Fundamentals 30 Script - Train Agents Real Estate Licensing

(Begin with Section 30 – 00 Beginning Slide)
Chapter 30
Appraisal - The first thing we have to look at is the definition of appraisal. The basic
definition of the word appraisal is an estimate of value or an opinion of value of real
property. The important aspect of this definition is that it is not an exact statement.
Different appraisers will come in with different appraisal figures. The accuracy depends
upon the skill of a licensed appraiser.
Example: A husband and wife are going through a divorce. The husband's appraiser
says the home is worth $190,000 and the wife's appraiser says the home is worth
$180,000. Here we have two different opinions.
Basis of Appraisal - An appraiser will utilize actual "sales" of similar property within the
property's area. An appraiser will NOT use the listing prices of similar homes that are up
for sale.
1. An Appraisal - A written report issued by a licensed appraiser. This written report is
required to show the following:
a. Description of the Property - A description that clarifies the property being
appraised. Note: It does not require a full fledged legal description.
b. Value - It must show information about the current values that are present on the
property. Example: The property, buildings, rental contracts, etc.
c. Explanation - A statement as to how the analysis of the information determined the
opinion of value for the property.
Example: "My value is based on the fact that similar property is selling for this, demand
for similar property is this, etc."
d. Date In Time - Usually an appraisal at the top of the report will have a statement that
the value is valid only as of the date shown on the appraisal sheet. This is why if a person
needs a 2nd appraisal on the property 4 months later, the lender will usually require
another appraisal.
2. Narrative Report - The most complete and comprehensive appraisal report is called a
narrative report. The appraiser will provide the 4 above requirements of a minimum
appraisal. IF the owner has hired the appraisal done just for the owner's use (not the
bank), the appraiser might also sit down with the owner and talk about all the good points
and bad points in determining the value.
(On the next page put slides Section 30 – 001 and 001A)
Market Value - The highest price that a willing buyer would pay for a property and the
lowest price that a willing seller would accept in a free market place. The reason for this
is the contractual OFFER and ACCEPTANCE requirement in contract law. The buyer
has to make an offer to start the ball rolling. Next the seller has to accept the offer, reject
the offer, or make a counter offer. So this is why we say the highest value a buyer will
offer and the lowest the seller will accept.
Selling Price - The selling price takes into consideration the non-economic factors that
affect the actual selling price. The selling price may be more or less than market value.
Non-economic factors might be the buyer loves the kitchen and deck and is willing to pay
more to get it. A non-economic factor for the seller might be that he/she wants to move to
Dallas as soon as possible and is willing to accept a lower than normal offer.
Ground Value - When appraising property, a good appraiser will separate the value of
the land vs. the appurtenances such as the house, fence, etc. Land can vary considerably
in value. Example: In Tokyo, Japan, a square yard in the down town area could easily
lease for $1,000 a month. In West Virginia, it could lease for $ .15 a month.
Appurtenance Value - A building or a residence will be calculated various ways.
Commercial property could be based on income. A residence would be based on "sales"
of comparable homes in a given area.
Reconciliation - An appraiser will take the various values and formulas and utilize all of
them to come up with a fair value of property.
(On the next page put slides Section 30 – 002 and 002A and 002B)
The Elements - There are elements that help determine the market value of property.
There are basic factors in real estate that can influence the market value of real estate in
given areas at a given time.
1. Scarcity = Supply and Demand - When there are more buyers than property for sale,
there is a scarcity for the demand. This allows sellers to up the offering price of their
Example: In 1999 there were 8 buyers for every home for sale in the North Seattle area.
Offers were coming in 10% higher than the seller's offering price. It was a bidding war
because of the scarcity of available property.
Example: In 1974 the opposite was the case for the same exact area. Very few buyers
and many homes for sale. Sellers were accepting offered prices 20% lower than their
offering price.
2. Utility - The ability to use and enjoy the property as desired. If a buyer cannot use the
property as desired it would cause him/her to offer a lower price.
Example: A house is located next to bus stop and the master bedroom faces it. This will
cause a buyer to not use the property as desired. Possible buyers would offer a lower
price than a bedroom facing a green belt.
a. Use - There is no value without use and use depends on buyer's concept of use.
b. Present vs Future - Includes present use and future enjoyment. One of the
considerations is zoning for a given area. If a buyer wants a home and the area is zoned
for apartments, he/she might not like their future high rise neighbors.
3. Right to Rights - Buyers would surely be interested in any encumbrances on their
future rights. Community encumbrances preventing them from enjoying as they wish.
Their ability to transfer rights in the future, type of estate, type of tenancy, restriction, etc.
The buyer would want to know, "How many sticks are removed from the Bundle of
4. Seller's Disclosure Form - Don't Forget..... The seller must disclose bus stops,
encumbrances, community restrictions, zoning, etc. etc. to the buyer on the seller's
disclosure form. A good licensee for the buyer, the buyer's agent, should protect the
interests of their buyer.
(On the next page put slides Section 30 – 003 and 003A)
The following factors will always affect the market value of real estate:
1. Topography - The contour of the land affects value. A completely flat parcel will
allow the buyer to utilize the entire parcel. If the lot is on a hill, the slope would prevent
total use of the parcel.
2. View - One of the main influencing physical factors is view. Most people would enjoy
a view other than their neighbor's home. Good views in urban areas influence the market
value of property tremendously.
3. Type of Soil - Examples of problems with soil could include land that is too rocky for
gardening; possible bad drainage characteristics for a septic tank; sandy loam or clay on
the hill in back of a home that could cause mudslides.
4. Exposure of Home: Improvements and how the buyer's react impact the market value;
also the direction the home faces.
a. Residential - Buyers prefer a south or west front exposure because of the desired
sunlight in the winter.
b. Commercial - Business buyers prefer a corner lot in that they would get more "traffic"
and more "signage". More people would see their business signs as they drove by from
either street. Because of the driving characteristic of being on the right side of the street,
the most preferred corner lot would be the SW corner. This intersection is called the
"100% Location". All drivers would see signage.
(On the next page put slides Section 30 – 004 and 004A)
The configuration of a lot will affect the value of the property.
1. Shape - Triangular or long narrow lots are difficult to use or develop. There is a lot of
wasted area. Square or rectangular lots have more value.
2. Wide Is Better ($) - A wider lot has more value than a narrow lot that is deeper. The
reason is the lot would have more frontage on the street.
a. Atwood Table - Appraisers use a depth table called the Atwood Table. This table
compensates for the value. In other words it changes value based on the amount of street
frontage that it has.
b. Rule of Thumb: 4-3-2-1 Rule - The first 1/4 of a lot on the street is worth 40% of the
property's value. The second 1/4 of the lot is worth 30% of the lot's value. The 3rd 1/4 is
worth 20% and the final 1/4 is worth 10%.
1) The first 1/4 is worth 4 times more than the back 1/4.
2) Example: A $10,000 lot. The frontage 1/4 is worth $4,000 and the back 1/4 is
worth $1,000.
(On the next page put slides Section 30 – 005 and 005A)
There are outside factors that affect the value of real estate in general. They include such
General Factors as the economy, the unemployment rate, inflation rate, and the tax rates
in a given area.
1. Attitude - It is a proven fact that the general "attitude" of the consumer (buyer) is
affected by the general economy. If the economy starts slowing down and there is a rise
in unemployment, company profits drop, etc. the consumer pulls in the reins and slows
down their spending.
Example: During the early 90s the economy came to a screeching halt. People slowed
down their spending and unemployment rose. This also had an affect on real estate
a. Low Demand - Less of a demand for housing caused the market value of homes to
drop as well. Appraisals had to take into consideration the buying habits of the consumer.
(On the next page put slides Section 30 – 006 and 006A)
Other economic factors that will affect the value of property would include:
1. Plottage Increment - Putting several parcels of land together increases the value over
all. The value of one larger parcel has a higher value per acre than the value of several
small parcels per acre. This is true in residential housing as well as commercial property.
One of the main factors of this characteristic is the scarcity factor as well.
Example: You have a client who wants 5 acres of land to build her dream home in the
center of San Francisco. You would have to arrange for the purchase of several
lots/parcels to do this. The value of the final lot will be worth more than the purchases
that you arranged. One of the main reasons will be the scarcity of large lots in downtown
San Francisco.
2. Value Greater Than Purchase Price - This is why huge corporations are willing to
purchase several parcels in order to construct one of their large retail stores. They know
that the eventual lot that they own will be worth more than the total purchase price of the
small little lots that they purchase.
a. Earned Increment - When an owner increases their property in value by their effort it
is known as an earned increment. The "earned" increase in value because it was due to
their efforts. Other examples of earned increments would be making improvements to the
property, making an addition to the property, etc.
3. Appreciation - When property increases in value over time and it is beyond the
outside of the owner's effort it is called appreciation. Because of the fact that it was not
due to the owner's efforts it is always known as an "unearned" increment. The
appreciation might be as a result of directional growth, increase in demand, inflation, etc.
Normally this is the largest source of increase in value of owned real estate.
Example: Mrs. K bought her house with her deceased husband in 1958 for $9,000. It
is now appraised at $283,000. She didn't make any additions. She didn't do anything
except normal home maintenance. This is an unearned increment of $274,000.
4. Depreciation - When property decreases in value over time it is called depreciation.
This includes any reason for the drop in value over time. Causes are separated in several
different categories.
a. Physical Deterioration - The amount of loss in value due to wear and tear of the
property. The deterioration could be appearance, which normally means it is lack of
maintenance. It could be structural which means it is simply a victim of time.
1) Curable or Incurable - Physical deterioration that is "curable" would mean that the
economics of repair would be less costly than building a whole new structure. "Incurable"
deterioration means that the economics of building a new structure is less costly than
repair of the current structure.
2) Bad Decisions - Unfortunately a fair amount of decisions regarding a structure being
curable have cost developers a lot of extra money. It would have been less costly to build
a new structure.
(On the next page put slides Section 30 – 007 and 007A)
The following would be additional factors in determining the value of Real Estate:
1. Functional Obsolescence - With old commercial structures there are a lot of problems
with the function of building. It is out-of-date in regard to use.
Example: The building has steps to all the floors, but no elevator. The roof is a flat roof
with 18 layers of tar paper. The ceilings are 7 feet in height and so on. Examples for a
residence would be:
a. Garage - A single-car garage with a sloped driveway of 20 degrees. Buyers want a 2car garage. A one-car garage is functionally obsolete.
b. Floor Plan - A bad floor plan with the dining room off the bathroom and not next to
the kitchen. It could be a large square footage with a multitude of little rooms. Because of
this there would be less demand for the property.
c. Non-Correctable Items - Something inside the property boundaries that can't be
corrected such as an old rockery.
d. Curable or Incurable - Again the decision regarding corrections or starting over is
important. Usually, a demolition crew should correct bad floor plans.
2. Economic Obsolescence - This is the loss of value due to economic conditions around
the property. This is one of the saddest situations where a residential community was one
of the best in the city and the owners of property had morale attitude or the government
put a freeway through the neighborhood. Other factors which would influence this are the
a. Zoning - Zoning changes by government. Zoning is changed to allow strip malls, low
cost housing, apartments, etc. If the owners do nothing about zoning changes, they will
regret it.
b. Directional Growth - When the expansion of a city heads out to the burbs, away from
your property, the demand for housing in your area drops. This drives the value of
property down.
c. Incurable - These forms of losses are generally incurable. Beyond the ability of the
owner to change the situation.
(On the next page put slides Section 30 – 008 and 008A)
Appraisers have specific principles that they use in appraising the value of property. The
following are additional areas regarding basic principles.
1. Anticipation - This is value as determined by the anticipation of the use by the new
owner; the utility of the property. This will take into consideration the enjoyment of the
property by the new owner. It also would take into consideration the profitability of
owning the property if it is an investment such as rental property.
2. Balance - This aspect looks at the use of the property and if all the aspects of use are in
balance. The land, labor, invested capital, and the time management of the property must
be in balance. If one of the factors were out-of-balance, this would decrease the value of
the property.
a. Imbalance - The property being appraised is over-improvement or underimprovement.
Example: An owner has a $100,000 home in a community made up of the same type of
housing. The owner puts up a $40,000 stone wall with an electric gate. The wall is not in
balance with the property. The property will not increase in value to $140,000.
b. Balance - If the owner puts a $1,000 picket fence around the property the value might
improve to $105,000 due to balance within the community.
3. Change - The area surrounding property is not static. If the properties in the
surrounding community are being developed, the value of the property in question will
rise as well. If there is no change (static) the area will eventually decay and possibly turn
into a slum.
4. Conformity - Use and style should conform to neighboring structures. When
neighborhoods conform to a community identity, the values of property are increased.
a. Mixing - When a community allows the mixing of values or uses it tends to devalue
Example - Residential neighborhood allows strip malls, convenience stores, burger
stands, etc. into their neighborhood, the community loses its identity.
b. "Buffer zones" - Zoning can protect a community's identity and value. A good
community will have a buffer between residential and commercially zoned areas such as
a park or a berm (a pile of dirt with bushes and trees) separating the different zoning
(On the next page put slides Section 30 – 009 and 009A)
Additional Economic Principles in regard to appraisal of value for real estate would
include the following:
1. Contribution of Items (senses) - The total value consists of all the parts of the
property. These are areas that are not part of the property, but can detract value from it.
Examples - Flight path to an airport, smoke, or odors from neighboring commercial
areas, etc. Other aspects would add to the value such as a view or nearness of a shopping
2. Diminishing Returns - This is when a dollar invested does not increase the property
value by one dollar. Improvements would not increase the value to the property on a
dollar for dollar basis. In other words the improvement costs to the property are more
than the increase in market value.
3. Highest and Best Use - The use of the land that will return the greatest net profit. Net
profit is the increase in value minus the amount of money spent to increase value.
a. Use Must be Legal and Possible - This means that the best use of the property must
be zoned properly. If the best use is an apartment and it is zoned single-family units, the
apartment would be illegal.
b. Earning Power Represents it's Value - For income property, the income after all
expenses are paid represents the net income or residual income. The formula is gross
income less expenses = net (residual) income. If one property has a net income of
$10,000 and another has $40,000, obviously the latter would be of greater value.
c. Tax Write-Offs - Old improvements rarely represent the Highest and Best Use. This is
why you see so many old buildings being demolished and a new one built on the same
property. There are instances where property is purchased and it just sits. The reason is
that the buyer is taking tax write-offs first. He/she will charge a loss in value to the
buildings due to economic depreciation whether it is physical, functional, and economic.
The depreciation is to the buildings not to the land. Land is not depreciated as an
economic loss.
d. Economic Rent - The income from the Highest and Best Use is called "Economic
Rent". This is what the highest possible rent would be for the proper use of the land.
1) Contract Rent - The income from its present use is called the "Contract Rent". This is
often less than the rent from the Highest and Best Use would be; the economic rent.
Example: An old obsolete building is producing a net income of $10,000. This is the
contract rent.
2) New Rent - If the same lot is zoned "high rise", a new building could produce a net
income of a $1,000,000. This would be the economic rent for the land. (On the next
page put slides Section 30 – 010 and 010A)
Additional principles in appraising property include the following:
1. Progression and Regression - These two principles go hand-in-hand in a
a. Progression - The value of the lowest valued property in the area is increased by its
more expensive neighbors. This is the safest real estate purchase by a buyer. If the home
being purchased is the lowest value in the neighborhood, the new home's value is being
increased by the neighboring properties.
b. Regression - The value of the highest valued property in the area is decreased by its
less expensive neighbors. This is the most risky real estate purchase by a buyer. If the
home being purchased is the highest value in the neighborhood, the new home's value is
being pulled down by the neighboring properties.
2. Substitution - The value of a piece of property is limited by finding an equally
desirable property in the same area at the same time. If another property was "substituted"
for the property being sold, no reasonable person will pay more than the cost to replace
the property with this equally useful property. This is why an appraiser will look for
similar properties in the area that recently sold. He/she will use these sales in determining
the appraised value of the home being sold.
(On the next page put slides Section 30 – 011 and 011A)
Additional economic factors that affect the value of real estate include the following:
1. Supply and Demand - The rule of supply and demand was discussed earlier. It was
taught as scarcity. Now we are going to look at this in greater detail. Let's first look at the
down side of real estate when there are few buyers and a large amount of homes for sale.
a. Large Supply Decreases Prices - Under the supply and demand concept, when there
are a large amount of homes "on the market" (up-for-sale) and few buyers we have a
small demand for housing.
b. Small Demand Decreases Prices - If there are few buyers and a large supply of
homes for sale, some sellers are "forced" to lower their offering price in order to sell their
Example: If Linda is moving to Atlanta and her home is not selling at $200,000, she will
be forced to lower her price to make a sale. If most of the sellers are forced to do this, the
value of real estate in the area will go down.
2. "Buyer's Market" - This is known as a buyer's market. The buyers can shop around
(and shop around) to find the best deal.
(On the next page put slides Section 30 – 012 and 012A)
Supply and Demand is probably the most important economic factor affecting the pricing
of housing over a short term period of time.
Demand - I am sure you have witnessed or heard of stories regarding Los Angeles in the
1970s vs. the 1980s; the City of Seattle fluctuations of the 1970s vs the 1990s and so on.
1. Small Supply Increases Price - When there are a small amount of homes "on the
market" (up-for-sale) and there are a large amount of buyers we have a large demand for
2. Large Demand Increases Price - If there are a large number of buyers and a small
supply of homes for sale, sellers can afford to increase their offering price to meet the
demand for homes in the area.
Example: Linda is moving to Atlanta and the homes in her area have sold for $200,000.
Her real estate agent suggests that she offer her home at $220,000 and see what happens.
a. "Seller's Market" - This is known as a seller's market. The sellers can raise their sale
price and see if a buyer is willing to pay more.
(On the next page put slides Section 30 – 013)
In the late 1990's, the demand for housing in Seattle caused some ridiculous offers by
1. Demand - There were actual offers that "demanded" the right to meet another offer
that might come in higher. There were offers that stated they were bidding "5% higher
than the highest bid." 2 bedroom homes with a small lot were selling for $300,000.
2. Low Demand - 300 miles away in Spokane county, 4 bedroom homes with 10 acres
were appraising for $155,000.
3. Economic Factors - Economic opportunities in Seattle were much greater versus
Spokane. Fast food restaurants in Seattle had to pay $10.00 an hour, plus benefits, to
obtain workers. Businesses in Spokane were offering $9.00 an hour for office workers.
(On the next page put slides Section 30 – 014)
The following factors are governmental and community regulations that affect the value
of property in their area.
1. Zoning - The control of the use of property by governments is done through zoning.
Interestingly, there is no present influence on property that is up-for-sale, but there is a
future impact regarding the use that could be changed which offers an anticipation value
to property. Any new zoning would allow a higher and better use of the property.
2. Building Codes - When building codes are more stringent requiring better building
materials and more labor the newly built or renovated home will increase in value
compared to other homes without such requirements.
Example: Homes that are renovated must utilize wiring, roofing, insulation, etc. that is
of much better quality than in the past. This adds to the value.
3. Deed Restrictions - Deed restrictions will usually increase the value of homes, but
they could decrease value. Most restrictions allow the best use of property such as
disallowing commercial businesses within the subdivision. This causes buyers to desire to
live in "that community" which drives up the value.
4. Governmental Housing Programs - The construction of Federally sponsored low
income housing within a community will usually drive down the value of property in that
area. It decreases the value of privately owned and privately financed housing. Also the
increase in the supply of housing in an area may decrease the demand for houses under
the principles of supply and demand.
(On the next page put slides Section 30 – 015 and 015A)
An appraiser has to place value of property based on social factors within an area as well.
The following areas are not weighted heavily towards the appraised value of property, but
they do make a difference.
1. Growth Patterns - Is the growth towards the property in question? If so, the future
value will usually rise. Is the movement of population away from the property? Then the
value will decrease over time.
2. Desire for Suburban Life - Some areas of the country have the population desiring to
move out of the city such as Los Angeles. Other areas have the population desiring to
move into the city such as Seattle. Demand for housing can be low or high affecting
future pricing.
3. Changes in Family Composition - The size of families is diminishing which causes
less of a demand for large homes. There are a lot of single parent families in today's
world. Also, married couples aren't having the large number of children that used to be
the norm. The large 4 and 5 bedroom homes of the past are white elephants in today's
4. Value Associated with "Status Neighborhoods" - Demand for living in a specific
neighborhood is known as "status neighborhood". A house in one neighborhood might be
worth $150,000. The same exact house might be worth $250,000 in another
neighborhood. This again gets back to demand, but it applies to the demand of living in a
specific area. This demand might be due to status, being in a specific school district,
enjoying community services, etc.
5. Value Affected by "Amenities" - An amenity is a value of attractive, desirable
features of a given piece of real estate. Social and regional mores regarding real estate
have their affect on value. Some people desire the "closeness" of convenience to stores or
shopping. Some desire to be close to their church. Others desire to be close to mass
transit. Amenities to a specific piece of property would include the beauty of landscaping,
having a view, the arrangement of floor plan, etc.
Location - Location is the most important creator of value. It is often times said that the
most important aspect in determining the value of real estate is location, location, and
location. The reason is that the location of real estate affects the physical characteristics,
economic factors, political factors and the social factors involved with determining value.
If you stop to think about it, all the value influences that we have just discussed are
affected by the location of the property.
(On the next page put slides Section 30 – 016 and 016A)
When an appraiser looks over all the appraisal methods and uses all of the information
from them, it is known as reconciliation. The appraiser takes the best values from each
method and determines the over all value of the property.
This is mainly used in commercial real estate when there are so many involved variables.
A good commercial appraiser will arrive at a property value after looking over all the
before mentioned factors.
In residential real estate, most appraisers will look to the market value of similar home
SALES in a similar area of residency. Lot size, construction, year built, square footage,
etc. will be used when comparing property that have recently sold. However, there are
not as many variables involved with residential real estate as with commercial real estate.
(On the next page put slides Section 30 – 017 and 017A)
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