The Value Of Real Estate
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Chapter 11
The Value of Real Estate
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
1
Chapter 11: The Value of Real Estate
Important Definitions and Concepts • Seven characteristics of real estate include: – 4 value characteristics (demand, utility, scarcity, transferability) that all items must have – 3 physical characteristics (uniqueness, immobility, indestructibility) • Factors that can affect real property value: – Broad market factors – Property-specific
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
2
Chapter 11: The Value of Real Estate
Important Definitions and Concepts • Difference between: – Value – Price – Cost • Market value • Arm’s length transaction • Assemblage, plottage, subdividing, and frontage as they relate to increasing the value of land
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
3
Chapter 11: The Value of Real Estate
Key Terms • Arm's Length Transaction • Assemblage • Buyer's Market • Conformity • Contribution
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
• • • •
Demand Depreciation Effective Demand External Obsolescence • Frontage
4
Chapter 11: The Value of Real Estate
Key Terms • Functional Obsolescence • Highest and Best Use • Immobility • Indestructibility
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
• Law of Decreasing Returns • Law of Increasing Returns • Market Value • Plottage • Price
5
Chapter 11: The Value of Real Estate
DUST The seven characteristics of real estate include the four value characteristics (remember: D U S T): 1. 2. 3. 4.
Demand Utility Scarcity Transferability
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
6
Chapter 11: The Value of Real Estate
Physical Characteristics Three physical characteristics unique to real estate: 1. Uniqueness 2. Immobility 3. Indestructibility
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
7
Chapter 11: The Value of Real Estate
Value • The amount of goods or services offered in marketplace in exchange for something else • To have value, certain value characteristics must be present and perceived by the user and other potential users • All four characteristics must be present and in harmony for item to achieve maximum value Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
8
Chapter 11: The Value of Real Estate
Demand • The need or desire for a specific good or service, and an essential ingredient in creating value • Without demand, any amount of supply is meaningless • Effective demand or purchase ability means a prospective buyer has enough disposable income available to satisfy needs or desires
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
9
Chapter 11: The Value of Real Estate
Utility • The ability of a good or service to satisfy human wants, needs, or desires • Utility is the degree of usefulness to prospective users – No perceived use for something no perceived value
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
10
Chapter 11: The Value of Real Estate
Scarcity • The perceived supply of a good or service relative to the demand for it: Unlimited supply of something
Perceived to have little value
• Scarcity and utility must both be present for the item to have value • Value also derived from scarcity
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
11
Chapter 11: The Value of Real Estate
Transferability • The ability to freely buy, sell, encumber, dispose of property in any way the owner sees fit – Property value derived from freedom to transfer title readily from one person to another
• The fewer restrictions on property, the more perceived value in the marketplace Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
12
Chapter 11: The Value of Real Estate
Added Requirement • Effective demand or purchase ability (effective purchasing power) – Person receiving property must have ability to pay
• Without this, desires and demands go unfulfilled because property can’t be transferred to the person who desires it
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
13
Chapter 11: The Value of Real Estate
Uniqueness • A physical characteristic of real estate referring to each piece of land, each building, and each house being different – Non-homogeneity: No two properties are exactly the same
• More land cannot be created in a given location – Value is derived from this perceived scarcity due to uniqueness Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
14
Chapter 11: The Value of Real Estate
Immobility • The physical characteristic of real estate referring to the fact that it can't be moved • Immobility helps value in a good market – Other land can't be moved in to take away potential customers
• Immobility can hurt land value in a bad market
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
15
Chapter 11: The Value of Real Estate
Indestructibility • A physical characteristic of real estate referring to the fact that it can't be destroyed – Real estate will always have some minimum value by virtue of its existence
• Land’s usefulness, and hence its value, can change over time
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
16
Chapter 11: The Value of Real Estate
Additional Factors in Valuing Property
(more or less in order of importance): • • • • • •
Highest and best use Location Substitution Conformity Contribution Depreciation
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
17
Chapter 11: The Value of Real Estate
Highest and Best Use • The use that is the most physically possible, legally permissible, economically feasible, and maximally profitable or productive. • Vital consideration when examining vacant land or land that has changed zoning
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
18
Chapter 11: The Value of Real Estate
Location • The exact position of a piece of real estate • Consider neighborhood’s growth, popularity, prosperity, etc. • An individual home’s location within a neighborhood also affects its value
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
19
Chapter 11: The Value of Real Estate
Substitution • Theory that an informed buyer will not pay more for a home than a comparable substitute – The value of the “worst” home in a given area is increased by the other homes in the area – The value of the “best home in a given area is decreased by the other homes in the area • This theory can also be applied to items within a home Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
20
Chapter 11: The Value of Real Estate
Conformity • The theory that a particular home achieves its maximum value when surrounded by homes of similar style and function • Applies to neighborhoods as well
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
21
Chapter 11: The Value of Real Estate
Contribution • The theory that a particular item or feature of a home is worth only what it actually contributes in value to that piece of property • An item or improvement is worth only what a prospective buyer is willing to pay, not what it actually cost the owner
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
22
Chapter 11: The Value of Real Estate
Law of Decreasing/Increasing Returns • Law of decreasing returns: Beyond a certain point, added value of additional feature, addition, repair, is less than the actual cost of it – Also called law of diminishing returns
• Law of increasing returns: Added value of an additional feature, repair, is more than the actual cost of that item Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
23
Chapter 11: The Value of Real Estate
Depreciation • The loss in value to property for any reason • Factors contributing to depreciation can be classified as curable or incurable • Depreciation is usually attributed to one of three causes: 1. Physical Deterioration 2. Functional Obsolescence 3. External Obsolescence Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
24
Chapter 11: The Value of Real Estate
Law of Supply and Demand • For all products, goods, and services, when supply exceeds demand, prices will fall and when demand exceeds supply, prices will rise • Lag time for market forces to respond to supply and demand situations lead to buyer’s and seller’s markets
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
25
Chapter 11: The Value of Real Estate
Buyer’s vs. Seller’s Market • Buyer's market: buyers have a large selection of properties from which to choose • Seller's market: sellers can choose from a large number of buyers looking for houses in a particular area • The real estate market is in balance when there are slightly more homes available than buyers.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
26
Chapter 11: The Value of Real Estate
Value, Price, Cost • Value: What a typical person would pay for something • Price: What one person actually paid – Price is a fact. • Cost: Dollars needed to develop, produce, or build something – The value of a piece of real estate should never be confused with its price
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
27
Chapter 11: The Value of Real Estate
Market Value • The most probable price a property should bring in competitive, open market under all conditions requisite to a fair sale – The final value entered on the Uniform Residential Appraisal Report (URAR) should represent the appraiser's opinion of market value
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
28
Chapter 11: The Value of Real Estate
Arm’s Length Transaction • One that occurred under typical conditions in the marketplace with each party acting in his or her own best interest
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
29
Chapter 11: The Value of Real Estate
Making Land More Valuable • Assemblage: Combining two or more parcels of land into one larger parcel; typically done to increase usefulness of the land • Plottage: Increase in value (over cost of acquiring the parcels) by successful assemblage, usually due to a change in use • There are times when subdividing and splitting property into multiple smaller parcels can increase value
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
30
Chapter 11: The Value of Real Estate
Frontage • Dimension across access side of property • Adding it makes land more valuable than adding depth, even if total amount of land added is the same – This is especially true for commercial property
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
31
Chapter 11: The Value of Real Estate
Summary 1.
Value is the amount of goods or services offered in the marketplace in exchange for something. There are seven characteristics of real estate. Maximizing value requires all four value characteristics—demand, utility, scarcity, transferability (DUST)—plus the three physical characteristics – immobility, indestructibility, uniqueness. Buyers must want a site, feel it’s useful to satisfy needs, perceive limited supply, and be free to transfer the site later. To have value, scarcity must be coupled with utility. Without demand, supply is meaningless, but a person must also have an ability to purchase (effective demand).
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
32
Chapter 11: The Value of Real Estate
Summary 2. Factors that affect the value of a particular piece of real estate include many of the same economic, governmental, and social factors that influence the broad real estate market. Some of the most relevant broad market factors that influence the value of a particular piece of real estate include supply and demand, and uniqueness and scarcity. Property-specific factors include highest and best use, location, substitution, conformity, and contribution.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
33
Chapter 11: The Value of Real Estate
Summary 3.
Market value is the theoretical price that a piece of real estate is most likely to bring in a typical transaction, not to be confused with market price, which is the actual price paid for a piece of real estate. A typical real estate transaction is often referred to as an arm’s length transaction, meaning the transaction occurred under typical conditions in the marketplace with each party acting in his or her own best interests. Typical conditions are buyer paying cash, seller not offering financing or unusual terms, buyer and seller are not related, buyer and seller acting in their own best interests, buyer and seller not acting out of undue haste or duress, both are reasonably informed about the property, and the property has been on the market for a reasonable period of time.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
34
Chapter 11: The Value of Real Estate
Summary 4.
Inherent value of land can be increased through assemblage or subdivision. Assemblage is combining two or more parcels of land into one larger parcel, increasing the usefulness of the site. If the larger parcel is worth more than the sum total of the smaller parcels, this is called plottage. Subdividing a larger parcel of land can also result in more utility and more value. Frontage is the dimension across the access side of a parcel of land. With commercial property, frontage is usually more valuable than depth. The first number in a lot size is always the frontage. With residential land, usually, only total size is compared. In both cases, a market study must be done to determine any amount of value difference.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
35
Chapter 11: The Value of Real Estate
Quiz 1. The amount one particular person paid for property is its a. b. c. d.
cost. market value. price. value.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
36
Chapter 11: The Value of Real Estate
Quiz 2. What are the value characteristics properties must have in harmony to maximize value? a. b. c. d.
demand, utility, scarcity, transferability supply and demand uniqueness, immobility, indestructibility utility and scarcity, coupled with a lack of purchasing power
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
37
Chapter 11: The Value of Real Estate
Quiz 3. Land has inherent value because of a. b. c. d.
immobility. indestructibility. uniqueness. all of the above.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
38
Chapter 11: The Value of Real Estate
Quiz 4. Which is an example of real estate put to its highest and best use? a. flat, paved parking lot in downtown Boston b. house in a residential subdivision c. old house on a major highway surrounded by commercial buildings d. vacant lot
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
39
Chapter 11: The Value of Real Estate
Quiz 5. Which house will hold its value best? a. b. c. d.
"best" house in the "worst" neighborhood "worst" house in the "best" neighborhood $50,000 house overlooking a huge landfill $500,000 house in an area of apartment complexes
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
40
Chapter 11: The Value of Real Estate
Quiz 6. Typical conditions in the marketplace include all EXCEPT a. buyer pays cash for real estate. b. buyer and seller are not related. c. buyer and seller are reasonably informed about the property. d. property has been on the market for seven years.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
41
Chapter 11: The Value of Real Estate
Quiz 7. Someone buys two adjacent parcels of land for $20,000 each. An appraisal shows the combined larger parcel is now worth $40,000. What has occurred? a. b. c. d.
assemblage frontage plottage subdividing
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
42
Chapter 11: The Value of Real Estate
Quiz 8. Someone buys two adjacent parcels of land for $20,000 each. An appraisal shows the combined larger parcel is now worth $50,000. What has occurred? a. b. c. d.
assemblage frontage plottage subdividing
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
43
Chapter 11: The Value of Real Estate
Quiz 9. Someone buys one large parcel of land for $200,000. An appraisal shows it could become 10 lots worth $25,000 each. This is an example of a. b. c. d.
assemblage. frontage. plottage. subdividing.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
44
Chapter 11: The Value of Real Estate
Quiz 10. A fast food chain is looking for a new location. Assuming the cost of the lot is of less concern than customer convenience entering and exiting the property, which lot would the restaurant likely choose? a. 100’ x 200’ b. 125’ x 150’ c. 150’ x 125’ d. 200’ x 100’
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
45
The Value of Real Estate
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
1
Chapter 11: The Value of Real Estate
Important Definitions and Concepts • Seven characteristics of real estate include: – 4 value characteristics (demand, utility, scarcity, transferability) that all items must have – 3 physical characteristics (uniqueness, immobility, indestructibility) • Factors that can affect real property value: – Broad market factors – Property-specific
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
2
Chapter 11: The Value of Real Estate
Important Definitions and Concepts • Difference between: – Value – Price – Cost • Market value • Arm’s length transaction • Assemblage, plottage, subdividing, and frontage as they relate to increasing the value of land
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
3
Chapter 11: The Value of Real Estate
Key Terms • Arm's Length Transaction • Assemblage • Buyer's Market • Conformity • Contribution
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
• • • •
Demand Depreciation Effective Demand External Obsolescence • Frontage
4
Chapter 11: The Value of Real Estate
Key Terms • Functional Obsolescence • Highest and Best Use • Immobility • Indestructibility
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
• Law of Decreasing Returns • Law of Increasing Returns • Market Value • Plottage • Price
5
Chapter 11: The Value of Real Estate
DUST The seven characteristics of real estate include the four value characteristics (remember: D U S T): 1. 2. 3. 4.
Demand Utility Scarcity Transferability
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
6
Chapter 11: The Value of Real Estate
Physical Characteristics Three physical characteristics unique to real estate: 1. Uniqueness 2. Immobility 3. Indestructibility
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
7
Chapter 11: The Value of Real Estate
Value • The amount of goods or services offered in marketplace in exchange for something else • To have value, certain value characteristics must be present and perceived by the user and other potential users • All four characteristics must be present and in harmony for item to achieve maximum value Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
8
Chapter 11: The Value of Real Estate
Demand • The need or desire for a specific good or service, and an essential ingredient in creating value • Without demand, any amount of supply is meaningless • Effective demand or purchase ability means a prospective buyer has enough disposable income available to satisfy needs or desires
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
9
Chapter 11: The Value of Real Estate
Utility • The ability of a good or service to satisfy human wants, needs, or desires • Utility is the degree of usefulness to prospective users – No perceived use for something no perceived value
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
10
Chapter 11: The Value of Real Estate
Scarcity • The perceived supply of a good or service relative to the demand for it: Unlimited supply of something
Perceived to have little value
• Scarcity and utility must both be present for the item to have value • Value also derived from scarcity
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
11
Chapter 11: The Value of Real Estate
Transferability • The ability to freely buy, sell, encumber, dispose of property in any way the owner sees fit – Property value derived from freedom to transfer title readily from one person to another
• The fewer restrictions on property, the more perceived value in the marketplace Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
12
Chapter 11: The Value of Real Estate
Added Requirement • Effective demand or purchase ability (effective purchasing power) – Person receiving property must have ability to pay
• Without this, desires and demands go unfulfilled because property can’t be transferred to the person who desires it
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
13
Chapter 11: The Value of Real Estate
Uniqueness • A physical characteristic of real estate referring to each piece of land, each building, and each house being different – Non-homogeneity: No two properties are exactly the same
• More land cannot be created in a given location – Value is derived from this perceived scarcity due to uniqueness Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
14
Chapter 11: The Value of Real Estate
Immobility • The physical characteristic of real estate referring to the fact that it can't be moved • Immobility helps value in a good market – Other land can't be moved in to take away potential customers
• Immobility can hurt land value in a bad market
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
15
Chapter 11: The Value of Real Estate
Indestructibility • A physical characteristic of real estate referring to the fact that it can't be destroyed – Real estate will always have some minimum value by virtue of its existence
• Land’s usefulness, and hence its value, can change over time
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
16
Chapter 11: The Value of Real Estate
Additional Factors in Valuing Property
(more or less in order of importance): • • • • • •
Highest and best use Location Substitution Conformity Contribution Depreciation
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
17
Chapter 11: The Value of Real Estate
Highest and Best Use • The use that is the most physically possible, legally permissible, economically feasible, and maximally profitable or productive. • Vital consideration when examining vacant land or land that has changed zoning
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
18
Chapter 11: The Value of Real Estate
Location • The exact position of a piece of real estate • Consider neighborhood’s growth, popularity, prosperity, etc. • An individual home’s location within a neighborhood also affects its value
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
19
Chapter 11: The Value of Real Estate
Substitution • Theory that an informed buyer will not pay more for a home than a comparable substitute – The value of the “worst” home in a given area is increased by the other homes in the area – The value of the “best home in a given area is decreased by the other homes in the area • This theory can also be applied to items within a home Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
20
Chapter 11: The Value of Real Estate
Conformity • The theory that a particular home achieves its maximum value when surrounded by homes of similar style and function • Applies to neighborhoods as well
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
21
Chapter 11: The Value of Real Estate
Contribution • The theory that a particular item or feature of a home is worth only what it actually contributes in value to that piece of property • An item or improvement is worth only what a prospective buyer is willing to pay, not what it actually cost the owner
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
22
Chapter 11: The Value of Real Estate
Law of Decreasing/Increasing Returns • Law of decreasing returns: Beyond a certain point, added value of additional feature, addition, repair, is less than the actual cost of it – Also called law of diminishing returns
• Law of increasing returns: Added value of an additional feature, repair, is more than the actual cost of that item Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
23
Chapter 11: The Value of Real Estate
Depreciation • The loss in value to property for any reason • Factors contributing to depreciation can be classified as curable or incurable • Depreciation is usually attributed to one of three causes: 1. Physical Deterioration 2. Functional Obsolescence 3. External Obsolescence Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
24
Chapter 11: The Value of Real Estate
Law of Supply and Demand • For all products, goods, and services, when supply exceeds demand, prices will fall and when demand exceeds supply, prices will rise • Lag time for market forces to respond to supply and demand situations lead to buyer’s and seller’s markets
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
25
Chapter 11: The Value of Real Estate
Buyer’s vs. Seller’s Market • Buyer's market: buyers have a large selection of properties from which to choose • Seller's market: sellers can choose from a large number of buyers looking for houses in a particular area • The real estate market is in balance when there are slightly more homes available than buyers.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
26
Chapter 11: The Value of Real Estate
Value, Price, Cost • Value: What a typical person would pay for something • Price: What one person actually paid – Price is a fact. • Cost: Dollars needed to develop, produce, or build something – The value of a piece of real estate should never be confused with its price
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
27
Chapter 11: The Value of Real Estate
Market Value • The most probable price a property should bring in competitive, open market under all conditions requisite to a fair sale – The final value entered on the Uniform Residential Appraisal Report (URAR) should represent the appraiser's opinion of market value
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
28
Chapter 11: The Value of Real Estate
Arm’s Length Transaction • One that occurred under typical conditions in the marketplace with each party acting in his or her own best interest
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
29
Chapter 11: The Value of Real Estate
Making Land More Valuable • Assemblage: Combining two or more parcels of land into one larger parcel; typically done to increase usefulness of the land • Plottage: Increase in value (over cost of acquiring the parcels) by successful assemblage, usually due to a change in use • There are times when subdividing and splitting property into multiple smaller parcels can increase value
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
30
Chapter 11: The Value of Real Estate
Frontage • Dimension across access side of property • Adding it makes land more valuable than adding depth, even if total amount of land added is the same – This is especially true for commercial property
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
31
Chapter 11: The Value of Real Estate
Summary 1.
Value is the amount of goods or services offered in the marketplace in exchange for something. There are seven characteristics of real estate. Maximizing value requires all four value characteristics—demand, utility, scarcity, transferability (DUST)—plus the three physical characteristics – immobility, indestructibility, uniqueness. Buyers must want a site, feel it’s useful to satisfy needs, perceive limited supply, and be free to transfer the site later. To have value, scarcity must be coupled with utility. Without demand, supply is meaningless, but a person must also have an ability to purchase (effective demand).
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
32
Chapter 11: The Value of Real Estate
Summary 2. Factors that affect the value of a particular piece of real estate include many of the same economic, governmental, and social factors that influence the broad real estate market. Some of the most relevant broad market factors that influence the value of a particular piece of real estate include supply and demand, and uniqueness and scarcity. Property-specific factors include highest and best use, location, substitution, conformity, and contribution.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
33
Chapter 11: The Value of Real Estate
Summary 3.
Market value is the theoretical price that a piece of real estate is most likely to bring in a typical transaction, not to be confused with market price, which is the actual price paid for a piece of real estate. A typical real estate transaction is often referred to as an arm’s length transaction, meaning the transaction occurred under typical conditions in the marketplace with each party acting in his or her own best interests. Typical conditions are buyer paying cash, seller not offering financing or unusual terms, buyer and seller are not related, buyer and seller acting in their own best interests, buyer and seller not acting out of undue haste or duress, both are reasonably informed about the property, and the property has been on the market for a reasonable period of time.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
34
Chapter 11: The Value of Real Estate
Summary 4.
Inherent value of land can be increased through assemblage or subdivision. Assemblage is combining two or more parcels of land into one larger parcel, increasing the usefulness of the site. If the larger parcel is worth more than the sum total of the smaller parcels, this is called plottage. Subdividing a larger parcel of land can also result in more utility and more value. Frontage is the dimension across the access side of a parcel of land. With commercial property, frontage is usually more valuable than depth. The first number in a lot size is always the frontage. With residential land, usually, only total size is compared. In both cases, a market study must be done to determine any amount of value difference.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
35
Chapter 11: The Value of Real Estate
Quiz 1. The amount one particular person paid for property is its a. b. c. d.
cost. market value. price. value.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
36
Chapter 11: The Value of Real Estate
Quiz 2. What are the value characteristics properties must have in harmony to maximize value? a. b. c. d.
demand, utility, scarcity, transferability supply and demand uniqueness, immobility, indestructibility utility and scarcity, coupled with a lack of purchasing power
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
37
Chapter 11: The Value of Real Estate
Quiz 3. Land has inherent value because of a. b. c. d.
immobility. indestructibility. uniqueness. all of the above.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
38
Chapter 11: The Value of Real Estate
Quiz 4. Which is an example of real estate put to its highest and best use? a. flat, paved parking lot in downtown Boston b. house in a residential subdivision c. old house on a major highway surrounded by commercial buildings d. vacant lot
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
39
Chapter 11: The Value of Real Estate
Quiz 5. Which house will hold its value best? a. b. c. d.
"best" house in the "worst" neighborhood "worst" house in the "best" neighborhood $50,000 house overlooking a huge landfill $500,000 house in an area of apartment complexes
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
40
Chapter 11: The Value of Real Estate
Quiz 6. Typical conditions in the marketplace include all EXCEPT a. buyer pays cash for real estate. b. buyer and seller are not related. c. buyer and seller are reasonably informed about the property. d. property has been on the market for seven years.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
41
Chapter 11: The Value of Real Estate
Quiz 7. Someone buys two adjacent parcels of land for $20,000 each. An appraisal shows the combined larger parcel is now worth $40,000. What has occurred? a. b. c. d.
assemblage frontage plottage subdividing
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
42
Chapter 11: The Value of Real Estate
Quiz 8. Someone buys two adjacent parcels of land for $20,000 each. An appraisal shows the combined larger parcel is now worth $50,000. What has occurred? a. b. c. d.
assemblage frontage plottage subdividing
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 11: The Value of Real Estate
Quiz 9. Someone buys one large parcel of land for $200,000. An appraisal shows it could become 10 lots worth $25,000 each. This is an example of a. b. c. d.
assemblage. frontage. plottage. subdividing.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
44
Chapter 11: The Value of Real Estate
Quiz 10. A fast food chain is looking for a new location. Assuming the cost of the lot is of less concern than customer convenience entering and exiting the property, which lot would the restaurant likely choose? a. 100’ x 200’ b. 125’ x 150’ c. 150’ x 125’ d. 200’ x 100’
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
45
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