Chapter 3 Using the Market Analysis
There are three basic types of heat systems:
1. Forced air system: fired by gas (natural, manufactured, or liquid petroleum-propane), fuel oil, or electric 2. Water convection radiator system: boilers that generate hot water or steam 3. Electric heat pump system: Acts as both a heat system and air conditioning system
Electrical systems
A 100 ampere service is the minimum standard today for structures that do not have electric heat or central air conditioning. If electric heat or air conditioning is present in the dwelling, then 150-200 ampere service is required. Appraisers are not electricians. Appraisers must use common sense when inspecting the electrical system and note those conditions that could impair the livability or safety of the occupants.
Examples of functional obsolescence may include:
A four bedroom house with only one bath; Small bathrooms when the market is trending toward large bathrooms; Dated fixtures versus modern fixtures; Shag carpeting in the living areas, even though still functional, may be outdated; Walk-through type bedrooms (which were once thought of as an ingenious idea to incur more living area for the expanding family); Air conditioning is a "must" for homeowners while in years past, air conditioning was said to be a luxury that few could afford.
Exterior wall coverings:
After the framing of the structure has been completed, the sheathing and waterproofing wrap is put in place on the exterior of the framing. Now the structure is ready for an exterior wall covering. There are several different styles and types of this wall covering material. In addition, there are new materials appearing on the market everyday. Once the standard, wood lap siding was replaced by aluminum siding, which in turn has given way to vinyl siding in most parts of the country. Now composite siding is becoming more popular because of its durability. Of course, stucco, brick, and masonry siding (full or partial) is still popular with some styles of housing design.
air conditioning system
An air conditioning system should maintain a temperature of 78 degrees (Fahrenheit) as measured in the center of each room at a height of 5 feet. Cooling systems are based on their tonnage capacity. One ton is equal to 12,000 BTUs and is generally adequate for a 500-600 square foot dwelling. This is dependent on the location of registers supplying the cooling air, dwelling location in relation to the sun, shade trees, etc
Analyzing the Improvements
Analysis of the improvements relative to similar housing within the market area is an important step in developing an opinion of the subject's value. As we have already stated, the visual inspection will allow the appraiser to identify those relevant characteristics that the market determines to be important in a house. If the buyers believe it is important, then it will contribute to the overall value. Some of the major areas of this analysis are shown below:
Availability of a skilled labor market:
Another factor for the appraiser to consider is the "brain drain" of those specialized craftspeople. The skilled work force may be leaving for other locations and better employment opportunities. The availability of a skilled work force within the community and the employment center's ability to retain that work force will cast a long shadow over the entire community. This situation may cause an unbalanced status in the supply side of economics for the community. This will result in an oversupply of housing in the market. The market will change from a balanced seller's market to an unbalanced buyer's market.
Footings:
Appraisers do not arrive at the property with a pick and shovel. Typically, the appraiser has a clip board, a camera, and some sort of a measuring tool. In other words, the appraiser is not expected to verify the footing is at least a foot below the frost penetration line "if appropriate for the area." The appraiser assumes the footing was inspected at the time of its construction. Foundations are placed on top of the footings and serve to support the house proper.
Environmental conditions:
Are there environmental conditions in the community in the form of unsafe water or unclean air or smog that could affect the demand to locate in the area? Are there toxic hazards or superfund sites that continually emit toxins into the air? These conditions can cause the entire community to be stigmatized in one way or another. Any of these things may decrease the demand for housing in this market area. Analyzing this market with a similar market will provide the appraiser with the support for his or her conclusions relating to this kind of a situation.
Supporting the Effective Age (EA):
As part of the appraisal process, the appraiser will typically estimate the effective age of the subject based on comparable properties from the local market area. In many cases, the actual age is not the same as the effective age of the improvement. Actual age is the physical, or chronological, age of the structure. The effective age is based on the condition and utility of the structure in relation to the market place. Support for the effective age of the structure is a requirement and referenced in the the Uniform Standards of Professional Appraisal Practice (USPAP). This estimate of effective age requires additional analysis on the part of the appraiser and is achieved by segmenting the market area to isolate comparable sales of similar properties. When the land value is subtracted from the sales price, the depreciated value of the improvement is identified. Subtracting the depreciated value of the improvement from the improvement's cost new (RCN) will show the total dollar amount depreciation for the improvement. The dollar amount of depreciation is divided by the dollar amount of the cost new (RCN) for the improvement to arrive at a total depreciation percentage. When the percent of total depreciation is divided by the actual age of the comparable sale, the annual rate of depreciation for the comparable sale will be identified. The appraiser then reconciles the annual rates of depreciation for the comparable sales and applies that reconciled annual rate to the subject improvement. The reconciled annual rate of depreciation is multiplied by the actual age of the subject improvement to produce the accrued depreciation for the subject. The subject's accrued depreciation is multiplied by the subject's total economic life to arrive at the effective age for the subject improvement. Further support for the subject's effective age can be derived by reconciling the effective ages for the comparable sales used in this analysis process.
Example to Support Total Economic Life of the Subject Property
As with effective age, use several comparable sales from the same neighborhood. Sale Price of the Comparable Less: Land Value Equals: Contributing Value of the Improvement Gross Living Area of the Comparable is multiplied by the appropriate cost per square foot for the type of construction to obtain: Replacement Cost New of the Improvement. Replacement Cost New minus the Contributing Value of the Improvement Equals: Total Accrued Depreciation from Cost New. Total Accrued Depreciation divided by the Replacement Cost New equals: Percent (%) of total Accrued Depreciation. Percent of Total Accrued Depreciation (%) divided by the Chronological Age of the Comparable Sale equals: Rate of Depreciation per year. 1.0 (this is 100 percent depreciation) divided by the Rate of Depreciation per year equals: Total Economic Life The results of these calculations can support the appraiser's conclusion for the subject property's Total Economic Life. There are assumptions here just as there were with the effective age formula. No, it will not work in every instance. We do the best with what we have to work with. That's all we can do.
Private Restrictions for land use were:
Deed restrictions Covenants (CC&Rs) (typically enforced by Homeowner's Association)
Seek out other indicators:
Depending on the type of property, or the client's requirements, the appraiser will have to study the market place for additional indicators of value to be used in the assignment: 1. If the Cost Approach is a requirement for the assignment, the effective age and the total economic life of the subject will require additional research and analysis from the market place. Building costs for new residential construction will also be required for the completion of the Cost Approach to value. The appraiser may use a cost service for much of this information; however, the appraiser is ultimately responsible to insure the cost service information is reliable for his or her market area. Market surveys by the appraiser will verify the accuracy of the localized cost service figures. Individual analysis will be required to determine the subject's site value as well as the present value of the site improvements. 2. If the Income Approach is a requirement for the completion of the assignment, market derived market rental information should be researched for the analysis. The appraiser must arrive at a conclusion of the appropriate market rent for the subject property using comparable market indicators. The appraiser will also be analyzing recent sales of similar income producing properties to obtain an appropriate Gross Rent Multiplier (GRM) for use in the Income Approach.
Utilities:
Electric, natural gas, water, sanitary sewers, telephone, cable for TV, computer high-speed internet access, are all important factors that could decide the public's decision for locating in a particular area. Increased property value can be achieved in part because of these off-site improvements available throughout this neighborhood. The absence of any of these perceived essential utilities may necessitate alternative methods to supply the particular utility. If there is no public water source a well will be necessary to supply the needed water. The market will determine the difference in property value due to the alternative utility source for potable water.
Agricultural properties:
Farms: (livestock) Dairy cows Beef cattle Pigs Chickens Farms: (crops) Growing corn Growing wheat Growing soybeans Land: For any of the above agricultural uses For mineral rights Coal Oil Natural gas Gravel
Property analysis:
For this, we look to the subject property. This walk-through or visual inspection of the subject site and improvements serves to identify all of the relevant characteristics that could enhance or detract from the property's value relative to similar properties sold in the subject's market area. The appraiser will be able to identify those features that contribute to value and list those detractions from value by inspecting the property. The appraiser's knowledge of the market trends will aid him or her in the identification of those relevant characteristics concerning the property. The property inspection will identify the condition of the improvement and also verify previous information obtained from various sources about the subject. The extent of this inspection process will be determined by the appraiser's scope of work required for this assignment. Without a visual inspection the appraiser cannot know, for certain, all of the relevant characteristics that will or will not influence the value of the property. Extraordinary assumptions may be necessary for the development of the assignment without the complete visual inspection.
Plumbing fixtures:
From the water source at the entry area, a plumbing system must be capable of supplying the desired water (with adequate pressure) to the various parts of the house. Reduction of the size of the water line coming into the house serves to increase the pressure throughout the dwelling. Sometimes it is necessary to reduce the pressure of the water supply by a pressure reduction valve situated at the point of entry. Generally "p" traps are installed within two feet of the fixture to create a water barrier within the trap to prevent the back flow of sewer gasses into the house. There are venting systems installed to allow for the escape of the gasses from the roof area. Water heaters are also considered part of the house's plumbing system.
If the appraiser is assigned the task of determining the market value of a single family property for the purpose of obtaining a long term mortgage, the residential, single family, one story categories will have to be further segmented for appropriate analysis of that market. Data will be gathered from the market to analyze those properties most similar to the subject relative to:
Gross Living Area (GLA) Number of bedrooms Number of baths Number of car storage spaces Basement, crawl space, concrete slab, post & pier Pool, in-ground, deck, patio Exterior siding, brick, vinyl, wood, Site size and others.
Special purpose properties:
Houses of worship Hospitals Assisted living centers Hotels / Motels Shopping centers Casinos Golf courses Sports complexes and stadiums Cemeteries
Street lights, storm sewers, curbing, fire hydrants, and sidewalks:
How far to the nearest fire hydrant? Is there a street light in close proximity to the subject property? Is there curbing? Is there a storm sewer system and are there easements along the borders of the subject property?
Clarification of the market will involve more than identifying the property.
How many buyers are there for this type of property that is complete with all of the desired amenities? Where are the buyers coming from?
The appraiser will have to reach a conclusion relative to the demand for this type of housing. If the individual property is one classified as a high-value property, the appraiser will identify the limited market for this type of property on the basis of the disposable income availability within the defined market area.
How many buyers can afford to purchase this type of property in this location? There are several Internet sites that will identify the percentage of people in the community who could afford to buy a high-value property. The appraiser will look further to identify the market trends for this type of property relative to the buying public's disposable income levels. Exposure time, absorption rates, expiration ratios, normal ratios between the offered price for similar properties and the actual selling price for properties, are all considerations in the segmented analysis of the market area.
Stigmas
If, for example, there was the occurrence of a violent act in the neighborhood that resulted in a negative perception for locating in that particular neighborhood, the appraiser's analysis will determine the extent of the public's reaction to that neighborhood stigma. Stigmas have been known to impact values in different ways. Keep in mind that it is not okay to just dismiss the perception of value by the public because of a stigmatized condition. Additional research and analysis will be necessary to determine if the market has or does react to the presence of a property or neighborhood stigma. While we generally talk about stigmas having a negative impact on property values, the appraiser must also realize that certain conditions found in the market place could actually enhance the value of properties in that market area.
Recent sales of similar properties:
In any comparable analysis of the market, the appraiser must seek out those comparable sales that have taken place in the immediate area of the subject property. In conjunction with this process, another analysis will be demanded for those individual amenities that are perceived to contribute to value by the public. If there are no similar recent sales in the subject's neighborhood, the appraiser must seek out competitive neighborhoods for recent similar comparable sales. This information will be used by the appraiser in the comparable sales analysis approach to determine an indicated value for the subject. This extraction of information directly from the market and the application of supportable and appropriate analysis will produce a market-derived indicator of value for the subject. By applying the appropriate contributory analysis (also derived from the market place) to the comparable sales, the appraiser will be able to support the conclusions reached in the performance of this analysis process.
Design
Is the overall design in keeping with the neighborhood? The market will decide if the individual improvement is in conformance with the neighborhood or not. Every house does not have to be exactly the same but the different designs should complement each other. Developers usually have taken this conformity issue into consideration when they are also acting as the contractors for home construction within the subdivision.
View:
Is the property abutting a forest preserve or a conservation area? Is there a scenic view of the mountains or the lake from the front porch or deck? It has been well documented that a property with a view in some parts of the country will command a much higher price than the same property without that view. View is an important aspect of value for some types of properties in certain locations. The market will be able to identify the impact on value for a property with or with out a desirable view.
Public or private street:
Is the street a public street, a private street, a county road, a state highway, a private road? Is there an effect on value because of noise, dust or dirt, or heavy traffic at certain times of the day or night?
Street length and curvature:
Is the street straight and long and without any speed bumps which could may be conducive to speeding or car races? Is there a curvature to the street to slow the traffic down and prevent speeding? How wide is the street? Is the street used to park vehicles or is there an ordinance against all night parking? What is the surface of the street? Is the street gravel, asphalt, or concrete? If a private street, is there a written and recorded maintenance agreement for upkeep of the street and emergency vehicle access?
Foundations:
Is there a choice of foundations for the homes constructed within the market area. Sometimes the choice is limited by the type of soil or the water table levels for the area. Can the house be supported by the soil? Will the water table allow for a full basement under the house? If not a basement, will the table allow for a crawl space or must the construction take place over a concrete slab on grade? In some older construction the appraiser may see a pier and beam type of foundation. In today's market, the pier and beam type of foundation is usually reserved for the placement of manufactured homes on their own site. Soil conditions can be determined by soil boring tests conducted at the time of the development process. Appraisers often see the results of soil incapacity when inspecting the basement or crawl space areas of the home. Telltale signs are also present on the exterior of the homes with above grade foundation walls. Stair-step cracks, horizontal cracks, or vertical cracks would indicate to the appraiser that there is some sort of problem with the foundation area of the house.
Flood hazard area
It is extremely important that the appraiser supply the most accurate available information relative to the subject and its flood hazard designation as assigned by the Federal Emergency Management Agency (FEMA). Not every community is enrolled in the FEMA flood designation survey program; however, it is still the appraiser's responsibility to communicate the information about the community's non-participation in the designation programs. If the subject property is located in a designated Special Flood Hazard Area (SFHA), additional information must be supplied in the appraisal report by the appraiser. SFHAs are those zones designated by FEMA as "A" and "V". Zones designated as "B", "C", or "X" are not included in the SFHA category. Property values can be impacted by FEMA designations.
Levels of Analysis
It should be very evident by this time that communication with the client is essential if the appraiser is to determine the appropriate type and level of analysis required for the assignment. How will the client be using the appraiser's opinions and conclusions? This is a question that must be answered if the appraiser is to successfully complete the assignment. By communicating with the client, the appraiser will be better equipped to determine the proper level of analysis and gather sufficient data for the analysis process. Appraisers must determine the appropriate level of analysis (i.e., scope of work) required for the assignment. Appraisers must decide how much data will be required for the assignment. Appraisers will generally consider a combination of current information and historical data when analyzing the market area for those indicators of demand and supply that are relevant. Communication with the client is essential, as it helps an appraiser make an appropriate scope of work decision; however this decision is the responsibility of the appraiser, and no one else. If the market place is found to exhibit stable characteristics, market condition adjustments may not be found to be supportable or necessary. If the market is found to be unstable and values are fluctuating up or down because of the changes in demand and supply, market analysis may provide the necessary support for a market condition adjustment to the comparable property sales. As stated above, a combination of current information concerning demand and historical data relative to supply characteristics will prove to be invaluable to support the appraiser's conclusions in this example.
Industrial:
Manufacturing Warehousing Distribution centers
Framing methods:
Most of the framing allowed by building codes is of the western framing technique. This type of framing is used to construct one story at a time and is commonly called platform framing. The other types of framing are post and beam framing and balloon type framing.
Commercial properties:
Office: Single story Low-rise High-rise Warehousing space
Analyzing Off-site Improvements
Often times the presence of off-site improvements will contribute to the value of individual properties in the market area. Up to this point, we have dealt with relevant characteristics that could affect the property value but we have not cited many specifics. We have mentioned a stigmatized condition and indicated the condition could impact (either positively or negatively) the value of the property. In this segment, we will attend to some off-site improvements and indicate that a requirement for an additional study may be necessary because of their presence.
Markets will generally fall into the following categories:
Residential properties Commercial properties Industrial properties Agricultural properties Investment properties (which could include any of the above) Special purpose properties
Residential properties:
Single Family: One story Two stories Townhouse Manufactured Home Condominium Cooperative Time Share Multi-Family: 2 to 4 units
Government Restrictions for the use of the land presented were:
Taxation Police Power Eminent Domain Escheat
Other Value Considerations:
The appraiser is faced with a very specific challenge in the effort to solve a problem for the client. Most often that challenge is the development of a credible opinion of the value for the property, as of a specific date. In addition to the above stated effects and characteristics having to do with value, there are always individual circumstances to be considered in the analysis process. The market factors that will affect an individual property or market area must be considered for the intended use of the appraiser's opinions and conclusions.
Layout and floor plans
The appraiser must be able to identify any functional obsolescence due to the layout or floor plan for the structure. The market will be the determining factor for the social desires of the public relative to the actual floor plan in place for the subject property. The appraiser must be aware of the social changes that will determine what is acceptable in the market place today.
Using the market:
The appraiser will always have the "market" to provide the necessary information for analyses. The data may not be right in the immediate market area but it is out there in an expanded market area. The appraiser must possess the knowledge and experience to seek out the required data. The appraiser will then interpret that data for application in the appropriate analysis process to form an opinion of value for the subject property. The appraiser's scope of work will identify the amount of research that was necessary and the availability of the data in the expanded market area that was used in the appraisal process.
Survey the market
The appraiser will conduct a study of the market place to form a conclusion about the availability of similar real estate offered to the public at the present time. Is there a new housing development proposed or in process for the subject's market area? Will the presence of that development affect the pre-owned housing market? The social attributes of the market may play an important part in the overall contribution to value for properties in the market area. The community's contribution in the form of police protection, a convention center, well-stocked library system, fire protection, and the presence of ample utilities will also enhance property value for the market as a whole. General data will be invaluable in determining the segmentation of the market. This type of data will assist the appraiser in analyzing the community's contributory enhancements and their effect on the needs and desires of the buying public.
When the core business brings in new employees, that increase is felt throughout the community. The appraiser can develop an economic base multiplier to project the increase in the demand for services and ultimately demand for housing needs.
The appraiser will gather the data pertaining to the total number of people employed in the community. This number will be divided by the number of those employed in the core industries or businesses in the community. The resulting multiplier can be used to identify the spin-off jobs that are created because of the presence of the core industry or business in the community. As the labor force of the core business increases so does the number of additional jobs that are required to support that increase in employment. 22,740 Number of people employed in the community 12,633 Number of core industries employees 22,740 divided by 12,633 will indicate a base core multiplier of 1.8. This economic base multiplier indicates that for each new core employee hired, there will be an additional .8 jobs created in the community. This means that for every 10 new core employees hired, eight additional jobs will be generated throughout the community as a spin-off from those core business or industry employees. This, of course, will occur over time in the community. This ultimately results in an increase in the number of people employed in the community. Any increase in employment generally means an increase in the public's disposable income.
Projecting future economic growth potential
The appraiser will want to look at the anchor businesses that form the core of employment for the community. What is the outlook for future employment trends? Are these core industries or commercial entities looking to expand their production or facilities? Is there competition for their services or products and will that affect the stability of the core businesses? Is there a downsizing of the labor force in the company's forecast? Decrease in production and labor force adjustments reflect throughout the community in the form of less disposable income available for the purchase of those big ticket items. The demand for a bigger house may not be as great as it once was.
Competitive properties:
The appraiser will want to look at the market to determine the number of available properties that are similar to the subject in terms of both location and amenities. How much competition does the subject property have when offering the property to the market place? How much similar housing is being offered to the market place? How long have the competitive properties been exposed to the market? Have their offering prices been reduced during their exposure to the market? This may be an indication of an over-abundance of similar housing on the market? Once more, we are looking at the market for an indication of excess available housing inventory. Excess available similar housing may be cause for declining property values in the subject's market area.
Equilibrium Status:
The continued demand for the particular type of housing is an important factor in the market's ability to maintain the overall property values. The appraiser will study the market in order to determine the demand for the subject property. As you see, we keep coming back to those principles relating to supply and demand. The appraiser will determine if the market is looking for the subject's style of improvement. Is the subject property in demand at this time? Are there buyers who are looking for this type of house in this particular price range and in this market area? If there is a shortage of this type of property and buyers want to locate in the subject's market area, the market, if properly studied with adequate data, will indicate the demand for this trend. On the other hand, the market analysis may indicate the lack of interest in the subject property's location. The result of that trend could produce an oversupply of properties for that particular location or neighborhood.
Steps in the Analysis Process
The feasibility analysis is generally the most common type of market study the appraiser might be called upon to accomplish. The client will want to know if a proposed project is feasible for the market place at this time. Should the client invest their money and be a party to this project? The appraiser will be able to perform the necessary analysis to answer this question. The following steps can be applied to most market analysis assignments. Keep in mind the actual analysis will be developed in accordance with the appraiser's scope of work and that the steps may vary with the appraiser's decision of the work and research necessary to accomplish credible results for the individual assignment.
Heat, ventilation, and air conditioning systems (HVAC):
The heat and air conditioning systems must be adequate for the size of the structure. They are installed and maintained by licensed individuals. Generally, a heating system should be capable of maintaining a temperature of 70 degrees as measured in the center of each room at a height of 5 feet. The capacity of the furnace heating system is measured in British Thermal Units (BTU).
Support for the Total Economic Life (TEL)
The length of time that a given structure will prove beneficial and contribute to the overall value of the property can be termed to be its economic life. The calculations for the support of the subject's total economic life estimate involve the same initial calculations as taken from the market and similar comparable sales. The appraiser will perform the same calculations, as cited above, to arrive at the annual rate of depreciation for the comparable sales. It is at that point that calculations are different. The whole number 1, or 100 %, is divided by the annual rate of depreciation for each of the comparable sales used in the analysis. The whole number (1) represents the total life expectancy for the improvements and, when divided by the comparable's annual rate of depreciation, will indicate the number of total life expectancy years for that comparable sale. Reconciling the total life expectancy years for the comparable sales used in the analysis, the appraiser can apply that life expectancy figure to the subject improvement.
Study the market
The status of the major employment centers of the community will determine the market for the foreseeable future. Any increases in the production by the employment centers may result in additional people required to facilitate the proposed increases in production. This increased production will necessitate an increase in the supply for housing. The demand will normally make itself known before supply can increase sufficiently to accommodate that increase in demand for housing. When the equilibrium status has been altered, the market will be unbalanced until the supply can catch up. It is during these market swings that the market changes from a balanced buyer's market to a fluctuating seller's market.
Roof types and window types
There are several different styles of roofs that will complement the design of the house itself. In some areas of the country, the roof structure and the roof cover are mandated by community ordinances and homeowner's insurance policies. In warmer parts of the country, a lower roof pitch is generally seen as there is not the heavy snow loads to contend with. The roof pitch is steeper in the areas of the country where heavy snow conditions are a factor. Some of the different types of roofs are: Gable Hip Pyramid Mansard Shed Flat
windows
There are several different types of windows that will serve as an energy saving component of the house. Double glazed windows are the standard in most parts of the country. In the colder parts of the country, there are triple glazed windows with even better insulating qualities. In addition, there are single glazed windows, single hung windows, double hung windows, etc.
Measuring gross living area (GLA):
There is no measuring system that will satisfy every type and style of residential construction. The American National Standards Institute (ANSI) has initiated a standardized system for measuring residential properties. ANSI standard Z-765-2013 is the most recently revised information source for the measurement procedures. This standard provides an element of consistency, throughout the appraisal profession, in the calculation of Gross Living Areas for single-unit residential properties. Using the ANSI standard, the appraiser will realize that the procedure is not unique and there is no radical departure from the normal measurement methods employed for single-unit residential properties. ANSI has attempted to consolidate the measurement process into a set of guidelines for the many different entities that use finished square footage as a measurement of value. A sampling of the requirements is shown below: Exterior measurements are taken at floor level. The structure's finished areas above grade are included in the GLA. Any part of the structure that is below grade in not included in the GLA figure. Stairs are counted as part of the living area from which they descend. If there is an entry area and there is no flooring at the second story level, that space without a floor must be subtracted from the second story living area. The finished first floor area measures 30.5 feet by 45.6 feet and equates to 1,390.8 square feet of living area The second floor finished area is the same as the first floor except for the entry foyer that is 20 feet to the ceiling. The entry foyer area without a floor is 20 feet by 20 feet or 400 square feet. GLA is calculated as follows: 1,390.8 first floor area 1,390.8 second floor area - 400.0 less: second floor entry foyer area 2,381.6 2,382.0 rounded to nearest square foot of GLA Fannie Mae, Freddie Mac, FHA, and the VA all agree in principle with the ANSI Standards. These agencies realize that some types of residential construction may not be representative of ANSI's rules of measurement and the public's perception of living areas. As has been already stated, it is recognized that one system of measurement will not satisfy all of the different types and styles of single-unit housing. The agencies mentioned above have issued exceptions for the perceptions of living area in different markets. Basically, if the market recognizes additional finished areas (below grade) as living areas, then the appraiser may include those areas in the gross living area calculation for the dwelling. However, the appraiser must explain and justify this departure from the typical measurement standards. The main issue for these exceptions is consistency with the market perceptions. The value of these additional living areas will ultimately be determined by the appraiser's analysis of the market area. It is important that the appraiser's calculation of the GLA be consistent with the measurements of the comparable sales used in the market analysis.
Fundamental Analysis:
This is defined in The Dictionary of Real Estate Appraisal, Sixth Edition as "A prediction of future market conditions based on comparison of a quantified estimate of future demand with a quantified estimate of future supply; also known as fundamental demand analysis." According to Market Analysis for Valuation Appraisals by Stephen Fanning, MAI, Terry Grissom, MAI, PhD., and Thomas Pearson, MAI, PhD., inferred analysis is principally performed using the studies and surveys of others (secondary data), while fundamental analysis relies primarily on the appraiser's own data searches and surveys (primary data).
Investment Analysis:
This type of analysis examines the present worth of a future benefit. You are right if you equate that statement to the principle of anticipation. Investors want to know the market perception of an acceptable rate of return for their real estate investment. Included in this analysis will be the consideration of an appropriate holding period for the property, anticipated cash flows during the holding period, and the anticipated return when the property is sold at the end of the holding period. The frequently asked questions asked of the appraiser are: How much should I pay for this property considering that I want a -- % return from the investment? Is my --% return from this investment realistic? How long should I hold on to this property to maximize my investment? How much cash flow can I expect during the holding period? How much can I resell the property for at the end of the holding period? If the investor is going to tie up his or her money in real estate, he or she will want an acceptable rate of return for the investment. If that rate of return cannot be achieved the property is not a good investment for the investor.
Inferred Analysis:
This type of analysis is used by the appraiser to project the demand for properties based on current market trends. Inferred analysis is defined in The Dictionary of Real Estate Appraisal, Sixth Edition as "A prediction of future market conditions based on inferences drawn from general market information, published data, and historical trends in rents and absorption rates and occupancy for similar property types."
Feasibility Analysis:
This type of analysis will relate to the client whether the market considers such a project worthwhile - that is, whether or not the market "needs" this particular project. There must be a financial benefit from this project for it to be feasible. If the cost to purchase the site and construct a four-unit building is estimated at $300,000, then the marketplace must be able to recognize that $300,000 cost, plus the developer's profit, as the minimum value for the project when completed. If that is the market reaction to the construction project, then the market has determined the project is worthwhile, or financially feasible. The market has indicated a demand for the four-unit building.
Example to Supporting Effective Age of the Subject property
Use several comparable sales from the same neighborhood. Assumptions are that all sales and the subject property have had similar upkeep, with no major upgrading, remodeling, rehabilitation, or additions. Sale Price of the Comparable Sale: $100,000. Less: Land Value: $ 20,000. Present Value of the Improvements: $ 80,000. Cost New of the Improvements: $130,000. (No land value included here) Less: Present Value of the Improvements: $80,000. Total accrued Depreciation of Improvements: $50,000. Total Depreciation of Improvements / Divided by Cost New of Improvements: $50,000 / $130,000 = .3846 This is the total percentage of loss from cost new: .3846 or 38.5% Assume that the comparable sale is 24 years old. That means it has depreciated 38.5% over 24 years - or an average of 1.6% per year (.385 / 24 = 0.016). Let's further assume that two other comparable sales indicate average annual depreciation rates of 1.4% and 1.5%. If we reconcile the three indications to be 1.5% depreciation a year; then we can use that to estimate the Effective Age of the subject property. The subject property is 26 years old. 26 X 0.15 = .39 or 39% depreciated. If the subject has a Total Economic Life of 70 years, then its Effective Age could be calculated as 70 X .39 = 27.3; rounded to 27 years.
Estimating Functional Obsolescence
We have previously mentioned that the lack of air conditioning could represent a functional inadequacy in some market areas. A house was constructed several years ago without air conditioning. At that time air conditioning was not deemed to be an essential element of the improvements. Today it is said to be a requirement and part of those amenities that are important in a residential property. If the air conditioning had been installed as part of the original construction, there would be no functional obsolescence at the present time. The cost to install the air conditioning at the time of construction would have been $4,000. The cost to install the air conditioning now is $7,000. By subtracting the cost to install the air conditioning at the time of construction ($4,000) from the cost to install the air conditioning now and eliminate the functional obsolescence ($7,000), a dollar figure is derived for the functional obsolescence of $3,000. $7,000 cost to install air conditioning now -$4,000 less: cost to install at time of construction $3,000 dollar amount of functional obsolescence If the property's value will increase by more than the $7,000 because of the installation of the air conditioning, then the functional obsolescence is said to be curable. If the property value would only increase $5,000 because of the installation of the air conditioning, then the functional obsolescence would be labeled as incurable. The owner may still want to install the air conditioning but the full cost of installation will not be returned in the form of increased value as determined by the market place.
As a part of the clarification process, the appraiser will examine the strengths and weaknesses of the public's social attitudes, desires, or needs for locating within the particular market area.
What is the typical buyer's disposable income level that can be used to satisfy their housing demands? Are open recreational areas desired for children? Are there other recreational facilities available within the market area for the family? What appears to be the standard size for homes in the subject's market area? What does the standard appear to be for homeowners in the subject's market area? Does a three car garage indicate the standard of acceptance for the neighborhood? Are covered decks the "norm" for this particular market area?
segment
Where does the appraiser start with the analysis of the market? The appraiser must decide how much of the market - called the segment - he or she is concerned with for the particular assignment. Defining the market segment is the first step in the market analysis process. Defining the market segment allows the appraiser to concentrate on the specific data required for the analysis of the submarket of concern for the assignment. Market identification involves subdividing the larger market into a workable study area.
