 2009)

A broker is to act in the best interest of their client, buyer or seller. They are to act only as a statutory agent for any real estate transaction. This broker should not act as a dual agent or what is called a dual capacity of agent and undisclosed this in any transaction. This said broker may be a single party separate transaction for different relationships such as selling a property as an agent or working with the seller in buying a different property as long as the broker acts in the proper establishments of the relationships for each transaction. If a broker is engaged in a transaction, oral or written, the landlord, seller, buyer, or tenant the broker should be considered a transaction broker. Failure to disclose dual relationships or transactions can hold additional liability for that broker. In addition, the failure to disclose can allow the buyer or seller to rescind their offer based on the failure to disclose the dual-relationship.

#68. It is discovered after a sale that the land parcel is 10 percent smaller than the seller represented it to be. The licensee who passed this information on to the buyer is: (Correct answer is) D. liable if the licensee knew or should have known of the discrepancy.

It is the licensee if responsible to validating the land parcel of any sale. They are presenting this to the potential customer as being true and accurate. It is highly unlikely that a buyer will verify the information such as size prior to purchase. They are under the impression a belief that the licensee has verified the information prior to the sale. Therefore the liability falls onto the licensee for not verifying the land parcel as they presented it to the customer. In the event that the licensee had no prior knowledge or advisement of the discrepancy, the liability no longer falls on this licensee.

There are several areas that licensees can be liable for. This includes but is not limited to:

1. Fraud;
2. Breach of Duty;
3. Breach of Contract;
4. Negligence;
5. Bodily Injury / Property Damage;
6. Misrepresentation regarding the Condition of the Property;
7. Consumer Protection Act;
8. Earnest / Escrow Money Dispute;
9. Misrepresentation regarding Flooding or Leaks; and
10. Misrepresentation regarding the Value of the Property.

In order to avoid any potential legal liability, the agent or licensee needs to be upfront and proactive in the land or property they are representing. By doing this the licensee lessens their potential for legal ramification and potential lawsuits.

References:

The Cost Approach Appraisal Method. (2008) Retrieved from http://realestateandappraisal.blogspot.com/2008/02/cost-approach-appraisal-method.html

Blaze, Dane. (2009) Common Law of Agency. Retrieved from http://www.charlesbarnes.com/pdf_files/agency.pdf