Chapter 8

Price is the ...

contractual agreement between a buyer and seller

Land cannot be created of destroyed, but...

it can have a negative value when encumbered with an environmental hazard.

Due to market conditions, the...

price can change while the sot is more static

The real estate market is a slow market but...

the market conditions can change rapidly

Indirect Costs (soft costs)

-Architectural fees -Engineering fees -Professional fees: appraisers, accountants etc. -Financing -Lease up -Administration -Filing Fees

Highest & Best Use of a property

-As vacant (unencumbered): Provides the highest and best return to the site -As improved: Must make economic sense. -Must be legally permissible -physically possible -economically feasible -appropriate use for the site

Residential Market Analysis

-Collecting data of recently sold properties -Expired offering -Current listings -Contracts of sale -Analyze subject property in terms of buyer appeal -Understand the market

Residential Market Analysis

-Collecting data of recently sold properties -Expired offerings -Current listings -Contracts of sale -Analyze subject property in terms of buyer appeal. One has to understand the specific market and submarkets.

Appraisal

-Defensible estimated value -Data is compared to the property being appraised and adjusted for those differences

Indicators of Market Depreciation

-Exposure time increases -Offering prices will be reduces -Supply increases

CMA

-Gathering sales data -Looking at the difference between sold properties and NOT making adjustments as you would do on an appraisal.

Direct Costs (hard costs)

-Labor -Materials

Indicators of Market Appreciation

-Offering prices increase -Contractual prices increase -Time on market decreases -Properties move faster -Previously unsold properties are absorbed by market

For a house: Price not equal to Value

-Price varies depending on demand -Demand goes up and down -Cost established and carries little

To determine market value:

-Research sales in the last 3, 6, and 12 months. -Current offerings -Current listings -Current contracts

Three approaches to value

1. Sales companions approach (Market approach) 2. Cost approach 3. Income approach

Site Valuation

A site is always valued as if it is unimproved and ready to be built upon. -Look at: Common unit of comparison- Price/sq ft, price/build able sq. price/acre.

Changing conditions in a market must....

Adjust quickly to market conditions. Best indicators: Current offerings, Contracts of sale

Comparative Market Analysis (CMA)

An analysis of the competition of the market place that a particular will face Used to derive a value range or price point for a broker to market a property. -Not an appraisal -Can be done my participants in the market. ---Brokers ---Salespeople ---Appraisers ---Investors ---Developers

Cost Approach Formula

Replacement Cost-Depreciation=Deprecated Value of Improvement Types of depreciation: physical: -Curable (ex. broken windows) Incurable (a boiler) Functional (the market demands two bathrooms) -Curable (the cost of adding the additional bathroom is equal to or less than the contributory value) -Incurable (economically not feasible) External (the main industry left town, which affects property demand) Site improvements- Depreciated Value Site Improvements + Depreciated Value of Overall Improvements + Value of site Under Highest and Best Use

Price

The amount a purchaser agrees to pay and a seller agrees to accept in an arms length transaction.

Cost Approach

The cost approach is a real estate valuation method that surmises that the price a buyer should pay for a piece of property should equal the cost to build an equivalent building. A method of estimating the value of real property by calculating a current construction cost, subtracting accrued depreciation and adding a land value obtained from the market. This method works best when the improvements are relatively new and estimates of depreciation are thus more likely to be accurate. -Used if a property is unique -Used if there are no comparable sales in the area.

How to determine if an estimated market value is accurate?

The data collected will lead to certain conclusions and market trends. -Look for taxes, how the property have been maintained ect.

How can an appraiser or salesperson determine if their esteemed market value is accurate?

The data you are collecting will lead to certain conclusions and market trends.

Income Approach

The income approach is a real estate appraisal method that allows investors to estimate the value of a property by taking the net operating income of the rent collected and dividing it by the capitalization rate. Gross Income-contingency vacancy-holding cost- Real estate taxes insurance maintenance saleries reserves =Net operating income.

Cost

The total dollar expenditure for labor, materials, legal services, architectural design, financing, taxes during construction, interest, contractor's overhead and profit, and entrepreneurial overhead and profit (may or may not equal value).

Order of adjustments

Things you adjust for when creating a comparable sale. -Rights conveyed differences in financing -Conditions of sale -Differences in size or location etc.

Sales Comparison Approach

Valuation method which compares a subject property's characteristics with those of comparable properties which have recently sold in similar transactions. -Based on the principle of substitution where you can't find the house you want so you buy another like it. -Any differences are compared to the subject property and adjusted for accordingly. -Minimum number of comparable sales is 3. Though your not limited to 3.