APPRAISAL - CHAPTER 3

REGRESSION

"best" home in the "worst" area. The value of a home is negatively affected by other homes in an area.

PROGRESSION

"worst" home in the "best" area. The value of a home is positively affected by the other homes in an area.

4 VALUE CHARACTERISTICS D-U-S-T

-Demand - someone has to want it -Utility - usefullness -Scarcity - less there is, more its worth -Transferability - be able to lease/sell it

SOCIAL FORCES

-Demographic changes-changes in general population -migrations of the population-ex one city over another -social trends-single parent households/empty nest households, etc. -buyer tastes and standards-specific features of property

PHYSICAL (PROPERTY SPECIFIC) FACTORS

-Highest and best use -Location -Substitution -Conformity -Contribution

4 BROAD FORCES THAT AFFECT VALUE (P-E-G-S)

-Physical - businesses opened, roads changed -Economic - taxes, school district -Governmental - taxes, mortgage lenders int. rates -Social-styles of homes/decor Make property valuable/not valuable at any particular time

ECONOMIC (BROAD MARKET) FACTORS

-Supply and demand -Uniqueness and scarcity

CONTRIBUTION

A particular item or feature of a property is worth only what it actually contributes in value to that piece of real estate ex - adding on a 5th bedroom in a development that only has 3-4 bedroom homes may not increase value.

GOVERNMENTAL FORCES

Affect value in real estate -Revenue generating laws (taxes) -Right to regulate laws (police power) -Fiscal and monetary policy -Secondary mortgage markets _Government programs

SUBSTITUTION

An informed buyer will not pay more for a home than a comparable substitute. Look at competition

OTHER TYPES OF VALUE

Asset value-the value of property based on specific investment criteria - accounting Book value - the value of property as capital based on accounting methods - accounting Liquidation value - the value a property could get if sold under the duress of a must-sell situation with less than typical market exposure Salvage value - the value of property in a distress situation.

BUYER'S MARKET

Buyers have a large selection of properties from which to choose.

EFFECTIVE DEMAND

Considers the ability of a particular market to afford a property

CHANGE

Constantly occurring. This is why appraisals are only valid as of its effective date.

BUSINESS CYCLES

General swings in business activity. Real estate cycles typically trail behind business cycles.

CONFORMITY

Home achieves its maximum value when it is surrounded by homes that are similar in style and function. ex - building a log home by the beach- it doesn't fit in.

3 PHYSICAL CHARACTERISTICS OF REAL ESTATE

Immobility - it can't be moved Indestructibility - cant' be destroyed/consumed Uniqueness - each piece of land/building/house is said to be different. (non-homogeneity)

INFLATION

Increase in the cost of goods or services

SELLER'S MARKETS

Property offerings are scarce and buyers have fewer properties being offered on the market to choose from.

BALANCE

Real estate market is said to be in balance when there are slightly more homes available than buyers. This keeps real estate prices in check.

THE LAW OF DIMINISHING RETURNS

Says that beyond a certain point, the added value of an additional feature, addition, repair, etc, is less than the actual cost of that item. -can add too much to a property that you cannot increase the price enough to recoup the money you invested.

SUPPLY AND DEMAND

Says that for all products, goods, and services, when supply exceeds demand, prices will fall and when demand exceeds supply, prices will rise.

THE LAW OF INCREASING RETURNS

Says that the added value of an additional feature, repair, etc, is more than the actual cost of that item.

UNIQUENESS AND SCARCITY

Scarcity is tied to supply and demand Uniqueness - no two properties are exactly alike. Can be good or bad.

UTILITY

The ability of a good or service to satisfy human wants, needs, or desires. (ex - enough bedrooms)

TRANSFERABILITY

The ability to freely buy, sell, encumber, or dispose of property in any way that the owner sees fit -- the fewer the restrictions on real estate, the higher the perceived value.

VALUE

The amount of goods or services offered in the marketplace in exchange for something else.

LOAN VALUE

The amount of money a lender is willing to let someone borrow to finance a property. Usually a loan-to-value ration (LTV)

INSURANCE VALUE

The amount of property can be insured for, usually representing only the replacement costs of the structure and disregarding any value for the land.

ASSESSED VALUE

The amount of value used to calculate taxes due, and usually represents a percentage of the market value.

COST OF MONEY

The interest rate people or businesses must pay to use another person's money for their own purposes.

ECONOMIC BASE

The main business or industry which a community uses to support and sustain itself.

MARKET VALUE

The most probable price that a property should bring in a competitive and open market.

HIGHEST AND BEST USE

The most profitable, legally permitted, feasible, and physically possible use of a property.

DEMAND

The need/desire for a specific good or service by others. The essential ingredient in creating value.

SCARCITY

The perceived supply of a good or service relative to the demand for the item.

ARM'S LENGTH TRANSACTION

The transaction occurred under typical conditions in the marketplace, with each of the parties acting in their own best interests Typical conditions include: 1. Paid cash or mortgage through lender 2. No owner financing or unusual payment terms 3. Buyer and seller not related 4. Buyer and seller acting in own best interests 5. No undue haste or duress 6. Parties are reasonably informed about property 7. Property has been on the market for a reasonable period of time.

ECONOMIC FORCES

These can affect value in real estate market: -Business cycles -Economic base -Supply and demand -inflation -cost of money (interest rates)

PHYSICAL FORCES

Topography-contour of the land - too hilly/flat Water-waterfront/swamp, city water/well water Location- Popularity- Environment-natural or man made - soil, natural waterway, man-made lake

ABC Company just opened in a new suburb of Pittsburgh. Potential workers are hoping to move into the area but there are limited houses for sale and no new construction underway. What type of market has been created?

a. a balanced market b. a buyer's market c. a seller's market d. a trader's market ANSWER: C

Quiz A new company that moves to an area helps the local real estate market by helping maintain a healthy

a. balance b. economic base c. economy of scale d. environment ANSWER: B

Quiz A run-down house in a good neighborhood

a. benefits from the principle of progression b. benefits from the principle of regression c. is hurt by the principle of progression d. is hurt by the principle of regresion ANSWER: A

Which is NOT part of an arm's length transaction

a. buyer and seller are acting in their own best interest b. buyer and seller are not related c. buyer and seller are reasonably informed about the property and its uses d. buyer and seller have agreed upon payment terms for a land contract. ANSWER: D

The real estate market is said to be in balance when there are more

a. buyers than houses for sale b. buyers than sellers c. houses for sale than buyers d. houses than apartments ANSWER: C - keeps real estates prices in check

A nice, well-kept house located in the heart of an all-residential area, surrounded by other well-kept houses of similar value, is an example of

a. conformity b. highest and best use c. both conformity and highest and best use. d. neither conformity nor highest and best use ANSWER: C

When the value of an additional feature is worth more than the actual cost of the item, this is an example of law of

a. decreasing returns b. diminishing returns c. increasing returns d. none of the above ANSWER: C

Quiz Maximum value for a property can be achieved only when

a. demand, utility, scarcity, transferability, and purchase ability are present b. the market is in balance c. supply outweighs demand d. there is a buyer's market. ANSWER: A

Quiz Market value is the

a. dollars needed to rebuild the property b. price determined by Freddie Mac, Fannie Mae, and/or USPAP c. price a property actually sold for d. theoretical price that real estate is most likely to bring in a typical transaction ANSWER: D

The physical forces affecting real estate contribute to its value because

a. economies of scale will help those who buy more b. people can just move to a new are anytime they want c. a popular area will always remain popular and desired d. there is a limited supply that cannot be moved, destroyed, or created. ANSWER: D

Quiz The influence of the cost of money on real estate is

a. irrelevant because interest rates are not important to real estate. b. less than other big ticket items because mortgages have adjustable rates c. more than other big ticket items because mortgages are long term d. negligible because people are not always rational ANSWER: C

Uniqueness and scarcity help the value of real estate because

a. it's impossible to find exactly what you want in a house b. no two properties are exactly the same c. real estate is difficulty to find d. real estate is unlimited. ANSWER: B

How do the government programs administered by the FHA and VA affect the real estate market?

a. they build additional low-income housing b. they make fewer houses available for the general public c. they provide insurance or make loan guarantees to lenders d. they service only veterans ANSWER: C

LOCATION

exact position of a parcel of real estate. SITUS - term used to describe the place where something exists.