Chapter 11
Overview of
Real Estate Market Analysis
Chapter 11: Objectives
• After completing this chapter, students will
be able to:
– Identify effective real estate market analyses.
Key Terms
• Absorption Analysis
Amortization
• Base Companies
• Competitive Supply
• District
• Economic Base
Analysis
• Feasibility Study
• Gentrification
• Household
• Market Analysis
• Market Area
• Market
Disaggregation
• Market Segmentation
• Marketability Analysis
• Neighborhood
• Service Companies
• Transition
Market Areas and
Market Analysis
• Market area: a specified geographic area or
location for a specific type of property.
• An appraiser cannot use unsupported
conclusions by defining a neighborhood:
– Race
– Handicap
– Color
– Receipt of public
assistance income
– Religion
– Gender
– National origin
– Familial status
– Marital status
– Age
Market and
Marketability Analysis
• Market analysis: a study of supply,
demand and other economic conditions in
an area.
Sub-Markets
• Sub-markets: delineating a market further
using subcategories.
• Subcategories, or sub-markets of a market
area are:
– Neighborhoods
– Districts
Defining Real Estate Market
Areas
• Market Analysis:
– Define
– Delineate
Defining Market Areas by
Location
• Defining location, examples:
– Geographic boundaries
– School districts
• Comparable sales
– These should come from the same
neighborhood, when possible.
Defining Markets by
Property Type
• Examples of property type:
– Single-family homes
– Multi-unit rental properties
Analysis of Market Conditions
• Neighborhood Life Cycle
– Four Forces (P-E-G-S):
• Physical forces
• Economic forces
• Governmental forces
• Social forces
Analysis of Market Conditions
• Four phases of a neighborhood life
cycle:
– Growth
– Stability
– Decline
– Revitalization
• Gentrification: a form of revitalization with
displacement of current residents that
takes place in a more natural fashion and
is not driven by any public movement.
Business Cycles
• The four phases of the business cycle
are (remember the acronym EPCoT):
– Expansion
– Peak
– Contraction
– Trough
Economic Base Analysis
• Economic base analysis examines the present
business and employment climate in an area to
determine the likelihood of continued stability,
growth, or decline.
• Base companies are only those that bring new
business and jobs to the area.
• Service companies are the remainder of the
companies and businesses in the area act as
service companies to those base companies
and industries.
Real Estate Cycles
• Real estate cycles are general swings in
real estate activity that result in increasing
or decreasing activity and property values
during different phases of the cycle.
Supply-Side and
Demand-Side Analysis
• Buyer’s Market:
– Homes are on the market longer (days on
market) due to high supply and low demand
– Home prices and values decline
– Buyers become price sensitive and fear
paying too much for a property
– Sellers and homebuilders may provide
incentives to buyers to purchase their homes
which may include offering better loan rates,
no closing costs, bonuses, free options, etc.
Supply-Side and
Demand-Side Analysis
• Seller’s Market
– A limited supply or no homes for sale in an
area
– Homes sell quickly—some may not even
make it on the market before they are sold
– Selling prices rapidly increase
– Multiple buyers compete for a particular home
or property for sale
– Homes may sell for more than the asking
price
Market Disaggregation
• Market disaggregation: A supply
analysis that identifies properties by type,
features, and use, which are similar and
likely to compete with the subject property.
• Competitive supply: Properties available
in the marketplace that a buyer would
accept as ready substitutes for the subject
property.
Final Supply and
Demand Analysis
• Absorption Analysis: A supply and
demand study of the number of property
units that will be sold (or rented) in the
marketplace during a certain period of
time.
• Forecasting: Estimating future supply and
demand trends.
– Demographics
– Competition
Other Types of Analysis
• Productivity Analysis: A means of
determining the current position of a
property in relation to the marketplace.
• Feasibility Study: A study of the costbenefit relationship of an economic
endeavor.
Chapter 11 Quiz
1. __________ factors are NOT a force
influencing housing cycles.
a.
b.
c.
d.
Economic
Social
Structure
Supply
Chapter 11 Quiz
2. When housing prices fall due to the
relocation of a major employer, it is
an example of a(n) __________
force influencing value.
a.
b.
c.
d.
economic
governmental
physical
social
Chapter 11 Quiz
3. A neighborhood is undergoing much
rehabilitation and property improvement.
The movement is not part of any public
movement or initiative but rather from a
general trend toward people desiring to live
there. What phase of the neighborhood life
cycle is being evidenced?
a.
b.
c.
d.
expansion
gentrification
growth
transition
Chapter 11 Quiz
4. The point in a business cycle when
prices fall and production slows
until demand catches up with
supply is most likely a period of
a.
b.
c.
d.
contraction.
expansion.
peak.
trough.
Chapter 11 Quiz
5. During the course of a market analysis, an
appraiser notes that a particular area, which
has been predominately residential
properties, is rapidly undergoing a complete
change of use to commercial due to the
widening of a street and increasingly higher
traffic counts. What is the appraiser
observing?
a.
b.
c.
d.
decline
equilibrium
gentrification
transition
Chapter 11 Quiz
6. The various complimentary land
uses present in an area are being
examined as part of a larger market.
What component of a market area is
being analyzed?
a.
b.
c.
d.
district
neighborhood
quadrant
zone
Chapter 11 Quiz
7. An appraiser primarily considers
general data concerning the overall
conditions of the real estate
marketplace when performing a
a.
b.
c.
d.
economic base analysis.
household study.
market analysis.
productivity analysis.
Chapter 11 Quiz
8. Existing inventory of houses and
planned new construction are
elements of what type of analysis?
a. competitive supply analysis
b. economic base analysis
c. market segmentation
d. productivity analysis
Chapter 11 Quiz
9. Analysis indicates that 170 residential lots
are needed for sale in the next four years
based on projected demographics. There are
currently 80 residential lots available with
another 28 soon to be completed. If 50% of
the demand will come in year one and 30% of
the demand will come in year two, how many
lots are projected to be needed to satisfy
demand in year three?
a.
b.
c.
d.
27
31
34
51
Chapter 11 Quiz
10. A study is being performed that will
examine the benefit of a proposed
real estate project in relation to the
project’s cost. What type of analysis
is being performed?
a.
b.
c.
d.
absorption study
feasibility study
marketability study
productivity analysis
Chapter 12
Application of
Ethical Principles
Chapter 12: Objectives
• After completing this chapter, students will
be able to:
– Interpret USPAP concepts and acceptable
standards of appraisal practices.
Key Terms
• Extraordinary Assumption
• Hypothetical Condition Competitive
Supply
Appraisal Principles in Action
• Review of the subject property
The Appraisal Assignment
• The lender has initially provided the appraiser
with following information:
–
–
–
–
–
–
–
Property address
Seller’s name (owner of record)
Purchaser’s name
Type of value in the assignment—market value
Pending contract price—$300,000
Appraised value needed—$375,000
Requirement for the appraisal report to be completed
and submitted to the lender within 48 hours of
inspection
The Appraisal Assignment
Point Break
Do you see any problems with this scenario?
• Do the assignment conditions conflict with the
appraiser’s independence?
• Is the inclusion of the “appraisal value needed” with the
appraisal order an issue?
• Is the information provided by the lender enough to
properly identify the problem?
• Why is the appraisal value needed greater than the
pending contract price in context of economic principles
in a market value assignment?
• Is the transaction of the property likely “arm’s length”?
The Appraisal Assignment
• Other specific data as noted by appraiser:
– Year built—approximately 1930
– Total gross living area of each unit—
2,200 square feet
– Exterior—wood lap siding
• The appraiser concluded the following:
– Indicated value by the income approach—
$180,000
– Indicated value by the sales comparison
approach—$385,000
– Appraiser’s final conclusion of market value—
$385,000
The Appraisal Assignment
Point Break
Who is the intended user(s) in the assignment?
• The company with which the loan
originator was affiliated, as the company
engaged the appraiser and was not
evidently acting as a designated agent for
any other entity. No other intended users
have been identified at the time the
appraisal assignment was accepted.
The Appraisal Assignment
Point Break
What is the intended use of the appraiser’s
opinions and conclusions?
• To assist in a mortgage finance
transaction.
Review of Appraisal
• In summary, the review appraiser reported the following:
– Economic characteristics of the subject neighborhood
were faulty.
– Highest and best use of the property was misstated.
– Physical characteristics of the property were misstated.
– Sales data selected for the sales comparison approach
represented characteristics of a different market, which was not
addressed by adjustments or commentary as to why adjustments
were not warranted.
– Significant differences between the subject and the selected
comparable sales data were improperly addressed.
– Final opinion of value was not supported by a rational and logical
reconciliation regarding the quality of the indications produced by
the two approaches that were developed. This led to a final
opinion of value that was more than double of that concluded by
the review appraiser.
Findings of Regulatory
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Findings of Regulatory
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Highlighted USPAP Concepts
and Obligations
• Hypothetical Conditions and
Extraordinary Assumptions
– A hypothetical condition is something that
the appraiser knows to be false but he is
considering it as being true for the purpose of
his analysis and obtaining credible results.
– An extraordinary assumption is used in a
specific assignment when the appraiser has a
reasonable basis for his belief, but something
about which the appraiser is not certain.
Hypothetical Conditions and
Extraordinary Assumptions
• The USPAP definitions for extraordinary assumption and
hypothetical condition are:
– EXTRAORDINARY ASSUMPTION: an assumption, directly related to a
specific assignment, as of the effective date of the assignment results,
which, if found to be false, could alter the appraiser’s opinions or
conclusions.
– Comment: Extraordinary assumptions presume as fact otherwise
uncertain information about physical, legal or economic characteristics of
the subject property; or about conditions external to the property, such as
market conditions or trends; or about the integrity of data used in an
analysis.
– HYPOTHETICAL CONDITION: a condition, related to a specific
assignment, which is contrary to what is known by the appraiser to
exist on the effective date of the assignment results but is used for
the purpose of analysis.
– Comment: Hypothetical conditions assume conditions contrary to known
facts about physical, legal, or economic characteristics of the subject
property, or about conditions external to the property, such as market
conditions or trends, or about the integrity of data used in an analysis.
Workfile Requirements
•
USPAP has very specific workfile
requirements. Items that must be included
in the workfile for a written appraisal
include, but are not limited to:
– Name of the client and the identity, by name or type,
of any other intended users
– True copies of any written reports, documented on
any type of media
– All other data, information and documentation
necessary to support the appraiser’s opinions
and conclusions and to show compliance with
USPAP or references to the location(s) of such
other documentation.
Misleading Report
• Communicating a misleading or fraudulent
report is a violation of professional ethics.
Valuation Methods
• The appraiser in the case study employed
the sales comparison method and the
income method in his development.
USPAP has very basic and broad
obligations for development of the
approaches to value.
Reconciliation
• Appraisal development standards of
USPAP require the appraiser to
address reconciliation as a two-part
process. An appraiser must:
– Reconcile the quality and quantity of data
available and analyzed within the approaches.
– Reconcile the applicability and relevance of
the approaches, methods, and techniques
used to arrive at the value conclusion(s).
Definition and Source of
Definition of Market Value
• The appraiser must identify the type of
value and the specific definition of value
during problem identification. In the case
scenario, the appraiser did state that the
purpose of the appraisal (type of value in
the assignment) was market value.
Analyzing Agreements of Sale
• Appraisal development standards require,
in market value assignment, for the
appraiser to analyze all agreements of
sale, options, and listings of the subject
property current as of the effective date of
the appraisal, if available in the normal
course of business.
Unacceptable Assignment
Conditions
• USPAP prohibits appraisers from
accepting assignments with unacceptable
assignment conditions.
• USPAP does not specifically identify a
“value needed” as an unacceptable
assignment condition.
Highest and Best Use
Analysis
• Depending on the reporting option chosen
for the appraisal report (self-contained,
summary, or restricted use) the highest
and best use of the property must be:
– described
– summarized, or
– stated.
Appraising a Physical
Segment
• Appraising a physical segment of a
property that has differing ownership of the
segments is not a violation of professional
ethics and is not at all uncommon for
some properties in some locations.
However, specialized methodology and
technique must be applied to determine
the affect of the multiple ownerships.
Prior Sales History
• USPAP requires the analysis and
disclosure of all sales of the subject
property that occurred within the three
years prior to the effective date of the
appraisal.
Reporting the Scope of Work
• For reporting the scope of work,
professional standards require that the
scope of work actually performed in the
assignment be (depending on the
reporting option chosen) described
summarized, or stated.
Chapter 12 Quiz
1.
Jack appraised a residential dwelling located
across the street from a factory that he
determined is negatively affecting the value of
the subject property. Jack applied a location
adjustment in his sales comparison approach;
however, the client asked that the factory not
be discussed in the appraisal report. Since
Jack addressed the condition with an
adjustment, has he complied with USPAP?
a.
b.
c.
d.
No, because USPAP requires explanation for each
adjustment.
No, omitting the discussion could produce a
misleading report.
Yes, since an adjustment was included.
Yes, since the client requested the omission.
Chapter 12 Quiz
2.
If a property is known by the appraiser, on the
effective date of the appraisal, to have an
inoperative mechanical system component, but
the appraiser is considering the component as
if it were operating properly on that date for the
purpose of his analysis, what is the appraiser
basing his opinions and conclusions on?
a.
b.
c.
d.
anticipated condition
extraordinary assumption
hypothetical condition
hypothetical exception
Chapter 12 Quiz
3.
Josh received an appraisal request from a lenderclient who told him to immediately call if the value
on the property is less than the amount stipulated
by the lender, as he doesn’t intend to pay for an
appraisal that won’t benefit his position. Will
acceptance of this assignment be in compliance
with USPAP?
a.
b.
c.
d.
Yes, it is permissible for a client to call the client with the
value prior to adequately supporting the opinion.
Yes, this would be a hypothetical condition, which is
acceptable.
No, an appraiser may not accept an assignment with
unacceptable assignment conditions.
No, it is not permissible unless Josh discloses this fact in
the report.
Chapter 12 Quiz
4. What information is NOT required
to be in an appraisal workfile?
a. copy of the bill sent to the client
b. documentation to support the
appraiser’s opinions and conclusions
c. references to the location of other
documentation not in the workfile
d. true copies of any written reports
Chapter 12 Quiz
5. The scope of work disclosed in an
appraisal report must include the
a. appraiser’s final conclusions and
value opinion.
b. initially planned scope of work at the
onset of the assignment.
c. intended use in the assignment.
d. scope of work that was actually
performed.
Chapter 12 Quiz
6. Appraisers must analyze agreements of
sale, options, and listings of the subject
property current as of the effective date
of an appraisal, in a market value
assignment, if it is
a.
b.
c.
d.
available in the normal course of business.
a matter of public record.
not deemed confidential information.
required by the client.
Chapter 12 Quiz
7.
While appraising a property, Lydia could not check
the furnace to see if it is in good working order due
to the utilities being off at the time of the
inspection. Since the home is relatively new and
the components appear to be in good condition,
Lydia has a reasonable basis to believe that the
furnace is in satisfactory operating condition, but
she is uncertain. Therefore, Lydia bases her
conclusion on a(n)
a.
b.
c.
d.
expected condition.
extraordinary assumption.
hypothetical assumption.
hypothetical condition.
Chapter 12 Quiz
8. For reconciliation, in addition to
reconciling the quality and quantity of data
available within the approaches used,
USPAP also requires an appraiser
to ________ the approaches, methods, and
techniques used to arrive at the value
conclusion.
a.
b.
c.
d.
mathematically average the results of
not rely solely on
reconcile the applicability and relevance of
report the conclusions individually of
Chapter 12 Quiz
9. In an appraisal report, sufficient
information regarding the scope of work
includes disclosure of research and
analyses performed and might also
include disclosure of
a. the client’s objectives for the assignment’s
results.
b. confidential information used in
development.
c. fees and things of value paid to the
appraiser.
d. research and analyses not performed.
Chapter 12 Quiz
10. An appraiser determines the
appropriate definition of market
value to be used in the assignment
during
a.
b.
c.
d.
market analysis.
problem identification.
reconciliation.
valuation analysis.