Market Value.

Every day, thousands of Ontario professionals work with property value - each with his or her own unique perspective. Insurance brokers concentrate on replacement cost to provide adequate house/contents coverage, tax a__essors routinely establish a__essed value leading to tax notices, stock brokers a___yze corporate a__ets including real estate values, loan officers scrutinize real property security for a mortgage, and appraisers painstakingly prepare narrative appraisals for the courtroom. Meanwhile, real estate practitioners routinely address value in listing and selling property.

Value is focal to our profession and many others, and principles underlying value are fundamental to the marketplace.

Session Guide

These topics are covered in this session:

Understanding Value

Differing Values
Subjective v. Objective Value
Market Price v. Market Value
Market Value Defined
Investment Value
Principles of Value

Introduction to the Appraisal Process

Comparative Market a___ysis (CMA)

Contents
Knowledge Integration

session 2: Learning Outcomes

At the conclusion of this session, students will be able to:

Describe and differentiate between subjective and objective value, as well as market price versus market value.
Differentiate between market value, investment value, and value in use.
Outline four a__umptions underlying market value.
Describe and provide an example for fifteen principles of value that provide guidance in establishing market value.
Briefly outline eight steps required in completing an appraisal report.
Detail key components making up a typical comparative market a___ysis (CMA) and outline the role of CMAs in listing and selling activities.

UNDERSTANDING VALUE
Price mechanisms continuously operate to establish values in the marketplace. Countless exchanges of goods and services and a host of prices ultimately lead to value. Real estate value is intrinsically tied to sale prices. Value responds to price fluctuations over time, as supply/demand forces play out in the marketplace.
Differing Values
Many types of value are referenced in our complex society. The Canadian economy is filled with value: insurable value, book value, appraised value, salvage value, a__essed value, liquidation value, loan value... even sentimental value. In real estate, the primary focus rests on market value. Endless debates rage on what constitutes value. Undeniably, the ebb and flow of the market and price mechanism (asking and selling prices) are at the source. Value, for real estate purposes, is most commonly confirmed through a___ysis of historical data.

Subjective vs. Objective Value
Value has both subjective and objective dimensions: objective relating to the direct cost of creating (e.g., acquiring a lot and building a home), and subjective involving the perception of value in the minds of the buyer and seller. In subjective valuation, cost is not the primary consideration, but rather the present worth of future benefits that accrue from ownership. For example, a home and lot may objectively cost $225,000 to build, but the $195,000 selling price is subjective (value in the eyes of the buyer).

Most estimates of market value rely on subjective values. However, appraisers ensure that both dimensions are a___yzed by using three approaches to establishing value: the cost approach, the income approach, and the direct comparison approach. The cost approach favours objective value through a___ysis of actual cost, while income and direct comparison approaches emphasize subjective values. Through all three mechanisms, appraisers arrive at an estimate of value.

Market Price vs. Market Value
Market price is the price for an individual property, while market value is an estimate of value arising from many sales (market prices). Consumers are often misled by market price. For example, a sale may occur for $295,000 and neighbours a__ume that comparable homes will command at least that value. However, special circumstances may have been present, i.e., the seller was under financial duress and sold too low.

Conversely, the property may have had a distinctive feature that commanded a higher price. Knowledgeable appraisers seek various comparables (market prices) to ultimately estimate value.

Curiosity

From Marketplace to Market Value

Individuals seeking real estate values first go to the market, obtain relevant facts, and then
a___yze their findings to arrive at market value.

The real estate market involves thousands of transactions.
Market prices for individual transactions are driven by supply/demand.
Market prices are established through negotiations.
Review market transactions for most comparable properties.
Most comparable sold properties are selected for comparison (subjective).
Costs a__ociated with reproducing similar properties is a___yzed (objective).
Three approaches to value may be considered in arriving at estimate of value (cost, direct comparison, and income).
Estimate of market value is prepared and the report completed.

Market Value Defined
Market value (also referred to as value in exchange), is based on judgement arising from various sales in the marketplace. The definition, frequently found in appraisal reports, is:

The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and a__uming that neither is under undue duress.

Source: The Appraisal of Real Estate, 11th Edition, Appraisal Institute.

Four a__umptions of Market Value

Investment Value

Investment value, as with market value, flows from the present worth of future anticipated benefits, but differs in that the value of the property is most directly related to cash flows, investor objectives, and related circumstances. For example, an individual investor may perceive added benefit due to a specific use for the property, his/her tax status, investment yield requirements, etc. Interestingly, commercial practitioners may encounter circumstances in which market value is established based on an unknown buyer with a second investment value relating to specific needs of a buyer. Market value and investment value can in theory be the same, but in practice often differ.

Focus: Value in Use

Value, while simplified for this text, is a complex issue. For example, appraisers must contend with value in use. a__ume that a small plant in Barrie is worth $750,000 to its owners given its unique layout which accommodates a specific manufacturing process. Yet, to a developer, this aging building and site has a market value of $650,000 (less building demolition costs), when contemplating a new condominium project. The property has a higher value in use to the owner than its true market value. The same could be true of a residential property in London in which a tennis court consumes the entire rear yard. To the owner, the special value (value in use) attaches given his devotion to tennis. To the buyer, the unsightly court is viewed as an obstacle to be removed for landscaping and a pool. Some buildings and a__ociated purposes are so unique in design that few buyers would seriously purchase the property. Establishing a defensible market value may be all but impossible.

Study Links

Encyclopedia

Value
Subjective Value
Objective Value
Market Price
Market Value
Value in Exchange
Investment Value
Value in Use

1.
Value

The quantity of one thing that can be obtained in exchange for another. Money is the common denomin­ator by which real property value is usually measured. The utility of a commodity, such as property, is expressed in the amount of money that would be paid for its acquisition. Value is the present worth of future benefits arising out of ownership to typical users or investors and depends on the need for, and availability of, a commod­ity; i.e., supply and demand.
Application

Value is the key word used in practically every segment of the real estate business. Its significance and importance would imply a precisely and clearly under­stood meaning. Unfortunately, this is not often the case. Value is a word for which there are as many definitions as there are types of value in everyday life. For example, the tax a__essor usually thinks of value in terms of a__essed value, the insurance agent in terms of insurable value, the accountant in terms of book value, the appraiser in terms of market value, and the commercial practitioner in terms of both market value and investment value. Further, the banker or mortgagee is likely to equate value with lending value. A natural tendency exists to attach to the word value a variety of descriptive adjectives suggesting a specific kind of value: intrinsic value, sentimental value, salvage value, liquidation value, and appraised value.

A precise meaning has been a life-long study of many economic theorists. Most debates centre on objective versus subjective value. Objective value maintains that value is tied to the cost of reproduction. Subjective value states that value exists only in the minds of buyers and sellers.

Further, one of the most important distinctions for real estate purposes is that value may have one value in exchange and quite a different value in use. A second important distinction arises from activities of commercial practitioners between market value (value based on the actions of typical buyers and sellers), and investment value (value of the subject property based on individual investor needs, goals, and objectives).

For additional discussion relating to differing perspectives on value, see Investment Value, Market Value, Objective Value and Subjective Value.

2.
Subjective Value

Created and exists only in the minds of the potential buyers and sellers. Subjective value is the price that people will pay for a property, irrespective of its cost, as differentiated from objective value in which value is a__ociated with the cost of production or cost of creating the property.
Application

An appraiser uses subjective value in both the direct comparison approach and the income approach. In fact, the subjective value dominates real estate valuation. It can matter little what costs are a__ociated with development of a property. Value is measured through the present worth of all the future benefits that likely will accrue through ownership. Future benefits do not necessarily indicate money, e.g., an income stream. Non-monetary benefits, in the case of residential property, may include subjective factors such as pleasurable living, or amenities, e.g., a park or forest reserve.

3.
Objective Value

The value of a property based on the a___ysis of costs a__ociated with the reproduction of that property (an exact replica), or one of equal utility, (a replacement). Replacement cost is most commonly used given the ease of obtaining accurate information.
Application

Objective value plays a significant role in determining value by means of the cost approach. Essentially two schools of thought have arisen over the con­cept of value. One school emphasizes the objective nature of value as it relates to the actual production cost of creat­ing a property (the cost approach). The other, representing advocates of subjective value, believes that value exists only in the mind of potential buyers, sellers, owners, and users of real estate (the direct comparison approach).

In the residential appraisal process, both methods of valuation are used reflecting these schools of thought, but the direct comparison approach is more heavily relied upon.

Five steps make up the cost approach.

4.
Market Price

The amount paid, or to be paid, for a property in a par­ticular transaction. Market price is an accomplished or historic fact, as opposed to market value that remains an estimate until proven otherwise. Market price involves no a__umption of prudent conduct by the buyer and/or seller and does not a__ume the absence of undue stimuli, reasonable exposure to the marketplace, or any other condition basic to the market value concept. Under an efficient market system, where property is openly offered and promoted to well-informed, capable buyers, market price and market value closely approximate each other.

5.
Market Value

The highest price in terms of money, that the property will bring to a willing seller if exposed for sale on the open market; allowing a reasonable time to find a willing buyer, buying with the knowledge of all the uses to which it is adapted and for which it can be legally used, and with neither buyer or seller acting under necessity, compulsion nor peculiar and special circumstances.
Application

Market value is not to be confused with market price, i.e., the amount paid, or to be paid, for a property in a particular transaction. Market price is an accomplished or historic fact. Market price tends to closely align with market value in an efficient market system involving willing, informed buyers and sellers acting rationally and prudently, given reasonable periods of time with no undue influences. Successive market prices in the sale of comparable homes form the basis of estimating the market value of a partic­ular property.

Market value should not be confused with cost. Expending $150,000 in constructing a new home plus $80,000 for the purchase of the land in no way ensures a market value of $230,000. However, a__uming a reason­ably efficient market, the difference between actual cost and market value may be negligible unless obsolescence was built into the property or intervening factors affect the marketplace, such as lack of housing supply, dynamic growth in a particular market, or extremely depressed market conditions.

6.
Value in Exchange

The amount of goods and services that an informed buyer would offer in exchange for an economic good, under given market conditions. Value in exchange is relative, since there must be comparison with other economic goods and alternatives available from which the potential buyer may choose.
Application

Value in exchange is best described as the probable price at which a commodity trades in a free, competitive, and open market and is synonymous with market value.

7.
Investment Value

Investment value is defined as the value of an investment property from the perspective of a specific investor. Investment value must be clearly differentiated from market value. Market value focuses on the most probable price that a property will sell for based on a typical buyer and seller. Many appraisers reference market value as value in the marketplace. Both market value and investment value flow from the present value of future anticipated benefits. However, differing a__umptions and conditions can alter the perception of such benefits. Investment value is slanted to the individual's objectives and unique investor circum­stances that can affect yield; for example, marginal tax rate or distinct operating methods that may affect income and/or expense projections. Accordingly, forecasted cash flows will vary based on the extent and weighting of these factors and these, in turn, impact the valuation process.
Application

Many investor-oriented factors can inter­cede in arriving at investment value. Commercial practi­tioners, in providing estimates, must carefully review all income and expense forecasts in relation to the individ­ual investor. For example, the net present value (NPV) of future cash flows is a direct consequence of the selected discount rate. The discount rate may be derived totally from the marketplace but ultimately be modified to reflect such factors as investor tolerance for risk and stated corp­orate policies regarding anticipated returns. Even minor alterations to a discount rate can significantly impact value. The investor's tax position will also affect cash flows after tax and direct­ly impact both the screening and selection process.

Interestingly, commercial practitioners work in two worlds: market value estimates and investment value esti­mates. On the one hand, a salesperson may be required to estimate market value a__uming no specific buyer when working with a seller client. Conversely, he/she may a___yze prospective properties based on the needs and dictates of a specific buyer client and arrive at a unique investment value. The difference between these values is dependent on a__ump­tions made. Market value and invest­ment value can be the same theoretically, but rarely are in practice. Practitioners may prepare both market and investment value estimates, or even a range of values for each based on selected a__umptions. The client is then furnished with parameters in which to select both an initial bid position as well as overall negotiating range.

8.
Value in Use

The value of an economic good to its owner/user or pros­pective buyer that is based on the productivity of the eco­nomic good to that specific individual. This usually consists of market value plus an increment that represents some extra value to the owner/user or prospective buyer.
Application

For real estate purposes, value in use is the value given to a property by the owner who is using that property. The property would probably have been designed or used to suit the particular needs and enjoyment of the owner and takes on a special significance that translates into an additional monetary value in the owner's opinion. This type of value is difficult to measure and is normally different in every case. It may often be higher than market value, since it is looked at from the owner's viewpoint only.

Interestingly, buyers considering investment property may perceive special value due to unique circumstances, needs, or uses particular to that individual that can be applied to a property. This uniqueness can translate into value, most commonly referred to as investment value. Commercial practitioners often use investment value when a___yzing investment-grade properties. However, special value is not limited to commercial property. Residential property may also have additional value to a specific buyer given certain features or amenities.

session 2: PRINCIPLES OF VALUE
If the real estate market is built on numerous individual transactions and market prices are set by countless negotiations, what underlying principles are at work? Fortunately, appraisal research has contributed significantly by explaining and codifying underlying forces. Fifteen generally accepted principles of value are detailed that, in concert, provide insight to anyone when delving into market prices, market value, and the subtleties of real estate negotiations.

Anticipation
Buyers Buy the Present Worth of Future Benefits
A buyer purchases a home with a double garage and pays $240,000 when a similar home with a single garage is available at $225,000. The anticipated benefit of that additional garage is $15,000. Interestingly, the added value may have little to do with the actual cost of the garage, but rather the perceived value of having more storage room/parking and/or the improved appearance of the home (anticipated resale value).
Balance
Maximum Value is Maintained through Balance
Three hardware stores in an area warranting only one; none will likely achieve their true potential given an imbalance of supply and demand. From a residential perspective, consider a 5,000 square foot home with only a single car garage. The home will probably not achieve its true value, as the house and garage components are not in balance.
Change
A Value Today is Valid only for Today
Salesperson Lane estimates the value of the Smith home at $249,000 today. Tomorrow, an announcement confirms that 20% of the community workforce will be laid off within 60 days. The next day, Smith calls to list his home, but the value is significantly less due to economic change.
Competition
Excess Profit Breeds Ruinous Competition
Two entrepreneurs, perceiving market opportunity, open identical stores across from each other; neither will probably achieve maximum value for their investment. Two builders overestimate market demand and build excess housing units on the same street. Neither achieves anticipated profit levels.
Conformity
Reasonable Conformance with Existing Standards Protects Value
Standards Protects Value Housing or other structures that reasonably conform with one another tend to hold their value. Inharmonious uses can impact value. See also Progression and Regression.
Consistent Use
No Double Dipping When a___yzing Value
One value cannot be given to the building for a specific use and another for the land. The two must be viewed together. For example, a residential house on a commercial lot cannot be summed as the value of the residence as a home plus the value of the commercial lot for development. The cost of demolishing or renovating the home to commercial purposes must be taken into consideration (a__uming that the highest and best use is commercial).

Contribution
Value Relates to Contribution, not Cost
An owner wants to install a swimming pool at a cost of $35,000. An appraiser estimates that the value of the home will increase by $28,000. The contributory value is $28,000, not the true cost of the pool. Owners typically wrestle with many improvements as to what their contribution to value is in relation to their cost.
External Factors
Things Nearby Can Influence Value
Buyer A purchases a home in a quiet residential neighbourhood. Buyer B purchases a similar home located nearby, but at a noisy intersection. The noise factor will probably negatively impact Buyer B's value.
Highest and Best Use
Focus on the Use that will Produce the Greatest Return
Appraisers typically view both the current use as well as its highest and best use. A large single family home situated on a lot permitting a four-plex would probably have more value (highest and best use) as an income property, a__uming that the conversion could be accomplished economically and that zoning provisions permit such a change. Marketplace negotiations and price mechanisms pursue the highest and best use.
Increasing/Decreasing Returns
More is Not Necessarily Better
Adding one garage to a new home may increase its value by $20,000, but adding two more (totalling three) does not usually translate into $60,000. Another example might involve a landlord painting a rental unit and receiving $150 more per month due to the improved condition. However, buying more expensive paint or applying a third coat will probably not result in additional rent. In other words, there is a point at which adding value results in diminishing returns. The principle is often referred to as the principle of diminishing returns.
Progression
The Smallest House on the Street May be the Best Buy
Where neighbouring properties are dissimilar, the value of the poorer property will be positively impacted by properties of higher value in the immediate vicinity.
Regression
The Largest House on the Street May Not be the Best Buy
This principle states that where neighbouring properties are dissimilar, the value of the higher valued house will be negatively impacted by properties of lower value in the immediate vicinity.
Substitution
Buyers Look for the Best Bang for the Buck
This principle a__erts that a prudent buyer will not pay more for something than the cost of acquiring an equally desirable substitute in the marketplace. Buyers, often unwittingly, become astute appraisers of value. For example, when viewing a new home at $299,500 and a resale with equally desirable (but differing) features at $279,500, the buyer may conclude that the resale is better value, in effect substituting newness for other features and a lower price. The principle of substitution is continuously at work in the marketplace.
Supply and Demand
Market Forces Are Always at Work
No property sits in isolation. All real estate is impacted by the constant ebb and flow of supply/demand forces. Lack of availability in the face of strong demand typically drives prices upwards. Excess properties, when buyer interest is lagging, tend to lower prices. Real estate practitioners typically watch listing inventory, selling price ratios, number of days on the market, total sales volume, and sale prices to get a sense of supply/demand forces.
Surplus Productivity
Net Income Flows to the Land
A principle stating that after all costs are satisfied in a venture, the net income flows to land and establishes the value of that land. For example, if a farmer received $38,000 in net income after all farming expenses have been paid, those funds flow to the land. If the capitalization (cap) rate is 10%, then the value of that land is $38,000 ? .10 = $380,000. Additional discussion of cap rates is addressed in a subsequent Module.

Market Focus

The Cost vs. Value Debate

Heated debates between dollars spent and value received reach every corner of the marketplace. The sellers adamantly want $200,000 for their property, because that's what they've got in it. Buyers will pay only $175,000 because that's what it is worth. Cost v. value goes to the heart of negotiations. New hardwood floors may cost $14,000, but their value may only be $10,000 in the eyes of the buyer. Essentially, buyers and sellers are arguing over subjective versus objective value. Knowing the difference and listing property based on value not cost is vital to any sales career. Recently, the Appraisal Institute of Canada conducted a member survey about payback on renovations. In other words, for every dollar spent, what payback (increase in value) would occur:

The reader is reminded that this information is derived from a survey of Institute members and does not constitute a formal research project.

Source: Appraisal Institute of Canada, 1999

Study Links

Encyclopedia

Principles of Value (Appraisal)
For those seeking more information about commercial sales and the principle of surplus productivity, look up:
1.
Principles of Value (Appraisal)

The appraisal of real estate involves various principles that are either fundamental to understanding value or explain how various components of real estate contribute to value. These principles are isolated for discussion purposes but, in fact, are interrelated in the marketplace.

Factors of Production
2.
Factors of Production

(see also Economics)

Components, also referred to as agents of production and factors in production, used in the production of wealth, income, or services that can be sold for money. Factors of production include labour (natural resources), management (co-ordination), capital, and land.

Labour has the first claim on the gross income from any enterprise. The costs of labour include wages, salaries, and benefits, such as health insurance and employ­ment insurance. Costs of co-ordination follow labour and involve entrepreneurial incentive together with those services necessary to co-ordinate the other three factors and weld them into a productive unit. The cost of capital refers to payments for the use of capital, and interest on and amortization of investment concerning buildings, equipment, and furnishings, but not land. Lastly, a claim for land is made against the residual portion of the gross income.
Application

In appraisals, factors of production are used where applying the principle of surplus productivity. This principle states that when the net income remaining after all expenses necessary to the operation have been paid and the capital invested in improvements has been satis­fied, the remainder is imputable to the land and tends to fix its value. The land is valuable according to the sur­plus productivity imputable to it. More simply put, the land is only as valu­able as the income that can be attrib­uted to it after all expenses have been addressed.

Figure F.1 illustrates the successive levels in which gross income is applied. The last of which is land.
(the above reference is NOT required for exercises or the examination).

3.
Economics

The study of how individuals and society allocate scarce resources in satisfying their wants and needs, including the production, distribution, and consumption of goods and services to meet the needs of various economic units (e.g., individual, family, corporation, and government).

Perspective

What's Around Us!

Value involves a complex interplay of what exists on the property, as well as what is present nearby. The principle of external factors best highlights the challenge for anyone estimating value. Clearly anything beyond the control of the property owner can impact value, whether it be the type of property next door, the number of competitors in a commercial complex, or the services available within a specific neighbourhood. Recently, the environment has taken centre stage as one more external force to be reckoned with. Both positive and negative possibilities are highlighted.

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Contamination:

The Property Next Door
Many factors can affect value. Increasingly, contamination has become a hot topic in real estate marketing. For example, in Brantford, a large underground chemical contamination from a former refrigerator making plant was recently discovered. Trichloroethylene, known as TCE, is a toxic chemical used as a degreaser in manufacturing. Initial estimates suggest that a 12 block residential area in the city's east side may be affected.

In Port Colborne, high levels of lead were discovered in the soil. Elevated levels have been linked to various medical problems. Near Waterloo, residents voiced objection to mega farms and the potential impact of offensive odours and possible water contamination involving farms that can house more than 2,500 pigs with storage for 15.5 million litres or more of liquid manure.

Ontario is not alone. Perhaps, the most-publicized contamination story lies in the No Co (North of c__e Ovens in Sydney, N.S.) where a neighbourhood is caught in the aftermath of more than a century of steelmaking, ironically the result of the government-operated Sysco plant and c__e ovens that became a provincial crown corporation in the late sixties.

This story is far from over, even with millions now spent on research and clean-up, and more funds allocated. For years, c__e oven emissions floated over adjacent residential areas and leaked into Sydney harbour. Concerns centre on high levels of polycyclic aromatic hydrocarbons, but testing has also revealed concentrations of other chemicals, such as a___nic, lead, manganese, copper, and cadmium.

The difficulty from a real estate perspective involves the stigma attached to the No Co area. According to some practitioners, the demand for homes has dwindled, as buyers shun affected neighbourhoods. Others have minimized the health risk and point to huge funds now invested in remediation (clean up involving soil removal). However, despite such efforts, the issue still casts a shadow on the marketplace.

While sincere efforts to clean up the area are positive, perceptions and the lingering memory of problems are more difficult to erase. Time may be the only solution.

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Green Value

Teeing Off
Even those who don't play the game are attracted to golf course communities. This new hot niche in the residential market provides open s___e, a different lifestyle, and often an opportunity to reclaim land once relegated to dump sites, quarries, and brownfields (contaminated sites). Premium prices are now a__ociated with lots backing onto the course. Open s___es, green vistas, and rear yards that don't b___ up to neighbouring houses are in demand.

Clearly, real estate values follow these sought after locations, as choice lots are few and supply/demand forces dominate. Presently, golf course communities are springing up in urban as well as rural settings. From a planning perspective, such communities can pose certain challenges (e.g., water resources to keep greens and fairways in excellent shape), but the trend is clearly growing.

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Noise Pollution:

Taking Off
The sound of aircraft may cause some to daydream about travel, but not those near an airport runway. The creation of new runways or extensions to existing ones typically evoke debates and extensive community consultations.

Courts have awarded settlements to disgruntled neighbours, recognizing that property values are affected. But noise problems are becoming much more pervasive than taxiways and jet engines. Canadians are living in closer proximity to one another. What soundproofing should be installed in condominiums, what windows will block street level noise, and what to do about noisy neighbours? Quiet and privacy are increasingly in demand... and demand usually translates into value.

INTRODUCTION TO
THE APPRAISAL PROCESS
Appraisal is the act or process of estimating value and providing an opinion concerning that value. The opinion can be verbal or written. Written reports can range from a lengthy document (a narrative report), or a summary report (commonly called a form report ).

Interestingly, appraisal is not just relegated to professionals, thousands of consumers perform the function everyday. What differentiates individuals is knowledge and sophistication in performing valuations.

Over the years, the appraisal process has been formalized through the use of sequential steps leading to an opinion of value. In a detailed narrative report, eight steps are fully detailed to enable the reader to follow the logical a___ysis leading to an estimate of value:

STEP 1 Define the Problem
STEP 2
Preliminary Inspection and Planning the Work
STEP 3 Data Collection and a___ysis
STEP 4 Apply the Cost Approach
STEP 5 Apply the Direct Comparison Approach
STEP 6 Apply the Income Approach
STEP 7 Reconciliation and Final Estimate
STEP 8 Write the Appraisal Report

In a form report, the same eight steps are taken, however the written document summarizes details in a systematic and precise fashion. Form reports are most commonly a__ociated with appraisals relating to mortgage financing etc., in which individuals receiving the report have experience and training in the field.

Appraisers in the Marketplace

Curiosity

Narrowing the Focus

Appraisers must be aware of general trends as well as specifics concerning the property. Several levels of data can positively or negatively impact value.

Perspective

The Professional Appraiser At Work

A recent interview by the Ontario Real Estate Times with Anne Appraiser, an accredited appraiser and member of OREA, sheds light on the full narrative report.

Click on the icon to view the conversation.

COMPARATIVE MARKET
a___YSIS (CMA)
The comparative market a___ysis (the OREA Standard Form #260 is t__led Residential Market Comparison Guide), is not designed to estimate market value, but rather to establish a realistic listing price. The CMA is not an opinion of value, but a tool used to competitively market the property.

This informal a___ysis is typically completed by a salesperson using available MLS and exclusive office sale, sold, and expired data. The CMA can be an effective mechanism to inform sellers about market conditions. The CMA should be updated as required.

Contents
Some CMA forms include estimated selling price, transaction costs, and estimate of net proceeds. Caution is advised regarding the latter. Any estimate of net proceeds should include a fully detailed disclaimer, e.g., that costs are typical, the information is provided for illustration purposes only, and the seller's actual net may vary significantly based on individual circumstances and situations arising from the transaction.

MLS systems also typically provide a standard CMA template to enable salespeople to set parameters for sold, for sale, and expired properties within a defined area of the subject property.

Market memo

The E-CMA

The Internet has brought about revolutionary changes in how business in done. Increasingly sophisticated electronic CMAs are appearing that serve both buyers and sellers. With basic information about a specific property, these databases can produce:

Listing of all sales within a defined area.
Property specifics for each sale
Mapping of sales in relation to subject property.
Detailed a___ysis of the most comparable sales.
a___ysis of key sale characteristics, e.g., square footage, a__essed value, number of bedrooms, etc.
Market trend a___ysis, e.g., average prices over the past 10 years.
Demographic details of residents in the area.
School profiles.
Retail establishments within defined trading area.
The Internet poses both challenges and opportunities for real estate professionals.

CMA Focus

The True Cost of Overpricing

The CMA brings reality to a listing presentation. However, sellers may still insist on overpricing in hopes of getting more than true value. Here?s some compelling arguments not to do so:

Buyers are good appraisers. After all, their dollars are being invested.
The seller misses those who are truly motivated. A buyer looking in the $170,000 range would probably
not look at a $200,000 house, as he/she a__umes it could not be bought for less.
Salespeople use the property for comparison shopping to highlight the true value of other listings.
Advertising costs are wasted as ads attract buyers looking in a higher price range.
Low interest and unfavourable responses extend the time to sell the property.
The property remains on the market longer giving the impression that something is wrong.
The property becomes market stale as buyers and salespersons lose interest.
The listing price may have to be reduced lower than true value to finally attract buyers and get a sale.
Remember: A well-listed home is half sold.

Residential Market Comparison Guide

Study Links

Encyclopedia

Appraisal
Appraisal Institute of Canada
Comparative Market a___ysis

1.A.

Appraisal

In real estate appraisal, depreciation refers to any decline in the value of a physical a__et resulting from physical deterioration (ordinary wear and tear), and functional/ external obsolescence. Appraisers rely on two perspectives regarding depreciation. In the cost approach to value, accrued depreciation is calculated, while in the income approach to value, accruals for depreciation are used. For a detailed a___ysis of depreciation relating to deterioration and obsolescence, see Accrued Depreciation.

1.B.
Appraisal

The act or process of estimating value. The resulting opinion of value derived from the appraisal may be informal, trans­mitted verbally, or it may be formal, pre­sented in written form. Usually, it is a written statement setting forth an opinion of the value of an adequately described property as of a specified date, supported by the presentation and a___ysis of relevant data.

1.C.
Accrued Depreciation (Appraisal)

A loss of value, measured as of the date of appraisal, indicating the difference between reproduction cost new (RCN) or replacement cost of improvements, and the present worth of those improvements. Accrued deprecia­tion is sometimes referred to as diminished utility. This loss of value or diminished utility of the improvements to real property can be caused by many different factors. Using one or more of these methods, a schedule of accrued depreciation can be developed for the appraised property through several integrated steps. Various methods are used by appraisers including Observed Condition (Breakdown) Method, Economic Age-Life Depreciation Method, and Economic Age-Life Depreciation Method (Modified).
Application

Figure A.13 illustrates a typical schedule of accrued depreciation prepared by an appraiser when apply­ing the cost approach to value. This involves estimat­ing the reproduction cost less deductions for various forms of depreciation leading to a depreciated cost of the building and improvements, which is added to the site value to arrive at the final estimate of value.

2.
Appraisal Institute of Canada

Acronym: AIC

The Appraisal Institute of Canada, founded in 1938, is the national society of professional real estate appraisers. The Institute is dedicated to serving the public interest by advancing high standards for members of the appraisal profession through the granting of professional designations.

Practising members provide reasoned valuations widely respected by courts, chartered banks, real estate corporations, trust companies, mortgage and lending institutions, all levels of government, and private individuals. Members are governed by a Code of Ethics and Uniform Standards of Professional Appraisal Practice that establish minimum standards of performance in the rendering of professional services. The Institute's education program is available through most of its provincial a__ociations and chapters. Certain universities and colleges also offer the program on a full-time basis.
Reference

The national office of the Appraisal Institute of Canada is located at 203-150 Isabella Street, Ottawa, ON K1S 1V7. Provincial offices are main­tained in all provinces.

3.

Comparative Market a___ysis

(see also Residential Market Comparison Guide)

Acronym: CMA

An a___ysis used by real estate practi­tioners to a__ist the seller in comparing his/her property with others in the marketplace in order to establish a listing price. The comparative market a___ysis is not designed to establish market value.
Application

The CMA form typically includes homes that are currently for sale, have recently sold, or on which listings have expired or did not sell in a defined time period. This inform­ation provides the seller with an indication as to what buyers are prepared to pay, given current market conditions. The CMA is a valuable tool for salespeople when properly informing sellers regarding market conditions and obtaining saleable listings. No standard format for the CMA in Canada exists and content varies among brokerages, regions, and provinces.
Provincial

See applicable reference materials.

KNOWLEDGE INTEGRATION

Notables

Value has both objective and subjective perspectives. Most estimates of value rely on subjective values (e.g., direct comparison approach).
Professional appraisers consider three approaches to value: cost, direct comparison, and income.
Market price is the price for an individual property, market value is an estimate of value arising from many sales.
Most definitions of market value include four dimensions: informed buyer and seller, prudent behaviour, no undue pressure, and reasonable time.
Both market value and investment value flow from the present worth of future benefits, however investment value is particularly sensitive to individual investor perspectives, e.g., objectives and yield requirements.
Fifteen widely accepted principles impact value. Carefully review them.
The great debate in many consumer minds has to do with the cost of something as opposed to its value in the marketplace.
The appraisal process is commonly divided into eight distinct steps when arriving at an estimate of value.
A comparative market a___ysis (CMA) is not designed to estimate market value, but rather to establish a realistic listing price.
CMAs may include provision for seller net proceeds. Caution is advised, as accuracy is essential.

Glossary

Appraisal
Comparative Market a___ysis
Investment Value
Listing Price
Market Price
Market Value Objective Value
Principles of Value
Residential Market Comparison Guide
Subjective Value
Valuation
Value in Use

Web Scans

Appraisal Institute of Canada

Strategic Thinking

How will I handle sellers in the future who want more for their properties than they are worth? What sort of information will I need to help in such circumstances?
What types of questions should I ask buyer clients to determine their level of knowledge and experience in making well-informed decisions about value when buying properties?
What documentation and information will I need to ensure that sellers receive proper guidance in establishing a competitive listing price?
The workbook provides two examples of value in use relating to a manufacturing facility and a residential property with a large tennis court consuming the rear yard. What other circumstances might I encounter in the local marketplace that would indicate value in use ?
The principles of progression and regression work well in urban environments. Do they also apply in rural or cottage areas, particularly when adjacent properties are distant?
How could overpricing a property affect my reputation and impact my ability to earn a reasonable income?

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