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Chapter 8

Chapter 8. Influences on Real Estate Values. Chapter 8: Objectives. After completing this chapter, students will be able to: Identify the differences between the four broad forces and how these forces and perceptions affect the value of real estate. Asbestos Clean Air Act Clean Water Act

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Chapter 8

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  1. Chapter 8 Influences on Real Estate Values

  2. Chapter 8: Objectives • After completing this chapter, students will be able to: • Identify the differences between the four broad forces and how these forces and perceptions affect the value of real estate

  3. Asbestos Clean Air Act Clean Water Act Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) Electromagnetic Fields (EMFs) Environmental Hazard Environmental Protection Agency (EPA) Key Terms

  4. External Environmental Hazards External Obsolescence Internal Environmental Hazards Lead-Based Paint Hazard Reduction Act (Title X) Linkages Methamphetamine Mold National Environmental Policy Act (NEPA) Nuisance Radon Key Terms cont.

  5. Resource Conservation and Recovery Act (RCRA) Safe Drinking Water Act (SDWA) Sick Building Syndrome Stigmatized Property Underground Storage Tanks (USTs) Urea-Formaldehyde Urea-Formaldehyde Foam Insulation (UFFI) Wetlands Key Terms cont.

  6. Four Forces InfluencingReal Estate Values • PEGS: • Physical forces • Economic forces • Governmental forces • Social forces

  7. Physical Forces • May also be referred to as environmental and geographic forces • May include conditions: • On a property (specific) • External to the property (broad)

  8. (Physical)Environmental Forces • Many are controlled at the federal level through federal laws and regulations • Other environmental issues are controlled at the state or local level • Certain inspections and/or disclosures may be required

  9. Environmental Protectionat the Federal Level • National Environmental Policy Act (NEPA) • Environmental Protection Agency (EPA) • Clean Air Act (CAA) • Clean Water Act (CWA) • Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) • Superfund Amendments and Reauthorization Act (SARA)Resource Conservation and Recovery Act (RCRA) • Safe Drinking Water Act (SDWA)

  10. EnvironmentalProtection—Wetlands • Ecosystems where the land is permeated with water, and are commonly referred to as swamps, bogs, and marshes • Protected under the federal Clean Water Act • Enforced by the U.S. Army Corps of Engineers • Some activities are prohibited and require a permit if they could permanently change or destroy the wetland habitat

  11. Environmental Protection—Property Hazards • Internal and external hazards • Nuisance: Anything emitting from the outside of the property that interferes with the owner’s right of quiet enjoyment • If a nuisance is permanent, it is an external obsolescence • Environmental hazard: A situation that exists with potential for harm to persons or property from conditions that exist outside or within a property

  12. CommonEnvironmental Hazards • Asbestos • Electromagnetic fields (EMFs) • Lead • Methamphetamine • Poor air quality (sick building syndrome) • Underground storage tanks (USTs) • Urea-formaldehyde • Mold • Radon

  13. (Physical) Geographic Forces • Characteristics related to the environment surrounding the property that either can contribute or detract from value • Topography • Soil conditions • Water • Location and view (linkages) • Climate • Natural features and barriers

  14. Work Problem What are some uses or locations where various types of natural features and barriers can either be a benefit or a hindrance to property value? • Possible examples include (but are not limited to): • • Ski slopes • • Mountain resorts • • Waterfront businesses and housing sites • • Nature preservations and resorts

  15. World events Energy costs War Terrorist activities Cost and availability of credit Employment levels Availability of employment Earnings levels Taxes Inflation Economic Forces

  16. Government Forces • Government services • Revenue generating law (right of taxation) • Right to regulate laws (police power) • Governmental fiscal and monetary policies • Secondary mortgage markets and government mortgage programs

  17. Social Forces • Demographic changes • Migrations of the population • Social trends • Buyers tastes and standards

  18. Stigmatized Properties • Properties held to be undesirable by most people because of a past event or condition • Crime, murder, suicide, drug activity, past environmental hazards (methamphetamine, fire, chemical spill) • Determining value influence can be time intensive and require significant knowledge of market reaction • Being objective is ultimately important

  19. Chapter 8 Quiz 1. Radon gas • can indicate the presence of a toxic uranium dump close to the property. • can present a problem indoors if allowed to build up to dangerous levels. • is a man-made waste byproduct. • makes a house worthless because it must be condemned by the EPA.

  20. Chapter 8 Quiz 2. What statement about electromagnetic fields is FALSE? • They are created by moving electrical currents. • They can affect other charged objects. • They can be produced by high-tension power lines. • They have been proven to cause cancer.

  21. Chapter 8 Quiz 3. It is well known that a murder took place in a house 40 years ago. This could be an example of • an internal obsolescence. • neighborhood decline. • a stigmatism. • social force.

  22. Chapter 8 Quiz 4. A trend of moving to a new suburban area is an example of • economic forces • locational forces • physical forces • social forces

  23. Chapter 8 Quiz 5. The state’s housing finance authority has just issued a low-interest, first-time homebuyer mortgage program. Sales are spurred as a result of this • governmental force. • physical force. • social force. • supply and demand.

  24. Chapter 8 Quiz 6. Which is an example of the governmental force of revenue generating laws? • cost of credit • earnings levels • permissibility of zoning • specific tax policies

  25. Chapter 8 Quiz 7. Wetlands are protected under what federal Act? • Clean Water Act • Federal Wetlands Protection and Wildlife Act • SARA • U.S. Army Corps Act

  26. Chapter 8 Quiz 8. Sick building syndrome is a result of • a former traumatic act. • inadequate soil composition. • linkages to toxic waste dumps. • poor air quality.

  27. Chapter 8 Quiz 9. The Comprehensive Environmental Response, Compensation, and Liability Act primarily addresses • abandoned waste sites. • air quality in public buildings. • properties ridden with mold. • safe drinking water.

  28. Chapter 8 Quiz 10. Which is an example of linkages? • estimated driving time from populated areas to major interstate highways • known relationship of environmental concerns and terminal illness • proximity of hazardous substances to populated areas • relationship of household members when analyzing social forces

  29. Chapter 9 Economic Principles and Applications

  30. Chapter 9: Objectives • After completing this chapter, students will be able to: • Apply economic principles when forming value opinions

  31. Amenity Anticipation Balance Buyer’s Market Change Competition Conformity Contribution Excess Land Four Agents of Production Highest and Best Use Interim Use Law of Diminishing Returns Law of Increasing Returns Market Equilibrium Key Terms

  32. Market-Use Property Opportunity Cost Principle of Consistent Use Progression Regression Seller’s Market Single-Use Property Special-Use Property Substitution Supply and Demand Surplus Land Surplus Productivity Key Terms cont.

  33. Four Agents of Production • C E L L • Capital • Entrepreneurship • Land • Labor

  34. Anticipation Change Supply and demand Substitution Competition Balance Contribution Conformity Externalities FundamentalEconomic Principles

  35. Economic Principles Exercises 1. Value constantly fluctuates due to the principle of _______. 2. When demand exceeds supply, prices will _____. 3. Property uses that compliment each other are evidence of the theory of __________. 4. Value is created through the expectation of future benefits according to the theory of ____________. change rise conformity anticipation

  36. Economic Principles Exercises True or False 5. To an investor, the greater the expectation of benefits from a property, the less valuable it is to the investor. 6. Surplus productivity is realized after various agents of productivity have been satisfied. FALSE TRUE

  37. Economic Principles Exercises 7. Contribution, whether more or less than cost, is measured by the law of __________and ____________ returns. 8. Name the four agents of production (hint: C-E-L-L): a. Capital b. Entrepreneurship c. Land d. Labor increasing decreasing

  38. Highest and Best Use • There is only one highest and best use for land at a given point in time. • Land not devoted to highest and best use results in a loss of income. • Highest and best use gives the owner maximum economic advantage.

  39. Highest and Best Use cont. • Highest and best use allocates land resources efficiently; maximizing economic return. • Highest and best use gives economic benefits to surrounding land (conformity). • Highest and best use gives economic benefits to the community (conserves a scarce resource—land).

  40. Four Tests ofHighest and Best Use • Is the ideal use legally permitted? • Is it physically possible for the ideal structure to be built on the property? • Is the ideal use economically (financially) feasible on the property? • Is the ideal use the maximally productive use for the property?

  41. Value of a Vacant Site orAs If the Land Were Vacant

  42. Value of theLand as Improved

  43. Application Illustration 1 A corner lot with commercial zoning currently is improved with a residential dwelling. Determine the appropriate highest and best use recommendation if demand for the commercial site is recognized immediately. Improved value—$185,000 As vacant—$205,000 Demolition cost—$12,000 Recommendation: Raise the dwelling to make the site vacant. $205,000 – $12,000 (demolition cost) = $193,000 $193,000 – $185,000 = $8,000 higher value

  44. Application Illustration 2 A single-family residence is currently valued at $58,000. The majority of properties within close proximity to the subject are duplexes with typical values in the range of $79,000. If the cost of converting the subject’s single-family residence into a duplex has been estimated at $20,000, and the interior demolition is estimated to be $1,000, what is the highest and best use conclusion? Conclusion: The highest and best use of the property remains as a single-family residence, since there is no entrepreneurial reward for the owner upon completion of the conversion. $58,000 + $20,000 + $1,000 = $79,000

  45. Application Illustration 3 A real property appraiser is performing a highest and best use analysis for a vacant parcel. The appraiser has determined that the highest and best use of the parcel is for a two to four unit apartment building with (per maximum lot coverage) exterior dimensions of 4,000. Which improvement should the appraiser suggest? • Two, four-bedroom, three-bath units which could each rent for $1,250 per month.Indicated value by the income approach is $42.50 per square foot and cost of the 4,000 square foot building will be $67.00 per square foot. • Three, three-bedroom, two-bath units which could each rent for $950 per month.Indicated value by the income approach is $50.59 per square foot and cost of the 4,000 square foot building will be $49.00 per square foot. • Four, two-bedroom, two-bath units which could each rent for $750 per month.Indicated value by the income approach is $44.25 per square foot and cost of the 4,000 square foot building will be $45 per square foot.

  46. Application Illustration 3continued Suggested unit type and mix: Three three-bedroom, two-bath units Two, four-bedroom, three-bath units 4,000 × $42.50 = $170,000 4,000 × $67.00 = $268,000 Three, three-bedroom, two-bath units 4,000 × $50.59 = $202,360 4,000 × $49.00 = $196,000 Four, two-bedroom, two-bath units 4,000 × $44.25 = $177,000 4,000 × $45.00 = $180,000

  47. Application Illustration 4 A 20,000 square foot residential lot zoned for single-family or two-family use is the subject of an appraisal assignment. The lot is currently improved with a 1,800 square foot single-family residence. What is the indicated highest and best use? • Vacant land value—$0.75 per square foot • Razing cost—$8,000 • Present value of single-family dwelling from paired data—$80 per square foot. • Potential monthly rent if converted to two-family—$800 each • Indicated value by the income approach per square foot—$96 • Conversion cost to two-family—$28,000

  48. Application Illustration 4 continued Indicated highest and best use: Converted to two-units Vacant: 20,000 square feet × $0.75 per square foot = $15,000 Razing cost: $8,000 $15,000 – $8,000 = $7,000 “As is”: 1,800 square feet × $80 = $144,000 Converted: 1,800 square feet × $96 = $172,800 – $28,000 conversion = $144,800

  49. Application Illustration 5 A single-family dwelling contains 1,860 square feet and is situated on a commercially zoned lot that is 155’ x 220’. If, through paired-data, the improved property has a per square foot value of $58 and the commercial land value in this area is $150,000 per acre, what is the highest and best use if the razing cost is estimated to be $20,000? Highest and best use conclusion: as-improved As-improved: 1,860 × $58 = $107,880 Vacant: 155 × 220 = 34,100 ÷ 43,560 = 0.7828 acre 0.7828 × $150,000 = $117,424 – $20,000 = $97,424

  50. Interim Use • A temporary use of property while it awaits conversion to its highest and best use • E.g., waiting for a zoning change or accumulation of investment dollars • Appraiser must observe the principle of consistent use: • Land cannot be valued for one use while the improvements are valued for another use

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