Real Estate Appraisal Midterm 2

Market Analysis

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

Fundamental Market

Users of space, determines how much income a property makes

Capital investment market

Buyers and sellers of real estate assets, determines cap rate.

Marketability analysis

focuses on how one specific property is expected to perform

Compares how one particular neighborhood shopping center is expected to perform

Market analysis

Looks at how a type of property is expected to perform in a market. Measures demand and competition for neighborhood shopping centers in a specified market

Market analysis includes

supply and demand analysis and requires the appraiser to identify sources and use that to estimate current demand/supply

Inferred analysis

does not quantify characteristics, but informs us of trends

Fundamental analysis

provides quantifiable results

Highest and Best Use

The most reasonable, most probable use of a property that results in the highest value. 

Physically possible

Site size, topography, shape, drainage

Legally Permissible

Zoning, building codes, long term leases, environmental regulations

Financially feasible

Is it reasonably possible for the project to be successful? Is there enough cash flow? Is there a sufficient workforce? Is there a demand for the use?

Must determine

physical and legal before considering whether the use is financially feasible

As vacant

Determines the highest and best use of a property assuming it is unimproved, evaluating its potential based purely on land value and market demand.

As improved

Considers the existing structure and assesses whether its current use is the most financially and functionally viable compared to alternatives

Land is valuable for 4 main reasons

Structure or agricultural tract, Transportation, Water storage or extraction, Minerals stored within.

What is the preferred method for land valuation?

Sales comparison approach

When choosing comps…

recent sales, location and zoning are more important than the size of the property

Market Extraction

Valuation method where land value is estimated by deducting the contributory value of the improvements from the sale price.

Market Extraction is appropriate when

the value of the improvements is relatively low as a part of the total value of the property

Market extraction formula

Sale price - Improvements = Land value

Allocation valuation method

presumes that there is a typical ratio of land value to property value for a specific categories of real estate in specific locations.

Qualities of the allocation method

Very market specific and segment specific. Requires consultation with developers and observations of patterns over time. Difficult to use to support a conclusive value opinion. More often can be an indicator of the reasonableness of a given sale price.

Land Residual analysis

valuation method used to estimate land value by determining the income a property generates and subtracting the return attributable to improvements.

What are the requirements for land residual analysis

building value, NOI for the property, and building and land capitalization rates.

steps 1 for Land residual analysis

Building value X Building Cap rate = Income to the building

steps 2 for Land residual analysis

NOI - Income to the building = Income to the Land

steps 3 for Land residual analysis

Income to the land / Land Cap rate = Land value

Sales Comparison Approach

An opinion of market value can be supported by studying the markets reaction to comparable and competitive properties

Characteristics of SCA

Appraisal principle of substitution. Best to use sold properties, rather than pending or listed properties. Useful for most appraisal situations, provided there are sufficient comparable, but most common for owner occupied properties

What makes a comp an appropriate one to use for the sales comparison approach?

Same highest and best use. Date of sale, location, and zoning are more important than size

Qualitative Adjustments

no precise number, just adjusts upward or downward effect of that element

Quantitative Adjustments

specific number assigned. Information comes from specific data analysis, market knowledge, ect.

Transactional adjustments

Real property rights conveyed, Financing terms, Conditions of sale, Expenditures made immediately after purchase, Market conditions

Property Adjustments

Location, Physical characteristics, Economic characteristics, Legal characteristics, Non-reality components of value

Adjust up if

the comp is inferior

Adjust down if

the comp is superior

Adjustments should be made based on

the likely reaction of market participants as a result of the difference

Quantitative adjustments

Paired analysis, Cost analysis, Capitalization of income differences

Paired analysis

When two properties are equivalent in all respects except one, the value of the single difference can be measured by the difference in price between the two properties.

Cost analysis

Bases adjustments on cost indicators such as depreciated building cost to cure or permit fees

The problem with cost analysis

the cost of an improvement frequently does not result in an equal increase in value and that it is too close to the cost approach

Capitalization of income differences analysis

Uses the differences in NOI to derive an adjustment 

The problem with Capitalization approach

ties sales comparison approach closely to the income approach

Qualitative analysis

Used when we cant determine a precise adjustment through quantitative techniques

Relative comparison analysis

Inferior when a property has worse features and superior when a property has the better features. 

market area is

a portion of a state or country, not the entire area.

Level A & B

Inferred

Level C & D

Fundamental