1. The Real Estate Marketplace

2. Characteristics of Real Estate Markets Every parcel of real estate is unique Every parcel of real estate is unique Number of buyers and sellers varies Number of buyers and sellers varies Most buyers and sellers are unsophisticated Most buyers and sellers are unsophisticated Real estate is intensely regulated Real estate is intensely regulated Real estate is immobile Real estate is immobile

3. Market Analysis Demography is study of population statistics Demography is study of population statistics Segmentation further defines overall market Segmentation further defines overall market Forecasts predict future market performance 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 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 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 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 Credit is “tight” when there is not enough financing for all potential buyers Sources of capital— money market and capital market Sources of capital— money market and capital market Investments come from debt investors and equity investors Investments come from debt investors and equity investors Role of REIT’s, Pension Funds, etc. Role of REIT’s, 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 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 trustee’s sale; if repaid, trustee’s deed returns title to owner 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 trustee’s sale; if repaid, trustee’s deed returns title to owner

6. Elements That Create Value D emand—financially qualified buyer U tility—property serves useful purpose S carcity—short supply relative to demand T ransferability—title moved readily

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

8. Types of Value assessed valuecash valuerental value market valueimproved valuesalvage value mortgage valueinsurable valuedepreciated value capitalized valueappraised valuereplacement value book valueexchange valueleased fee value inheritance tax value liquidation valueleasehold value value in useinvestment value going - concern 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. Arm’s-Length Transaction Buyer and seller are typically motivated Buyer and seller are typically motivated Both parties are well informed Both parties are well informed The property has been on the market for a reasonable time The property has been on the market for a reasonable time Payment is made in terms of cash in U.S. dollars Payment is made in terms of cash in U.S. dollars Price represents normal consideration with no special financing concessions Price represents normal consideration with no special financing concessions

11. Influences on Real Estate Value Physical and environmental Physical and environmental Economic Economic Government and legal Government and legal Social Social

12. Basic Value Principles Anticipation Anticipation Balance Balance Change Change Competition Competition Conformity, Progression and Regression Conformity, Progression and Regression

13. Basic Value Principles II Contribution Contribution Externalities Externalities Four Agents of Production Four Agents of Production Growth, Equilibrium, Decline and Revitalization Growth, Equilibrium, Decline and Revitalization Highest and Best Use Highest and Best Use

14. Basic Value Principles III Law of Increasing Returns and Law of Increasing Returns and Law of Decreasing Returns Opportunity Cost Opportunity Cost Substitution Substitution Supply and Demand Supply and Demand Surplus Productivity 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 and location of property Identification of property rights to be appraised Identification of property rights to be appraised Definition of value to be estimated Definition of value to be estimated Purpose and intended use of appraisal Purpose and intended use of appraisal Effective date of appraisal estimate Effective date of appraisal estimate Any special limiting conditions Any special limiting conditions

19. Limiting Conditions FNMA 1004B/FHLMC 439 Statement of Limiting Conditions and Appraiser’s Certification

20. Sales Comparison 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. Also called market data approach

21. Cost Approach Reproduction or – Depreciation on + Site = Property Reproduction or – Depreciation on + Site = Property Replacement Cost Improvements Value Value of Improvements of Improvements

22. Income Capitalization Approach Net Operating Income = Property Value Net Operating Income = Property Value Capitalization Rate Capitalization Rate

23. Relationship of Approaches Sales comparison approach is most reliable with single-family residences Sales comparison approach is most reliable with single-family residences Cost approach is most reliable with non-income producing property or special-purpose property Cost approach is most reliable with non-income producing property or special-purpose property Income capitalization approach is most reliable with income-producing property Income capitalization approach is most reliable with income-producing property

24. End of Chapter Four