Real Estate Course Level 18

Broad Markets and Thin Markets

In addition to buyer's markets and seller's markets, there are broad markets and thin markets. A broad market is one with many people wanting to buy and sell property. A thin market is the opposite: one with few buyers and sellers. There isn't necessarily a correlation between the breadth of a market and whether it favors buyers or sellers. Remember, if a market is thin on just one kind of person (not a lot of buyers, say), then you're just talking about a buyer's market. Broad and thin are more generally about the amount of activity happening at any given time. Often, markets go through broad and thin cycles seasonally. For example, in cold places, winter tends to be a lot slower. Fewer people want to move when there's snow on the ground. On the other hand, summer tends to be a much busier time (or a broader market), because people with kids are trying to move before the next school year starts, college students are moving in and out, and houses generally show better in the summer. Every market has a different cycle, depending on the weather, the main industry of the area, and the demographics of the typical buyer (parents with young kids? seniors? single tech bros?). Paying attention to these seasonal cycles will give you an advantage in your career if you're selling residential real estate. It's not that you never want to advise a client to try and sell during a thin market: There are fewer buyers, but also less competition. It's just something to be aware of. Tailor your marketing strategy accordingly.

Economic Characteristics

In addition to physical characteristics, real estate also has certain economic characteristics that relate to value. Is this sounding familiar? We covered it before, but let's run through it all again quickly to make sure we're all on the same page. The economic characteristics that distinguish land as a commodity are: . Economic scarcity . Alteration . Situs Economic Scarcity: Although good, usable land may be physically scarce in the world, this is not what the term "economic scarcity" describes. Economic scarcity is created solely by demand for land in particular areas. Like all commodities, land is most valuable when it is in short supply and in high demand, and some land is more desirable than other land. Another way to grasp the notion of scarcity is to think about the fact that the economic scarcity of land changes over time, even if the physical amount of available land does not change. For example, land in densely populated cities or on tropical beachfronts is scarce; however, this economic scarcity is due to the high demand for land in that particular geographical region, NOT because some geological catastrophe destroyed large parcels of earth and made that land physically scarce. Technology can also affect the economic scarcity of land. For example, new farming techniques may make food production possible on previously unusable land. In this case, farmers would be eager to purchase the land in order to grow more crops. This could make previously useless land become economically scarce, even if there is the same physical quantity of land as before. The scarcity of land that is in high demand makes the selling price rise. However, the inverse is also true. For example, consider the plight of a small town that has lost its primary job provider. As a result, many people move away due to the lack of job opportunities. Businesses close and homes sit empty because no one wants to live there. Many properties are up for sale and the scarcity is gone. This lack of demand for the area means prices will fall. Alteration: The economic value of land depends on how heavily it is developed, altered, and modified by buildings and other developments. A neighborhood that was once undesirable due to its inaccessibility or lack of amenities may become more desirable and see an increase in home prices if it improves its roads, schools, and hospitals. Conversely, if a sewage treatment plant is built next to a neighborhood, the owners are likely to see their homes' values decrease. Alteration is one reason real estate prices may fluctuate. The alteration does not have to be physically located on a particular piece of property in order to affect that property. The change could simply be near a property and still affect its desirability. For example, being downwind from a polluting factory may cause a property to lose its value (and be a little stinky). Fixity and Situs: The permanence of land is known as fixity. Land cannot be moved. This is a physical, geographic characteristic. However, location can be an economic characteristic, as well. The importance of location in the real estate industry is now a cultural cliché. (Does the phrase "location, location, location" ring a bell?) The desirability of a location, known as situs, is an economic preference for a particular location (not a geographic one). For residential areas, the ambiance of a neighborhood is important, and therefore parks and friendly neighbors are a factor in value. When looking for a site to build an industrial park, ambiance is not important, but access to transportation and inexpensive land on which to build large warehouses definitely are. Situs is an economic preference for a certain location or characteristic that affects land and value. The preference is a social convention that creates part of the value of a particular tract; because of this, we say that situs is an economic, rather than a physical, characteristic. Situs may change from time to time. This change is usually caused by differing generational attitudes. For example, many believe that the younger generation is more interested in living close to amenities such as coffee shops and restaurants. This is a shift from other generations who preferred to live in the suburbs with a yard and a spacious garage.

Level 18: Property Valuation

In this level, we are going to take a look at all the processes and considerations that go into determining the value of a piece of real estate. Objectives: By the end of this level, you will be able to: . Identify the characteristics and types of value that apply to real property. . Explain the process of preparing a comparative market analysis (CMA) and how it can be used to price a property. . Find a suggested asking price based on adjusting comparable properties from a CMA. Overview: This level is approximately three hours long, which is the amount of time the average adult spends every week contemplating their own mortality. There are four chapters: Chapter 1: Value in Real Estate. Chapter 2: Supply and Demand. Chapter 3: How to Do a CMA. Chapter 4: CMA Workshop.

Quiz Level 18 c) increase. When the cost of financing, construction, or land values increases, the price of real estate also increases.

Increases in the cost of financing, cost of construction, and land values can cause the price of real estate to: a) become stagnant. b) deflate. c) increase. d) decrease.

Quiz Level 18 d) Mary doesn't need to worry. Regardless of leveling, the land plot will not change because land is indestructible. Land is indestructible, so making physical changes to the surface cannot destroy it.

Mary is interested in buying a property upon which a house has recently been demolished, and the land has been leveled out with a bulldozer. But Mary is afraid that the land plot may have changed due to the leveling. Evaluate Mary's worry. a) Mary does not need to worry. Though land can be destroyed, merely leveling it won't hurt it. b) Mary is right to be worried; leveling almost always results in a shift in land square footage. c) Mary is right to be worried; surface improvements can alter the characteristics of a piece of land. d) Mary doesn't need to worry. Regardless of leveling, the land plot will not change because land is indestructible.

The Takeaway

Supply and demand are some of the biggest forces shaping how property is valued. And in case you forgot, the value of property is directly related to the value of your paycheck. Economics at work! In Chapter 2, you learned: ✅ How market cycles affect real estate value. ✅ How the economic principle of supply and demand affects real estate markets. In the next chapter, we'll get into the nitty-gritty of how a CMA is done. Get your pricing pants on Yoni, because we're going to analyze some markets!

Quiz Level 18 b) opposite directions. Supply and price move in opposite directions.

Supply and price move in: a) the same direction. b) opposite directions.

Appraisals vs. CMAs

Take a look at this diagram comparing appraisals and comparative market analysis. Despite a couple similarities, they are different processes that serve different functions. Appraisal: . Requires an appraiser's license. . Usually done for a fee. . Formal and detailed. . Required by most lenders. Comparative/Competitive Market Analysis (CMA): . can be performed by agents. . Usually done for free. . Simple, casual estimate.

Impact of the Economy

The state of the economy has a strong impact on the real estate market. If the economy is strong, first-time buyers will be buying homes and current homeowners will be wanting to upgrade or upsize to a new home. If the economy is weak (or consumers are feeling unsure), more homeowners will stay with their homes and fewer people will be interested in buying. You may not have control over the health of the United States economy, but you can at least stay on top of economic news. I'm not saying you have to read the whole Wall Street Journal every morning, but it's not a bad idea to try and follow economic news and trends through the medium that suits you best. The Real Estate Market: For real estate finance, more than for any other type of real estate studies, it is necessary to know the basic workings of the market and, most especially, the impact of supply and demand. For instance, the sale of residential property constitutes a specific real estate market with its own trends and rules. Similarly, the sale of loan products by lenders constitutes another, different market. If you want to be really successful in your market, you have to get to know it first.

It's All Connected

The supply curve and the demand curve for any particular commodity are independent of each other; however, they are not independent of the curves for other commodities. For instance, because most real estate is purchased with borrowed money, the supply of loans affects the demand for real estate. The supply of loans is in turn affected by the supply of money and the interest rate. The Supply of Money: In short, one very important factor affecting the supply and demand of housing is the supply of money. In general: . The higher the supply of money available to finance real estate ventures, the higher the demand for housing. . Result: When the demand for housing becomes higher than the supply, property price increases. . The lower the supply of money available to finance real estate ventures, the lower the demand for housing. . Result: When the supply becomes higher than the demand, property price decreases.

Highest and Best Use

The value of a property depends in part on the purpose it serves. A property's highest and best use is achieved when the property is used for the most appropriate purpose and yields its highest possible returns. Appraisers determine whether a property is serving its highest and best use by considering the zoning regulations, size of the lot, deed restrictions, and potential value of the property if it were to be used for something else (such as if a commercial building were used as a single-family residence, etc.). Assemblage: Sometimes property is most valuable when combined with neighboring property via the process of assemblage. The larger parcel is then worth more than the sum of its parts. Isn't that sweet? 😄 Plottage is the increase in value by successful assemblage, usually due to use. Assemblage 👉 the act of combining parcels Plottage 👉 the resulting increase in value

Quiz Level 18 b) who the previous tenants were. Who the previous tenants were would NOT change the value of a home. There are many different factors that can impact the value of a home, like exposure to the elements, lot dimensions, landscaping, and title concerns.

Which of the following would NOT change the value of the home? a) exposure to the elements. b) who the previous tenants were. c) size and dimensions. d) title concerns.

Quiz Level 18 c) low prices of raw land. A decrease in the cost of construction and price of raw land would motivate builders to build new houses right away.

Which of the following would motivate builders to build new houses right away? a) low prices of real estate. b) high cost of construction. c) low prices of raw land. d) expectation of recession.

Quiz Level 18 c) low housing supply. Low housing supply creates a seller's market.

Which of these could be a factor in creating a seller's market? a) few qualified buyers. b) too much inventory on the market. c) low housing supply. d) low demand.

Quiz Level 18 d) actual cash value. The actual cash value is the depreciated value of a property.

Which of these is the depreciated value of a property? a) market value. b) mortgage value. c) insured value. d) actual cash value.

Quiz Level 18 c) There are a lot of buyers and sellers. Broad markets mean lots of buyers and lots of sellers.

Which of these statements about broad markets is true? a) There are a lot of sellers and few buyers. b) There are a lot of buyers and few sellers. c) There are a lot of buyers and sellers. d) There are not a lot of buyers or sellers.

Quiz Level 18 b) A licensed appraiser assigns a value to a home. An appraisal MUST be done by a licensed appraiser.

Which one of these is an appraisal? a) A real estate agent assigns a value to a home. b) A licensed appraiser assigns a value to a home. c) A buyer decides how much they are willing to pay for a home. d) A tax assessor assigns a value to a home.

Quiz Level 18 a) assessed value. The assessed value is the value given to a property by the local tax authority for tax purposes.

Which value is given to a property by the local tax authority for tax purposes? a) assessed value. b) All choices are correct. c) appraised value. d) market value.

Other Unusual Features of Real Estate as a Commodity

Real estate comes in all kinds of sizes, shapes, and with a variety of improvements that can add to or diminish the value of the property. One kind of property you are probably familiar with is the residential home: one home on one lot. But driving around any city in America, you'll see land being used for purposes beyond single-family living - from acreage that has cows roaming on it (Heya, cows! Lookin' good!), to industrial factories, and everything in between. Even if tracts look the same, the legal description assigned by the developer is different for each tract of land. For example, one may be Lot 2 and the other, Lot 3. Application: When looking at tracts of land, it is also important to consider the tract's application, or what it is being used for. A corner lot with a strip shopping center on it is nothing like a park provided by the city. Regardless, both of these are still called real estate (and they're both good places to take your family and friends for a fun day out). Perceived Value: The perceived value of each tract is another important real estate feature. This value may be determined by the use of the land, but the location of the property also plays a part in determining this value. Land at the end of a dirt road in a rural county will have value to someone, but there's a good chance it's not worth as much as a downtown building in a big city. Transfer of Ownership: An additional feature of real estate is that the ownership can be transferred without transferring the property to another location. When personal property is purchased, the new owner usually takes the item with them. In real estate, land can be bought without being moved - the "possession" of the property still changes hands. Person in Possession: Another interesting real estate feature is that the person in possession of the property may not be the owner of the property. One example of this is a tenant living in and using a property even though they do not own that property.

A Property Can Have More Than One Value

Remember our garage sale example from the beginning of the chapter? Even in that relatively simple setting, we saw several different types of value. The price the seller gave to the table was one kind of value. The price the buyer wanted to pay was another. And then the eventual sale price is yet a third. You can see that one object can have different values, depending on who is assigning those values, and how. The same is true of real estate. We're going to go over several kinds of value that are assigned by different people, for different purposes. A single property can have all of these values at once, even if they are different amounts. What's the "real" value of a property? There is no single answer to that question! It depends on who is assigning the value, and what the purpose of their valuation is. Different Types of Value: Let's go over these three main ones first: . Market value . Appraised value . Assessed value Market Value: Market value is the price for which a property will theoretically sell under typical conditions. That means both parties in the sale should be making well-informed decisions and not be acting under an unreasonable amount of pressure. Note: Market value is not necessarily the same as the listing price or sale price of a property. Properties are sold above or below market value quite often, but market value tells us what a reasonable price should be, not considering other circumstances that motivate buyers and sellers to deviate from this number. A property is more likely to actually sell at its market value if it has reasonable exposure in a competitive market under all conditions requisite to a fair sale. The buyer and seller should each be acting prudently, knowledgeably, and for self-interest, assuming that neither is under undue duress. Fair, Normal Conditions: Again, a property is likely to sell at market value when there are fair, normal conditions. This isn't an official legal term, so I want to clarify what I mean by fair, normal conditions. Basically, it means there are no unusual factors that lead to a property being sold for more or less than market value. The marketing of the property also factors into fair, normal conditions. Agents should ask: . How widely was the property advertised? . Was it posted all over the internet, or just shared with a few close contacts? . Did it stay on the market for a reasonable amount of time, or was it marketed for sale for a much shorter or longer period of time? These things can determine whether the property has the amount of marketing time and exposure needed to level out to its true market value. Not Fair or Normal: Here are a few examples of conditions that are NOT fair and normal: . A wealthy clairvoyant sees the house of her childhood visions, but it's not for sale. She makes an offer to the homeowners that's well above market value to convince them to move. 🔮 . An elderly man wants to sell the house he has lived in for decades in a city that has seen massive growth. A buyer offers to buy it in cash for an amount that seems like a lot to the elderly man, but it's actually below market value. . A doctor gets a job offer in a new city, and they need her to start ASAP. She accepts a below-market offer on her condo after having it listed for one day. She needs to sell quick! Things to Know About Market Value: 1. It's not the same as the sales price. 2. It's an opinion, not a fact. 3. It's not something all appraisers will agree on. 4. It doesn't have a long shelf life. (It's specific to the date when it's estimated.) 5. It's representative of what a buyer would theoretically pay for the property in cash or its equivalent.

Quiz Level 18 a) fair, normal conditions. Fair, normal conditions are most likely to result in a property selling for market value.

A property is most likely to sell for close to its market value under what kind of conditions? a) fair, normal conditions. b) coercive conditions. c) competitive conditions. d) conditions where the buyer or seller feels unusual pressure from external forces.

Seller's Market vs. Buyer's Market

A seller's market is a market condition in which the number of properties for sale does not meet the demand (number of people looking to buy). The pricing and negotiations of a transaction are typically in favor of the seller (hence the name) - though this is not a hard and fast rule. EXAMPLE: If there is high demand for a certain area and relatively few homes on the market, the seller probably will not have to lower their asking price or give concessions to a buyer. (Seller's market.) Yay seller! A buyer's market is the condition of having fewer buyers than the supply of homes for sale in an area. In a buyer's market, there is relatively low demand for real estate. Prices and negotiations in a buyer's market will tend to be more in favor of the buyer. It may be easier for a buyer to negotiate a lower price or even get the seller to pay the buyer's closing costs. Yay buyer! Summing it up: A license holder should always know what type of market they are in so they are ready to properly negotiate for their client. One Market Creates the Other: Part of the market cycle of real estate is that one market creates the other. How does that work? Let's walk through an example. 1. The Fishtown neighborhood is currently a buyer's market. There are many properties for sale, and few interested buyers. This oversupply causes prices to fall and fall. 2. Seeing that the market stinks in Fishtown, many property owners will choose to stay in their current homes, knowing they're not going to get a very good price for their property. Still, there will always be people who have to sell, and so the housing stock that is available will be available cheap. 3. It's possible the market will stagnate, but if Fishtown is a neighborhood in a growing city, soon buyers priced out of other, more desirable neighborhoods will look at the stone cold deals in Fishtown and start buying properties there. 4. Often, an influx of buyers can cause a first wave of gentrification, bringing in restaurants, coffee shops, and other businesses looking for cheap rent and a young customer base (think about it — buyers looking for deals are likely to be first-time homebuyers, and first-time homebuyers are likely to be young-ish). 5. As more people purchase in Fishtown, and especially if it gets a reputation for being hip or up and-coming, more and more buyers will arrive. Prices go up as supply goes down. 6. Homeowners who were waiting to sell until the market picked up may now be willing to list their properties. Speculators, investors, and developers who see prices continuing to rise in Fishtown may snap up some of these properties, flip them or tear down old buildings and build something new on them, driving prices even higher. 7. Eventually, supply will start to dwindle, pushing prices even higher as Fishtown becomes desirable in and of itself, full of recent remodels, new condos, and cool restaurants. Hey, look at that! It's a seller's market now! 8. Buyers who once considered Fishtown for its affordable real estate will have to look somewhere else. As prices climb, you get what's often referred to as a "bubble": at some point, prices will go too high, buyers will lose interest, and prices will start to fall again. 9. After all, once you get above a certain price point, in most cities, your pool of qualified buyers shrinks. If a buyer sees they can get a better deal in another neighborhood, especially a more traditionally established one, Fishtown will start to lose buyers. 10. As the bubble pops, property values will readjust downward. There will be more stock for sale, and it can become more of a buyer's market again. Depending on the city and the economy as a whole, prices might find an equilibrium below the high water mark, but above where things started. This is part of the cycle of gentrification (which is rarely considered a good thing, but that's a conversation for another day). As you can see, the extreme point of each market pushed it in the other direction. Real estate markets are best thought of as a pendulum, swinging between buyer's markets and seller's markets. Just try not to get swept up in the hype and buy at the top of the market!

Chapter 3: Comparative Market Analysis

After completing this chapter, you will be able to: . Create a comparative market analysis (CMA) . Understand the purpose of a CMA and broker's opinion of value (BOV). Why It Matters: A comparative market analysis, or CMA, is a powerful instrument for a real estate agent. Not only does it help both buyer's agents and seller's agents find a fair price for their clients, but it's also an amazing marketing tool. When you show up to a first meeting with a potential seller with a glossy CMA tucked under your arm, you're telling that person you know the market, you understand a data-driven approach to pricing, and you're willing to put in the work, even before they've hired you. A pretty great sales pitch, if you ask me! Pricing a property is easy, Yoni. Pricing you, not so much — because YOU'RE PRICELESS! Key Terms: . comparative market analysis (CMA) . comparable . price mechanism . multiple listing service (MLS)

Chapter 2: Supply and Demand

After completing this chapter, you will be able to: . Explain how market cycles affect real estate value. . Understand how the economic principle of supply and demand affects real estate markets. Why It Matters: Supply and demand are economic principles that have extremely real effects in the world of real estate. Understanding these basics is the first step to understanding your market: the seasonal fluctuations that determine the best times to list a home or shop for a property, as well as the macro fluctuations influenced by the world economy, the growth patterns in your city, demographic trends, and changing tastes. Fantastic agents know their markets inside and out. Reading this chapter is one of your first steps toward being that fantastic agent! Key Terms: . scarcity . seller's market . buyer's market . demand . equilibrium . supply . market

Chapter 1: Value in Real Estate

After completing this chapter, you will be able to: . Explain why real estate is valuable. . Describe the ways that real estate can be valued and the economic principles behind value. Why It Matters: Determining value is one of an agent's first and most important jobs, but the "value" of a property isn't so straightforward. You need to understand the different kinds of value and ways land has value. Key Terms: . appreciation . value . market value . highest and best use . assemblage . plottage . real estate appraiser . appraisal . assessed value . taxable value . contribution . substitution

Have It on Hand

Although you should not tell a property owner that you can give them a firm idea of the market value of their home without seeing it, you're going to want to create a CMA before the listing appointment. Why, you ask? Locking Down the Listing: For all you know, the prospective client already has other agents lined up to come by later in the afternoon for the very same purpose: to discuss listing the property. You can't afford to show up unprepared. You want to walk out of that meeting with a signed listing agreement. And you'll increase your chances of doing just that by showing that you've done your homework BEFORE the meeting. You can always tweak your value estimation during the appointment based on your visual tour of the property.

Quiz Level 18 c) demand and scarcity. The lots are scarce, and therefore in high demand.

An exciting new development is being created, but the developer is only putting three lots up for sale (and keeping the rest). Many buyers in town want to be the one to own one of these three lots. Which two characteristics of value does this demonstrate? a) utility and transferability. b) demand and utility. c) demand and scarcity. d) scarcity and transferability.

Portion of the Property

Another feature of real estate is that someone other than the owner may have the right to use a portion of the property because of an easement that has been granted. As you may recall, an easement is the right to use or cross someone else's land for a specific purpose. A common example of this is a utility company that is able to go onto someone else's land in order to repair or replace a piece of equipment.

Demand Factors: Price, Income, and Employers

As I mentioned earlier, demand can be defined as a consumer's ability and willingness to buy a good or service at a certain price. Though the demand for real estate is affected by several factors, price is the clearest example. When real estate costs more, fewer people are willing to buy. The price of a particular piece of real estate is also influenced by many factors. Prices can increase because of increases in construction costs, the cost of financing, and property values. Additionally, the price of purchasing real estate can be affected by the prices of other commodities. For instance, if the cost of leasing an apartment is low, the cost of purchasing a house might also decrease to attract more buyers. Income: The second factor affecting real estate demand is personal income. . If the average salary goes down or the unemployment rate goes up, the demand for certain types of housing is likely to decrease. . If the average salary goes up or the unemployment rate goes down, the demand for certain types of housing is likely to increase. Employers: Cities experience significant changes in supply and demand when a major employer sets up shop or closes down. A new major employer can stimulate the local economy and lead to an increase in population. This will result in lower supply and higher prices. If a major employer closes or moves away, the local economy takes a hit. People move away or take lower-paying jobs, resulting in more supply and lower prices. Expectations: Finally, a buyer's expectations of their future financial situation, and of the economy as a whole, will affect the demand for real estate. Consumers are less likely to buy a home if any of the following situations apply: . They expect their income will decrease in the near future. . They expect the price of housing will decrease in the near future. . They expect the price of housing will decrease at the time they expect to sell their current house.

All About the Sales Price

As far as pricing goes, it's important to remember that the sales price is far more important than the listing price. The common misconception sellers have is that they can list higher and adjust the price downward if they need to. Worst case scenario is they just get market value, right? Well, not really. This is not usually the case because: 1. The longer a property is on the market, the more likely buyers are to perceive a "defect" in the property (i.e., why hasn't it sold yet?), which makes them less likely to pay higher prices. 2. A smart buyer's agent will see multiple price adjustments on the property's history and likely ask for many more concessions (which could result in the seller getting even less for their adjusted price than they anticipated). So, instead of overpricing, some savvy seller's agents — particularly in seller's markets — will advise their clients to list at a price just below the comparative market analysis' suggested value. This can create a bidding war or multiple offer situation due to increased buyer traffic early on in the listing period. In many cases, the seller could get far more money by listing the home for less versus if they had overpriced the listing from the start. The Strategic Approach to Pricing: That's called a pricing strategy. Pricing a home to sell for the most it possibly can requires more than just doing a CMA and picking a reasonable price based on your findings. An agent must devise a strategy that will result in the desired sale price. Tricky! If that sounds complicated, well, it is. It requires up-to-the-second knowledge about your market's peculiarities and quirks, in addition to more widely known data like which way things are trending and whether it's a buyer's or seller's market. That's the kind of knowledge you'll learn in the field by doing it a few times, and from your mentors at your brokerage. So don't worry if this sounds like a lot. Pricing is a skill you have to learn, just like any other. Multiple Listing Service: Once you've got a good listing price, what do you do with it? Put it on the MLS, of course! A multiple listing service is a database in which local member brokers share listings so that fellow member brokers can procure buyers for those properties and establish compensation for properties sold jointly.

Why Real Estate Is Valuable to Your Clients

As long as there are people interested in buying property, there will be opportunity for you as an agent. But why do people find value in real estate? Its value stems from the following benefits: . Income, if it's an investment property. . Appreciation (the increase in value of a property), because most real estate tends to increase in value over time. . Use, because having a roof over one's head is quite valuable . Tax benefits, which can make ownership more attractive than renting.

Step 4: Compare & Adjust the Comparables

As much as we'd like the CMA to be filled with clean, apples-to-apples comparisons, the fact is not all apples are created equal. Not to worry, though, there are ways to make adjustments and account for the differences between one apple and the next. Two things to remember about this: 1. The adjustments needed should be relatively small otherwise the apples aren't really "comparable." 2. We're not really talking about apples... but we both know that, right? 🍎 Typical Adjustments: Typical adjustments for comparables found on a CMA include: . Number of bathrooms . Number of bedrooms . Size of lot . Square footage . Garage (how many cars fit) . Basement (finished or unfinished) How to Price the Adjustment: There are several ways to arrive at the dollar impact of comparable adjustments. Eventually, you'll join the ranks of the experienced license holders who just kind of know the value of certain features of a home. But brand-new license holders (like you!) can make adjustments by looking at recently sold homes that are identical in all ways except for one feature and then attributing the price difference between the two homes to that one feature. For example, if two recently sold homes were deemed to be identical in all respects other than the fact that one had an additional bedroom, the $5,000 sales price difference between the two homes could be reasonably attributed to the extra bedroom. That $5,000-per-bedroom figure can now be used as an adjustment price to add or subtract to the overall sales price of your comparables as needed. When the comparable home has features or amenities the subject property lacks, you will need to subtract the price value of that feature from the price of the comparable. Conversely, if the comparable lacks a feature or amenity that the subject property has, you will need to add that feature's price value to the comparable's price. Why do we adjust the comps to match the subject property and not the subject property to match the comps? Because we don't have a price for the subject property yet! Let's take a look at this chart, and the one on the next screen, to see comparable adjustments in action:

The Takeaway

As you can see, there are lots of ways to assign value to a property, and lots of ideas that underpin the very concept of value. I mean, economics is a whole field of study for a reason, you know? Our main focus in this level will be understanding how to determine market value using a tool called a comparative market analysis, or CMA. Good thing you now know what market value is! In Chapter 1, you learned: ✅ Why real estate is valuable ✅ The ways that real estate can be valued and the economic principles behind value. Next, we're going to spend some time learning about how supply and demand affect real estate value.

Putting the Fun in Fungible

Because of it's uniqueness, land is said to be a non-fungible commodity. What does fungible mean? Is it a kind of mushroom? No, Yoni, fungible just means something that can be exactly replaced by another item. For example, a 50-pound slab of beef (stay with me!) may be replaced or exchanged with another 50-pound slab of beef, and the exchange will be indistinguishable. It is fungible. However, an acre of land in the desert exchanged for an acre of land in Hawaii is hardly an exact substitute, even though they are both an acre of land. See what I mean? If location changes, we are talking about a different plot of land. Non-Fungible Commodity: No two tracts of land are exactly alike because no two lots can occupy exactly the same space. Each parcel of land is an object that has no precise equal or substitute. Even in a subdivision where each neighboring parcel of land had the exact same house built on it, and even if they were both priced exactly the same, they're not exactly the same (and not fungible), because they occupy two different points in space.

Assemblage Example

How about an example? In this illustration, you can see two neighboring properties that are worth $200,000 each. Through the process of assemblage, the two properties are combined into one larger property. The previous combined value of the two smaller properties was $400,000 ($200,000 + $200,000). But after the assemblage, the resulting mega-property is worth $450,000. That $50,000 increase in value - without any increase in square footage - is plottage. This is possible because changing the size of the parcel often opens the use of the land to new and lucrative possibilities.

Quiz Level 18 b) 5 months. Approximately 4 properties are sold per month, so there is a five-month supply of housing on the market now.

If 12 properties have been sold in the last 3 months in an area, and there are 20 houses for sale now, there is a supply of housing for: a) 4 months. b) 5 months. c) 6 months. d) 3 months.

Quiz Level 18 a) subtract the pool's price value from the comparable property's sales price. If an agent is comparing a home with a pool to the subject property that has no pool, the agent will subtract the pool's price value from the comparable property's sales price.

If an agent is comparing a home with a pool to the subject property (which has no pool) the agent will: a) subtract the pool's price value from the comparable property's sales price. b) establish an average price between the two properties. c) have the subject property owner add a pool to make the property more competitive. d) add the pool's price value to the subject property's sales price.

Facts of a feather c) market value.

representative of what a buyer would theoretically pay. a) condemnation value. b) actual cash value. c) market value. d) assessed value.

Facts of a feather b) actual cash value.

the depreciated value of a property. a) condemnation value. b) actual cash value. c) market value. d) assessed value.

Facts of a feather a) condemnation value.

the value according to the condemning authority in an eminent domain proceeding. a) condemnation value. b) actual cash value. c) market value. d) assessed value.

Facts of a feather d) assessed value.

used for tax purposes. a) condemnation value. b) actual cash value. c) market value. d) assessed value.

Facts of a feather c) market value.

what a property should sell for under fair, normal conditions. a) condemnation value. b) actual cash value. c) market value. d) assessed value.

Physical Characteristics

A commodity is a product that can be bought and sold. The physical characteristics that make land or real estate a distinctive commodity are: . Immobility . Durability (indestructibility) . Uniqueness (non-homogeneity) Does this sound familiar? We talked about these characteristics way back in the very first level. But let's do a quick review with an eye toward putting a valuation on land. Immobility: While it is true that some parts of what we usually call "land" can be removed, such as soil or plants, a parcel has a particular geographical location that will remain constant, barring erosion or slow, geological changes. The actual land itself - the tract or lot that an individual purchases - is immovable. Nobody's loading an entire slice of earth, down to the molten core, into a pickup truck and driving it across town. This characteristic is called immobility. Durability or Indestructibility: Indestructibility, or physical durability, refers to the permanence of land. While its economic value and surface appearance may change, land itself is indestructible for all practical purposes. Remember how we talked in an earlier level about how land can't be depreciated? This is why: It can't be destroyed, and it doesn't wear out. There is no "usable life" to land. Even if you let it get overgrown, poison it with toxic chemicals, or blast a giant hole in it, it's still there, and could still potentially have value. Uniqueness or Non-homogeneity: The physical location of a lot or parcel is an integral feature of its identity. Because land occupies a specific site that no other piece of land may also occupy, it is unique unto itself and not interchangeable with an exact substitute.

The Comp Sales Comparison

Chart in file (CompSalesComparison) Looking at the Comp Sales Comparison chart, you can see that none of the three comparables are a perfect match. . Comp A is the closest, needing only one adjustment to account for having one-half less of a bath than the subject property. . The other two comps have two adjustments each. But in each instance, we are ultimately able to get to an apples-to-apples (here come those apples again!) comparison with the subject property, which is reflected in the "adjusted sales price" for each of the three comps. And with that, we can move onto our next step in building a CMA.

A Handy Chart for the Principles of Value

Economic Principals of Value: Principal of anticipation - When the present value of a property is affected by anticipated income or utility. Principal of contribution - A property's overall value is made up of the combined value of its parts. Principal of substitution - The value of a property is influenced by the cost of getting a similar (substitute) item elsewhere. Principle of change - Any change in the market can change the value of the property, for good or for bad. Principle of conformity - Values are highest when the houses in the neighborhood look roughly the same. Principle of regression - Lower-value houses around a house can lower its value. Principle of progression - Higher-value houses around a house raise its value. Principle of competition - Low supply and high demand raise the value of a property, high supply and low demand lower it.

Quiz Level 18 c) All options possess the characteristic of durability. All land possesses the characteristic of durability. Improvements or structures on the land do not and are subject to decay, etc., but land itself is durable.

Evaluate which type of land possesses the characteristic of durability: a three-acre farm with four brick-based structures; a commercial property in the city spanning one block; or a retirement home on one acre of land in the suburbs. a) the retirement home. b) the three-acre farm. c) All options possess the characteristic of durability. d) the commercial property in the city.

The Takeaway

For every piece of property that goes on the market, there are different people with different opinions about the value of that property and what its price should be. Some are as official as a licensed appraiser's report, and some are as casual as an estimate made by a random website or the owner's father-in-law. Your job, if you want to have successful transactions, is to understand the different types of valuations, prepare CMAs, and help your clients interpret this info. They're counting on you to cut through the noise and advise them well. I know you can do it, Yoni. In Chapter 3, you learned: ✅ How to create a comparative market analysis (CMA). ✅ The purpose of a CMA and broker's opinion of value (BOV). In the next chapter, we're going to do a workshop on making a CMA. We can pretend to be real agents working with a real client. Role play!

Quiz Level 18 a) $440,000 - $455,000. $440,000 - $460,000 is the range that makes the most sense, given those comps.

Given that our three comp properties came in with prices at $445,000, $445,000, and $451,000, what is a reasonable price range for our subject property? a) $440,000 - $455,000. b) $420,000 - $435,000. c) $460,000 - $475,000. d) $400,000 - $415,000.

How Supply and Demand Affect Price

The impact of supply and demand differs when applied to value and the market, respectively. If the supply of real estate and the demand for it are proportional, values will remain stable. If there is an under-supply, prices will increase. If there is an over-supply, prices will decrease. So, supply and price move in opposite directions. Demand and price move in the same direction. As demand increases, the prices increase, and as demand decreases, the prices decrease.

Step 3: Get Your Comparables

The next step is to collect the same information on your comparables as you did for the subject property. Remember that the comparables should be recently sold homes in the area that closely match the subject property. Because of the work you did in evaluating the subject property, you know what to look for, so you should have a baseline of sorts to work against. Let's get into the details of what makes a good comparable. Recently Sold: A good comparable is a property that was sold less than six months ago. See several similar properties that sold within the past three months? That's even better! This guideline has to be a little flexible since some markets have more sales per month than others, but appraisers will usually set the upper limit at 12 months. Select at least three comparables. Depending on where you live, the final sale price may or may not be publicly listed. If so, great! If not, it doesn't hurt to ask the agents involved, if you know one of them. Otherwise, you have to guess based on the listing price. Also, make sure you're only using what are known as "arm's length" transactions for your comps. An arm's length transaction is one where both agents are acting impartially and arrive at a fair price. Essentially, try to exclude sales between family members or friends that may not be at market value, pocket listings that sold for less because the agent took a lower fee, or any sales that would have weirdly low or high prices for reasons that don't have to do with the property itself. The MLS listing for recently sold homes will also provide the original listing price and days on market, which may be useful in the property pricing discussion. Close to Home: In most cases, a good comparable is a property that is within a quarter-mile to a half-mile of the subject property. This rule does not apply if the subject property is in a rural location or if the market is so slow that there are very few comparables to choose from. In these cases, you may have to expand your horizons a little. Back to the Neighborhood: Obviously, it's best if comparables are from the same neighborhood. However, it might be that a house a half-mile away has more in common with the subject property than a house located just two blocks away but on the other side of a busy, four-lane road. Distance is not always the best decider of comparability - and this is especially true when it comes to close-by properties that belong to different neighborhoods. Age Matters: While newer construction generally commands higher prices, some older, mid-century homes are also highly valued if they are kept in good condition or refurbished. And, as we mentioned earlier, some builders have a better reputation for quality construction than others, so houses built at certain times or by certain builders might hold value better than newer, lower-quality homes. In the end, to make an apples-to-apples comparison, do your best to keep your comparables around the same age and in the same neighborhood. Sale Pending: On one hand, pending sales are great because they reflect the most up-to-date buyer/seller behavior on the market. On the other hand, they are NOT final, so the ultimate sales price is unknown. Technically, the listing agent shouldn't be sharing information like the agreed-upon price until the property has closed, but it never hurts to ask for any details that agent is willing to share. You never know what you're going to learn. And, as with recently sold homes, make a note of days on the market and any price reductions publicized in the listings history. Current Listings: Sellers are usually very interested in the current listings in their area, as they should be — but perhaps not for the reasons they should be. Sellers see current listings as competition and can be tempted to price their own home according to what others are asking. But, in the words of parents everywhere, "If your best friend jumped off a bridge, would you jump off a bridge, too?" People can ask whatever they want for their homes, so the asking prices of current listings might not be grounded in reality. After all, asking isn't getting. Many homes sell for much less than their asking prices, to the extent that some say current listings are a good indicator of what homes won't sell for. The fact that it's not a "sale pending" or "recently sold" home means that home does not have a willing buyer for the listing price. Expired Listings & Re-listings: More than anything else, expired listings and re-listed properties can serve as teaching opportunities in the listing agreement conversation. The primary cause of expired listings is improper pricing - a re-listed property can show the importance of getting pricing right the first time. If you're going to make note of a re-listed property that eventually sold, be sure to add the days-on-market together from both listing episodes. A Note on Sold Properties: What I really want you to take away from this, Yoni, is this: One of the best things to look at when trying to determine the price of a property is the price that willing buyers have recently and actually paid for similar structures. This is the most accurate way to get a price assessment for a property without a formal appraisal, especially in new and rapidly selling neighborhoods.

Quiz Level 18 d) A property's overall value is made up of the combined value of each of its parts.

The principle of contribution states: a) The value of something is affected by the cost of getting a similar item elsewhere. b) The present value of a property is affected by the anticipated income or utility that property will give its property owner. c) The value of something is determined by adding the assessed and previous market values to find the average of the new value. d) A property's overall value is made up of the combined value of each of its parts.

Quiz Level 18 d) the principle of progression. This illustrates the principle of progression:If a subject property is located among properties that have a higher value, that can bump up the subject property's value.

Two super fancy homes have been built on Frank's block recently. Because they sold for so much money, the value of his home has increased as well. Which economic principle does this illustrate? a) the principle of competition. b) the principle of regression. c) the principle of conformity. d) the principle of progression.

Quiz Level 18 d) All choices are correct. Your client's emotional attachment to their home could skew their vision of the property's value. Remind them that their original purchase price is irrelevant, that costs of improvements do not always correlate with an increase in value, and that you only get the "new listing" interest factor once.

When determining a listing price, you may have to remind your client that: a) You only get the "new listing" interest factor once. b) Property improvements made may not result in a corresponding bump in appraised value. c) Their original purchase price has little to do with its present market value. d) All choices are correct.

Quiz Level 18 d) situs Situs is an economic (not geographic) preference for a particular location. Durability (or indestructibility) and uniqueness (or non-homogeneity) are physical characteristics of land.

What term identifies an economic preference for a certain location? a) uniqueness b) durability c) fixity d) situs

Quiz Level 18 c) sold within the last six months. When finding comparable properties, it's best to look back at properties sold within three-to-six months of the current date. Appraisers will stick to properties sold within three months. Next Page

When finding comparable properties, it's BEST to look at properties: a) sold over a year ago. b) sold within the last year. c) sold within the last six months. d) sold over six months ago.

Quiz Level 18 c) It goes up. When supply decreases and demand increases, prices go up.

When supply decreases and demand increases in a market, what happens to price? a) Price is not affected by supply and demand. b) It goes down. c) It goes up. d) It stays the same.

Who Prices a Home, and How?

When you see the listing price on a home, who do you think decided what the price ought to be? (You know by now that the asking price is not necessarily the same as the market value, appraised value, or assessed value.) Does the property owner figure it out? Does the agent get to make that call? The answer is that it's usually a collaborative discussion. The seller gets the final say, but it's the agent's responsibility to present a well-researched price range to suggest to the seller. Learning to CMA: This chapter will prepare you to conduct a comparative market analysis. Creating a CMA is a crucial skill for listing agents who are helping their sellers determine a listing price. Not only is pricing a property one of the most important things you'll do for a client, it's one of the first things you'll do for a client. In fact, more often than not, this "client" will only be a potential client at this point in the process. They will be waiting to see what you bring to the listing meeting before committing to and signing a listing agreement. CMA Real Talk: In this chapter and the next, we're going to walk through the process of doing a CMA using a worksheet so that you understand how everything works. But I'll be honest with you, Yoni, in the real world, you will almost certainly have a sophisticated digital analysis tool at your disposal to do all of this for you. In any large, data-driven agency, creating CMAs with a program that uses regularly tweaked algorithms is de rigueur. I just want to let you know so you don't show up on your first day, clutching your spreadsheet and a pencil, feeling like a nerd. CMA vs. CMA: More real world talk! Almost everyone you meet in the real estate biz will call a CMA a CMA. If you ask them what CMA stands for, some people will tell you "comparative market analysis" and some people will tell you "competitive market analysis." /> Turns out, they're both right! Comparative market analysis and competitive market analysis are generally considered to be synonyms, so don't let it throw you if a co-worker says "competitive" when you are used to "comparative." In this course, we'll stick with "comparative," because not everything has to be a competition, Yoni.

DUST Off This Old Acronym

When you think of valuable things, dust is probably the last thing that comes to mind. But DUST is a pretty handy acronym used in the real estate biz to help us remember the four characteristics that make real estate valuable: D:emand U:tility S:carcity T:ransferability Demand: This is an obvious component of value. If no one wants the property, it's not valuable. The more demand there is for something, the more value it has. Utility: Properties need to be useful or serve some kind of purpose in order to have value. Utility is more apparent on some properties than others. An empty lot, for example, may not look like it has much utility, but to a buyer who wants to build a custom home in that area, it's quite useful! Scarcity: If you woke up one morning and all the rocks in the world had turned into diamonds, diamonds wouldn't be quite as valuable, would they? The same thing happens when too much of a certain type of property is available on the market. But when real estate is scarce, it grows in value. Transferability: How valuable is property that no one is able to buy? Not very. Whether it's government rules or a title issue, anything that limits the transferability of real estate makes it less valuable.

Quiz Level 18 b) mobility. The physical characteristics that make land or real estate a distinctive commodity are immobility, durability (or indestructibility), and uniqueness (or non-homogeneity).

Which is NOT a physical characteristic that makes land or real estate a distinctive commodity? a) indestructibility. b) mobility. c) durability. d) uniqueness.

Quiz Level 18 d) All choices are correct. The price of real estate is affected by the supply and demand for real estate. Demand for real estate is affected by many things, including the supply of available loan money, unemployment, confidence in the economy, etc.

Which of the following affects the price of real estate? a) demand for property. b) supply of money. c) unemployment. d) All choices are correct.

Quiz Level 18 d) Appreciation describes the growth in value that most property will gain over time. Appreciation is the increase in value of a property. Real estate is valuable to property owners in part because most real estate tends to increase in value over time.

Which of the following best describes why appreciation makes real estate valuable to property owners? a) Appreciation explains the tax benefits enjoyed by those who own instead of rent. b) Appreciation means that the property will yield a steady stream of income for the owner. c) Appreciation is the concept of owning a property that provides utility, such as shelter. d) Appreciation describes the growth in value that most property will gain over time.

Quiz Level 18 b) Only an owner has the right to use a property. Someone other than the owner may have the right to use a portion of the property because an easement has been granted.

Which of the following is NOT a feature of real estate? a) The person in possession of a property may not be the owner. b) Only an owner has the right to use a property. c) Property ownership can be transferred without transferring the property to another location. d) Property value is determined by the use of the land and the location of the property.

Quiz Level 18 b) FALSE. False: The appraisal is the more formal valuation.

A CMA is a more formal market analysis than an appraisal. a) TRUE. b) FALSE.

Supply and Demand

As you might imagine, supply and demand plays a big role in how property is valued and priced. It's a relatively simple concept, but what really drives demand in the real estate market? If demand were simply a measurement of how many people would fancy owning their own property, demand would be a much higher number—who likes paying rent? . Demand tells us how many consumers are willing and able to afford property. . Supply is determined by looking at the amount of properties that are vacant or are available for sale or rent. Supply and demand are both affected by many factors, such as employment rates, wages, interest rates, and more. Characteristics of the population, the social attitudes prevalent at the time, and the legal and tax structure of the economy also shape the demand for and supply of real estate. Property values can change often. These changes are mostly driven by good ol' supply and demand. As the demand for real estate rises, supply will decrease. When demand is high and supply is low, property becomes more valuable and prices rise. On the other hand, if the demand for real estate falls, supply will increase. When demand is low and supply is high, prices fall. The Makeup of a Market: Supply and demand are the basic forces that control all markets. But what's a market? A nice place where you can stroll around and pick up some seasonal vegetables? 🍅 Yes, but for our purposes a market is a theoretical construct that isolates the selling and purchasing of any one particular commodity from the economy as a whole. Levels of supply and demand differ between different areas and markets. A market can be as small as a neighborhood or as large as a city, state, or country.

Step 5: Establishing a Listing Price Range

As you search for comparables for the subject property, you should look for an exact match. More often than not, however, that won't be what you find and you'll have to make sales price adjustments (like we did in the example I just showed you). Once you have those adjusted comp sales prices, you can create a suggested price range for your prospective client: That range will usually start at or just below your lowest adjusted comp's value and end at or just above your highest adjusted comp's value. The Seller Has the Final Word: The comparables that required the least amount of adjustments will be the ones you lean on the most when you create the suggested price range for the subject property. Ultimately, the listing price will be decided by the owner - not you. But it will be your research and price range that will give the owner a realistic market starting point. Listing Price: Market Considerations: When settling on a listing price, you will want to help the seller understand the market environment, as this will impact the listing price. For example, in a buyer's market, the seller might want to consider a buyer-friendly price just below the top end of the range you provided. They should understand that the actual agreed-upon price will probably come in under that. In a neutral market, the seller might want to start closer to the top end of pricing and adjust for the market trend. For example, if the last comparable sale closed a few months back, but the median price for homes in the area have inched upward 1% per month, add that amount to the list price for every month that has gone by since that last comparable closed. In a seller's market where prices are moving up and inventories are shrinking, the seller can add 10-12% to the last comparable sale and still attract buyers. Listing Price: Seller Considerations: Although the price the buyer paid for the subject property doesn't have any bearing on its market value, that doesn't mean you won't want to practice your good listening skills and find out other facts about the subject property. For example, what are the seller's considerations and motivations for selling their home? These motivations could affect pricing. Seller considerations might influence how aggressive they want to be with pricing. These considerations might include: . Pending purchase of another home . Job transfer . Financial issues Talk to the seller. Find out what their motivations are and let them know how those motivations transfer to pricing. Listing Price: Internet Browsing Considerations Once the seller has a listing price for the subject property in mind, they might want to adjust that price to optimize their listing for internet searches. This is important because most buyers begin their home buying searches online. These searches usually require the input of a minimum and maximum price. If the seller lists their property even a single dollar outside of a price range, it might not be seen by a potential online buyer. For example, if the seller is tempted to price their home at $199,999 because it sounds cheaper than $200,000, they could be making a mistake. If they were to list it at $200,000, instead, their home would be seen by those looking at homes between $150,000 to $200,000 AND those looking at homes between $200,000 to $250,000. Double duty, Yoni!

The Informed Prospect

Back in the day, the masses were usually kept in the dark about their local market, without access to the addresses or listing prices of houses for sale in their area. Both buyers and sellers were much more reliant on agents to be the sole source of truth in real estate. Nowadays, thanks to the many resources available online, it's not unusual for a property owner to come to a listing discussion with their own data-backed thoughts about a possible listing price. Try to see this preparedness as a good thing, Yoni, and don't be like your doctor (well, not your doctor, I'm sure, but some of the docs out there). Zillow = WebMD: If you've ever walked into a medical appointment with screenshots from WebMD on your phone, you know what I'm talking about. The doctor can barely repress an eye roll as they explain that not every elbow rash is the deadly and exotic tropical disease you read about online — even if it fits all the symptoms. Likewise, not every Zestimate® a homeowner pulls from Zillow is going to be an accurate reflection of a property's true market value. But, rather than treat a client's research with disdain, be supportive of your client's efforts to get educated. Show them how the information they brought to the discussion can be used to get a proper listing price. The Zestimate®: Fun(?) Fact: Fun fact: In February 2016, Zillow CEO Spencer Rascoff sold his home for 40% less than its Zestimate®.

Quiz Level 18 d) $400,000 The price is $400,000, because that is what a buyer ACTUALLY PAID for the home.

Developer Justin spent $250,000 building a house: $200,000 in materials and labor, and $50,000 in other fees and financing costs. A real estate appraiser valued the house at $375,000. He then sold it for $400,000. Which number represents the home's PRICE? a) $375,000. b) $150,000. c) $250,000. d) $400,000.

More Principles

Let's keep at it with the rest of our principles! Principle of Substitution: The principle of substitution is present in practically all markets, not just real estate. This principle states that the value of something is affected by the cost of getting a similar (substitute) item elsewhere. If there are two restaurants in your neighborhood that sell equally amazing pizza, the principle of substitution suggests that Wise Pies should not charge more than Nice Slice for the same quality pizza. 🍕 A lot of factors make the appraisal or valuation process more complicated than following this simple principle, but it still informs us that similar properties should have fairly similar values. Principle of Change: The principle of change reminds us that the condition of a property, the desirability of its location, and the market in which it exists can always change. Any change could affect the value of the property, which is why appraisals are only good (acceptable to lenders) for a few months. An outdated appraisal may not reflect important zoning changes, damage to the building, or changes in the housing market. Principle of Conformity: Ever wonder why houses in any given neighborhood all tend to look alike? Sure, they probably match whatever architectural style was popular when they were built, and they were probably built by the same company. But aside from that, you'll learn that there is a principle of conformity that says values are highest when the houses in a neighborhood look roughly the same. Value suffers when a house is much nicer, much worse, or just plain weirder than the other houses on the block. Note: Another way of stating the principle of conformity is that maximum value is realized when land use is in harmony with surrounding standards. Principles of Regression and Progression: The tendency is for houses in a neighborhood to be fairly close in value, but the presence of higher or lower value homes can change the value of a nearby subject property. Principle of Regression: When lower-value properties surround a subject property, they can drag down the value of that property via the principle of regression. Principle of Progression: If a subject property is located among properties that have a higher value, that can bump up the subject property's value because of the principle of progression. Principle of Competition: The basic economic concept of supply and demand has an effect on the value of real estate. . When supply is low (not many available houses) and demand is high (lots of people who want to buy houses), prices increase. . When supply is plentiful (lots of houses for sale) and demand is low (few potential buyers), prices drop. The supply and demand, or level of competition in the market, helps determine the value of a property.

It's the Principle of the Thing

Let's move on to economic principles that affect the value of land, but aren't exclusively related to land. These next few screens will cover principles that affect how real estate is valued. These are important concepts to know if you want to have a solid understanding of how and why property is valued the way that it is. They're called the economic principles of value, and they are: . Principle of anticipation . Principle of contribution . Principle of substitution . Principle of change . Principle of conformity . Principles of regression and progression . Principle of competition Let's look at each of these, one at a time. Principle of Anticipation: The principle of anticipation is the idea that the present value of a property is affected by the anticipated income or utility that property will give its property owner. Scenario: The Investor: An investor buys a house for a little more than its current market price because they believe the house will increase in value due to the new corporate headquarters opening in the neighborhood. The investor's anticipation of the future price affected the property's current market value. Scenario: Jane: Jane buys a house, expecting to rent out one of the bedrooms since it has a separate bathroom and entrance to the house. She expects to earn a decent amount of money from renting it out to visitors, and this expectation affects how much she's willing to pay for the house. Principle of Contribution: A property's overall value is made up of the combined value of each of its parts. The value of each component contributes to the total value. This is the principle of contribution. One important thing to know about this (especially if you are a seller's agent) is that the contributory value of an item is not always equal to the cost of that item. For example, the cost of a smart improvement would be less than the monetary value gained from that improvement (overall, the seller makes money). On the other end of the spectrum, the cost of a not-so-smart improvement would be greater than the monetary value gained from the improvement (overall, the seller loses money).

Recap: Physical Characteristics of Land

Let's review, Yoni. The physical characteristics that distinguish real estate from other commodities are: . Immobility . Indestructibility (sometimes called durability) . Uniqueness (sometimes called non-homogeneity) Let's look at a few more qualities that real estate can have. See if they fit into one of the above categories.

Step 1: Evaluate the Neighborhood

Location is one of the primary factors that determines a subject property's value. You can remodel, renovate, or even rebuild a home, but you can't change its location (at least not without a great deal of cost, effort, and magic - excluding tiny homes on wheels). Buyers understand that they have to be happy with a property's location as is. When we talk about the role of location in real estate, Yoni, a large part of what we're really talking about is the impact of the neighborhood. This includes the houses that immediately surround the subject property, the street the subject property is on, and - of course - the characteristics of the neighborhood as a whole. As we discuss the impact of location on market value, be aware that, within the same neighborhood, property values can vary greatly. A house backing up to a green space or on the waterfront will be more expensive and in much greater demand than an identical house located on the other side of the same street. Neighborly Principles: Three principles of value (remember these? they're back to party!) are at play when evaluating the subject property and its neighborhood: . The principle of conformity says that values are highest when the houses in a neighborhood look roughly the same. . The principle of regression says that a subject property situated in the midst of lower-value homes will experience a downward pull on its own value. . The principle of progression says that a subject property situated in the midst of higher-priced homes will experience an upward pull on its own value. Other Neighborhood Factors: Here are a few other factors to consider when analyzing a neighborhood to see how it will influence a subject property's market value: . Percentage of rentals vs. owner-occupied homes (high rental percentage lowers value) . Presence of vacancies or foreclosures (these lower value) . HOA codes (used to regulate home appearance, maintenance, and use) . Zoning (how is it zoned? is it in transition? is it mixed use?) . Street width and condition . Utilities (electric, gas, sewer, cable, internet, etc.) . Public services (transportation, police, and fire) . Access (to major roads, stores, entertainment, employers, schools, etc.) . Environment (noise, traffic, smells, wind) . Geography (varied or uniform, flat, barren, steep, hilly, etc.) . Property taxes Contamination and Pollution: Another thing to be aware of in terms of location is the possibility that a property has been contaminated. As old industrial land is rezoned into residential land, there are concerns that there could be soil contamination, underground storage tanks, or other troubling environmental factors. Additionally, lots next to gas stations or former gas stations, dry cleaners, manufacturing facilities, or chemical storage areas are likely to have some contamination. Homes near highways that have been in place since early in the last century may have lead in the soil from car exhaust. Finally, there are an increasing number of areas where municipal water supplies are unsafe to drink, due to contamination from heavy metals or pollutant runoff. Be aware of whether or not this is an issue in your subject property's area.

Buyer's and Seller's Markets

Most experienced real estate agents will tell you that the industry is rarely in a "normal market." Rather, most will say that we are either in, or moving towards, either a buyer's market (where it's good to be a buyer) or a seller's market (where it's good to be a seller). Whether the market is advantageous for buyers or sellers is closely related to the greater economy (nationally and locally) and where we are in the real estate cycle. Yes, just like the moon, the real estate market waxes and wanes in cycles. The real estate market's phases include: . Recession 🌘 . Recovery 🌗 . Expansion 🌖 . Hyper supply 🌕

Broker's Price Opinion

My final act (in terms of pricing property) will be to take you through a different type of property pricing estimate: the broker's price opinion (BPO). Note: This may also be referred to as a broker's opinion of value (BOV). A broker's price opinion is similar to a comparative market analysis. It's created by a real estate license holder, not a licensed appraiser. It's an estimation of property value that may be even shorter or less formal than a CMA. A BPO may be more commonly seen in commercial real estate settings than in residential real estate. Who Creates a BPO? The person doing a BPO does NOT have to be a broker. However, the action must be performed by someone with a real estate license (that will be you!). The Salesperson's Role: When it comes to putting a price on property, the salesperson in any given transaction kinda has their hands tied. You can create a convincing comparative market analysis, but ultimately it is your client who gets to choose the amount at which they want to list their property or what kind of an offer to make on a property. However, it's not just the client's opinion that counts. If an appraisal is involved, that appraised value carries more weight, especially in the eyes of a lender. Still, the agent has an important role to play when acting as a liaison between multiple parties with multiple opinions about value. As an agent, you should exhibit: . Competence: Have a strong understanding of appraisals, CMAs, and current market conditions. . Diligence: Take care in creating CMAs and be a persistent negotiator. . Documentation: Keep good records of information that either support or contradict statements of value. . Effective communication: Quickly and effectively share information between involved parties.

Supply

Next up: supply. Supply is an economic term for the available amount of something. In real estate, it's based on the willingness and ability of sellers in a given market to sell their property. Several factors affect supply: . Selling price: As the price of housing increases, owners become more willing to sell. . Loan price: As the price of a loan increases — that is, as the interest rate goes up — lenders become more willing to lend and buyers become less willing to take out loans. Price: Price plays an important role in the supply of real estate (high prices entice owners to sell and builders to build), but there's a limit to its influence. For example, consider the leasing side of the real estate market. Apartment complex managers are always willing to rent, whether the price of apartments increases or decreases, because renters = income. If landlords can command higher rent during a certain period (if apartment prices are increasing), they may be more interested in offering long-term leases, but there is always an incentive to fill units. Cost of Production: The supply of real estate is also affected by the cost of its production. . If construction costs go down, it is cheaper to build houses, apartments, and office buildings, so more of them will appear on the market. . If the cost of construction goes up, there is a greater expense to builders and new housing becomes scarcer. An increase or decrease in the price of raw land has a similar effect. However, because real estate is a long-lasting commodity, there is usually an existing supply (on the market) of houses that have already been built. Expectations: Finally, expectations affect supply as much as they affect demand. If sellers expect the price of real estate to go up in the near future, they will be less likely to sell right now. If sellers expect the price to go down soon, they will be more likely to sell right away. The case is similar for lenders when an interest rate is expected to increase or decrease. However, lenders are much like apartment managers: They cannot afford not to receive interest for any significant period of time. Similarly, market expectations only sway sellers if they have the luxury of a flexible schedule.

Homing in on the Home

Once you've taken a thorough inventory of all the features of the lot, turn your attention to the home itself. You might find it helpful to take the same outside-in approach we used before, especially as you document the age and general condition of the home. Include the quality of the construction and materials, and find out if the neighborhood was developed with multiple builders. (Take note of which builder constructed the subject property's home, as some builders have better reputations than others.) Outward Appearances: As you continue to focus on the home's exterior, pay attention to details like: . Do the gutters go completely around the home? . Is there a garage? If so, how many cars does it hold and is it attached to the home? . Is there a front porch? A back patio? . Is the yard fenced in? If so, in what condition is the fence? . Are there additional structures on the lot? A workshop? Storage shed? . Are there any gardens or flower beds? How about sprinklers? . What is the condition of the sidewalk and driveway? . Is the home due for a new roof or paint job? (These can be expensive maintenance issues that will need to be considered.) Quality Through and Through: After you've covered all of the surface details, it's time to move your evaluation to the inside of the home. Be sure to wipe your feet on the doormat on your way in! Continue to document the quality of construction, and be sure to make note of any special upgrades or finishes that would differentiate this home from others you might compare it to. Home Size: The size of a home is one of the primary factors that influences the market value of a property. This is why appraisers prefer to stay within 10% of the net square footage when comparing one home to another - before you can make comparisons, you need to nail down that square footage. While there seems to be some variance in method when calculating square footage, it's important to know that some municipalities have standards in place for these calculations. Make sure you know if that's the case in your area. So Roomy: Count the total number of rooms, making note of the number of bedrooms and bathrooms. And remember that bathrooms are further broken down by whether they are a: . Full bath: tub and/or shower, sink, and toilet or . Half bath: sink and toilet Offices or dens should be noted, as they can easily be converted into a bedroom. If a dining area is truly separated from the kitchen and living area, that, too, should be noted. Infrastructure & Systems: Infrastructure and systems that can differentiate a property should be documented. These include things like: . A/C, heating, gas, and electric . Energy efficiencies (solar panels, double-paned windows, insulation, appliances) . Electronics, internet, cable-readiness, etc. Interior Design: Even if a home has the number of bedrooms and bathrooms a family is looking for, the general design and layout of a home can influence its desirability. Take note of how the home is laid out, how conveniently things are set up, and what the lighting is like. These less definite (but still significant) factors should also be a part of your overall evaluation of the subject property.

Step 2: Evaluate the Subject Property

Once your outside-in evaluation approach has landed you on the doorstep of the subject property, what do you do next? Knock on the door and try to sell magazine subscriptions? (No.) How about thin mint cookies? (No, but save me some!) The next step is to collect as much information as possible about the subject property so that when you look for comparables, or recently sold or listed homes you will use to determine the subject property's price, you'll know that you're comparing apples to apples in your CMA. The Lot Matters Lots!: Before we focus too much on the structure, though, let's back up a bit and give the lowly lot its five minutes of fame. The lot is the plot of land a structure sits on. There are many attributes and features to a lot that will influence a property's market value. When the home of Zillow's CEO ended up selling for 40% less than its Zestimate®, their postmortem revealed that the lot shape and its location within the neighborhood was the primary reason for the discrepancy. His home sat on a triangular lot, but was being valued equal to the rectangular lots in the same area. In reality, rectangular lots almost always command a higher price because they are perceived to have greater utility. Also, his particular triangular lot was situated on a corner of a busy road. Lots to Consider: As the Zillow example demonstrates, the unique features of a lot can make a big difference in the market value of a home. Some of the lot features you will want to make note of and consider as you build your CMA include: . Size and dimensions (standard shapes are more desirable). . Frontage (can increase value if it gives access to certain features). . Landscape (flat, hilly, wooded, etc.). . Orientation to sun and amount of shade. . Exposure to the elements and environment (wind, noise, etc.). . Title concerns (easements, encroachments, etc.). . Stigmatization: a stigmatized property is one where a violent act or illegal activity has occurred, is claimed to be haunted, or has any other negative associations known to people in the area.

Quiz Level 18 a) FALSE. False: Listing agents and buyer's agents will both conduct CMAs to assist their clients. Sellers need to know a price range in which to list their property and buyers need to know what a reasonable offer amount would be.

Only agents who are representing sellers will conduct CMAs. a) FALSE. b) TRUE.

Overpricing

Overpricing is one of the most common reasons properties don't sell. That's because many sellers think their property is more valuable than any other in the neighborhood. This is a natural thought, but not necessarily the best thought to cling to in a real estate transaction. That's where you come in, Yoni: It is the real estate agent's job to let the owner know what price is practical. (This is also the primary reason a comparative market analysis is crucial during a listing appointment with the owner.) You have to help the seller step back from their emotional attachment to the home and see it like a buyer would. After all, precious as it may be to the seller, it doesn't actually add value for the buyer that little Persimmon learned to ride her bike on this driveway, or that sweet Ozymandias took his first steps on this tile. If the agent cannot get the owner into a realistic price range, the sales agent may need to walk away from the listing. For most new license holders, this lesson usually takes at least one year to learn (but hopefully not for YOU, my Aceable Agent!), as new listings are always tempting. Here's how it usually plays out: An overpriced listing sits on the market with very few showings, and the seller calls the listing agent repeatedly to ask why the home hasn't sold yet. Eventually, the listing expires and another sales agent takes over the listing. Sigh. The circle of (overpriced) life. What You Paid: In addition to talking through expectations created by online real estate sites, you may also have to liberate your clients from their past. They need to understand that what they originally paid for their property matters very little now. The same can be said for the balance left on their mortgage - this shouldn't change pricing. Market value is all about the present. What will someone pay for their property TODAY? Don't Say Reduction: Sometimes the only cure for overpricing is a price adjustment. It is important to note that this act should be called a price adjustment and NOT a price reduction. The word "reduction" carries too many emotions for the seller and will make them less likely to want to work with an agent. So when it comes to the word reduction, steer clear!

Determining Value

Picture yourself at a garage sale. Suppose you see a unique coffee table that would look great in your apartment. The seller put a sticker on it with what they assumed was a fair price. You think it's overpriced, so you haggle. It's getting late in the day, and the seller hasn't seen much interest in the coffee table, so they make you a deal. There are many economic principles at work during the average garage sale. The same ideas govern the value and price of real estate, just in a more formal way (and with much higher price tags). The value of land is tied to its unique characteristics that set it apart from other commodities. In this chapter, I'll go over the physical and economic characteristics that help appraisers, real estate agents, and the average consumer make judgments about what a property is worth.

Quiz Level 18 d) the price willing buyers have recently paid for similar properties in the area. Other than an appraisal report, the price that willing buyers have recently paid for similar properties in the area is likely the most accurate and appropriate measure for setting a listing price.

When an appraisal report is not available, which of the following provides the BEST indicator for setting a listing price in a fast-moving seller's market? a) replacement cost of the structure plus current lot value. b) the average listing price for similar properties in the area. c) the average purchase price for all properties in the immediate area. d) the price willing buyers have recently paid for similar properties in the area.

Practical Application of Supply and Demand

Real estate agents often evaluate other properties to help their sellers select a good listing price. Part of this evaluation process is researching the number of homes that have sold in the market area in the last three months - these numbers reflect supply and demand. For example, if nine local homes have sold in the last three months, the agents knows that approximately three homes sell per month (this is the demand). But if there are already 15 local homes listed for sale, we know there is a five-month supply of housing on the market (which means supply is pretty high). If you have a seller client who really wants to sell quickly, they may need to make sure their price is competitive with the best three or four properties listed. On the other hand, if three homes in the area are sold each month, and there is a total of four homes for sale in the area, the seller may be able to set a slightly higher price and still get attention and a sale. As a listing agent, you want to always be aware of what properties are on the market and where your listing fits competitively.

The CMA: What It Is and Is Not

So if not Zillow, what should a client be using to price their home? Your CMA, of course. A comparative market analysis (CMA) is a report that compares the prices of recently sold or listed homes ("comparables") in order to estimate the market value of a similar property (the "subject property") located in the same area. This is the tool you'll use to guide your client towards a proper price for their property. Before we do our how-to, let's talk about what a CMA is and, perhaps more importantly, what it isn't. CMA ≠ Appraisal: Let's get this out of the way right now: A CMA is NOT an appraisal. Here are a few significant differences between the two: . You must have an appraiser's license to create an appraisal. . An appraisal is usually done for a fee. . A CMA can be done by anyone, including a licensed real estate agent. . A CMA is usually done for free. . A CMA is less detailed AND less reliable than an appraisal. How They Are Alike: In spite of those differences, a CMA and an appraisal have a few things in common: 1. Both are used to arrive at a fair market value of a property. 2. Both use a sales comparison approach that is based on the principle of substitution and the principle of contribution.

Guided Practice: Doing Adjustments

That was a lot of talk. Let's put some of it into practice. We'll be doing a whole workshop in the next chapter, so let's just do a bare-bones version here to make sure you understand how adjustments work. We'll do one together, then you can do one independently. Sound good? Good! Let's pretend our subject property is a three-bedroom, two-bathroom ranch home. (That's often shortened to a 3/2 in real estate parlance). In this chapter, we'll use a scaled-back set of stats, like this: Bedrooms: 3 Bathrooms: 2 Age: 10 years old Square footage: 1,800 sf Pretty nice house! Our first comp looks like this: HOUSE A Bedrooms: 3 Bathrooms: 2.5 Age: 15 years old Square footage: 2,000 sf Sale price: $450,000 As you can see, it has a half bath and 200 square feet more than our subject property, but it's a few years older. How do you know how much to adjust? Eventually, you'll just have a sense of what different things are worth in different neighborhoods: "Oh, East Pickman? A bedroom is worth about $15,000 over there." - You, someday. Until then, you can compare the comps to each other to get a sense of what something is worth. For example, let's look at this second comp: HOUSE B Bedrooms: 3 Bathrooms: 3 Age: 15 years old Square footage: 2,000 sf Sale price: $455,000 If we compare House A and House B, we can see that the only difference is that House B has an additional half bath. It sold for $5,000 more, so we can conclude that in this neighborhood, a half bath is worth about $5,000. But Ace, we don't know anything about the condition of these homes, how can we say that? I hear you, Yoni. For now, we're just doing an example to show you how the math works. But even in the real world, you're going to have to use your judgment a lot of the time — comps are rarely an exact comparison. Remember, it's as much art as science. The Price List: Let's say for this neighborhood, you have determined the following values: . Bedroom: $15,000 . Full bath: $10,000 . Half bath: $5,000 . Square footage: $1,000 per 100 sf . Age: $2,000 for every five years So to adjust House A to match our subject property, what would we do? House A has .5 more bathrooms than our subject property, so we subtract $5,000 from the price of House A to make it more similar to the subject property. $450,000 - $5,000 = $445,000 We also need to subtract $2,000 for 200 square feet, and add $2,000 for the five-year difference. So House A still comes in at $445,000. Now let's think about House B. Recall that House B has: . A whole bathroom more than our subject property . 200 more square feet . But is five years older Looking back at our price list, we can see we need to subtract $10,000 for the bathroom, $2,000 for the square footage, and then add $2,000 back for the age: $455,000 - $10,0000 - $2,000 + $2,000 = $445,000. Independent Practice: Price Adjustment: Okay, now you try one on your own!

Appraised Value

The appraised value of a property is the value determined by a licensed real estate appraiser. Before most real estate purchases, the buyer (or lender, if financing is involved) will choose a licensed appraiser to appraise the property for its value. Note 1: Only licensed appraisers can give an appraised value, or appraisal. Note 2: What the appraiser will seek to estimate is the market value of the property. So the two terms "market value" and "appraised value" can be a bit tricky. Just remember that market value is a theoretical concept, and appraised value will be a number on an actual appraisal report. Assessed Value: The assessed value is the value placed on a property by a governmental unit for use in calculating property taxes. Property taxes are ad valorem taxes, which means "according to value." For this reason, taxing authorities assess properties in order to determine how much owners owe in taxes. Note: Taxes are based on the assessed value of the property, NOT the price that the homeowner paid for it. Assessed Value vs. Market Value: Let's review the difference between these terms: . The assessed value is the value placed on a property by a governmental unit for use in calculating property taxes. . The market value is the price for which a property will theoretically sell under typical conditions. The assessed value and the market value of a property are NOT the same thing, and do not necessarily have any influence on each other. Market vs. Appraised vs. Assessed: You just learned a lot of values, Yoni! Let's recap: Market value: This is the price for which a property will theoretically sell under typical conditions. This refers to the economic principle; it's the price that a buyer and seller would probably accept. Appraised value: This refers to the value determined by a licensed appraiser, usually during the mortgage origination process. Assessed value: This refers to the value placed on a property by a governmental unit for use in calculating property taxes. There is often a difference between a property's market value and its assessed value. This is because tax authorities may not revaluate (which would update the assessed value) as quickly as the market changes (market changes would alter the market value). Also, as you have learned in earlier levels, some municipalities don't assess property for taxes at full market value. Some use a percentage of what the tax assessor determines the property's value to be, for various arcane reasons we don't need to explore here.

Quiz Level 18 c) 6 months or more. The average time it takes to sell a home in a buyer's market is six months or more.

The average number of months it will take to sell a house in a buyer's market is: a) 12 months or more. b) 4 - 6 months. c) 6 months or more. d) 0 - 4 months.

Price Adjustments: Explanation

The comp for House C should be valued at $451,000. Let's walk through it just in case you're still confused. Remember House C looks like this: Bedrooms: 4 Bathrooms: 1.5 Age: 10 years old Square footage: 2,000 sf Price: $463,000 So we subtracted $15,000 for a bedroom, added $5,000 for the extra half bath that our subject property has, and subtracted $2,000 for the extra 200 square feet in House C. That leaves us with $451,000. $463,000 - $15,000 + $5,000 - $2,000 = $451,000. Our three comp properties came in with prices at $445,000, $445,000, and $451,000. What does that say about our subject house's price range?

The Demand Curve

The demand for any commodity, such as real estate, can be illustrated using a demand curve. You will notice that as price increases (vertically), the amount of real estate that buyers are willing to purchase (horizontally) decreases. The opposite is also true: As price decreases, the quantity demanded increases. Demand for real estate and average price correlate, although there are other factors that keep this from being a perfect 1:1 relationship. Together, the two forces of supply and demand help determine the actual price, and quantity of, real estate on the market. The law of supply and demand states that the forces of supply and demand push the market price of any commodity to one particular point, the market equilibrium. This equilibrium is the point at which the supply and demand curves cross.

Benefits of a Properly Priced Property

There are a number of benefits to properly pricing a property, but getting there is more complicated than just "crunching numbers." Pricing a property is a magical mix of research, math, and art. The benefits that make that effort worthwhile include: . Fast responses: Multiple studies have shown a property's first two weeks on the market are critical. Overpricing will repel buyers who notice the new listing, and you cannot recapture the attention-getting "new factor" by reducing a price later on. Also, when potential buyers see the price was reduced, they may tend to think, "What's wrong with this property?" and become unnecessarily skeptical. . Increased competition: Whereas overpricing a property will stymie activity and waste the "new factor" novelty period, achieving a perfect price (possibly through underpricing) will have the opposite effect. Oftentimes, a home priced slightly below market value will create a competitive environment in which multiple offers are made. And, like a good hockey game, a fight will break out and the price will be driven up to (or beyond!) the actual market value. Nothing like being fought over, am I right? . Sets realistic expectations: Great Expectations isn't just a famous novel by Charles Dickens - it's what clients often bring to the property pricing process. Emotional attachment to a property and hyper-awareness of all improvements made over the years can cause a property owner to lose objectivity regarding the market value of their home. Helping clients understand how to arrive at a proper listing price will set their expectations right away and make for a more satisfying experience overall.

Other Types of Value

There are even more types of value! Check 'em out: . Taxable value: the value placed on a property by a governmental unit for use in calculating property taxes, minus any exemptions (assessed value - tax exemptions = taxable value). . Investment value: the highest price an investor would be willing to pay for a property based on how well it will serve their investment goals. . Insurable value: the highest value for which a property can be insured; generally equal to the replacement cost of the structure and NOT the land value. Related: the insured value is the value of the actual insurance policy on the property. . Mortgage value: the value of an asset in the context of securing a mortgage loan, a.k.a. loan value. . Actual cash value: the depreciated value of a property — we'll talk more about depreciation and value in the next level. . Value-in-use: the current worth of the future benefits of ownership. . Condemnation value: the value according to the condemning authority in an eminent domain proceeding.

Assigning Value

There are many different ways to assign value to a piece of real estate. We're going to go into the different kinds of value later in the chapter, but first let's differentiate between ways of assigning those values. Appraisal: Appraisal is an impartial, qualified appraiser's written opinion of value of a specific property as of a specific date, supported by relevant market information. It's very official. This unbiased estimate of value considers the nature, quality, and utility of an interest in or aspect of an identified piece of real estate and related property. Valuation: Valuation is the process of collecting information and developing an opinion of value for real property. Like an appraisal, a valuation is an estimation of value of an identified interest in specific property as of a given date. The difference is that a valuation does NOT have to be performed by a licensed appraiser. Evaluation: Evaluation is a statement regarding the usefulness or utility of property, but not the value of it. It's a study of the nature, quality, or utility of certain property interests in which a value estimate is not necessarily required. This sets it apart from an appraisal or valuation, which are more focused on determining value. An evaluation is more focused on determining the property's highest and best use, feasibility, market supply and demand, etc.

Characteristics Impact the Real Estate Market

These various characteristics have an impact on land use, the real estate market, and ultimately the values of real property. The real estate market is impacted not only by the economic and physical characteristics of land, but by many other factors such as supply and demand, demographics, employment, government controls, and interest rates. When a newly licensed person (that's future you!) begins a career in real estate, it doesn't take long to discover which types of properties and areas are in demand and which ones are not. In this level, we'll learn about one way of assigning value that takes into consideration all of these physical and economic characteristics: the comparative market analysis or CMA. But first, let's further explore the concept of value as it pertains specifically to real estate.

Who Needs a CMA?

This chapter will focus on the CMA from the seller's point of view. Take note, however, that when a license holder represents a buyer, the license holder should expect to do a CMA for that buyer on any property the buyer expresses real interest in. (And do this BEFORE extending an offer on a property on behalf of the buyer.) While it's not reasonable for a license holder to do a CMA on every property listing a buyer peruses, once the buyer has seen a property and has expressed continued interest, a CMA should be done.

Quiz Level 18 c) An appraisal must be done by a licensed appraiser. A CMA can be done by anyone. An appraisal must be done by a licensed appraiser, while a CMA can be done by anyone.

What is one of the most important differences between an appraisal and a CMA? a) An appraisal is for commercial property. A CMA is for residential property. b) An appraisal affects a seller's title. A CMA does not. c) An appraisal must be done by a licensed appraiser. A CMA can be done by anyone. d) An appraisal is used to price a new property. A CMA is used to price a resold property.

Quiz Level 18 d) Assemblage is combining lots. Plottage is the resulting increase in value. Assemblage is combining plots. Plottage is the resulting increase in value.

What is the difference between assemblage and plottage? a) Assemblage is done by a real estate agent. Plottage is done by a developer or subdivider. b) Assemblage requires the approval of the zoning board. Plottage does not. c) Assemblage is combining residential lots. Plottage is combining commercial lots. d) Assemblage is combining lots. Plottage is the resulting increase in value.

Comparative Market Analysis

While it's not an appraisal, a comparative market analysis is similar to one. It takes into account the number of homes that are currently on the market in the local area, their listing prices, and the purchase prices of recent sales. Of all of these variables you could consider (in the absence of an appraisal), the most helpful variable for establishing market price is the price willing buyers have recently paid for similar properties in the area. But, one more time, comparative market analysis ≠ appraisal. In a comparative market analysis, the license holder is determining value based on comparable sales from the previous months. The National Association of Realtors includes rules for CMAs in their standards of practice (or guidelines for how agents should do things ethically and well). Let's take a look. Standard of Practice 11-1: When REALTORS® prepare opinions of real property value or price (like a comparative market analysis), other than in pursuit of a listing or to assist a potential purchaser in formulating a purchase offer, such opinions shall include the: . Identification of the subject property. . Date prepared. . Defined value or price. . Limiting conditions, including statements of purpose(s) and intended user(s). . Disclosure of whether and when a physical inspection of the property's interior was conducted. . Any conflicts of interest. . Any present or contemplated interest, including the possibility of representing the seller/landlord or buyers/tenants. . Basis for the opinion, including applicable market data. . If the opinion is not an appraisal, a statement to that effect (Amended 1-01).

Steps to Creating a CMA

While there will always be a little variation from one real estate professional to the next when creating a CMA, most address these steps in one fashion or another: 1. Evaluate the neighborhood. 2. Evaluate the subject property. 3. Find comparables. 4. Compare and adjust selected comparables. 5. Establish a listing price range. I like to think of it as working from the outside in: We start with the neighborhood, then narrow down to the inside of the home.

Quiz Level 18 b) the owner. Listing agents should present a well-researched price range to recommend to their seller clients, but the final listing price must be chosen by the owner of the property.

Who makes the final decision on what the listing price of a property will be? a) the listing broker. b) the owner. c) the listing agent. d) the certified appraiser.

Differences Between Value, Price, and Cost

Yes, some people use the terms value, price, and cost interchangeably. No, they're not the same in the world of technical real estate terms. This level is mostly focused on value, but before we go any further, I want you to know the subtle differences between these words. . Value, specifically market value, is the price for which a property will theoretically sell under typical conditions. . Price is the amount a ready, willing, and able buyer agrees to pay (and a seller agrees to accept) for a property. . Cost is the amount of money required to buy, build, or develop something. It's not taking much context into consideration, only the literal cost of acquiring or making something. Price: Ready to make things a lil' more complicated? I know you can handle it, Yoni. There are two different kinds of prices: Market price is the actual open market price paid in a typical transaction that occurs under normal conditions. Think of it as the realistic counterpart to market value. Market value predicts what a probable price would be, and market price reports the actual price paid. These figures shouldn't be too different from each other. Price, on the other hand, is the amount a ready, willing, and able buyer agrees to pay (and a seller agrees to accept) for a property. The difference between price and market price is that a price doesn't have to result from normal market conditions. The circumstances of the sale could cause price to deviate from the expected market price. Cost: As mentioned earlier, cost is the amount of money required to buy, build, or develop something. It's the total dollar expenditure for labor, materials, legal services, architectural design, financing, taxes during construction, interest, the contractor's overhead and profit, and the entrepreneurial overhead and profit. The cost of a property may or may not equal the value of that property. Direct and Indirect: To break it down a little further, costs can be sorted into two different categories: . Direct costs are the costs of labor and materials. You may also hear these referred to as hard costs. . Indirect costs are costs associated with a construction project, NOT including labor or materials. We're talkin' architectural and engineering fees, professional fees (such as the ones charged by appraisers), financing costs, lease-up costs, administration, filing fees, etc. Scenario: Value, Price, and Cost: So let's look at an example. A developer builds a home for a total of $200,000. That is the cost. If material and labor costs were $150,000, those are the direct costs. The other $50,000 were spent on architect fees, financing, permits, etc., which are the indirect costs. An appraiser comes and appraises the house for $250,000. That is the value. Remember, the appraiser is attempting to determine the home's current market value. A buyer then pays $275,000 for the property. That's the price. Since it was paid under normal conditions, it's also the market price. Make sense?

Facts of a feather d) assessed value.

given by a tax assessor. a) condemnation value. b) actual cash value. c) market value. d) assessed value.

Market vs. Appraised vs. Assessed

in file (TypesOfValue)