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Fundamentals of Pricing  The principles operating in the market as a prelude to transforming the physical facts of the property into a realistic expression.

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Presentation on theme: "Fundamentals of Pricing  The principles operating in the market as a prelude to transforming the physical facts of the property into a realistic expression."— Presentation transcript:

1 Fundamentals of Pricing  The principles operating in the market as a prelude to transforming the physical facts of the property into a realistic expression of its economic potential. 4-1

2 Objectives  Legal and financial environment influences land use and value  Property rights provide the basis for value  Conditions necessary for land to have value  Market value represents the most reliable summary of property’s potential  Influence of availability of financial resources on land value 4-2

3 Introduction  Real property is the right to use land  Land is soil, natural plants, and improvements  Rights to control and dispose of property  Right to enjoy benefits of improvements  Promote development and economic progress 4-3

4 Property Rights - Basis for Land Value  Property is a collection of rights  Rights to control land forms its value  Rights of the owner and rights of the state  Owner can possess the property  Owner can dedicate it to desired use  Ownership rights are called Fee Simple Ownership 4-4

5 Basis for Land Values (cont.)  Government reserves four distinct rights  Taxation  Eminent domain  Police Power  Escheat  Rights appear to infringe on fee simple ownership 4-5

6 Fundamental Principles  Principles endow real estate with potential uses  Anticipation - present value of expected future benefits  Substitution - cost of acquiring land of equivalent utility  Change - forces in constant flux  Balance - combining elements in proper proportion 4-6

7 Fundamental Principles (cont.)  Contribution - contribution of a particular item to value  Competition - market interactions establish value  Conformity - Property is in harmony with surroundings  Basis for estimating market potential  Understanding underlies valid analysis of property value 4-7

8 Conditions That Create Value  Must display particular set of qualities  Derive enjoyment from controlling property  Earning income or simply from pride of ownership  Utility alone cannot create value  Second element of value is scarcity  Third element of value is effective buying power 4-8

9 Efficiency and Highest and Best Use  Individuals decide how to use and development  Successful bidder must offer more  Price reflects the most highly valued use  Properties ultimately rise to highest and best use  Residual claimant to returns from production  Lower valued use can damage land value 4-9

10 Unbiased Judge of Potential  Market value definition varies from state to state  Assumes principals are unrelated  Assumes typical financial arrangements  Every analysis begins with concepts of market value  Most probable selling price replaces highest price  Market value altered by prevailing market conditions 4-10

11 Financial Considerations  Real estate market thrives on borrowed funds  Typically includes down payment and amortization  Mortgage pledges the property as collateral  Foreclosure consumes months  Deed of trust conveys property to trustee  proceedings to acquire full title, months 4-11

12 Financial Considerations (cont.)  Contract for deed or land contract  Title remains with the seller  Envision commonly available interest rate  Most frequent in times of high interest rates  Creative financing  Cash equivalent adjust sale price for financing 4-12

13 Financial Considerations (cont.)  Evaluating terms involves two steps  Payment required by mortgage  Adjusting loan to yield market value of interest  True value of the mortgage  Cash equivalent = sale price - value of payment reduction 4-13

14 Group Activity 4-1A 4-14

15 Group Activity 4-1B 4-15

16 Module 4 - Review  Understand how the legal and financial environment influences land use and value ò Property rights ò Government limits ò Fee simple ownership ò Rights that will transfer 4-16

17 Module 4 - Review  Understand how property rights provide the basis for value  Unique environment, Substitution, Change, Balance, Contribution, Competition, and Conformity 4-17

18 Module 4 - Review  Explain the conditions necessary for land to have value ò Utility and scarcity ò Buyers with power to purchase ò Access to capital 4-18

19 Module 4 - Review  Understand how markets promote efficiency in society ò Free market - highest price prevails ò Highest use and efficiency 4-19

20 Module 4 - Review  Explain market value and understand why it represents the most reliable summary of a property’s potential ò Unbiased based on current market conditions 4-20

21 Module 4 - Review  Evaluate the influence of the availability of financial resources on land value ò Favorable financial terms ò Market equivalent in cash 4-21

22 Self-Assessment Questions  Property rights form the basis of land value because  Governmental powers over land include  Fundamental principles of real estate markets include  The necessary conditions for a property to have a market value are  Highest and best use refers to  Financial terms of a mortgage that differ from typically available terms 4-22


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