real estate economics and financing

7/21/2019 Real Estate Economics and Financing

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REAL ESTATE

ECONOMICS AND

FINANCING

Prepared by:

RAMON R. ALBEUS,

IE,MM,ICCV,ALAF,REA



General Valuation Concepts:

V A L U E

• The relationship between a thing desired anda potential purchaser.

• It also refers to the present worth of futurebenefits arising out of ownership of property;

•

A value exists when an item of property hasUTILITY, is relatively SCARCE, arouses theDESIRE of potential buyer to buy and isbacked by the purchasing power.



Land

Land can include:

• the space beneath the surface which extends to

the center of the earth• The space above which extends to the sky

• Whether vacant or improved, it is also referredto as REAL ESTATE

• Land value is created by real estate’s utility orcapacity to satisfy the needs and wants ofhuman societies.



Contributing to land value are:

•

General Uniqueness

•

Durability

•

Fixity of location

•

Relatively limited supply

•

Specific usefulness of a given site



Property• The legal concept encompassing all the interests,

rights and benefits related to ownership

• It consists of the rights of ownership, which entitle theowner to a specific interest or interests in what is owned

•

The rights associated with private ownership ofproperty referred to as the BUNDLE OF RIGHTS

• Right of possession

• Right to control

• Right of enjoyment

•

Right of disposition or use

• Right not to exercise any of the above rights

• It refers to REAL PROPERTY, PERSONAL PROPERTY,

or OTHER TYPES OF PROPERTY eg. Business and

Financial Interests, etc.



Property

• The rights associated with private ownership ofproperty referred to as the BUNDLE OF RIGHTS

• Right of possession

•

Right to control• Right of enjoyment

• Right of disposition or use

• Right not to exercise any of the above rights

• It refers to REAL PROPERTY, PERSONAL PROPERTY,or OTHER TYPES OF PROPERTY eg. Business and

Financial Interests, etc.



Real Estate

• The physical land and those human-made items attachedto the land.

•

It is the physical, tangible “thing” which can be seen andtouched together with all additions ON, ABOVE, or

BELOW the ground.

PROPERTY• REAL PROPERTY – all the rights, interests, and benefits

related to the ownership of real estate (rights in realty).

• PERSONAL PROPERTY – interests in tangible andintangible items which are not real estate.



Assets

• Resources controlled by an entity as a result of pastevents and from which some future economic benefits

are expected to flow to the entity

• Current Assets – assets not intended for use on a

continuing basis on the activities of an entity

• Non-current Assets – tangible and intangible assets

which fall into the following categories:

•

Property, plant, machinery and equipment• Other non-current assets



PRICE, COST, MARKET & VALUE

•

PRICE:

•

A term used for the amount asked, offered, or paid

for a good or service

•

An indication of relative value placed upon thegoods or services by the particular buyer and/or

seller under particular circumstances.

•

COST:

•

A term used for the amount asked, offered, or paid

for a good or service



PRICE, COST, MARKET&

VALUEPVS:GAVP 4.0

•

MARKET:

•

The environment in which goods and services trade

between buyers and sellers thru a price mechanism.

•

VALUE:

•

An economic concept referring to the price most

likely to be concluded by the buyers and sellers of agood or service that is available for purchase.



CONCEPT OF MARKET

VALUE PVS; GAVP 5.0

• The estimated amount for which a

property should exchange on the date

of valuation between a willing buyer

and a willing seller in an arms-length

transaction after proper marketing

wherein the parties had each actedknowledgeably, prudently and without

compulsion.



FORCES INFLUENCING

VALUES• A. SOCIAL FORCES

• B. ECONOMIC FORCES

• C. GOVERNMENT, POLITICAL, LEGAL FORCES

• D. PHYSICAL/ ENVIRONMENTAL FORCES



SOCIAL FORCES:

A. Population Growth and Decline

B. Shift in population density

C. Changes in Family SizeD. Attitudes toward education and

social activities;

E. Attitudes toward architectural

design and utility;F. Other factors emerging from

human social instincts, ideas, amd

yearning.



ECONOMIC FORCES

A. Natural resources- quantity,

quality, location, rate of depletion;

B. Commercial and industrial trends;

C. Employment trends and wage

levels;

D. Availability of moneys and credit;

E. Price level interest rates, taxburdens;

F. Other factors affecting purchasing

power.



GOVERNMENT OR

POLITICAL FORCES A. Zoning Laws;

B. Building Codes;

C. Police and Fire Regulations;D. Rent Controls ,special use permits,

credit control;

E. Government sponsored housing and

guaranteed mortgage loans;F. Monetary policies affecting free use of

real estate including taxation.



PHYSICAL OR

ENVIRONMENTAL FORCE A. Climate;

B. Soil Fertility;

C. Mineral Resources;

D. Community Factors- transportations,

proximity to schools, churches, parks andrecreation areas;

E. Flood control and soil conservation;F. Soil characteristics.



ECONOMIC

PRINCIPLES

RELATING TO VALUES 1. Principle of Supply and Demand

2. Principle of Highest and Best Use

3. Principle of Substitution

4.

Principle of Contribution5. Principle of Competition

11. PrincipleofIncreasing /DecreasingReturns

12. Principle of Balance

13.

Principle of Change14. Principle of Anticipation

15. Principle of Conformity

16. Principle of Utility



PRINCIPLE OF SUPPLY AND

DEMAND

• The principle of supply anddemand holds that :

• the value of a site will increase ifthe demand increases and the

supply remains the same• the value of the site woulddecrease if the demand decreased

• land is unique, since the supply isfixed; its value varies directly withdemand.”

Value is determined by the interaction of the

forces of supply and demand in the appropriatemarket at the date of appraisal.



PRINCIPLE OF HIGHEST

AND BEST USE

The most probable use of a property

which is physically possible,appropriately justified, legally

permissible, financially feasible, andwhich results in the highest value of

the property being valued.



PRINCIPLE OF

SUBSTITUTION• This principle holds that a

prudent person would not paymore for a good or service than

the cost of acquiring an equallysatisfactory substitute good orservice.

• The lowest cost of the bestalternative, whether a substituteor the or iginal, tends toestablish Market Value.



PRINCIPLE OF CONTRIBUTION

• The value of an element in production or a

component of a property depends on howmuch it contributes to the whole, or how

much its absence detracts from the value ofthe whole.

PRINCIPLE OFCOMPETITION

• … profit tends to breed competition and

excess profit leads to ruinous competition.”



PRINCIPLE OF CHANGE •

Change is inevitable and constantly

occurring.



• “The principle of change serves as a reminder that real

property uses are always in a state of change.

Although it may be imperceptible on a day to day

basis, housing supply and demand change can easily

be seen when longer periods of time are considered.

Because the present value of property is related to itsfuture uses, the more potential changes that can be

identified, the more accurate the estimates of its

present worth.” – TJ Nelson (The Principle of Supply

and Demand on Property Values,



PRINCIPLE OF ANTICIPATION • Value is created by the expected benefits.

Value is dependent on the future, not thepast. Past experience is useful for

indications of future trends and conditionsthat it may provide.

PRINCIPLE OFUTILITY Value is

determined by the usefulness of theproperty.



PRINCIPLE OF CONFORMITY

• Maximum value is realized when areasonable degree of homogeneity and

compatibility is present. Over

improvement, under improvement ormisplaced improvement may bring

about non-conformity within a propertyor its environment.



• Progression – between dissimilar properties ofthe same type, the value of the lesser propertyis enhanced by the presence of the superior.

•

Regression – between dissimilar properties ofthe same type, value of superior property isaffected adversely by the presence of the

inferior.



FINANCING

the act or process or an

instance of raising orproviding funds.

real estate economics and financing

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