Real Estate Valuation Theory: Environmental Determinants of Value

1. Lecture 9 Real Estate Valuation Theory

2. “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

3. “Value” “Value-in-use”: Individual’s 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)

4. Common Fallacies on “Value” • All real estate is valuable • All real estate increases in value

5. Lecture 9 Environmental Determinants of Value

6. 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)

7. Local Economic Area Analysis • Economic Factors • Locational Factors • Physical Factors • Government and Political Factors • Social Factors

8. 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.

9. 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

10. Local Economic Area Analysis LOCATIONAL FACTORS • Linkages • Commuter/Transportation Costs • Environmental Factors of Transportation Routes

11. 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

12. Local Economic Area Analysis GOVERNMENT AND POLITICAL FACTORS • Eminent Domain • Can be beneficial to non-condemned, neighboring properties • Utilities • Tax Assessments

13. 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.).

14. 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

15. 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

16. Neighborhood Analysis SOCIAL FEATURES • Demographic traits of the neighborhood’s 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

17. Neighborhood Analysis ECONOMIC FEATURES • Economic profile of the neighborhood’s 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

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

19. Lecture 9 Site-Specific Determinants of Value

20. 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

21. 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

22. Lecture 9 The Appraisal

23. The Appraisal “The act or process of estimating value; an estimate of value” • Unbiased Opinion • Knowledgeable Opinion • Documented Opinion

24. 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

25. Regulations for Appraisers Appraisal Foundation (U.S. Congress) - USPAP Appraisal Subcommittee State Appraisal Boards Non-Profit Sponsors

26. USPAP Ethics and Competency Requirements • Conduct • Management • Confidentiality • Record Keeping • Competency

27. 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