Chapter 17: Real Property Valuation - Art Poling CE and ... ... Dearborn Real Estate Education, 2012...

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Transcript of Chapter 17: Real Property Valuation - Art Poling CE and ... ... Dearborn Real Estate Education, 2012...

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    Dearborn Real Estate Education, 2012

    Chapter 17: Real Property Valuation

    Dearborn Real Estate Education, 2012

    Appraising

    Estimate or opinion of value

    Only valid for the day conducted

    Appraisal may only be conducted by a licensed appraiser

    Regulated by NC Appraisal Board

    Broker does a CMA to find probable sales price, not an appraisal (or BPO) for market value

    Value

    Characteristics of value

    Demand the need or desire for possession or ownership backed by the financial means to satisfy that need

    Utility the capacity to satisfy human needs and desires

    Scarcity a finite or limited supply

    Transferability the relative ease with which ownership rights can be transferred

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    Dearborn Real Estate Education, 2012

    Value

    Characteristics of Value

    Demand

    Utility

    Scarcity

    Transferability

    Dearborn Real Estate Education, 2012

    Market Value

    The most probable price a property will bring in a competitive and open market under all conditions requisite to a fair sale; the buyer and the seller are each acting prudently, knowledgeably, and without undue influence.

    Value

    Market value Definition The most probable price a property will bring In a competitive and open market Under all conditions requisite to a fair sale The buyer and seller are each acting prudently,

    knowledgeably and without undue influence The buyer and seller must be unrelated and acting

    without undue pressure A reasonable length of time must be allowed for the

    property to be exposed in the open market Both the buyer and the seller must be well informed of the

    property's use and potential, including its assets and defects

    Consideration paid in cash or its equivalent

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    Dearborn Real Estate Education, 2012

    Value

    Market value vs. market price

    Market value vs. cost

    Dearborn Real Estate Education, 2012

    Forces and Factors Influencing Value

    Social forces

    Economic forces

    Political forces

    Physical forces

    Social forces

    Were likelier to own homes than our parents or grandparents were. 1

    According to the US Census Bureau, the home ownership rate was 55 percent in 1950; 64 percent in 1980; an 69 percent in 2005. The homeownership rate fell to 64.7 percent in the 2nd quarter of 2014, the lowest level since 1995.

    1 Quoted from HOME: The Blueprints of Our Lives from Harper Collins

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    Social forces The Evolution of Home, Sweet Home

    The average house in 1950 was 1,100 square feet. IN 1980- it was 1,740. By 2005, it grew to 2,434. Meanwhile lot sizes shrank about 4 percent from 1980 to 2005.

    Dearborn Real Estate Education, 2012

    Basic Economic Principles of Value

    Highest and best use

    Substitution

    Supply and demand

    Conformity

    Anticipation

    Contribution

    Competition

    Change

    Basic economic principles of value

    Highest and best use the most profitable single use to which a property can be adapted; is subject to change

    Substitution the maximum value of a property tends to be set by the cost of purchasing an equally desirable replacement; basis for the Sales Comparison Approach

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    Substitution

    market value of real estate is influenced by the cost of acquiring a substitute or comparable property.

    Basic economic principles of value

    Supply and demand (buyers market/sellers market) Supply increases, demand stays constant: prices

    will fall

    Supply decreases, demand stays constant: prices will rise

    Demand increases, supply stays constant: prices will rise

    Demand decreases, supply stays constant: prices will fall

    Supply and Demand

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    Basic economic principles of value

    Conformity maximum value is realized if the use of the land conforms to existing neighborhood standards

    Anticipation value can increase or decrease if one anticipates some future benefit or detriment from the property

    Conformity

    The economic principle which states that the maximum value of an improved property is realized when other properties in the immediate area have compatible and harmonious style

    Anticipation

    The principle that the purchase price of property is affected by the expectation of its future appeal and value.

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    Contribution

    The principle that any improvement to a property, whether to vacant land or a building, is worth only what it adds to the propertys market value, regardless of the improvements actual cost.

    Competition

    The principle that a successful business attracts other such businesses, which may dilute profits.

    Change

    The principle that no physical or economic condition ever remains constant.

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    Basic economic principles of value

    Contribution the value of any component of a property is what its addition contributes to the value of the whole or what its absence detracts from the value of the whole; beware of over improvement

    Competition excess profits tend to attract competition

    Change no physical or economic condition remains constant; life cycle

    Basic economic principles of value

    Competition excess profits tend to attract competition

    Change no physical or economic condition remains constant; life cycle

    Dearborn Real Estate Education, 2012

    The Appraisal Process

    Methodical collection

    and analysis of data

    Specific data

    General data

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    The Appraisal Process

    State the problem: what type of value is being sought?

    List the data needed and the sources

    Gather, record and verify the necessary data General data national, regional, city, and

    neighborhood data; data about factors not located on the property

    Specific data data on the subject land and improvements

    Both general data and specific data would include information regarding each of the three approaches to value

    The Appraisal Process

    Determine the highest and best use of the site.

    Estimate the land value, usually by sales comparison analysis

    Estimate the value by each of the three approaches

    Reconcile the estimated values for the final value estimate

    Report the final value estimate

    Dearborn Real Estate Education, 2012

    Approaches to Value

    The Sales Comparison Approach

    The Cost Approach

    The Income Capitalization Approach

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    Dearborn Real Estate Education, 2012

    Sales Comparison Approach

    Comparing subject property to comparable properties that have sold recently

    Comps should be as similar to the subject as possible

    Adjustments are made to comps

    CMA is based on this approach

    Best approach for residential and land

    Dearborn Real Estate Education, 2012

    Selecting Comparables

    Arms length transaction

    Comps should be as similar to the subject as possible

    Recently sold 3 or more comps

    Fewest adjustments possible

    Superior vs. inferior

    Correlation vs. simple averaging

    The Sales Comparison Approach

    Comparing subject property to comparable properties that have sold recently

    Comps should be as similar to the subject as possible

    CMA is based on this approach

    Best approach for residential and vacant land

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    The Sales Comparison Approach

    The factors for which adjustments to the comparable properties are made

    Date of sale changes in economic conditions between the date of the sale of the comparable property and the date of the appraisal

    Location compensate for location or neighborhood differences

    The Sales Comparison Approach

    The factors for which adjustments to the comparable properties are made

    Physical features and amenities -- physical differences between the comparable properties and the subject

    Conditions of salemotivational factors such as financing concessions, foreclosure or a sale between family members (not an arms length transaction)

    The Sales Comparison Approach

    Selecting comparables

    The more similar the comp is, the more recently sold, and the fewer adjustments required, the more reliable the estimate of value

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    The Sales Comparison Approach

    Selecting comparables

    Adjustments are made as follows

    If the comparable property is superior to the subject property or has a feature that the subject property lacks, the value of the comparable is decreased accordingly

    If the comparable property is inferior to the subject Property or lacks a feature that the subject property has, the value of the comparable is increased accordingly

    The Sales Comparison Approach

    Selecting comparables

    Adjustments are made as follows

    After the appraiser has arrived at a value for each comparable (a minimum of three), he must determine a single value using a weighing process called correlation; not simple averaging

    The Sales Comparison Approach

    Comparative market analysis (CMA)

    Real estate licensees must be familiar with appraisal techniques to perform a comparative market analysis (CMA) which is an informal version of the sales comparison approach

    Usually determines a range of value vs. a specific value like an appraisal

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    SALES COMPARISON

    Comparing the Subject Property to Comparables (recently sold properties) and making plus or minus adjustments for differences.

    COMPARABLE

    SUBJECT

    $80,000

    - 1,500

    $78,500

    Minus fireplace

    Adj