The Real Estate Marketplace

1
The Real Estate Marketplace
2
Characteristics of Real Estate Markets

• Every parcel of real estate is unique
• Number of buyers and sellers varies
• Most buyers and sellers are unsophisticated
• Real estate is intensely regulated
• Real estate is immobile

3
Market Analysis

• Demography is study of population statistics
• Segmentation further defines overall market
• Forecasts predict future market performance
• Absorption analysis is study of number of
  property units that can be sold or leased over a
  given period of time in defined location
• Feasibility study predicts likely success of
  proposed real estate development

4
Real Estate Finance

• Cost of credit is the interest paid on loan used
  to purchase real estate
• Credit is tight when there is not enough
  financing for all potential buyers

• Sources of capitalmoney market and capital
  market
• Investments come from debt investors and equity
  investors
• Role of REITs, Pension Funds, etc.

5
Mortgage Terms and Concepts

• Security instrument hypothecates real property to
  assure lender that debt will be repaid
• Mortgage given by mortgagor (property owner)
  creates lien in favor of mortgagee (lender) if
  default, enforced by judicial foreclosure
• Deed of trust transfers title from trustor
  (property owner) to trustee (neutral third party)
  to be held on behalf of beneficiary (lender) if
  default, enforced on default by trustees sale
  if repaid, trustees deed returns title to owner

6
Elements That Create Value

• Demandfinancially qualified buyer
• Utilityproperty serves useful purpose
• Scarcityshort supply relative to demand
• Transferabilitytitle moved readily

7

• What is the role of risk (uncertainty) in the
  valuation of properties?

8
Types of Value
9
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

10
Arms-Length Transaction

• Buyer and seller are typically motivated
• Both parties are well informed
• The property has been on the market for a
  reasonable time
• Payment is made in terms of cash in U.S. dollars
• Price represents normal consideration with no
  special financing concessions

11
Influences on Real Estate Value

• Physical and environmental
• Economic
• Government and legal
• Social

12
Basic Value Principles

• Anticipation
• Balance
• Change
• Competition
• Conformity, Progression and Regression

13
Basic Value Principles II

• Contribution
• Externalities
• Four Agents of Production
• Growth, Equilibrium, Decline and Revitalization
• Highest and Best Use

14
Basic Value Principles III

• Law of Increasing Returns and
• Law of Decreasing Returns
• Opportunity Cost
• Substitution
• Supply and Demand
• Surplus Productivity

15

• The End of Chapter Three

16

• The Appraisal Process

17
Steps in the Appraisal Process

• 1. State the problem
• 2. List the data needed and the sources
• 3. Gather, record and verify necessary date
• 4. Determine the highest and best use
• 5. Estimate the land value
• 6. Estimate value by each of the
• three approaches
• 7. Reconcile the estimated values for the
• final value estimate

18
Stating the problem includes

• Identification and location of property
• Identification of property rights to be appraised
• Definition of value to be estimated
• Purpose and intended use of appraisal
• Effective date of appraisal estimate
• Any special limiting conditions

19
Limiting Conditions

• FNMA 1004B/FHLMC 439
• Statement of Limiting Conditions and Appraisers
  Certification

20
Sales Comparison Approach
Also called market data approach

• Basic process is to take the sale price of
  comparable properties and make adjustments which
  will indicate what the comparable properties
  would have sold for if they had been identical to
  the subject property.

21
Cost Approach

• Reproduction or Depreciation on Site
  Property
• Replacement Cost Improvements Value
  Value
• of Improvements

22
Income Capitalization Approach

• Net Operating Income Property
  Value
• Capitalization Rate

23
Relationship of Approaches

• Sales comparison approach is most reliable with
  single-family residences
• Cost approach is most reliable with non-income
  producing property or special-purpose property
• Income capitalization approach is most reliable
  with income-producing property

24

• End of Chapter Four