✓ ~~~ -value of RE can be determined by analyzing the sale prices of similar properties
-in a competitive market, close substitutes should sell for similar prices
-difficulty: how many truly close substitutes exist & how many of these have sold
recently?
-"one price" rule (i.e. equivalent goods sell for equivalent prices)
*arbitrage not available in RE (can't buy & sell RE quickly)
cost approach
✓ ~~~ -setting a long-run equilibrium
-theory of substitution
estimated reproduction cost of improvements - estimated accrued depreciation =
depreciated cost of building improvements
+estimated value of site
,= indicated value by cost approach
-assumption: cost of creating a property is related to its market value
income approach
✓ ~~~ -"income capitalization"
-theory of anticipation
-value in investment property is a function of the income it is expected to produce (&
inherent risk)
-mimics analytics B&S use
value = PV of expected future CFs (PV of anticipated income
✓ ~~~ -value assigned by local government for property tax purposes
-WI: the assessor's opinion of "market value"
when are value calculations required?
, ✓ ~~~ -property acquisition is contemplated
-structure is: modernized, renovated, abandoned, demolished
-site is developed
-property is used for collateral for a loan
appraisal
✓ ~~~ -more narrow definition, estimation of value
market value
✓ ~~~ -most probable selling price, assuming normal sales conditions
-may not be fundamental value
-typical buyer/seller interaction in a typical market
investment value
✓ ~~~ -value to a particular individual (investor)
transaction price
✓ ~~~ -price actually paid for a specific property
cost
✓ ~~~ -amount paid to build, create
why do we have to estimate market value?
, ✓ ~~~ -in markets with perfect competition, all transactions take place at true market value
-in such markets, no need for B&S to search for true market value of an asset
(revealed by transaction prices of perfect substitutes)
-RE markets do not exist within perfectly competitive conditions
-even the few transactions of comparable properties that we do observe may not be
indicative of the value of the "subject" property
-"fee appraisers" needed to estimate market value of RE assets
who uses market value appraisals?
✓ ~~~ -buyers
-sellers
-corporate acquisitions, mergers or dissolutions, tax & accounting
-courts (divorce, eminent domain, settlement of estates, bankruptcy)
-mortgage lenders
professional appraisal practice
✓ ~~~ -imperfect information
-reliable data & analysis applies
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