Real Property Valuation

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Real Property Valuation

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• The Nature of Value
• Foundations of Appraisal

Wayne Foss, MBA, MAI, CRE Foss Consulting
Group Email wfoss_at_fossconsult.com
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Land is Unique

• In Location and its Composition
• Physically Immobile
• Durable
• Supply is finite
• Useful to People

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Concepts

• Governmental and Legal
• the focus of law is on ownership rights
• Legal Definition
• Land includes not only the ground, or soil, but
  everything that is attached to the earth, whether
  by course of nature, as are trees and herbage, or
  by the hand of man, as are houses and other
  buildings. It includes not only the surface of
  the earth but everything under it and over it.
  Thus in legal theory, the surface of the earth is
  just part of an inverted pyramid having its tip,
  or apex at the center of the earth, extending
  outward through the surface of the earth at the
  boundary lines of the tract, and continuing
  upward to the heavens.

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Concepts, cont...

• Geographic
• Diverse physical characteristics
• May be used for many purposes
• Use influenced by geographic considerations
• Legal
• Individuals hold private rights to own and use
  land
• public rights to shared use
• Land The earths surface, both land and water,
  and anything that is attached to it whether by
  the course of nature of human hands.
• Subsurface rights
• Surface rights
• Suprasurface rights

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Concepts, cont...

• Social
• resource that all individuals share
• marketable commodity
• Conflicts between groups with different views on
  land use
• Environmental and Historic preservation concerns

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Concepts cont...

• Economic
• Major source of wealth
• Can be used for multiple purposes
• Restrictions
• Public right to use of the nations airspace
• Highest and Best Use
• Physical Characteristics
• Locational Characteristics

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Definitions

• Real Estate
• Physical Land and Appurtenances affixed to the
  land (e.g., structures)
• Real Property
• all interests, benefits and rights inherent in
  the ownership of real estate
• bundle of rights
• Personal Property
• Moveable items not permanently affixed to, or
  part of, the real estate

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Real Estate, Personal Property and Real Property

1. Schaefer owns land with a grove of trees that are
   prized for their wood. The trees would be
   classified as
2. Schaefer cuts down several of the trees and
   stacks the wood on this land.
3. Schaefer sends the wood to a woodworker to be
   made into cabinets. The finished cabinets are
   delivered and placed in Schaefers house.

Real Estate Personal Property Personal Property
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Real Estate, Personal Property and Real Property

1. Schaefer secures the cabinets to a wall in the
   family room of the house.
2. Years later Schaefer remodels the home and
   removes the cabinets and places them in the
   attached garage.
3. Schaefers marriage falls apart, and a judge
   orders that Schaefers spouse receive one-half
   the wholesale timber value of the tree grove. The
   interest in the tree grove represents

Real Estate Personal Property Real Property
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Types of Real Property

• Fee Simple Estate
• all interests, benefits, and rights inherent in
  the ownership
• Leased Fee Estate
• an ownership interest held by a landlord
• Leasehold Estate
• an ownership interest held by the lessee
• Life Estate
• Total rights of use, occupancy and control
  limited to the lifetime of a designated party.
• Easement
• A conveyance of use, but not ownership

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Types of Real Property, cont...

• Partial Interest
• divided or undivided rights in real estate that
  represent less than the whole
• Specialized fractional ownership
• Condominium
• Cooperative
• Timesharing
• Vertical Interest
• Subsurface and air rights

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Limitations on Ownership

• Public Four Powers of Government that restrict
  private ownership
• Police Power
• the right of government under which property is
  regulated to protect public safety (e.g. zoning,
  building codes)
• Escheat
• Property reverts to the state when its owner dies
  without a will or any ascertainable heirs
• Taxation
• right of government to raise revenue through
  assessments (e.g. property tax, special
  assessments)
• Eminent domain
• right of government to take private property for
  public use

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Limitations on Ownership, cont...

• Private
• Deed Restriction
• limitation that passes with the land regardless
  of the owner
• Easement
• access, drainage, view
• Encroachment
• trespassing on the domain of another
• Lease
• Mortgage
• Lien

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Bundle of Rights

• Contains all of the interests in Real Property
• Use and/or improve
• Sell
• Lease
• Enter
• Give it Away
• or do nothing

• Each interest can be separated and traded from
  the bundle

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The Practice of Appraisal

• Appraisal
• an opinion of value
• Appraisal Consulting (Evaluation)
• an analysis, recommendation, or opinion to solve
  a problem
• Appraisal Review
• an opinion about the quality of another
  appraisers work

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Purpose and Intended Use

• The purpose establishes the foundation for the
  final value opinion. Some examples are
• Market Value
• Definitions of market value
• Insurable Value
• Assessed Value
• Use Value
• Investment Value

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Definition of Market Value
The most probable price which a property should
bring in a competitive and open market under all
conditions requisite to a fair sale, the buyer
and seller each acting prudently and
knowledgeably and assuming the price is not
affected by undue stimulus. Implicit in this
definition is the consummation of a sale as of a
specified date and the passing of title from
seller to buyer under conditions whereby 1.
Buyer and seller are typically motivated 2.
Both parties are well informed or well advised,
and acting in what they consider their best
interests 3. A reasonable time is allowed for
exposure in the open market 4. Payment is
made in terms of cash in United States Dollars or
in terms of financial arrangements comparable
thereto and 5. The price represents the
normal consideration for the property sold
unaffected by special or creative financing or
sales concessions granted by anyone associated
with the sale. Source Federal Register vol. 55,
no. 163, August 22, 1990 pages 34228 and 34229
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InternationalDefinition of Market Value
Market value is the estimated amount for which a
property should exchange on the date of valuation
between a willing buyer and a willing seller in
an arms length transaction after property
marketing wherein the parties had each acted
knowledgeably, prudently, and without
compulsion. Source International Valuation
Standards 2000, (London, 2000), 92-93
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Intended Use

• The intended use
• the manner in which the client will employ the
  information contained in the appraisal.
• Transfer of Ownership
• Financing and Credit
• Legal Claims
• Tax Matters
• Real Estate Taxes
• Estate Planning and Taxes
• Investment Counseling
• Rental Surveys
• Feasibility Analysis
• Supply and Demand Analysis

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Factors of Value

• Utility
• ability of a product to satisfy a human want,
  need or desire
• Scarcity
• supply relative to demand
• Desire
• wish to satisfy a human need
• Effective Purchasing Power
• ability of an individual or group to purchase

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Value, Price and Cost

• Value
• The monetary worth of a property, good or service
  to buyers and sellers at a given time. The
  present worth of future benefits that accrue to
  real property ownership.
• Price
• The amount a particular purchaser agrees to pay
  and a particular seller agrees to accept under
  the circumstances surrounding their transaction.
• Cost
• The total dollar expenditure for an improvement
  (structure).

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Agents of Production

• Land
• Cost of acquisition
• Labor
• direct and indirect cost to construct and market
  the product.
• Land or land and improvements
• Capital
• cost of capital on borrowed and equity capital
  invested in the project
• Entrepreneurial coordination
• incentive or profit (reward for the investment of
  time and expertise)

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Economic Principles

• Anticipation
• The perception that value is created by the
  expectation of benefits to be derived in the
  future.
• Residential amenities and pleasures of
  ownership
• Income the income it will produce in the future
• Change
• The result of the cause and effect relationship
  among the forces that influence real property
  value.

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Economic Principles, cont...

• Supply and Demand
• the price of real property varies directly, but
  not necessarily proportionately, with demand and
  inversely, but not necessarily proportionately,
  with supply.
• Supply
• usually values vary inversely with changes in
  supply
• quantity of space supplied is slow to adjust to
  changes in demand
• Demand
• supported by effective purchasing power results
  in effective demand

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Economic Principles, cont...

• Competition
• profit encourages competition
• Substitution
• when several similar commodities, goods, or
  services are available, the one with the lowest
  price will attract the greatest demand and widest
  distribution.
• Basis for data selection in the approaches to
  value
• Balance
• property value is created and sustained when
  contrasting, opposing or interacting elements are
  in a state of equilibrium.

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Economic Principles, cont...

• Increasing and decreasing returns
• successive increments of one or more agents of
  production added to fixed amounts of the other
  agents will enhance income, until a maximum
  return is reached.
• Contribution
• value of a component is measured in terms of its
  contribution to the value of the whole property.
• Basis of adjustments in the sales comparison
  approach

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Economic Principles, cont...

• Conformity
• real property value is created and sustained when
  the characteristics of a property conform to the
  demands of the market.
• Basis for under or over improvement of a site
• Externalities
• economies outside a property have a positive
  effect on its value, while diseconomies outside a
  property have a negative effect on its value.

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Highest and Best Use
The reasonably probable and legal use of vacant
land or improved property, which is physically
possible, appropriately supported, financially
feasible, and that results in the highest value.

• Two types
• HBU of land or a site as vacant
• HBU of property, as improved

Interim Use The temporary use to which a site or
improved property is put until it is ready to be
put to its future highest and best
use. Consistent Use Land can not be valued on
the basis of one use while improvements are
valued on the basis of another.
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So Thats An Introduction to Real Estate
Valuation
Are there any Questions?
Wayne Foss, MBA, MAI, CRE, Fullerton, CA
USA Phone [phone] Fax [phone]
Email wfoss_at_fossconsult.com