Real Estate Valuation Theory

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Lecture 9

• Real Estate Valuation Theory

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Value

• The worth of a commodity, which arises from its
  utility to an individual or ability to command
  other commodities in exchange.
• -Value is established or determined by the
  activity of participants in a real estate market
• -Value is set by a specified parcel of real
  estate and the environment in which it exists

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Value

• Value-in-use Individuals ability to obtain
  satisfaction or utility from the consumption of a
  product (valuable to one individual)
• Value-in-exchange Arises when at least two
  people recognize the value-in-use or utility of a
  commodity.
• -Commodity must be transferable
• -Commodity must NOT be a free good (must have
  scarcity)

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Common Fallacies on Value

• All real estate is valuable
• All real estate increases in value

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Lecture 9

• Environmental Determinants
• of Value

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Environmental Determinants of Value

• Economic, locational, social, demographic,
  physical, and government-political environments
  that affect real estate. These factors are NOT
  site specific.
• --Local Economic Area Analysis (broad scope)
• --Neighborhood Analysis (narrow scope)

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Local Economic Area Analysis

• Economic Factors
• Locational Factors
• Physical Factors
• Government and Political Factors
• Social Factors

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Local Economic Area Analysis

• ECONOMIC FACTORS
• Investigate growth or decline in an economy
• Housing Markets Analyze historic trends in
  housing markets reflected in a specified economic
  base. Assists in estimating future levels of
  households by age, size, income levels, etc.

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Local Economic Area Analysis

• ECONOMIC FACTORS
• Variables Considered
• Impact of increased income and changing
  preference patterns of consumers
• Desirability of the local base as a location for
  new commerce and businesses
• Ability of the local base to retain current
  commerce and business
• Desirability of the local base as a place of
  residence
• Impact of non-local consumers on the demand for
  locally-produced goods and services

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Local Economic Area Analysis

• LOCATIONAL FACTORS
• Linkages
• Commuter/Transportation Costs
• Environmental Factors of Transportation Routes

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Local Economic Area Analysis

• PHYSICAL FACTORS
• Climate
• Availability of Water and Sewage, Soil
  Conditions, Flood Zones, etc.
• Scenery
• Golf and water views v. Industrial Sites

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Local Economic Area Analysis

• GOVERNMENT AND POLITICAL FACTORS
• Eminent Domain
• Can be beneficial to non-condemned, neighboring
  properties
• Utilities
• Tax Assessments

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Local Economic Area Analysis

• SOCIAL FACTORS
• --Studies preferences and attitudes people have
  towards material goods, population density,
  crowding and congestion, social issues (marriage,
  divorce, families, etc.).

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Neighborhood Analysis

• Neighborhood Group of complimentary land uses
  or a contiguous group of inhabitants, buildings,
  businesses, etc.
• Physical Features
• Social Features
• Economic Features
• Governmental Features

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Neighborhood Analysis

• PHYSICAL FEATURES
• Age, conditions, appearances of residences
• Availability of municipal services
• Surrounding land uses
• Shape/Size of land
• Quality of infrastructure (transportation,
  schools, roads, etc.)
• Proximity to shopping and employment
• Topography, flood areas, soils, environmental
  hazards

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Neighborhood Analysis

• SOCIAL FEATURES
• Demographic traits of the neighborhoods
  population (age, household size, marital status,
  etc.)
• Social attitudes of consumers towards families,
  property appearance and preservation,
  interpersonal social conducts
• Level and existence of neighborhood
  organizations, community associations, religious
  centers
• Level of safety in the neighborhood
• Population density

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Neighborhood Analysis

• ECONOMIC FEATURES
• Economic profile of the neighborhoods residents
• Income levels, occupational skills, employment
  status, educational attainment
• Proportion of resident owners to renters
• Turnover and vacancy rates for rental properties
• Movement of the neighborhood
• Amount of vacant land and amount of new
  construction (land utilization)
• Relationship of the neighborhood to growth paths
• Attitudes of mortgage lenders to real estate in
  the neighborhood

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Neighborhood Analysis

• GOVERNMENTAL FEATURES
• Quantity and Quality of Public Improvements and
  Services
• Property Taxation and Special Assessments
• Public Restrictions and Regulations

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Lecture 9

• Site-Specific Determinants of Value

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Site-Specific Value Determinants

• Part One Site Analysis
• Legal Features
• Ownership Rights, Restrictive Covenants, Zoning,
  Height/Story Restrictions, Construction/Occupancy
  Code, Easements and Encumbrances
• Physical Features
• Width/Frontage, depth, shape, size, locational
  influences, topography, soil quality,
  drainoff/stormwater provisions
• Economic and Locational Features
• Prices of comparable and neighboring property,
  tax burdens, locations of commerce and employment
  (linkage), scenery, hazards, nusances
• Aesthetic Features
• Attractiveness of the real estate

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Site-Specific Value Determinants

• Part Two Improvement Analysis
• Quantity and Quality of the Improvement
• Structure Placement on a Site
• Public v. Private Zones
• Functional Description of the Improvement

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Lecture 9

• The Appraisal

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The Appraisal

• The act or process of estimating value
• an estimate of value
• Unbiased Opinion
• Knowledgeable Opinion
• Documented Opinion

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The Appraisal

• TYPES OF VALUE ESTIMATES
• Market Value
• Assessed Value
• Insurable Value
• Investment Value
• NEEDS FOR VALUE ESTIMATES
• Transfer of Ownership
• Financing and Credit
• Compensation for Eminent Domain
• Income Taxes
• Rental Schedules and Lease Provisions

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Regulations for Appraisers

• Appraisal Foundation (U.S. Congress) - USPAP
• Appraisal Subcommittee
• State Appraisal Boards
• Non-Profit Sponsors

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USPAP

• Ethics and Competency Requirements
• Conduct
• Management
• Confidentiality
• Record Keeping
• Competency

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USPAP

• Standards of Professional Appraisal Practice
• Real Property Appraisal
• Real Property Appraisal, Reporting
• Review Appraisal and Reporting
• Real Estate / Real Property Consulting
• Real Estate / Real Property Consulting, Reporting
• Mass Appraisal and Reporting
• Personal Property Appraisal
• Personal Property Appraisal, Reporting
• Business Appraisal
• Business Appraisal, Reporting