Residential Market Analysis and Highest & Best Use

Any recognized line or barrier that delineates a perimeter of a physical area. May coincide with changes in prevailing land use, occupant characteristics, natural boundaries, or man-made boundaries. Once the physical location of the relevant influences on a subject property's value is identified, all of the other properties that compete for the same buyers (market) as the subject property can be identified.

Boundaries

A temporary use of a property until it can be developed to its highest and best use is a(n) A. conditional use. B. excess use. C. interim use. D. nonconforming use.

C. interim use.

Highest and best use is the use that A. is appropriate. B. is permitted by zoning. C. maximizes value. D. minimizes cost.

C. maximizes value.

The highest and best use of a site as though vacant and the highest and best use of a property as improved are A. always the same. B. never the same. C. not always the same. D. synonymous.

C. not always the same.

A property's productivity is affected by which of the following elements? A. condition, linkages, and locational attributes B. income, absorption rates, and linkages C. physical, legal, and locational attributes D. size, condition, and income

C. physical, legal, and locational attributes

Which three items affect the demand for real estate? A. demographics, zoning, and supply B. existing properties, new construction, and planned construction C. population, employment, and effective purchasing power D. none of the above

C. population, employment, and effective purchasing power

When an appraiser inspects a subject property, what kind of data is gathered? A. census B. MLS C. primary D. secondary

C. primary

Which of the following affects the supply of real estate? A. actual income B. anticipated income C. proposed construction D. proposed tax increases

C. proposed construction

Which of the following is NOT a positive externality? A. good transportation linkages B. parks and quiet streets C. proximity to cell towers D. water, mountain, and/or golf course view

C. proximity to cell towers

Submarkets are identified through A. interviews. B. maps. C. segmentation. D. tax data.

C. segmentation.

Highest and best use is determined by A. the appraiser. B. the client. C. the market. D. zoning.

C. the market.

1. Time and distance relationship between a particular use and supporting facilities, e.g., between residences and schools, professional services, shopping, and employment. 2. The movement of people, goods, services, or communications to and from the subject site, measured by the time and cost involved. 3. In land use planning, a positive or negative relationship among various land uses.

Linkage

The study of the supply and demand in a specific area for a specific type of property.

Market Analysis

The geographic region from which a majority of demand comes and in which the majority of competition is located. Depending on the market, this may be further subdivided into components such as primary, secondary, and tertiary, or the competitive one may be distinguished from the general one.

Market Area

The theoretical balance where demand and supply for a property, good, or service are equal, with the only vacant space being space needed to service the market friction of normal tenant movements and space needed to accommodate new demand coming into the market. Over the long run, most markets move toward this, but a balance is seldom achieved for any period of time. ***When there is disequilibrium, market forces move supply and demand toward equilibrium.***

Market Equilibrium

The process by which submarkets within a larger market are identified and analyzed.

Market Segmentation

An analysis of the market conditions of supply, demand, and pricing for a specific property type in a specific area. (General)

Market Study

_______________________ characteristics help identify the potential users of a property.

Market appeal

The objective analysis of observable or quantifiable data indicating discernible patterns of urban growth, structure, and change that may detract from or enhance property values; focuses on four sets of considerations that influence value: social, economic, governmental, and environmental factors.

Market area analysis (neighborhood analysis)

The study of how a specific property is expected to perform in a specific market. It expands on a market analysis by addressing a specific property. (Specific)

Marketability Analysis

Information that is gathered in its original form by the analyst. Examples: -Subject property measurements and description -Neighborhood information -Buyer and seller motivations -Multiple listing service (MLS) data confirmed by the appraiser -Depreciation (analysis/trends)

Primary Data

An analysis of the capacity of a property to house economic activities, supply services, and provide amenities to meet human needs.

Productivity Analysis

A prediction of the future that is an extension of current and historical trends.

Projection

The relationships among these forces of demand are important no matter which type of market analysis is done.

Second Premise (Fundamental Forces of Demand)

Information that is not gathered in its original form by the analyst. Examples: -MLS raw data -Census data -Local interest rates on home mortgages -Chamber of commerce data -Data published by state and local departments of development,planning, etc. -Cost data (Marshall & Swift/Boeckh) -Studies by major universities or valuation experts

Secondary Data

An appraiser can arrive at a conclusion of the property's exposure and externalities by A. aerial mapping and a drive of the area. B. MLS sales search. C. Walk Score. D. none of the above.

A. aerial mapping and a drive of the area.

Which of the following linkages is least significant to residential property use? A. airports B. convenience shopping C. parks and recreational facilities D. police and fire protection

A. airports

The concept that land cannot be valued on the basis of one use while improvements are valued on the basis of another.

Consistent Use

The reasonably probable use of property that results in the highest value. The four criteria that the must be met is legal permissibility, physical possibility, financial feasibility, and maximum productivity. The reasonably probable use that produces the most benefits and highest land value at any given time.

Highest and Best Use

Study of locational influences occurs in which step of a market analysis? A. analyze property productivity B. measure and project/forecast competitive supply C. project/forecast subject capture D. project/forecast demand

A. analyze property productivity

Which theory states that land cannot be valued on the basis of one use while the improvements are valued on the basis of another? A. consistent use B. excess use C. interim use D. nonconforming use

A. consistent use

Increasing days on the market and declining sales prices indicate a(n) A. declining trend in the market. B. desirable market trend. C. improving market trend. D. stable market.

A. declining trend in the market.

Trends in regional population changes are what kind of data? A. demand-side B. marketability C. primary D. supply-side

A. demand-side

All of the following are tests of highest and best use except A. economically allowable. B. financially feasible. C. legally permitted. D. physically possible.

A. economically allowable.

What is a site-specific market analysis called? A. marketability study B. neighborhood analysis C. primary data study D. secondary data study

A. marketability study

The sum of a set of observations divided by the number of observations is called the A. mean B. median C. mode D. range

A. mean

A property's location in heavy traffic areas is usually considered a A. negative externality. B. positive externality. C. negative linkage. D. positive linkage.

A. negative externality

What is a use that was lawfully established and maintained, but no longer conforms to the current use regulations in that jurisdiction? A. nonconforming use B. planned unit development C. transitional use D. variance

A. nonconforming use

If the 1004MC indicates a declining price and listing trend, which of the following would be expected? A. a positive market conditions adjustment in the sales comparison approach B. a negative market conditions adjustment in the sales comparison approach C. no market conditions adjustment since the sales reflect the neighborhood trend, not comparable sales D. The 1004MC is not the basis for adjustments in the sales comparison approach.

B. a negative market conditions adjustment in the sales comparison approach

Which of the following would an appraiser study to determine demand for a property? A. aerial maps B. demographics C. geography D. sociology

B. demographics

A use that was lawfully established and maintained, but no longer conforms to the use regulations of its current zoning; also known as a grandfathered use.

Legal Nonconforming Use

What is the term used by appraisers to describe land not needed to support existing improvements, which could be developed to its own highest and best use? A. assemblage B. excess C. pottage D. surplus

B. excess

Which of the following is NOT affected by a property's locational attributes? A. appeal B. functional obsolescence C. highest and best use D. value

B. functional obsolescence

Identifying the improvement is a necessary part of highest and best use analysis. A. existing B. ideal C. remodeled D. typical

B. ideal

What are the first two criteria to be applied in testing highest and best use? A. legally permissible and financially feasible B. legally permissible and physically possible C. physically possible and financially feasible D. physically possible and maximally productive

B. legally permissible and physically possible

A freeway is what kind of boundary? A. economic B. man-made C. natural D. political

B. man-made

What is a group of complementary land uses called? A. district B. neighborhood C. region D. subdivision

B. neighborhood

The legally permissible test as vacant indicates the site could be used as a one-unit residence, two-unit residence, or apartments. Which of the following should be discussed in the physically possible test as vacant? A. one-unit residence B. one-unit residence, two-unit residence, and apartments C. only the use that is currently improved D. only the use that is financially feasible

B. one-unit residence, two-unit residence, and apartments

Which of the following can skew statistical data? A. objectivity B. outliers C. random sample D. representative sample

B. outliers

A property's location near a designated open-space area is usually considered a A. negative externality. B. positive externality. C. negative linkage. D. positive linkage.

B. positive externality.

The highest and best use is the use that ____________ value.

maximizes

The highest and best use as vacant is the same as the current use. Which of the following statements applies to the highest and best use of this property? A. Only the fi nancially feasible test is required. B. Only the tests for the highest and best use as improved are required. C. Only the tests for the highest and best use as vacant are required. D. The tests for the highest and best use as vacant and improved are required.

D. The tests for the highest and best use as vacant and improved are required.

A fundamental market analysis depends on A. competitive location ratings. B. general and descriptive data. C. supply, demand, and absorption. D. both B and C.

D. both B and C.

The 1004MC should be completed with A. all sales from the neighborhood. B. only comparable listings. C. only comparable sales. D. only comparable sales and listings.

D. only comparable sales and listings.

When the 1004MC trends are not reflective of the overall neighborhood trends, the appraiser should A. complete the neighborhood section using trends from all sales, with no explanation needed about the 1004MC data. B. comply with the guidelines and report the 1004MC data in the neighborhood section. C. contact the client and ask for direction. D. rate the neighborhood based on 1004MC data and narratively explain neighborhood differences.

D. rate the neighborhood based on 1004MC data and narratively explain neighborhood differences.

Absorption is developed by dividing the number of A. listings by the number of sales. B. listings by the number of sales per month. C. sales by the number of listings. D. sales by the number of months.

D. sales by the number of months.

Whether a market is a seller's market or a buyer's market is developed through A. marketability analysis. B. neighborhood analysis. C. property productivity analysis. D. supply and demand analysis.

D. supply and demand analysis.

Availability of vacant sites is what kind of data? A. demand-side B. marketability C. primary D. supply-side

D. supply-side

Planned construction is a component of A. demand. B. population. C. price increases. D. supply.

D. supply.

For a site-specific market analysis, the focus is on A. identifying the market area. B. properties immediately surrounding the subject. C. properties in the market area. D. the subject property.

D. the subject property.

The residential market is a submarket of A. multifamily dwellings. B. only owner-occupied units. C. similar house styles. D. the total market area.

D. the total market area.

To indicate or represent by drawn or painted lines; to mark the outline of; to describe or portray. (Merriam Webster's Collegiate Dictionary, 11th ed. Merriam-Webster, Inc., Springfield, Mass., 2003.) This definition implies an actual, physical area that can be outlined, or around which lines (markings) can be drawn.

Delineate

A study of the current or future quantity of a particular type of real estate product expected to be occupied in a given market, assuming adequate supply is available at market rent. Changes in demand are generally a function of changes in employment, population, or income

Demand Analysis

The study of population and population change.

Demography (demographic analysis)

A neighborhood characterized by homogeneous land use, e.g., apartment, commercial, industrial, agricultural.

District

When supply and demand are in balance, the market is said to be at ____________?

Equilibrium

Land that is not needed to serve or support the existing use. The highest and best use of the land may or may not be the same as the highest and best use of the improved parcel. The land has the potential to be sold separately and is valued separately.

Excess Land

(T/F) If a property has no improvements, there is no need to perform a highest and best use analysis of the site as though vacant.

False

(T/F) If there is no reasonable probability of a zoning change in the foreseeable future, an appraiser may still consider a use that is not currently allowed as a potential highest and best use.

False

(T/F) In determining the highest and best use of a site as though vacant, an appraiser may never assume that a parcel can be made vacant by demolishing any improvements.

False

(T/F) The legally permissible criteria must be applied before the physically possible criteria for highest and best use.

False

Real estate exists to house economic activities, supply services, and provide amenities to meet human needs.

First Premise (Fundamental Forces of Demand)

In market analysis, a prediction of the future based on the fundamental forces of demand.

Forecast

Identifies the present and forecasts the future demand based on segmentation of broad demographic and economic data to reflect the subject property's specific market.

Fundamental Demand Analysis

- Employment - Population - Income

Fundamental Forces of Demand

The improvement that takes maximum advantage of a site's potential given market demand, conforms to current market standards and the character of the market area, and contains the most suitably priced components; the improvement that represents the highest and best use of the land as though vacant.

Ideal Improvement

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.

Inferred Analysis

The temporary use to which a site or improved property is put until a different use becomes maximally productive.

Interim Use

A group of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises.

Neighborhood

A market area undergoing an economic and/ or demographic shift.

Neighborhood in Transition

One-unit homes are a ____________ of the residential property market.

Submarket

A study of the current or future competitive supply of space in a particular market, generally consisting of: identifying and surveying existing competitors; analyzing the relative competitive strength of the subject property and its competitors based on their physical, legal, and locational attributes; and when appropriate, predicting the future change in supply from new construction, conversions, or demolition over a particular time period.

Supply Analysis

Principle that states that the price of real property varies directly, but not necessarily proportionately, with demand and inversely, but not necessarily proportionately, with supply.

Supply and Demand (Principle)

Land that is not currently needed to support the existing use but cannot be separated from the property and sold off for another use. This land does not have an independent highest and best use and may or may not contribute value to the improved parcel

Surplus Land

There is a hierarchy to the fundamental forces of demand.

Third Premise (Fundamental Forces of Demand)

Changes in neighborhood use, e.g., agricultural to residential,residential to commercial.

Transition

(T/F) An interim use is a temporary use to which a site or an improved property is put until it is ready to be put to its future highest and best use.

True

(T/F) Highest and best use is determined by market forces.

True

(T/F) One reason to identify the highest and best use of a property is to establish a basis for the selection of comparable sale properties.

True

(T/F) The highest residual site value is the measure of maximum productivity in the analysis of a site as though vacant.

True

A market area undergoing an economic and/or demographic shift is a _____________________ .

market area in transition

The demand for real estate is a product of _________________________ , ____________ , and effective purchasing power.

demographics (population); income

Good roads and access are positive _______________ .

externalities

Uses that are expected to provide a positive return are regarded as ___________________ .

financially feasible

A _________________________ analysis is conducted to help the appraiser develop a basis for an opinion of the property's market value.

highest and best use

Identifying trends in a market area helps appraisers identify ______________________ .

highest and best use

Market analysis is essential to ___________________ , the three _________________ , and the ____________________.

highest and best use analysis; approaches to value; reconciliation and final value opinion

Identifying the __________ improvement concludes the analysis of the highest and best use of the site.

ideal

The _________ improvement is the bridge between highest and best use of the site as though vacant and highest and best use of the property as improved.

ideal

Obsolescence is identified by comparing the subject property to the _______________________.

ideal improvement

Alternative options available when considering a site as though vacant are to _________________________________________ .

improve the site or leave the site vacant

The ______________________ use is a use that was lawfully established and maintained, but no longer conforms to the use regulations of current zoning.

legal nonconforming

The four tests used in highest and best use analysis are _________________ , physically possible, ________________ , and maximally productive.

legally permissible; financially feasible

In the minds of probable users of a residential property, the geographic area in which similar properties compete with the subject property is typically called a(n) _______________ .

market area

Specific information about the subject property that will guide the collection and interpretation of data used in its market analysis and valuation approaches is gathered as part of a _________________________________________ .

property productivity analysis

Families with young children may wish to be located close to ______________.

schools

The two analyses of highest and best use are the ______________________________.

site as though vacant and the property as improved .

The market analysis process has _______ steps.

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