1. Real Property Valuation
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Real Property Valuation
The Nature of Value
Foundations of Appraisal
Wayne Foss, MBA, MAI, CRE
Foss Consulting Group

2. Land is Unique In Location and it’s Composition Physically Immobile
Durable
Supply is finite
Useful to People

3. Concepts Governmental and Legal Legal Definition
the focus of law is on ownership rights
Legal Definition
Land… includes not only the ground, or soil, but everything that is attached to the earth, whether by course of nature, as are trees and herbage, or by the hand of man, as are houses and other buildings. It includes not only the surface of the earth but everything under it and over it. Thus in legal theory, the surface of the earth is just part of an inverted pyramid having its tip, or apex at the center of the earth, extending outward through the surface of the earth at the boundary lines of the tract, and continuing upward to the heavens.

4. Concepts, con’t... Geographic Legal Subsurface rights Surface rights
Diverse physical characteristics
May be used for many purposes
Use influenced by geographic considerations
Legal
Individuals hold private rights to own and use land
public rights to shared use
Land: “The earth’s surface, both land and water, and anything that is attached to it whether by the course of nature of human hands.”
Subsurface rights
Surface rights
Suprasurface rights

5. Concepts, con’t... Social resource that all individuals share
marketable commodity
Conflicts between groups with different views on land use
Environmental and Historic preservation concerns

6. Concepts con’t... Economic Restrictions Highest and Best Use
Major source of wealth
Can be used for multiple purposes
Restrictions
Public right to use of the nation’s airspace
Highest and Best Use
Physical Characteristics
Locational Characteristics

7. Definitions Real Estate Real Property Personal Property
Physical Land and Appurtenances affixed to the land (e.g., structures)
Real Property
all interests, benefits and rights inherent in the ownership of real estate
bundle of rights
Personal Property
Moveable items not permanently affixed to, or part of, the real estate

8. Real Estate, Personal Property and Real Property
Schaefer owns land with a grove of trees that are prized for their wood. The trees would be classified as:
Schaefer cuts down several of the trees and stacks the wood on this land.
Schaefer sends the wood to a woodworker to be made into cabinets. The finished cabinets are delivered and placed in Schaefer’s house.
Real Estate
Personal Property

9. Real Estate, Personal Property and Real Property
Schaefer secures the cabinets to a wall in the family room of the house.
Years later Schaefer remodels the home and removes the cabinets and places them in the attached garage.
Schaefer’s marriage falls apart, and a judge orders that Schaefer’s spouse receive one-half the wholesale timber value of the tree grove. The interest in the tree grove represents
Real Estate
Personal Property
Real Property

10. Types of Real Property Fee Simple Estate
all interests, benefits, and rights inherent in the ownership
Leased Fee Estate
an ownership interest held by a landlord
Leasehold Estate
an ownership interest held by the lessee
Life Estate
Total rights of use, occupancy and control limited to the lifetime of a designated party.
Easement
A conveyance of use, but not ownership

12. Types of Real Property, con’t...
Partial Interest
divided or undivided rights in real estate that represent less than the whole
Specialized fractional ownership
Condominium
Cooperative
Timesharing
Vertical Interest
Subsurface and air rights

13. Limitations on Ownership
Public: Four Powers of Government that restrict private ownership
Police Power
the right of government under which property is regulated to protect public safety (e.g. zoning, building codes)
Escheat
Property reverts to the state when its owner dies without a will or any ascertainable heirs
Taxation
right of government to raise revenue through assessments (e.g. property tax, special assessments)
Eminent domain
right of government to take private property for public use

14. Limitations on Ownership, con’t...
Private
Deed Restriction
limitation that passes with the land regardless of the owner
Easement
access, drainage, view
Encroachment
trespassing on the domain of another
Lease
Mortgage
Lien

15. Bundle of Rights Contains all of the interests in Real Property
Use and/or improve
Sell
Lease
Enter
Give it Away
or do nothing
Each interest can be separated and traded from the bundle

16. The Practice of Appraisal
an opinion of value
Appraisal Consulting (Evaluation)
an analysis, recommendation, or opinion to solve a problem
Appraisal Review
an opinion about the quality of another appraiser’s work

17. Purpose and Intended Use
The purpose establishes the foundation for the final value opinion. Some examples are:
Market Value
Definitions of market value
Insurable Value
Assessed Value
Use Value
Investment Value

18. Definition of 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. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting in what they consider their best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in United States Dollars or in terms of financial arrangements comparable thereto; and
5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
Source: Federal Register vol. 55, no. 163, August 22, 1990 pages and 34229

19. International Definition of Market Value
Market value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after property marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.
Source: International Valuation Standards 2000, (London, 2000), 92-93

20. Intended Use The intended use
the manner in which the client will employ the information contained in the appraisal.
Transfer of Ownership
Financing and Credit
Legal Claims
Tax Matters
Real Estate Taxes
Estate Planning and Taxes
Investment Counseling
Rental Surveys
Feasibility Analysis
Supply and Demand Analysis

21. Factors of Value Utility Scarcity Desire Effective Purchasing Power
ability of a product to satisfy a human want, need or desire
Scarcity
supply relative to demand
Desire
wish to satisfy a human need
Effective Purchasing Power
ability of an individual or group to purchase

22. Value, Price and Cost Value Price Cost
The monetary worth of a property, good or service to buyers and sellers at a given time. The present worth of future benefits that accrue to real property ownership.
Price
The amount a particular purchaser agrees to pay and a particular seller agrees to accept under the circumstances surrounding their transaction.
Cost
The total dollar expenditure for an improvement (structure).

23. Agents of Production Land Labor Capital Entrepreneurial coordination
Cost of acquisition
Labor
direct and indirect cost to construct and market the product.
Land or land and improvements
Capital
cost of capital on borrowed and equity capital invested in the project
Entrepreneurial coordination
incentive or profit (reward for the investment of time and expertise)

24. Economic Principles Anticipation Change
The perception that value is created by the expectation of benefits to be derived in the future.
Residential: amenities and pleasures of ownership
Income: the income it will produce in the future
Change
The result of the cause and effect relationship among the forces that influence real property value.

25. Economic Principles, con’t...
Supply and Demand
the price of real property varies directly, but not necessarily proportionately, with demand and inversely, but not necessarily proportionately, with supply.
Supply:
usually values vary inversely with changes in supply
quantity of space supplied is slow to adjust to changes in demand
Demand:
supported by effective purchasing power results in effective demand

30. Economic Principles, con’t...
Competition
profit encourages competition
Substitution
when several similar commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution.
Basis for data selection in the approaches to value
Balance
property value is created and sustained when contrasting, opposing or interacting elements are in a state of equilibrium.

31. Economic Principles, con’t...
Increasing and decreasing returns
successive increments of one or more agents of production added to fixed amounts of the other agents will enhance income, … until a maximum return is reached.
Contribution
value of a component is measured in terms of its contribution to the value of the whole property.
Basis of adjustments in the sales comparison approach

32. Economic Principles, con’t...
Conformity
real property value is created and sustained when the characteristics of a property conform to the demands of the market.
Basis for under or over improvement of a site
Externalities
economies outside a property have a positive effect on its value, while diseconomies outside a property have a negative effect on its value.

33. Highest and Best Use
The reasonably probable and legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.
Two types:
H&BU of land or a site as vacant
H&BU of property, as improved
Interim Use: The temporary use to which a site or improved property is put until it is ready to be put to its future highest and best use.
Consistent Use: Land can not be valued on the basis of one use while improvements are valued on the basis of another.

34. So That’s An Introduction to Real Estate Valuation
Are there any Questions?
Wayne Foss, MBA, MAI, CRE, Fullerton, CA USA
Phone: (714) Fax: (714)