Chapter 12 Flashcards
The 4 elements of value (for a good) are:
*Utility (supply)
*Scarcity (supply)
*Desire (demand)
*Effective purchasing power (demand)
*All four of these elements must be present in order for an item to have value.
Desireis defined as
A purchaser’s wish for an item to satisfy human needs (e.g. shelter, clothing, food, companionship) or individual wants beyond essential life-support needs.”
Utilityis defined as
In economics, the ability of a product to satisfy a human want, need, or desire.”
*It has to be good for something - it has to have a purpose. You have to be able to use it.
functional utility is:
The ability of a property or building to be useful and to perform the function for which it is intended according to current market tastes and standards; the efficiency of a building’s use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms.”
Appraisers recognize functional utility as an element of value. If one property has more functional utility than another, it has more value. We also measure loss of value by the amount of diminished utility or inutility that we observe.
However, functional utility assumes that there is some amount of utility to start with. No utility = no value.
Scarcity is defined as:
The present or anticipated undersupply of an item relative to the demand for it. Conditions of scarcity contribute to value.”
(Scarcity triggers demand)
Effective purchasing power (also valued Effective Demand) is defined as:
The ability of an individual or group to participate in a market, i.e., to acquire goods and services with cash or its equivalent.
*Desire must be backed up by the ability to perform. Otherwise, it is a mere whimsy,like my dream of purchasing a Porsche.
Value:
Value is created and sustained by external market forces. Value is not created by appraisers. Value is not created by a buyer or a seller.
The four main categories of external market forces (that affect real property):
Governmental
Economic
Social
Environmental
Our task, as appraisers, is to research and analyze the property and the market, and develop and report an opinion of this value.
Unfortunately, these forces are intangible and hard to quantify. They overlap in some markets and it is hard to separate and accurately measure the impact of each one.
governmental forces that might affect real property value.
Planning
Zoning
Building Codes
Environmental restrictions
Taxes
Utilities
Transportation
Education
Cultural
Parks and recreation
Police
Fire protection
Public safety
City planning adds value
It has generally been proven that planned communities sustain higher real estate values.
Zoning: A property’s zoning is one of the strongest determinants of its value.
The first citywide zoning regulations were created in New York City in 1916.
Local zoning laws and regulations appeared in most areas in the country in the 1960s and 1970s.
Local zoning laws and regulations appeared in most areas in the country in the 1960s and 1970s.
Zoning regulations will also dictate minimum lot sizes. An area in which zoning permits nothing less than five-acre sites will probably result in different price levels for housing as opposed to an area which permits four houses to an acre.
you also need to investigate the procedures for and possibilities of getting a zoning change or exception. Perhaps a property is zoned single-unit residential, but many other properties in the neighborhood have been able to get a variance to construct multi-unit properties.
Building Codes
Like zoning laws and regulations, building codes can have an impact on values in an area. A strong building code can result in properties that meet health and safety standards. Such properties can be more valuable and also sustain their value over longer periods of time.
Building codes and subdivision regulations typically dictate requirements for land development. They may stipulate minimum requirements for road development, water and sewer easements, well and septic systems, footings and foundation specifications, etc
National Oceanic & Atmospheric Administration (NOAA):
This agency is charged with monitoring coastal habitats, such as estuaries and reefs. It also monitors development, water and sediment contamination, water diversion for industrial, agricultural, sedimentation, and dredging and filling activities.
They also review coastal development and water projects that may alter or destroy habitat and recommend measures to offset development and use impacts.
U.S. Army Corps of Engineers
Their mission is planning, designing, building and operating water resources and other civil works projects including:
Navigation Flood control Environmental protection Disaster response Ecosystem restoration Wetlands and waterways regulation & permitting
They keep the canals running and dredge the rivers. They occasionally make the news, especially after a major hurricane or flood or other natural disaster.
They also must be consulted when damming up a stream on private lands or dredging any wetland areas.
Environmental Protection Agency (EPA):
Some of their major duties include:
Developing and enforcing regulations Offering financial assistance Performing environmental research Sponsoring voluntary programs and partnerships Furthering environmental education Publishing information
Taxes
Taxes effect value… they vary from city, state, county, town, etc.
If you own and operate an income-producing property, property taxes generally make up a significant portion of your operating expenses. The amount of the taxes and the tax rates vary from community to community. Some areas just have a reputation as being high in taxes.
Property taxes are not the only kind of taxes that affect property values. There are other kinds of taxes, as well. There are state sales and income taxes and, in most areas, there are county, town and/or city taxes. Some states have no state income tax. Of course the states still need to generate revenue; they just do it in different ways.
In recent years, New Hampshire gained residents and increased values in some cases due to the fact that they had no state income tax and no state sales tax. The cost of living was lower because of that factor and induced some people to move to New Hampshire from adjoining states such as Massachusetts, where the tax rates were higher.
Utilities
In some rural areas, the local government offers no public utilities. In more densely populated areas, it is common to find public water and sewer.
The availability of public utilities to a site constitutes another value-influencing factor. If you have a piece of land with no utilities provided, in order to place a dwelling on that property, a well has to be drilled and a septic system installed. This will certainly cost thousands of dollars - sometimes tens of thousands of dollars. In some areas, there is uncertainty as to whether or not adequate systems can be built. If a piece of property can easily be connected to public water and sewer at the street, it should be worth more.
Beyond the availability of utilities, another factor is their cost of use. Some utility companies have rates that are much higher compared with companies in other areas. Even if costs are equal, many times there are differences in the quality of the water supply.
By the way, don’t just assume that because utilities are available nearby that you would have the right to automatically connect to them. In some communities, there are shortages of water because of rapid amounts of construction of new structures, and the availability of new hookups is limited. In some cases moratoriums have been put in place for a year or two to halt new construction until the supplies can be increased by modernizing or constructing new facilities.
Transportation
Let’s start with the basics. What kind of road access is there to a property? Is it a town road, a county highway, or a state highway? Is it a dirt road or a paved road? How far is it to the nearest interstate highway?
Is there any public transportation available nearby? Is it bus, rail, or subway? Is the system adequate and are the costs reasonable? Do most people take public transportation to work or do they drive?
These questions can affect the desirability and enhance the value of residential properties but again take on a more vital role in commercial or industrial properties.
Retail properties need to be near or on well-traveled highways. Ideally they would be near an exit of an interstate or arterial highway.
Industrial properties can’t survive without adequate transportation links. These operations need to bring in raw materials and ship out the finished product. Depending upon the nature of the product, this could entail transportation by highway, rail, train, or air. Of course they also need a good road network to get their employees back and forth to work.
Education
We consider all levels of education being offered by government. Perhaps there are state universities nearby, or community colleges run by the county. There may be local or regional occupational training centers, as well.
What about the local public school systems? Is there an elementary school nearby? How far is it to the high school? What is the quality of the local system? Is the school noted for academic excellence? What about the number of students and the student-to-teacher ratio? Is there overcrowding or planned expansion?
The availability and quality of education in an area usually are significant factors in valuation.
Cultural
Are there cultural facilities available in the community? This may be an additional attraction that would elevate one area over another in the eyes of a typical purchaser.
This could include many things such as:
Museums Art galleries Theaters Libraries
That is why we see an increasing trend in some areas towards people moving out of the suburbs and moving back into the metropolitan areas where there is a concentration of cultural facilities. This is more common among Baby Boomers or empty nesters who have more money and/or time to spend on entertainment.
Parks and Recreation
The availability of parks and recreational facilities can be dependent upon any or all levels of government. Perhaps there is a national park or national recreation area nearby. Maybe there is a state park with camping, swimming and hiking.
There might also be a county, town, village, or city park and recreation area. These may include play areas for children and facilities for specific activities such as golf, soccer, fishing, or cross-country skiing.
Even though these areas are not on a property or within the property’s view, they can provide a beneficial aspect to a property. Being five minutes away from a state park or a municipal golf course can be an added inducement to homebuyers. It may also provide an additional reason for a business to settle nearby. Obviously, there would be a demand for a ski shop near a ski slope or a boat dealership or a bait and tackle shop near a large lake.
Police
Police protection is a major concern for local governments as well as local homeowners and businesses. Are there full-time police officers, or is it a rural area with part-time constables?
How effective are they? How is the crime rate? What is the reputation of the local police department?
Any area with an above average crime rate or perceived problem can lose favor in the minds of the public. Some people may leave and values may diminish if the situation is not corrected.
If buyers have a choice among areas, all other things being equal, the safer area will usually win out.
Fire Protection
Fire protection is a similar issue. Is there a full-time staff of hired officers with up-to-date equipment and good communication? Or is it a strictly volunteer department that is not particularly well-trained or equipped?
Where is the closest fire station? How long would it take a fire truck to get to your property in the event of an emergency? Of course there can be too much of a good thing. If your property is two doors away from the fire station and you hear all the sirens and horns in the middle of the night; that may decrease the value of your property.
Where is the closest fire hydrant? Most insurance companies will give you a break on your fire insurance if you are within a certain distance from a fire hydrant.
By the way, you might investigate the cost of typical fire insurance in an area. The companies do vary the rates according to perceived risks.
Public Safety
Public safety encompasses things like electrical codes and fire codes. We want to make sure that buildings are up-to-date and protected from hazards. Are the codes strictly and fairly enforced?
In recent years, public safety has come to encompass other things, such as national security. Since 9/11, many municipalities have undergone extensive training and are well funded and equipped to deal with such eventualities as terrorist attacks. Medical facilities have also prepared disaster plans. Local governments have studied possible evacuation routes, etc.
We also have had experiences with natural disasters in recent years including hurricanes, tornadoes, earthquakes, floods, and droughts in many areas of the country.
Weather and climate are external forces beyond our control, but they may translate into a real impact on real estate values. People love to live in San Diego because of the moderate climate. The same goes for Hawaii. It’s not a coincidence that those two areas have some of the highest residential housing prices in the country.
Economic Forces
Economic forces are the second major category of external forces that influence real estate values. There is also a long list of possible items in this category.
Economic forces tend to be the most powerful and exert the most influence on value of any of the four categories. Once again, the list is not all-inclusive but might include:
National economy Consumer Price Index Interest rates Availability of financing Wage rates Types of employment Unemployment rates Cost of construction Rental rates Rental vacancies Expense levels
National Economy
The state of the national economy can have an impact on local realpropertyvalues. Are we in a recession or a boom time? We talked earlier about realpropertycycles and how the economy tends to move up and down in relatively similar historical patterns.
Is the economy expanding? Is the stock market going up? Are people generally optimistic? All these factors tend to inspire confidence and spur spending in the economy.
What’s happening with the national debt? What is the state of the U.S. dollar versus the rest of the world currency? What’s the cost of a barrel of oil? All these kinds of factors are remote from the local situation and yet ultimately they can trickle down and affect the value of local real estate.
If the price of gasoline gets too high, there may be a slow down on new subdivisions that are being planned a long commute away from employment opportunities. It also may hurt the second home market, where people may no longer want that two or three hour drive to their vacation getaway.
Consumer Price Index
The Fed, at its quarterly meetings, always takes a hard look at inflation figures. Sometimes it will raise interest rates slightly as part ofits continuing battle to keep inflation in check. It’s a delicate balancing act, because they typically want to keep interest rates low so that mortgage borrowing is affordable.
The Fed, at its quarterly meetings, always takes a hard look at inflation figures. Sometimes it will raise interest rates slightly as part of its continuing battle to keep inflation in check. It’s a delicate balancing act, because they typically want to keep interest rates low so that mortgage borrowing is affordable.
Interest Rates
The topic of interest rates is rather complex because of the interlocking effects on so many aspects of our economy. Let’s start with the obvious. We mentioned that most homeowners need to take out a mortgage in order to buy a home. If interest rates are low, it encourages mortgage borrowing. However, if the interest rates go up, it forces some people out of the market and slows the effective demand for home purchases.
Availability of Financing
The loan to value (LTV) ratio is an important factor. And the availability of mortgages.
In times of tight supply, you may have to put 20 or 30% down in order to buy a house. This removes many potential purchasers from the market and decreases the effective demand for properties in an area.
Wage Rates
Wage rates in an area are another item of interest. It can’t be much more basic than that. The more you make, the more you can afford.
You’ll find a direct correlation between average family earnings in an area and housing prices. A lot of it is related to the multiplier effect I mentioned earlier. If I can afford a mortgage payment up to 30% of my annual income, this means the more I make, the more I can borrow, and therefore the more I can afford to pay for a house.
Types of Employment
Beyond the nitty-gritty of actual dollars of wages, we need to consider the types of employment that are available in an area.
Is the primary employment heavy industry or manufacturing? Is it high-tech professional employment? Agricultural? Government work? Educational facilities?
Basic industries consist of the major employers in an area. They are net importers in that they produce goods that are shipped outside the region and bring more money back into the region.
Basic industries consist of the major employers in an area. They are net importers in that they produce goods that are shipped outside the region and bring more money back into the region.
Service industries are those which produce services rather than goods. People in the service industry would include real estate brokers, appraisers, insurance agents, restaurant owners and auto mechanics.
Much of the service industry income comes from money earned by people in the basic industries. There is a multiplier effect in that each job in a basic industry supports two to three jobs in the service industries.
