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Real Property Valuation

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Title: Real Property Valuation Author: Wayne Foss Last modified by: Wayne Foss Created Date: 8/18/2002 11:30:15 PM Document presentation format: On-screen Show – PowerPoint PPT presentation

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Title: Real Property Valuation


1
Real Property Valuation
  • This presentation will probably involve audience
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    points entered.
  • The Nature of Value
  • Foundations of Appraisal

Wayne Foss, MBA, MAI, CRE Foss Consulting
Group Email wfoss_at_fossconsult.com
2
Land is Unique
  • In Location and its Composition
  • Physically Immobile
  • Durable
  • Supply is finite
  • Useful to People

3
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.

4
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

5
Concepts, cont...
  • Social
  • resource that all individuals share
  • marketable commodity
  • Conflicts between groups with different views on
    land use
  • Environmental and Historic preservation concerns

6
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

7
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

8
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
9
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
10
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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12
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

13
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

14
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

15
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

16
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

17
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

18
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
19
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
20
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

21
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

22
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).

23
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)

24
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.

25
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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30
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.

31
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

32
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.

33
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.
34
So Thats An Introduction to Real Estate
Valuation
Are there any Questions?
Wayne Foss, MBA, MAI, CRE, Fullerton, CA
USA Phone (714) 871-3585 Fax (714) 871-8123
Email wfoss_at_fossconsult.com
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