MODULE II THE REAL ESTATE MARK Lyrics

MODULE II:
THE REAL ESTATE MARKET
Williamson patiently awaits the rate announcement, just like many other dedicated
market watchers. It's part of the routine, just like the daily newspaper scan of
employment rates, consumer confidence, or housing starts. The radio is tuned and
ready for the 9:00 a.m. announcement. Broker Williamson specializes in new
commercial and residential construction projects, and interest rate is the buzz
word these days.
At predetermined times, the Bank of Canada sets its overnight rate providing clear
signals to financial institutions regarding desired prime rates for the Canadian
marketplace.
Raising the Bank of Canada rate usually forewarns of corresponding changes by
individual lending institutions. Rate volatility typically has immediate
consequences, given the focal role of financing in real estate transactions. If rates
go down, lowered interest costs become a financial incentive to buyers and
investors. If up, the reverse is usually true. Real estate, like many other economic
sectors, is inextricably hinged to interest rates.
The announcement is made punctually at 9:00 a.m. No increase at this time. While
inflation increased due to brisk economic activity, an uncertain picture south of the
border prompted the cautious stance. Williamson's immediate reaction: Business
as usual for now; let's see what happens in a few weeks.

MARKET DYNAMICS
A solid grasp of economics and its impact on Canadian real estate markets
provides the backdrop. Understanding the inner workings is fundamental to value,
negotiations, and the listing/selling process. Little wonder that real estate chat is
crammed with mortgage rates, market statistics, buyer and seller markets, list to
sale ratios, vacancy rates, construction costs, and number of days on the market.
Fortunately, information abounds. Economics and real estate are routinely
splashed across daily newspapers, e.g., new construction levels, resale activity,
new projects, and rising prices from national, provincial, and local perspectives.
Overall economic trends are also readily available. The Bank of Canada, for
example, actively informs Canadians through Monetary Policy Reports and
Updates, as well as eight fixed announcement dates regarding overnight rates and economic conditions.
Economic trends are within easy grasp of every Canadian.

SESSION GUIDE
THESE TOPICS ARE COVERED IN THIS SESSION:

ECONOMICS AND THE CANADIAN MARKETPLACE
Statistics and Trends
Markets In Motion
Business Cycles
a___YZING THE REAL ESTATE MARKET
Unique Forces at Work
The Impact of Fixed Location
Overheated Markets and Corrections
TRACKING THE RESIDENTIAL MARKET
MLS Statistics
Market Trends
TRACKING THE COMMERCIAL MARKET
KNOWLEDGE INTEGRATION
Phase 1 Real Estate as a Professional Career Module II. The Market Session 1 of 2 Learning Outcomes
LEARNING OUTCOMES
AT THE CONCLUSION OF THIS SESSION, STUDENTS WILL BE ABLE TO:
Outline basic economic principles regarding the Canadian economy and the
real estate market.
Outline key economic and market indicators, and the impact of supply/demand
forces.
Detail unique factors affecting real estate markets with particular emphasis on
cycles, bubbles, and market corrections.
Briefly describe key indicators and trends within the residential marketplace.
Briefly describe key indicators and trends within the commercial marketplace.

Canadian
Marketplace

ECONOMICS AND
THE CANADIAN MARKETPLACE
The Canadian economy is classified as a mixed economy given the interplay of private (individuals, families, and
corporations), and public (governments) interest that direct and sustain economic activity. The cyclical mechanism
involves business, consumers, and the production of goods and services. At the centre, the government participates in
various aspects of the economy through intervention, e.g., spending policies (including monetary policies), activities of
crown corporations, taxation, and government legislative controls.
STATISTICS AND TRENDS
The grand picture is difficult to grasp. Canada's economic fabric consists of intermingled forces, factions, philosophies, and
activities. Business statistics bring some order to a___ysis by a__isting those seeking important trends and cause/effect
relationships. Canadian statistics focus on three broad categories and many sub-categories:
For example, popular consumer-related indices include retail sales, consumer confidence, consumer disposable
income/debt, and the consumer price index. Economists commonly use different indices to reflect change over time, e.g.,
base year comparisons, seasonally adjusted figures, and three-month moving averages.
MARKETS IN MOTION
Canadian markets are continuously changing, driven by supply/demand forces. In theory, a perfect marketplace could
attain balance and market equilibrium. In reality, the situation is vastly different. Most energies are devoted not to
balance, but to understanding and controlling market instabilities, intrusive forces, unexpected events, and competing
social/political factions.
CPI FOCUS
CONSUMER PRICE INDEX (CPI) 1995-2003 (BASED ON 1992 = 100)

This popular indicator of inflationary pressure (loss of buying power) is closely watched. The CPI, as a cost of living
measure, tracks 600 goods and services purchased by the average family, e.g., a family spending $100 for a basket of
goods in 1992 would require $122.10 for that same purchase in 2003.
Source: Statistics Canada and the Bank of Canada. The Bank of Canada provides an easy-to-use CPI calculator;
LABOUR FORCE FOCUS
UNEMPLOYMENT RATES 1976-2004
An undeniable link exists between unemployment rates and housing activity. Fewer dollars generated through jobs
impact large ticket purchases including housing.
View unemployment rates with caution. The real rate might be significantly higher due to various factors including
unreported unemployment (those discouraged in the job search) and/or those not registered with established agencies.
Source: Statistics Canada. CANSIM Table 282-0087
BUSINESS CYCLES
Business cycles often captivate both professional and casual market watchers. The procession through prosperity,

recession, and recovery are well documented. No two cycles display the same time interval, intensity, or precise curvature.
Extensive research has recently focused on real estate cycles. Many researchers contend that both short and long term
cycles are present. Short-term are driven by consumer confidence, interest rates, and localized economic conditions. Longer
cycles are impacted by broader demographic considerations. Real estate cycles typically vary from traditional business
cycles given inherently unique qualities.
Indicators that measure the length and amplitude (distance between prosperity and recession), of real estate cycles include
housing prices, available new and resale inventory, building starts/completions, consumer confidence, and mortgage rates.
In commercial real estate, the focus expands to vacancy factors, capitalization rates, and rents.
STUDY LINKS
Encyclopedia
Economics
Consumer Price Index
Employment [Statistics]
Business Cycle
Phase 1 Real Estate as a Professional Career Module II. The Market Session 1 of 2 a___yzing The Real Estate Market
a___YZING THE
REAL ESTATE MARKET
Real estate, once largely overlooked in our economy, is now carefully scrutinized by economists. Current research confirms
that the real estate market is more focal to national economics than originally thought. Millions of dollars routinely flow
through the buying, selling, and development processes.
UNIQUE FORCES AT WORK
Real estate has always intrigued researchers due, in no small way, to its unique qualities that make a___ysis and predictions
somewhat complex. See illustration below.
THE IMPACT OF FIXED LOCATION
Location, location, location! Residential and commercial buyers routinely differentiate seemingly identical properties by
focusing on fixed location factors, e.g., access to transportation, proximity to services, surrounding properties, travel
distance, distance to market, property taxation, and compatible land uses within the area.
Two similar structures in different locations can realize significantly different prices. The same is not true for other
products/services. For example, the car dealer's location does not normally dictate automobile price, nor does the cost of
groceries align with the grocery store's view.
To compound matters, slow/adjustment and local market considerations affect price. One location may offer similar
features, but supply is limited. Immediate demand drives up prices of existing inventory, particularly given time delays to
bring new construction to market. Other local circumstances may compound the dynamics, e.g., a freeze on building
permits due to lack of municipal services.

OVERHEATED MARKETS AND CORRECTIONS
Buyers should ultimately balance sellers in a perfect marketplace. But, countless intervening
factors make real estate cycles at best difficult to predict, at worst destructive. The
amplitude of a cycle can have far reaching effects. Simply put: How far is up and how long is
down.
Economists are keenly interested in real estate ups and downs. Little wonder, real estate has
displayed disturbing boom/bust cycles. The imperfect allocation of resources can have
disastrous economic impact.
Increasing consumer confidence, a seller's market, and lack of supply can give way to frenzied buying and market
bubbles.
The bubble of buyer excitement grows from its own momentum, with little or no economic justification.
Frenzied activity in the bubble typically leads to severe market corrections.
Ultimately, the market correction inflicts significant economic damage, e.g., unemployment, large equity (value)
losses, oversupply of products and services, and financial hardship including foreclosures and powers of sale.

Unique Real Estate Market Characteristics
No Standard Product Uniqueness of residential and commercial properties.
Local Real Estate Market Immobile, impacted by local market forces and situations.
Fixed Location Largely fixed in nature; cannot be taken to the market.
Market Not Standardized
Centralized control has proven difficult; MLS provides some form of order to
trading activities.
Slow Supply/Demand Adjustment
Supply/demand forces impacted by unique market variables, i.e., time to
introduce product and to deplete available inventory.
Private Transactions
Buyer/seller transactions are typically private matters; lack immediacy of
bid/asked and sold information as in the case of the stock market.
How imperfect is the market? The consequences can be devastating, if not properly understood and contemplated.
A CASUALTY OF IMPERFECT MARKETS
Activity (Developer A) Market Status Forces and Factors
Contemplates Building Landlord Market/ High Renter Demand No construction.
Adverse rental legislation being reviewed.
Arranges interim financing Landlord Market/Overheated Vacancy rate lowers to less than 1%.
Government offers financial incentives.
Lenders actively pursue developers.
Starts Construction Landlord Market/Bubble Grows Favourable financing-many starts.
Numerous developers enter construction
phase.
Rents continue rising given critical
shortage.
High migration levels fuel the shortage.
Entry of new units slowed by red tape.
Negative publicity about the shortage
increases.
Delays in Completion Minor Market Correction/
Excess Construction Begins
Government responds with rent controls.
Financing moves to other opportunities.
Economic downturn and rising interest
rates.
New units start appearing on the market.

Completes Building Severe Market Correction Bulk of new construction now on market.
Vacancy rate soars to double-digit.
Financing dries up.
Declares Bankruptcy Recession Developers exit given adverse legislation
and
economic realities.
CURIOSITY
RISING EQUITY, FINANCING, AND BUBBLES
Interest rates may have greater impact on market bubbles than originally contemplated. Financial experts are concerned
about equity borrowing. A buoyant market produces increased property values. With mortgage rates hovering at their
lowest in decades, owners are creatively addressing other financial burdens by borrowing against increased equity.
Mortgage funds are then used to maintain lifestyle, acquire goods, and pay off high interest credit card debt. To outward
appearance, the economy is expanding. Behind the scenes, rising real estate equity is driving the momentum, with the debt
boom close behind. No real accumulation of wealth is occurring, only manipulation of mortgaged equity. A correction could
prove onerous if real estate values decline in an over-leveraged marketplace.
STUDY LINKS
Encyclopedia
Real Estate Market
Real Estate Cycle
Phase 1 Real Estate as a Professional Career Module II. The Market Session 1 of 2 Tracking the Residential Market
TRACKING THE
RESIDENTIAL MARKET
Most active residential real estate professionals rely upon three primary sources of market information:

MLS STATISTICS
Canadian MLS systems typically separate data into active and historical (sold and/or expired) categories. Searches are
based on key fields, e.g., price, address, type, style, number of bedrooms, and other significant features. Pre-selected
parameters produce specific properties or groupings. Statistic information is also available to a__ist members with
marketplace trends and specialized local data for pre-determined geographic districts.
The scope of market indicators vary, but most provide sale prices, average prices, median prices, average listing to
selling ratios, and number of days on the market (see illustration below).
STUDY LINKS
Encyclopedia
Market Indicators
Canada Mortgage and Housing Corporation
Housing Absorptions
Housing Starts
MARKET TRENDS
Real estate salespeople typically receive market information from real estate boards and other external sources. Statistics
are often focused on measures of central tendency, most notably the mean (average) and median (mode is rarely used
for real estate statistics).
Further, means and medians are spotlighted in press reports and many media publications. While valuable, neither in
isolation warrant such status. Today's professional practitioner understands that accurate market depictions come not from
one or two measures, but rather from many distinct, but complementary, indicators.
Don't make snap decisions about mean and median trends. A decline or increase is often taken as an indication of falling or
rising prices, but appearances can be deceiving:
Mean and median may move due to increased sales activity in upper or lower price ranges. The shifting distribution
gives an impression of rising or falling prices.
Mean and median may move abruptly in a particular month given low total sales, particularly if several very high or
very low sales are included.
Mean and median may be rising, but not for all property types or areas included within the statistical report.

STUDY LINKS
Encyclopedia
Mean
Median
Mode
MARKET FOCUS
WHAT HAPPENS TO REAL ESTATE VALUES
Is real estate a sound investment? Consider the facts!

Measures of Central Tendency
Note: Middle f igure in an ar r ay
of f igur e s o rdered f r om
smalles t t o
l a rges t .

PERSPECTIVE
MARKET INDICATORS IN ANYTOWN
Broker Williams was asked by the local board to comment on market conditions in Anytown, Ontario. Williams is well known
for keeping his finger on the real estate pulse:
Click on the icon to view the conversation.
Phase 1 Real Estate as a Professional Career Module II. The Market Session 1 of 2 Tracking The Commercial Market
TRACKING THE
COMMERCIAL MARKET
Commercial markets demand intense research activity. Larger brokerages typically employ staff to track leasing and sale
data concerning office, retail, industrial, and other markets. Primary sources include:

COST FOCUS
NATIONAL NON-RESIDENTIAL TRENDS
Commercial research often goes well beyond local markets to national/international trends.
Non-Residential Building Construction Price Index (1997=100)
2003
4th Quarter
4th Quarter 2002 to 4th Quarter
2003 (% Change)
3rd Quarter 2003 to 4th Quarter 2003 (% Change)
Composite 119.8 2.9 0.5
Halifax 111.2 2.9 0.9

Montréal 117.4 2.2 0.1
Ottawa 121.8 3.1 0.4
Toronto 125.2 3.6 0.8
Calgary 119.9 2.7 0.2
Edmonton 118.3 2.7 0.5
Vancouver 109.7 2.0 0.7
Source: Statistics Canada. CANSIM Table 327-0039.
CURIOSITY
A MATTER OF s___E
The Greater Toronto Area boasts millions of square feet in office/industrial/commercial s___e. Commercial practitioners
methodically track its ups and downs.
Detailed breakdowns are the norm....consider the office leasing market. Data regarding vacancy rates, sublet s___e,
absorption (net change in occupied s___e over a given time period), and net rental rates (asking rate per square foot
excluding taxes and operating costs), are tracked.
PERSPECTIVE
PUTTING THEORY INTO PRACTICE
A recent conversation with Salesperson Lane puts economic discussions into perspective - from a practising professional.
Click on the icon to view the conversation.

The Market Session 1 of 2 Knowledge Integration
KNOWLEDGE INTEGRATION
NOTABLES
The Canadian economy, best described as a mixed economy, involves a cyclical mechanism.
Economic indicators can be broadly grouped under resource, business, and consumer categories.
Real estate has distinctive elements compared with other markets, e.g., fixed location and slow supply/demand
adjustment.
Business cycles and real estate cycles, while generally similar, often differ in length and amplitude.
Overheated markets, bubbles, and corrections can significantly impact the economy as well as labour markets,
investors, home owners, and other stakeholders in the real estate market.
Residential practitioners rely heavily on MLS systems, supporting data, and statistical trends.

Commercial practitioners also use MLS systems and supporting data, but also extensive brokerage research,
government resources, and private consulting/reporting mechanisms.
Market dynamics have direct bearing on listing/selling activities in both residential and commercial specialties.
GLOSSARY
Business Cycle
Canada Mortgage and Housing Corporation
Consumer Price Index
Economics
Market Bubble
Market Correction
Market Equilibrium
Market Indicators
Mean
Measures of Central Tendency
Median
Mixed Economy
Mode
Overnight Rate
Real Estate Cycle
Statistics Canada
Unemployment Rate
WEB SCANS
The Bank of Canada
Canada Mortgage and Housing Corporation
Statistics Canada
Consumer Price Index Calculator
Ontario Economic Stats/Trends
Commercial Listing Service
STRATEGIC THINKING
1. What specific local trends should I a___yze and who provides the most relevant information?
What information routinely appears in the local paper that can help explain market dynamics to prospective buyers
and sellers?
2.
What current supply/demand forces are affecting the local marketplace? Do they favour the buyer, the seller, or
both?
3.
At what stage in the real estate cycle are we now? What indicators confirm that fact? What impact does this have on
my new career?
4.
5. What market statistics does my employing broker (either currently selected or contemplated) provide?
Phase 1 Real Estate as a Professional Career Module II. The Market Session 1 of 2 Mini-Review

MIN I -REVI EW

The Market Session 1 of 2 Exercise Preparation
EXERCISE PREPARATION

QuickLinks cannot be displayed using compile for print.

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.

The Market Session 2 of 2 Session Guide
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
Phase 1 Real Estate as a Professional Career Module II. The Market Session 2 of 2 Learning Outcomes
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.
Phase 1 Real Estate as a Professional Career Module II. The Market Session 2 of 2 Understanding Value
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
Phase 1 Real Estate as a Professional Career Module II. The Market Session 2 of 2 Principles Of Value
SESSION 2 : P RI NCIPLES 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:
Factors of Production
(the above reference is NOT required for exercises or the examination).
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.
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.
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.
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.
Phase 1 Real Estate as a Professional Career Module II. The Market Session 2 of 2 Introduction To The Appraisal Process
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.
Phase 1 Real Estate as a Professional Career Module II. The Market Session 2 of 2 (CMA)
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
Phase 1 Real Estate as a Professional Career Module II. The Market Session 2 of 2 Knowledge Integration

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
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?
1.
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?
2.
What documentation and information will I need to ensure that sellers receive proper guidance in establishing a
competitive listing price?
3.
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 ?
4.
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?
5.
6. How could overpricing a property affect my reputation and impact my ability to earn a reasonable income?

MIN I -REVI EW

REVIEW QUESTIONS
This is a Self-a__essment; your answers will not be scored.
Click your mouse inside the text box and then type in your answer. The "Solution" b___on will appear. When you have
finished, click on the "Solution" b___on to compare your response to the model answer.
Phase 1 Real Estate as a Professional Career Module II. The Market Session 2 of 2 Exercise Preparation
EXERCISE PREPARATION

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a__IGNMENT
Welcome to the a__ignment segment of the course.
Click your mouse inside the text box and then type in your answer. The "Solution" b___on will appear. When you have
finished, click on the "Solution" b___on to compare your response to the model answer.

81 of 132 1/14/2008 7:12 PM
Phase 1 Real Estate as a Professional Career Module II. The Market a__ignment 2 a__ignment 2- Part B
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Phase 1 Real Estate as a Professional Career Module II. The Market a__ignment 2 Module Conclusion
Phase 1 Real Estate as a Professional Career Module III. Calculations Calculations
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