The Real Estate Marketplace. Characteristics of Real Estate Markets Every parcel of real estate is...

The Real Estate MarketplaceThe Real Estate Marketplace

Characteristics of Real Estate Characteristics of Real Estate MarketsMarkets

• Every parcel of real estate is uniqueEvery parcel of real estate is unique

• Number of buyers and sellers variesNumber of buyers and sellers varies

• Most buyers and sellers are Most buyers and sellers are unsophisticatedunsophisticated

• Real estate is intensely regulatedReal estate is intensely regulated

• Real estate is immobileReal estate is immobile

Market AnalysisMarket Analysis

• DemographyDemography is study of population statistics is study of population statistics

• SegmentationSegmentation further defines overall market further defines overall market

• ForecastsForecasts predict future market performance predict future market performance

• Absorption analysisAbsorption analysis is study of number of is study of number of property units that can be sold or leased over a property units that can be sold or leased over a given period of time in defined locationgiven period of time in defined location

• Feasibility studyFeasibility study predicts likely success of predicts likely success of proposed real estate developmentproposed real estate development

Real Estate FinanceReal Estate Finance

• Cost of credit is the Cost of credit is the interest paid on interest paid on loan used to loan used to purchase real purchase real estateestate

• Credit is “tight” Credit is “tight” when there is not when there is not enough financing enough financing for all potential for all potential buyersbuyers

• Sources of capital—Sources of capital—money market and money market and capital marketcapital market

• Investments come Investments come from debt investors from debt investors and equity and equity investorsinvestors

• Role of REIT’s, Role of REIT’s, Pension Funds, etc. Pension Funds, etc.

Mortgage Terms and Mortgage Terms and ConceptsConcepts

Security instrumentSecurity instrument hypothecateshypothecates real property real property to assure lender that debt will be repaidto assure lender that debt will be repaid

• MortgageMortgage given by given by mortgagormortgagor (property owner) (property owner) creates lien in favor of creates lien in favor of mortgageemortgagee (lender); if (lender); if default, enforced by judicial foreclosuredefault, enforced by judicial foreclosure

• Deed of trustDeed of trust transfers title from transfers title from trustortrustor (property owner) to (property owner) to trusteetrustee (neutral third party) (neutral third party) to be held on behalf of to be held on behalf of beneficiarybeneficiary (lender); if (lender); if default, enforced on default by trustee’s sale; if default, enforced on default by trustee’s sale; if repaid, trustee’s deed returns title to ownerrepaid, trustee’s deed returns title to owner

Elements That Create Elements That Create ValueValue

DDemand—financially qualified buyeremand—financially qualified buyer

UUtility—property serves useful tility—property serves useful purposepurpose

SScarcity—short supply relative to carcity—short supply relative to demanddemand

TTransferability—title moved readilyransferability—title moved readily

What is the role of risk What is the role of risk (uncertainty) in the valuation of (uncertainty) in the valuation of properties? properties?

Types of ValueTypes of Value

assessed value cash value rental value

market value improved value salvage value

mortgage value insurable value depreciated value

capitalized value appraised value replacement value

book value exchange value leased fee value

inheritance tax value liquidation value leasehold value

value in use investment valuegoing-concern

value

Market ValueMarket Value

. . . the most probable price which a . . . the most probable price which a property should bring in a property should bring in a competitive and open market under competitive and open market under all conditions requisite to a fair sale, all conditions requisite to a fair sale, the buyer and seller each acting the buyer and seller each acting prudently and knowledgeably, and prudently and knowledgeably, and assuming the price is not affected by assuming the price is not affected by undue stimulusundue stimulus

Arm’s-Length Arm’s-Length TransactionTransaction• Buyer and seller are typically Buyer and seller are typically

motivatedmotivated

• Both parties are well informedBoth parties are well informed

• The property has been on the market The property has been on the market for a reasonable timefor a reasonable time

• Payment is made in terms of cash in Payment is made in terms of cash in U.S. dollarsU.S. dollars

• Price represents normal consideration Price represents normal consideration with no special financing concessionswith no special financing concessions

Influences on Real Estate Influences on Real Estate ValueValue

• Physical and environmentalPhysical and environmental

• EconomicEconomic

• Government and legalGovernment and legal

• SocialSocial

Basic Value PrinciplesBasic Value Principles

• AnticipationAnticipation

• BalanceBalance

• ChangeChange

• CompetitionCompetition

• Conformity, Progression and RegressionConformity, Progression and Regression

Basic Value Principles IIBasic Value Principles II

• ContributionContribution

• ExternalitiesExternalities

• Four Agents of ProductionFour Agents of Production

• Growth, Equilibrium, Decline and Growth, Equilibrium, Decline and RevitalizationRevitalization

• Highest and Best UseHighest and Best Use

Basic Value Principles IIIBasic Value Principles III

• Law of Increasing Returns and Law of Increasing Returns and

Law of Decreasing ReturnsLaw of Decreasing Returns

• Opportunity CostOpportunity Cost

• SubstitutionSubstitution

• Supply and DemandSupply and Demand

• Surplus ProductivitySurplus Productivity

The End of Chapter ThreeThe End of Chapter Three

The Appraisal ProcessThe Appraisal Process

Steps in the Appraisal Steps in the Appraisal ProcessProcess1. State the problem1. State the problem2. List the data needed and the sources2. List the data needed and the sources3. Gather, record and verify necessary date3. Gather, record and verify necessary date4. Determine the highest and best use4. Determine the highest and best use5. Estimate the land value5. Estimate the land value6. Estimate value by each of the 6. Estimate value by each of the

three approachesthree approaches7. Reconcile the estimated values for the 7. Reconcile the estimated values for the

final value estimatefinal value estimate

Stating the problem includes:Stating the problem includes:

• Identification and location of propertyIdentification and location of property

• Identification of property rights to be Identification of property rights to be appraisedappraised

• Definition of value to be estimatedDefinition of value to be estimated

• Purpose and intended use of appraisalPurpose and intended use of appraisal

• Effective date of appraisal estimateEffective date of appraisal estimate

• Any special limiting conditionsAny special limiting conditions

Limiting ConditionsLimiting Conditions

FNMA 1004B/FHLMC 439FNMA 1004B/FHLMC 439

Statement of Limiting Conditions Statement of Limiting Conditions and Appraiser’s Certificationand Appraiser’s Certification

Sales Comparison Sales Comparison ApproachApproach

Basic process is to take the sale price of Basic process is to take the sale price of comparable properties and make comparable properties and make adjustments which will indicate what the adjustments which will indicate what the comparable properties would have sold for comparable properties would have sold for if they had been identical to the subject if they had been identical to the subject property. property.

Also called market data approach

Cost ApproachCost Approach

Reproduction or – Depreciation on + Site = PropertyReproduction or – Depreciation on + Site = Property

Replacement Cost Improvements Value ValueReplacement Cost Improvements Value Value

of Improvementsof Improvements

Income Capitalization Income Capitalization ApproachApproach

Net Operating Income Net Operating Income = Property Value = Property Value

Capitalization RateCapitalization Rate

Relationship of Relationship of ApproachesApproaches

• Sales comparison approachSales comparison approach is most reliable is most reliable with single-family residenceswith single-family residences

• Cost approachCost approach is most reliable with non- is most reliable with non-income producing property or special-purpose income producing property or special-purpose propertyproperty

• Income capitalization approachIncome capitalization approach is most is most reliable with income-producing propertyreliable with income-producing property

End of Chapter FourEnd of Chapter Four