Basic Real Estate Appraisal, 9th Edition
Chapter 4 Lecture Outline
CHAPTER 4
FOCUS ON NEIGHBORHOOD, COMMUNITY, AND MARKET
STUDENT LEARNING OUTCOMES
Property value is most influenced by the neighborhood and community, and by the state of the real estate market. The topics to be covered here include:
4.1 Neighborhood Analysis
4.2 Understanding Communities and How They Grow
4.3 Real Estate Markets and Their Analysis
Class Activities
[Instructor: Complete as needed.]
Lecture [ ] Discussion [ ] Breakout Groups [ ] Other ______[ ]
4.1 NEIGHBORHOOD ANALYSIS
In this section, we explain the concept of the neighborhood and show how to use neighborhood information.
Defining the Neighborhood
1. A neighborhood is a cluster of properties (most of which are) of similar land use and value.
2. It is a group of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises.
Boundaries of the Neighborhood
Neighborhood boundaries may be set by economic factors, physical features, or legal boundaries. Boundaries may also be set by changes observed in the characteristics of the occupants, buildings, and/or land uses.
Neighborhood Profile
Typical features described for a residential neighborhood include:
[Instructor: Refer to Figure 4.1 on Page 87 or Neighborhood section of URAR itself.]
1. Neighborhood Characteristics:
· Classified as urban, suburban, or rural.
· The percentage of built up land: over 75%, 25-75%, or under 25%.
· Growth rate may be described as rapid, static, or slow.
2. One-Unit Housing Trends:
· Are property values increasing, stable, or declining?
· Is supply/demand a shortage, in balance, or an oversupply?
· Is marketing time under 3 months, 3-6 months, or over 6 months
3. For One-Unit Housing:
· What are low, high, and predominant (most common) prices and ages of homes in the neighborhood?
4. Present Land Use in Percent:
· One-unit residential structures
· 2-4 unit residential structures
· Multi-family structures (5+ units)
· Commercial
· Other
[Note: Land use percentages should add up to 100%]
5. Neighborhood Boundaries
· Define; and explain if market data lies outside of neighborhood
6. Neighborhood Description
· How concisely can it be described? New subdivision? Older neighborhood with eclectic mix?
7. Market conditions
· Discuss macro and micro issues that specifically influence the market trends affecting the subject property
[Note: As of April 1, 2009, appraisals reported on the URAR for Fannie Mae or Freddie Mac must include the Market Conditions Addendum (Fannie Mae Form 1004MC); see Chapter 16 for expanded discussion and form (Figure 16.1).]
Sources of Neighborhood Data
· Local Building and Planning Agencies
· Chambers of Commerce
· Real estate sales and property management firms
· Neighborhood and community demographic services available on the Internet
[Instructor: This topic is explored in Chapter 8.]
Factors Affecting Neighborhood Quality
The major factors that affect the quality of any neighborhood can be grouped as physical, economic, social, and political in nature.
1. Physical and Locational Factors
The physical factors that affect neighborhood desirability and quality include the natural features of location, as well as those created by people. Other factors include:
· Convenience to schools, employment, transportation routes, shopping, public health and medical facilities, religious and recreation centers
· Adequacy of utilities and other public services
· General appearance and compatibility of properties
· Appeal to the market
· Absence of contamination and other adverse environmental conditions
2. Economic Factors
· The income level, employment opportunities, and employment stability of the neighborhood occupants
· Growth rate, trend of property values, supply and demand, marketing time for properties, and land-use changes in evidence
3. Social Factors
· Similarity of interests of the occupants
· Life-styles, standards, education, occupations, ages, and family makeup of neighborhood occupants
· The predominant occupancy (whether renters or owner-occupants)
· Rate at which the occupants move (the turnover rate)
· Neighborhood groups and organizations (e.g. homeowners’ associations, merchants associations, etc.)
· Importance placed on building maintenance and modernization
· Community support for the existing legal and political order
· How occupants rate desirability of their own neighborhood (relative to other neighborhoods)
4. Political Factors
· The level and fairness of property taxes and assessments
· City or community services provided
· Governmental positions on air, soil, and water pollution, job safety, social programs, noise, odor, and ecological controls
· Many political factors are the ultimate result of social attitudes (interdependent)
Neighborhoods and Change
Every neighborhood goes through a series of changes over the years. It is referred to as the neighborhood cycle because it tends to repeat:
1. Development phase
2. Stable phase
3. Decline or decay phase
4. Renaissance, revitalization or renewal phase
1. Evidence of Neighborhood Change
Signs of neighborhood change or transition include:
· Growth phase to the stable phase—reduction in vacant land and a decline in construction
· Stable phase to the declining phase--changes in existing buildings: reduced maintenance (deterioration) and/or higher density of use
· Declining phase to Renaissance phase--notable renovation of existing structures / change in uses / demolition
2. Neighborhoods as Barometers of Change
Appraisers study neighborhoods and their changes to get physical evidence of the social and economic forces affecting the neighborhood. Patterns and/or direction of change should be observed.
[Instructor: Refer to Figures 4.2, 4.3 and 4.4 on Pages 93-95 for illustrations.]
Using Neighborhood Information
Key Reasons for collecting and analyzing neighborhood information:
1. To define the geographic area that will be the center of the market search area.
2. It assists in defining the highest and best use of the subject property.
3. It is vital data source in deriving the adjustment of comparable sales. However, instances occur when insufficient data is available within the neighborhood – requiring one to collect data from outside the defined neighborhood.
4.2 UNDERSTANDING COMMUNITIES AND HOW THEY GROW
A study of the origin, location, and layout of cities helps us understand the land use patterns that form over time, and the potential for economic growth or other changes.
Community Origins and Growth
1. Town Site Selection Factors
· Availability of food and water
· Natural defense of the location against enemies
· Religious purposes
· Commercial benefits
· Topography and exiting transportation routes
· Raw resources
· Form of transportation systems in use at the time
2. Types of Towns
1. The central town
2. The transportation-service town (situated at nodes)
3. The special-function town
3. Changes in City Function
As a town grows, it can change from one functional type to another.
4. Economic Growth
· Communities are not self-sufficient; they must import goods from other communities, and pay for them by exporting their own goods.
· Each community produces goods and services for its residents; called local production.
· The surplus sold to other towns is called export production.
· Export production forms the economic base of the community.
· Each community has its own specialized skills, products and services.
· We use our knowledge of such factors to study the possible growth or decline, stability, and future of the community and neighborhood.
Physical Patterns of the Community
As the community grows, the different land uses form land-use patterns. Advantages and disadvantages form the basis for the principle of Comparative Advantage.
1. Major Factors in Land-Use Patterns
1. Topography
2. The town’s origins
3. Transportation systems used
4. Major existing uses
2. Typical Patterns
· The cluster of commercial activity or land uses at an intersection or at a transportation node
· Concentric or circular rings of uses around the central core, especially noticeable in smaller towns
· Concentric rings breaking into higher and lower valued segments (as in large towns)
· Linear strips, along transportation lines (per Current Trends, below)
3. Current Trends
Freeways and other transportation lines in modern cities have produced patterns of commercial uses forming fixed linear routes, instead of rings. Now the pattern of uses may not look like a series of concentric rings, but rather like an irregular spider web, or a star with a number of points (see Figure 4.10 Page 105).
Using Information About Communities
1. Community forces and trends may affect the trends in the neighborhood.
2. Community trends can affect all real estate markets.
Understanding community origins and patterns of growth helps one understand the data that will be used in the appraisal, and how it affects the subject property and neighborhood.
4.3 REAL ESTATE MARKETS AND THEIR ANALYSIS
To estimate market value, appraisers need an understanding first of markets in general, and then of real estate markets.
What Is a Market?
Any place where buyers and sellers meet to exchange goods or services.
1. The Perfect Market
The perfect market meets each of these seven tests:
1. There are numerous buyers and sellers.
2. All parties are knowledgeable.
3. All parties are free to trade or not trade.
4. All products are similar and interchangeable.
5. All products can be transported to better markets.
6. Items are small, inexpensive, and frequently purchased.
7. The government plays a very minor role in pricing.
2. Imperfect Markets
· Markets that cannot meet the tests of a perfect market are therefore imperfect
· Inadequate knowledge of buyers and/or sellers, for example
3. Real Estate Markets
· Real estate markets are often used by economists as examples of imperfect markets.
· For a given type, price range and location of real property, there are relatively few buyers and sellers.
· Neither buyer nor seller is very knowledgeable because the product is complex and not as commonly bought and sold as other commodities.
· Available properties are not very similar or interchangeable. They cannot be transported to a better market.
· Properties are not small or inexpensive; nor frequently purchased.
· Real estate pricing is strongly influenced by government actions.
· In the real estate market, each subcategory of property is distinct from the others.
Market Analysis and Interpretation
1. In the appraisal process, the appraiser uses the knowledge and understanding of market activity in three ways:
a. To help decide what kinds of market data to collect and what adjustments to make.
b. To estimate a reasonable marketing time for the subject property.
c. To report on current marketing conditions and trends that may affect future values, projected or forecasted income, and/or the absorption period for income-producing or multiple-unit sale properties.
2. For our study purposes, market behavior can be divided into three parts: 1) price levels, 2) price trends or movement, and 3) the levels or volume of market activity.
1. Price Levels
1. Compare price levels with current costs for new construction and lot prices.
2. See whether prices vary with the type of building, location, or market.
3. Compare the effects of age, size, and other features on sales prices.
2. Price Movements (Trends)
Price movements can suggest which way prices are changing, how fast, and whether there are differences between various types of properties or markets (i.e. Supply-Demand Balance).
1. The direction and speed of price movement tells us how strong or weak the particular market is.
2. The direction and speed of current price changes compared with past price changes (or economic changes) may be important.
3. The comparison of price changes with construction cost changes can suggest the trend of land values and builder’s profits.
3. Levels of Activity
1. Measures of market activity – prices do not always respond smoothly:
a. Volume (number) of sales compared to past volume for that location, property type, price range, etc.
b. Volume of sales compared to volume (number) of listings: is it a seller’s or buyer’s market?
c. Length of time a property was on the market prior to sale; are marketing times (days on market) increasing or decreasing?
d. Traffic (i.e., number of lookers) and types of offers on listed property
e. Pattern of asking price reductions in listings or activity:
2. Possible interpretations:
a. A market where prices are about to jump upward: increasing traffic, especially with declining numbers of listings
b. A stable, stagnant, or smoothly moving market
c. A troubled market where prices are about to drop: declining sales and/or increasing numbers of listings and expired listings
[Note: a. and c. are examples of transitional markets – very challenging to interpret.]
As noted earlier the preparation of the Market Conditions Addendum (Fannie Mae Form 1004MC) provides a structured format by which to present the foregoing types of market data, analyses, and conclusions.
CHARTER SUMMARY
[Instructor: Refer back to the beginning of your outline, or review the following terms and concepts to summarize this session.]
IMPORTANT TERMS AND CONCEPTS
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Instructor’s Manual: Basic Real Estate Appraisal, 7th. Edition
Chapter 4
Central town
Comparative advantage
Concentric rings
Decline phase
Density of use
Development phase
Economic base
Export production
Imperfect markets
Land-use changes
Land-use patterns
Linkage
Local production
Market activity
Marketing time
Neighborhood
Neighborhood boundary
Neighborhood cycle
Nodes
Perfect market
Price levels
Price trends
Renaissance phase
Sales volume
Special-function towns
Stable phase
Supply-demand balance
Topography
Town origin
Transportation-service town
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Instructor’s Manual: Basic Real Estate Appraisal, 7th. Edition
Chapter 4
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Instructor’s Manual: Basic Real Estate Appraisal, 9th Edition
Chapter 4 Lecture Outline
REVIEWING YOUR UNDERSTANDING
[Instructor: See end of textbook chapter for review questions.]
PRACTICAL APPLICATION
Students preparing an appraisal for class should refer to this textbook section for guidance and the collection and analyses of data to fill in the Neighborhood section of the URAR form and the separate preparation of the Market Conditions Addendum (Fannie Mae Form 1004MC).
STUDENT EXERCISES
[Instructor: Suggested True/False questions are available to use for Chapter 4.]
Suggested Discussion, Discussion Post, or Essay Exercise:
· Ask students if they have any personal experience that that could relate to and/or demonstrate:
o One or more of the factors affecting neighborhood quality;
o One or more of the phases in the neighborhood cycle; or
o Community origins or patterns of growth.
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