1. Real Estate Valuation Theory
Lecture 9
Real Estate Valuation Theory

2. “Value”
“The worth of a commodity, which arises from its utility to an individual or ability to command other commodities in exchange.”
-Value is established or determined by the activity of participants in a real estate market
-Value is set by a specified parcel of real estate and the environment in which it exists

3. “Value”
“Value-in-use”: Individual’s ability to obtain satisfaction or utility from the consumption of a product (valuable to one individual)
“Value-in-exchange”: Arises when at least two people recognize the value-in-use or utility of a commodity.
-Commodity must be transferable
-Commodity must NOT be a free good (must have scarcity)

4. Common Fallacies on “Value”
All real estate is valuable
All real estate increases in value

5. Environmental Determinants of Value
Lecture 9
Environmental Determinants
of Value

6. Environmental Determinants of Value
Economic, locational, social, demographic, physical, and government-political environments that affect real estate. **These factors are NOT site specific.**
--Local Economic Area Analysis (broad scope)
--Neighborhood Analysis (narrow scope)

7. Local Economic Area Analysis
Economic Factors
Locational Factors
Physical Factors
Government and Political Factors
Social Factors

8. Local Economic Area Analysis
ECONOMIC FACTORS
Investigate growth or decline in an economy
Housing Markets: Analyze historic trends in housing markets reflected in a specified economic base. Assists in estimating future levels of households by age, size, income levels, etc.

9. Local Economic Area Analysis
ECONOMIC FACTORS
Variables Considered:
Impact of increased income and changing preference patterns of consumers
Desirability of the local base as a location for new commerce and businesses
Ability of the local base to retain current commerce and business
Desirability of the local base as a place of residence
Impact of non-local consumers on the demand for locally-produced goods and services

10. Local Economic Area Analysis
LOCATIONAL FACTORS
Linkages
Commuter/Transportation Costs
Environmental Factors of Transportation Routes

11. Local Economic Area Analysis
PHYSICAL FACTORS
Climate
Availability of Water and Sewage, Soil Conditions, Flood Zones, etc.
Scenery
Golf and water views v. Industrial Sites

12. Local Economic Area Analysis
GOVERNMENT AND POLITICAL FACTORS
Eminent Domain
Can be beneficial to non-condemned, neighboring properties
Utilities
Tax Assessments

13. Local Economic Area Analysis
SOCIAL FACTORS
--Studies preferences and attitudes people have towards material goods, population density, crowding and congestion, social issues (marriage, divorce, families, etc.).

14. Neighborhood Analysis
“Neighborhood”: Group of complimentary land uses or a contiguous group of inhabitants, buildings, businesses, etc.
Physical Features
Social Features
Economic Features
Governmental Features

15. Neighborhood Analysis
PHYSICAL FEATURES
Age, conditions, appearances of residences
Availability of municipal services
Surrounding land uses
Shape/Size of land
Quality of infrastructure (transportation, schools, roads, etc.)
Proximity to shopping and employment
Topography, flood areas, soils, environmental hazards

16. Neighborhood Analysis
SOCIAL FEATURES
Demographic traits of the neighborhood’s population (age, household size, marital status, etc.)
Social attitudes of consumers towards families, property appearance and preservation, interpersonal social conducts
Level and existence of neighborhood organizations, community associations, religious centers
Level of safety in the neighborhood
Population density

17. Neighborhood Analysis
ECONOMIC FEATURES
Economic profile of the neighborhood’s residents
Income levels, occupational skills, employment status, educational attainment
Proportion of resident owners to renters
Turnover and vacancy rates for rental properties
Movement of the neighborhood
Amount of vacant land and amount of new construction (land utilization)
Relationship of the neighborhood to growth paths
Attitudes of mortgage lenders to real estate in the neighborhood

18. Neighborhood Analysis
GOVERNMENTAL FEATURES
Quantity and Quality of Public Improvements and Services
Property Taxation and Special Assessments
Public Restrictions and Regulations

19. Site-Specific Determinants of Value
Lecture 9
Site-Specific Determinants of Value

20. Site-Specific Value Determinants
Part One: Site Analysis
Legal Features
Ownership Rights, Restrictive Covenants, Zoning, Height/Story Restrictions, Construction/Occupancy Code, Easements and Encumbrances
Physical Features
Width/Frontage, depth, shape, size, locational influences, topography, soil quality, drainoff/stormwater provisions
Economic and Locational Features
Prices of comparable and neighboring property, tax burdens, locations of commerce and employment (linkage), scenery, hazards, nusances
Aesthetic Features
Attractiveness of the real estate

21. Site-Specific Value Determinants
Part Two: Improvement Analysis
Quantity and Quality of the Improvement
Structure Placement on a Site
Public v. Private Zones
Functional Description of the Improvement

22. Lecture 9
The Appraisal

23. “The act or process of estimating value;
The Appraisal
“The act or process of estimating value;
an estimate of value”
Unbiased Opinion
Knowledgeable Opinion
Documented Opinion

24. TYPES OF VALUE ESTIMATES NEEDS FOR VALUE ESTIMATES
The Appraisal
TYPES OF VALUE ESTIMATES
Market Value
Assessed Value
Insurable Value
Investment Value
NEEDS FOR VALUE ESTIMATES
Transfer of Ownership
Financing and Credit
Compensation for Eminent Domain
Income Taxes
Rental Schedules and Lease Provisions

25. Regulations for Appraisers
Appraisal Foundation (U.S. Congress) - USPAP
Appraisal Subcommittee
State Appraisal Boards
Non-Profit Sponsors

26. Ethics and Competency Requirements
USPAP
Ethics and Competency Requirements
Conduct
Management
Confidentiality
Record Keeping
Competency

27. Standards of Professional Appraisal Practice
USPAP
Standards of Professional Appraisal Practice
Real Property Appraisal
Real Property Appraisal, Reporting
Review Appraisal and Reporting
Real Estate / Real Property Consulting
Real Estate / Real Property Consulting, Reporting
Mass Appraisal and Reporting
Personal Property Appraisal
Personal Property Appraisal, Reporting
Business Appraisal
Business Appraisal, Reporting