Ch 3: Foundations of Appraisal Chapter 3 Ch 3: Foundations of Appraisal

Agents of Production Land Labor Capital Entrepreneurial coordination Chapter 3

Characteristics of Real Estate Markets Efficient market vs. real estate markets. Efficient markets Have many close substitutes like different brands of gasoline or types of bread. Have many buyers and sellers at any point in time, so the market tends to balance at a competitive price. Efficient markets often work with auctions or exchanges such as the NYSE. Real Estate Markets have immobile, heterogeneous properties that sell in localized, segmented markets. Prices are usually negotiated. Chapter 3

Price is not value Price is an historical fact, set in a marketplace with particular conditions at the time of sale Value is typically defined as the most probable sales price if the subject site (SS) is exposed to the market under normal conditions. I.e., market value. Insurable value is different because it is related to rules set by insurance companies and to the cost to rebuild if a property is destroyed by fire. Chapter 3

Supply and Demand, Substitution, Balance, and Externalities Supply and demand for a particular property type in a given local market determine the value of that property. Competition among buyers for scarce property of a given type at a given location determines its value Substitution – buyers can substitute similar properties at similar locations. E.g., they might even buy on the other side of town, but with a similar commute to work. Contribution – any component’s contribution to value is measured by the difference between what the property is worth with and without that component. E.g., the value of a third bedroom might be determined by the value of a similar house with only two bedrooms. Chapter 3

Anticipation Properties are valued based on the anticipation of benefits such as rental income net of costs. The market establishes expectations as to the value of these net benefits. Value is the net present value of these future benefits. Chapter 3

Forces that Influence Real Property Values Forces that Influence Real Property Values. Rapid changes in one of these forces may indicate that the market is out of balance: supply and demand are not in equilibrium. Social trends such as population or income change. Economic circumstances such as employment or supply and demand factors. Governmental regulations (controls) such as zoning, school quality and taxes. Environmental conditions such as climate or an active earthquake. Chapter 3

Review exercises are strongly recommended Save time by emphasizing “Key Terms” and the discussiona set apart from the text in boxes. Chapter 3