chapter 6 market conditions Flashcards
the 7 adjustments made in the sales comparison approach
Property rights conveyed Financing terms/Cash equivalency Conditions of sale Expenditures made immediately after purchase Market conditions Location Physical characteristics
An element of comparison in the Sales Comparison Approach; comparable properties can be adjusted for differences in the motivations of either the buyer or a seller in a transaction
conditions of a sale
A transaction between unrelated parties who are each acting in his or her own best interest
arms length transaction
An element of comparison in the Sales Comparison Approach; comparable properties can be adjusted for any additional investment (e.g., curing deferred maintenance) that the buyer needed to make immediately after purchase for the properties to have similar utility to the subject property being valued.
expenditures made after a purchase
An adjustment for expenditures made immediately after purchase might also be required in situations where the anticipated expenditures were for:
Curing deferred maintenance
Demolition and removal of any or all of the improvements
Costs for filling and grading of the site
Costs for attempting to change the zoning
Costs for remediation of actual or perceived environmental contamination
Costs for running utilities to a site
Costs for gaining access to a site, such as curb cuts
This has commonly been referred to by appraisers as a “time” adjustment.
market conditions
An element of comparison in the Sales Comparison Approach; comparable properties can be adjusted for differences in the points in the real estate cycle at which the transactions occur. Sometimes called a time adjustment because the differences in dates of sale are often compared, although that usage can be misleading because property values do not change merely as the result of the passage of time
Market Conditions
Your research of a comparable sale reveals that the purchase price was $200,000, but the purchaser realized the property needed extensive repairs to the mechanical systems. The estimated cost to cure the problems was $15,000 but the actual costs turned out to be $20,000. What should you do?
Adjust the property sale price by $20,000
Adjust the property sale price by $15,000
Make no adjustment
Adjust the property sale price by $5,000, the amount of the excess cost
Adjust the property sale price by $15,000
the estimated cost to the purchaser at the time of the sale
The definition of arms-length is a transaction between \_\_\_\_\_\_\_\_\_\_\_ parties acting in their own \_\_\_\_\_\_\_ interests. Dispassionate, best Affiliated, particular Unrelated, best Disconnected, biased
unrelated, best
Market condition adjustments are also commonly known as: Time adjustments Clock adjustments Conditions of sale adjustments Value-of-duration adjustments
time adjustments
Changes in a real estate market may be:
Cyclical - rising and falling with the fates of the local industries (aerospace, defense, etc.) that go through big hiring phases followed by layoffs
One-time only - related to an event, either good or bad, which is unlikely to reoccur
Seasonal - in a resort town, real estate purchases may occur within a narrow three month window of opportunity
Exponential - continuously increasing at a rapid rate, such as was experienced between 2002 and 2006 in the fast-growing parts of California, Nevada or Florida
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Market areas typically go through four distinct phases:
Growth - Lots of new construction and development activity, speedy sales, increasing prices, a “seller’s market”
Stability - Slowing down of new construction, prices remain steady and high, excitement is cooling
Decline - Prices start to fall, new construction halts, more existing homes flood the market creating a “buyer’s market”
Revitalization - Prices have bottomed, sales stagnate, and hopefully the area receives new interest and renewal
typically based on trends in population growth and income levels
market cycle long term
based on the availability of mortgages and the prevailing interest rate
market cycle short term
Long-term market cycles are:
Based on the prevailing interest rate
Always rapidly fluctuating and notoriously unstable
Caused by national or international conditions
Of little interest to an appraiser
Caused by national or international conditions
Changes in a market cycle may be cyclical, one-time-only, \_\_\_\_\_\_\_\_\_\_\_ and \_\_\_\_\_\_\_\_\_\_\_\_. Recurring, exponential Repeating, inverse Seasonal, exponential Seasonal, geometric
seasonal, exponential
The life cycle of a market area typically includes the stages of growth, \_\_\_\_\_\_\_\_\_\_\_\_\_, decline and \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. stability, destruction plateau, stagnation urbanization, rehabilitation stability, revitalization
stability, revitalization
Here is a list of some factors that can help you analyze changes in market conditions:
Changes in the area's demographics Changes in typical exposure time on the market Foreclosure rates in the area Increases or decreases in residential rents Instances of seller financing Nearby development New construction available for sale Quantity of offers received by sellers Relationships between asking prices and closing prices Terms of available financing Trends in listing prices Volume of properties available for sale Zoning changes
Market condition adjustments (and location adjustments) are generally calculated on a
percentage basis
Your subject is located in an area where property values have been rising consistently at 1% a month for the past fourteen months. You have located a comparable that is practically identical to your subject. It sold four months ago for $200,000. How much should you adjust the price?
$208,000.
The first month, the comparable increased $2,000 in value ($200,000 x .01 = $2,000), making it worth $202,000.
The second month, it increased $202,000 x .01 = $2,020, for a value of $204,020.
The third month, it increased $204,020 x .01 = $2,040.20, for a value of $206,060.20.
The fourth month, it increased $206,060.20 x .01 = $2,060.60, for a value of $208,120.80
This could be calculated by applying the compound interest formula.
Future Value = Present Value x (1 + i)n
Future Value would be $200,000 x (1 + .01)4 = $208,120.80
Principal x Rate x Time = Future Value
Simple Interest: $200,000 x .01/month x 4 months = $8,000.
That would mean that the comparable property would have sold today for $208,000.
Property values rise in your region during ski season (November through April) by 5% and remain flat the rest of the year. Your comparable sold in September for $105,000. You are doing an appraisal in December. How much would you adjust?
$105,000 x .05 = $5,250
You work in a beach town where property values increase by 10% during the summer months and then settle back down to pre-summer values. Your comparable sold in August for $150,000. You are doing an appraisal in November. How much should you adjust?
RIGHT WAY:
$150,000 – ($150,000 / 1.10) = $13,636 adjustment
WRONG WAY:
$150,000 x 0.10 = $15,000 adjustment
This gives you the wrong answer because you are working from the wrong base. You need to find the base price before the 10% increase. You can check this by starting with the base and adding 10%. 135,000 x 1.10 = $148,500 – NOT $150,000)
Market conditions adjustments to comparables should always be calculated from the time of the
contract of the sale to the effective date of the appraisal
If market conditions have changed and an adjustment is necessary, then the adjustment should reflect the change in market conditions from
January to August
