Market Approach A. Relationship to Appraisal Principles

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1 Market Approach A. Relationship to Appraisal Principles 1. Supply and demand Prices are determined by negotiation between buyers and sellers o Buyers demand side o Sellers supply side At a specific time o Time adjustment is required o Market condition is important 2. Substitution Value of a property can be set by the price that would be paid to acquire a property with similar utility and desirability Implies that the reliability of sales comparison approach is diminished if substitute properties are not available in the market. 1. Single family 2. Hospital 3. Externalities Position and negative external forces affect all types of property Two properties with identical property characteristics may have quite different market value if one of the properties has less attractive surrounding. 1. External forces are normally reflected in the adjustment of location - School - Highway 2. However, it is not always the case - Dumpsite - Ocean view 4. Balance Balance between supply and demand 1. New constructions when market condition is bad 2. Cluster of development activities Balance between land and improvement 1. A small home in a big lot 2. A big home in a small lot 3. Not the highest and best use of the land Balance between property and environment 1. Million dollar home in a poor neighborhood 2. A nice lodge in a busy area floor building in a nice remote resort area 5. Applicability and Limitation When there are sufficient market reliable transactions to indicate value patterns in the market. Economic conditions are not changing rapidly Best for single family

2 B. Procedure 1. Research market to obtain information on sales transaction: - MLS - Publications - Land Record - Assessment office 2. Verify the information: - Arm- length market transaction - Call buyers, sells, and brokers - There are incentives to lie 3. Select relevant units of comparison - Based on rule of thumb 4. Adjust the sale price of each comparable - Comparable properties. Vs. Subject property - Make positive or negative adjustment based on property attributes - Adjust the price of each comparable property (based on property attributes) to make it identical to the subject property - Comparable has a better attribute, adjust the price down - Comparable has a better attribute, adjust the price up 5. Reconcile the various value indications - Each comparable will indicate a value - How to place the weigh on each comparable? C. Sale Comparison method 1. Units of comparison Total price: Single family Unit price: - S.F.: office, retail, industrial - Lot: subdivision - Acre: raw land - Unit: apartment - Bed: hospital - Room: hotel Rate: i. Income multiplier ii. Capitalization rate 2. Elements of comparison a. Property right conveyed: i. Fee simple ii. Lease fee Market rent Vs. Contract rent iii. Lease hold b. Financing term: - Assume an existing mortgage at a favorable interest rate - Installment sale contracts - Wraparound loans - Balloon payment

3 - Cash equivalency method (net present value) - Market extraction method (% adjustment) c. Condition of sale - Assemblage need - Financial, business, or family relationship between the parties - Seller needs cash in a hurry - DON T USE THESE SALES! d. Market condition - Market conditions generally change over time. Past sales must be examined in light of the direction of change between the sale date of comparable and the valuation date of the subject property - Time adjustment - Percentage of previous price - Sale and resale data - Adjustment should be made first e. Location: Although no location is inherently desirable or undesirable, an appraiser can conclude that one location is better than, equal to, or worse than another based on comparable information. f. Property attributes Neighborhood Building size Quality of construction Architectural style Building materials Age Condition Utility Zoning Amenities Accessibility Traffic pattern The length of lease term Escalation clauses Tenant mix Occupancy level History of the property management Quality of the income Factors 3. Types of adjustments i. Dollar adjustments Physical characteristics Costs to care ii. Percentage adjustments: 4 types a. Subject Vs. comparable

4 (1 + adjustment) (1 adjustment) b. Comparable Vs. subject adjustment 1 1 adjustment 4. Extraction of adjustments Believe me: Instinct and experience Grid: Pairing: Sequential Pairing: Regression: o Simple o Multiple

5 Table 14.1 Sequence of Adjustments Element of Comparison Market-Derived Adjustments Adjustment to Price of Comparable Sales Sale Price $100,000 Adjustment for property rights conveyed +9% +5,000 Adjusted price $105,000 Adjustment for financing terms -2% -2,100 Adjusted price $102,900 Adjustment for conditions of sale* +5% +5,145 Adjusted price $108,045 Adjustment for market conditions +5% +5,402 Adjusted price $113,447 Adjustment for location +3% +3,403 Physical characteristics -5% -5,672 Indication of value of the subject property $111,178 * The conditions of sale adjustment may be combined with another adjustment depending on how it is extracted from the market. Problem: How to derive the adjustments?

6 Adjustment Grid Comparables Price Sold $10 $11 $9 $11 $8 Time Adj. 5% 3% 4% 1% 7% Time Adjusted Price $10.5 $11.33 $9.36 $11.1 $8.56 Location +0% +0% +0% +15% +10% Size +2% +0% +7% -15% +5% Frontage +1% +4% +2% +0% +5% Financing +1% +0% +10% +0% +10% Total adj. 4% 4% 19% 0% 30% Adj. Price $10.9 $11.78 $10.71 $11.1 $10.4 Recording Value Indications I. Similarities: Number of adjustments Amount of adjustments Confidence level of the adjustment II. Judgment: quality of the data III. Decide weights of each comparable

7 Pairing method: A. 2,000 SF 2,000 SF 2,400 SF 2,400 SF $160,000 $180,000 $200,000?

8 B. 2,000 SF 2,000 SF 2,000 SF 2,400 SF 2,400 SF $160,000 $150,000 $180,000 $200,000? Problem: Difficult to find pairs (identical in every aspect, except for one)

9 Sales Comparison Approach: Comparables Subject Price sold $ $ $ $ $ $ $ 48.80? # of months sold Attributes Location on one block one block on on on two blocks one blocks Congress away from away from Congress Congress Congress away from away from street Congress st. Congress st. street street street Congress st. Congress st. Size 100,000 SF 105,000 SF 98,000 SF 150,000 SF 50,000 SF 103,000 SF 99,000 SF 101,000 SF Age 3 years 5 years 5.2 years 3.2 years 5.1 years 5 years 1 year 2.9 years Financing 9% 10% 9.90% 10.10% 10% 10% 11% 9% int. rate int. rate int. rate int. rate int. rate int. rate int. rate int. rate Zoning C-1 C-1 C-1 C-1 C-1 C-1 C-2 C-2

10 Comparable Subj. Adjusted for # of Months Sold: 2 and 3 (P2 - P3) / P3 = 6.00% Price Sold $ $ $ $ $ $ $ 48.80? # of Months Adjustment *1.04 *1.03 *1.09 *1.02 *1.07 *1.06 *1.10 Adjusted P(1) Adjusted for Location: (2,3) and 6 (P6 - P2) / P2 = 20.00% Adjusted P(2) $ $ $ $ $ $ $ Location on one block one block on on on two blocks one blocks Adjustment /1.20 /1.20 /1.20 /1.20 *1.20 $ $ $ $ $ $ $ Adjusted for Size: (2,3,6) and 5 (P5 - P3) / P3 = 10.00% Adjusted P(2) $ $ $ $ $ $ $ Size 100,000 SF 105,000 SF 98,000 SF 150,000 SF 50,000 SF 103,000 SF 99,000 SF 101,000 SF Adjustment *1.10 /1.10 Adjusted P(3) $ $ $ $ $ $ $ Adjusted for Age: (2,3,5,6) and 4 (P4 - P3) / P3 = 7.00% Adjusted P(3) $ $ $ $ $ $ $ Age 3 years 5 years 5.2 years 3.2 years 5.1 years 5 years 1 year 2.9 years Adjustment *1.07 *1.07 *1.07 *1.07 /1.07 Adjusted P(4) $63.66 $ $ $ $ $ $ Adjusted for Financing: (2,3,4,5,6) and 1 (P1 - P3) / P3 = 10.00% Adjusted P(4) $63.66 $58.30 $58.08 $58.20 $57.94 $58.32 $60.20 Financing 9.0% 10.0% 9.9% 10.1% 10.0% 10.0% 11.0% 9.0% Adjustment *1.10 *1.10 *1.10 *1.10 *1.10 *1.20 Adjusted P(5) $63.66 $64.13 $63.89 $64.02 $63.73 $64.15 $66.22 Adjusted for Income: (1,2,3,4,5,6) and 7 (P7 - P3) / P3 = 4.00% Adjusted P(4) $63.66 $64.13 $63.89 $64.02 $63.73 $64.15 $66.22 Zoning C-1 C-1 C-1 C-1 C-1 C-1 C-2 C-2 Adjustment *1.04 *1.04 *1.04 *1.04 *1.04 *1.04 Adjusted Price $ $ $ $ $ $ $ 66.22

11 SIMPLE REGRESSION ANALYSIS: LINEAR ====================================================== PREDICTED COMPARABLE PRICE SIZE PRICE $245,000 1,000 $245,000 2 $249,500 1,100 $249,500 3 $254,000 1,200 $254,000 4 $258,500 1,300 $258,500 5 $263,000 1,400 $263,000 6 $267,500 1,500 $267,500 7 $272,000 1,600 $272,000 8 $276,500 1,700 $276,500 9 $281,000 1,800 $281, $285,500 1,900 $285, $290,000 2,000 $290, $294,500 2,100 $294, $299,000 2,200 $299, $303,500 2,300 $303, $308,000 2,400 $308, $312,500 2,500 $312, SUBJECT? 1,750 $278,750 ====================================================== IF WE KNOW: PRICE = $200,000 + $45 * SIZE ====================================================== ====================================================== Regression Output: Constant 200,000 R Squared 100% No. of Observations 16 Degrees of Freedom 14 X Coefficient(s) Std Err of Coef ======================================================

12 SUMMARY OUTPUT Regression Statistics Multiple R 1 R Square 1 Adjusted R Square 1 Standard Error E-11 Observations 16 ANOVA df SS MS F Significance F Regression E E-203 Residual E E-21 Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept E E E SIZE E E E

13 SIMPLE REGRESSION ANALYSIS: LINEAR ====================================================== PREDICTED COMPARABLE PRICE SIZE SIZE^2 PRICE $265,000 1,000 1,000,000 $265,000 2 $266,950 1,100 1,210,000 $266,950 3 $268,800 1,200 1,440,000 $268,800 4 $270,550 1,300 1,690,000 $270,550 5 $272,200 1,400 1,960,000 $272,200 6 $273,750 1,500 2,250,000 $273,750 7 $275,200 1,600 2,560,000 $275,200 8 $276,550 1,700 2,890,000 $276,550 9 $277,800 1,800 3,240,000 $277, $278,950 1,900 3,610,000 $278, $280,000 2,000 4,000,000 $280, $280,950 2,100 4,410,000 $280, $281,800 2,200 4,840,000 $281, $282,550 2,300 5,290,000 $282, $283,200 2,400 5,760,000 $283, $283,750 2,500 6,250,000 $283, SUBJECT? 1,750 $3,062,500 $277,188 ====================================================== IF WE KNOW: PRICE = $240,000 + $30 * SIZE - $0.005 * SIZE ^ 2 ====================================================== ====================================================== Regression Output: Constant 240,000 R Squared 100% No. of Observations 16 Degrees of Freedom 13 SIZE SIZE^2 X Coefficient(s) Std Err of Coef ======================================================

14 SUMMARY OUTPUT Regression Statistics Multiple R 1 R Square 1 Adjusted R Square 1 Standard Error E-10 Observations 16 ANOVA df SS MS F Significance F Regression E E-180 Residual E E-20 Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept E E E SIZE E E E SIZE^ E E E

15 PRICE Thousands y = x x REGRESSION ANALYSIS y = 45x Thousands SIZE PRICE Predicted PRICE PRICE2 Poly. (PRICE2)

16 MULTIPLE REGRESSION ANALYSIS ==================================================================== COMPARABLE PRICE MONTH SOLD SIZE AGE PREDICTED PRICE ==================================================================== 1 $ ,000 3 $ $ ,000 3 $ $ ,100 3 $ $ ,100 1 $ SUBJECT? 0 1,100 2 $12.00 ==================================================================== ==================================================================== IF WE KNOW: PRICE = $ 3 + $ 0.2 * MONTH * SIZE - $1.0 * AGE ==================================================================== ==================================================================== Regression Output: Constant R Squared MONTH SOLD SIZE AGE X Coefficient(s) Std Err of C ====================================================================

17 SUMMARY OUTPUT Regression Statistics Multiple R 1 R Square 1 Adjusted R Square Standard Error 0 Observations 4 ANOVA df SS MS F Significance F Regression #NUM! Residual E Total CoefficientsStandard Error t Stat P-value Lower 95% Upper 95% Intercept #NUM! 3 3 X Variable #NUM! X Variable #NUM! X Variable #NUM! -1-1

18 I. RAW DATA: =========================================================================== COMPARABLE PRICE MONTH SOLD SIZE LOCATION AGE FRONTAGE ZONING AMENITY =========================================================================== 1 $ , $ , $ , $ , $ , $ , $ , $ , =========================================================================== SUBJECT? 0 1, =========================================================================== II. REGRESSION ANALYSIS =========================================================================== Regression Output Constant R Squared No. of Observations Degrees of Freedom MONTH SOLD SIZE LOCATION AGE FRONTAGE ZONING AMENITY X Coefficient(s) (0.2000) (0.5000) (3.5000) Std Err of Coef =========================================================================== III. PRICE OF THE SUBJECT PROPERTY =========================================================================== PRICE $8.00 $0.00 $6.00 $2.00 ($1.50) $0.00 $0.00 $0.00 $14.50 ===========================================================================

19 SUMMARY OUTPUT Regression Statistics Multiple R 1 R Square 1 Adjusted R Square Standard Error 0 Observations 8 ANOVA df SS MS F Significance F Regression #NUM! Residual E Total 7 28 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept #NUM! 8 8 MONTH SOLD #NUM! SIZE #NUM! LOCATION #NUM! 1 1 AGE #NUM! FRONTAGE #NUM! ZONING #NUM! 2 2 AMENITY #NUM! 1 1

20 Sales Comparison Approach: I. You are provided with the following information: Property Price Sold $ $ $ $ $ # of months Size (S.F.) 1,000 1,200 1,000 1,200 1,000 Location Fair Bad Good Good Good Zoning CS CS-1 CS CS-1 CS Design Fair Fair Fair Fair Fair Frontage IH-5 IH-10 IH-5 IH-91 IH-5 Age Amenity Good Fair Good Fair Good Property Subject Price Sold $ $ $ $ $ 14.00? # of months Size (S.F.) 10,000 1,000 1,200 1,200 1,200 1,200 Location Bad Fair Bad Bad Good Fair Zoning CS-1 CS CS CS-1 CS CS Design Fair Fair Fair Fair Fair Fair Frontage IH-10 IH-5 IH-10 IH-10 IH-5 IH-10 Age Amenity Bad Good Good Good Good Fair

21 Property Subject Adjust for time: 3,5 (P5/P3-1) 8.33% Price Sold $ $ $ $ $ $ $ $ # of Months Adjustment 8.33% 0.00% 8.33% 0.00% 8.33% 16.67% 16.67% 0.00% Adj. Price $ $ $ $ $ $ $ $ Adjust for Size: 10, (3,5) (P10/P3-1) 7.69% Price Sold $ $ $ $ $ $ $ $ Size (S.F.) 1,000 1,200 1,000 1,000 1,000 1,200 1,200 1,200 1,200 Adjustment 7.69% 0.00% 7.69% 7.69% 7.69% 0.00% 0.00% 0.00% Adj. Price $ $ $ $ $ $ $ $ Adjust for Location: 7, (3,5,10) (P3/P7-1) 9.09% Price Sold $ $ $ $ $ $ $ $ Location Fair Bad Good Good Fair Bad Bad Good Fair Adjustment 0.00% 9.09% -8.33% -8.33% 0.00% 9.09% 9.09% -8.33% Adj. Price $ $ $ $ $ $ $ $ Adjust for Age: 1, (3,5,7,10) (P3/P1-1) 10.00% Price Sold $ $ $ $ $ $ $ $ Age Adjustment 0.00% -4.55% -9.09% -9.09% -9.09% -4.55% -4.55% -9.09% Adj. Price $ $ $ $ $ $ $ $ Adjust for Frontage: 8, (1,3,5,7,10) (P8/P3-1) 35.37% Price Sold $ $ $ $ $ $ $ $ Frontage IH-5 IH-10 IH-5 IH-5 IH-5 IH-10 IH-10 IH-5 IH-10 Adjustment 35.37% 0.00% 35.37% 35.37% 35.37% 0.00% 0.00% 35.37% Adj. Price $ $ $ $ $ $ $ $ Adjust for Zoning: 9, (1,3,5,7,8,10) (P9/P3-1) 15.38% Price Sold $ $ $ $ $ $ $ $ Zoning CS CS-1 CS CS CS CS CS-1 CS CS Adjustment 0.00% % 0.00% 0.00% 0.00% 0.00% % 0.00% Adj. Price $ $ $ $ $ $ $ $ Adjust for Amenity: 2, (1,3,5,7,8,9,10) (P3/P2-1) 9.38% Price Sold $ $ $ $ $ $ $ $ Amenity Good Fair Good Good Good Good Good Good Fair Adjustment -8.57% 0.00% -8.57% -8.57% -8.57% -8.57% -8.57% -8.57% Adj. Price $ $ $ $ $ $ $ $ 14.44

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