1. Chapter 5 Market Determinants of Value The material in this power point does not follow the text
Real Estate
FIN 331
Fall 2017

2. Real Estate Valuation Issues
Some Key Issues
Financing
Listing
Investment Analysis
Insurance (Liability, Flood, Windstorm)
Property taxes
Value versus Price
Value = present worth of future benefits
Benefits of ownership realized over a long period of time

3. Real Estate Valuation Issues
Four Elements of Value
Demand - the desire or need for ownership supported by the financial means to satisfy the desire;
Utility - the ability to satisfy future owners' desires and needs;
Scarcity - the finite supply of competing properties and
Transferability - the ease with which ownership rights are transferred.

4. Real Estate Valuation Issues
Value vs. Cost vs. Price
Value is not necessarily equal to cost or price.
Cost: out-of-pocket expenses
Price: what a person is willing to pay
Value and Price are not always the same.
Impact of flaws on price
Market value
Normally the result of an appraisal on a specific date (conditions change all the time)

5. IRS Issues in re Market Value
IRS Publication 561
The governing tax code publication for fair market value of real estate is IRS Publication 561.
This publication deals with all kinds of property valuations, such as cars, boats, collections, used clothing, securities, patents, annuities and many others, but it does not set aside a section for determining real estate market value.

6. IRS Issues (cont.)
Publication 561 explicitly states "a detailed appraisal by a professional appraiser is necessary" for proper valuation.
Three approaches are considered acceptable by the appraiser:
the comparable sales approach,
capitalization of income approach or
the replacement cost new method.

7. Basic attributes of real property
Five Attributes of Real Estate (land)
Unique in location —no two parcels are identical in terms of location.
Unique in composition —no two parcels are identical in their geological composition.
Durable —land is long-lasting.
Finite in supply —no more land is being created (reductions in usable land).
Useful —land has use or utility to people.

8. Four Major Forces Influencing Real Estate Values
Social Trends:
Trends in population growth and migration
Family composition (smaller, delayed formation)
Aging of population (downsizing)
More people working at home (may be ending)
Amenities supporting leisure time (swimming pools, tennis courts, etc.)
Security Consciousness (low crime rates, gated communities)
Environmental awareness (Energy efficiency, water conservation, recycling)

9. Four Major Forces Influencing Real Estate Values
Economic Forces
Changes in income levels
Availability of good jobs, stable employment opportunities
Cost of construction
Availability and cost of credit
Cost of utilities; electric, gas

10. Four Major Forces Influencing Real Estate Values
Physical / Environmental Forces
Location, Location, Location!
Access to public transportation, infrastructure
Topography (rolling hills vs. flat treeless land)
Weather (northern vs. southern vs. mid-west vs. southwest vs. Pacific)

11. Four Major Forces Influencing Real Estate Values
Government
State and Local employment taxes
Monetary Policy (effects on interest rates and credit availability)
Real Estate Taxes and Assessments
Zoning restrictions
Quality of schools
Availability and quality of services: Police, Fire, Health Care

12. Basic Valuation Forces
Supply of and Demand for Properties
Supply and Demand tend to be fluid.
Supply tends to follow upward price movements
Demand trends downward when costs are high
Fairness of Valuation tends to clear the markets (interest rates also a factor)

13. Impact of Risk on Valuation
Ways to minimize market risk
Avoid projects with high market risk
Most hotels and motels
Restaurants and entertainment facilities
Properties in distressed areas
Avoid projects with prospective major changes
Lease rollover for major tenants
Major renovations
Study the macro market environment
Are there changes in land usage?
Is the area undergoing gentrification?
Is industry moving into the area?

14. City vs. Country Cities grow vertically, suburbs grow horizontally
Cities tend to have higher taxes: city wage taxes, additional sales tax, greater millage rates
Some reasons for higher tax burdens: declining industrial activity
Unionized municipal employees typically increases cost of municipal services
Requirement to operate and maintain city owned transportation (buses, subways)

15. City vs. Country
Cities offer better access to convenience services; shops, restaurants, etc. easy walk distance.
Cities offer greater variety of entertainment venues

16. Homework Assignment
Key terms: Economic base (p. 102), Comparison activities (p 121)
Study Questions:
List some examples of economic forces.
List some examples of social forces.
List some examples of environmental forces.
List some examples of governmental forces.
List 5 major economic base activities in Wilmington, NC.
Using the US Census Web-Site: What is the distribution of income for Wilmington/New Hanover County and North Carolina? Why are there differences in distribution?
NC:
NHC:
Wilmington: