Data Collection, Market Areas and Neighborhoods Basic Information Needed Before the Three Approaches Wayne Foss, MBA, MAI, CRE Foss Consulting Group Email:

Data Collection, Market Areas and Neighborhoods

Basic Information Needed Before the Three Approaches

Wayne Foss, MBA, MAI, CREFoss Consulting GroupEmail: [email protected]

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Types of Real Property Fee Simple Estate

Definition: Absolute ownership unencumbered by any other interest or

estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.

Application: Appraisal of properties which are owner occupied. The owner

has all of the bundle of rights. Can be any property type, but most often is a single family

residence or condominium

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Types of Real Property, con’t.. Leased Fee Estate

Definition: An ownership interest held by a landlord with the rights of use

and occupancy conveyed by lease to others. The rights of the lessor (the leased fee owner) and the leased fee are specified by contract terms contained within the lease.

Application: Appraisal of properties which are tenant occupied. The owner

has given up the right of occupancy in exchange for the payment of rent from a tenant. Generally thought of as investment properties. i.e.: Apartments,

Industrial Parks, Office Buildings and Shopping Centers

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Types of Real Property, con’t Leasehold Estate

Definition: The interest held by the lessee (the tenant or renter) through a

lease conveying the rights of use and occupancy for a stated term under certain conditions.

Application:

Created when the contract rent is less that the prevailing market rent. A leasehold estate has a finite life, the length of the lease contract.

Generally found in investment properties. i.e.: Apartments, Industrial Parks, Office Buildings and Shopping Centers when long term leases are involved.

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Information Needed beforeapplying the three approaches

These items are needed to know what you are appraising (physically & legally) what problems are involved, and to estimate highest and best use

Market Area AnalysisNeighborhood,Identification of the submarket

Site Analysis Improvement Analysis

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Data Collection Three Broad Categories

General Data Includes information on the four forces that affect property value

Specific Data Details about the property being appraised

Competitive Supply and Demand Data Inventory of competitive supply

Analysis of prospective demand

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General Data Economic Trends

International National Regional Local

Local Market Considerations Macroeconomic and microeconomic studies

Macroeconomic studies are broad (cities and regions) Microeconomic studies are narrow and evaluate the factors that influence the

market for a particular parcel of real estate Demographics

Study of the changing population Government regulations and social attitudes

Land Use regulations (i.e. zoning, transportation systems)

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General Data, con’t...

Local Market Considerations, con’t.. Purchasing power

disposable income (the income that remains after deducting income taxes and all other payments to federal, state and local governments)

Price levels rates of change (trends) in overall prices, rents, expenses

Building fluctuations rates of change in the issuance of building permits

Building costs rates of change in the prices of construction. Items such as labor rates, changes

in construction technology, and public regulations Taxes

trends in assessed value and real estate taxes Financing

Cost, availability and terms of construction and take-out financing

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General Data, con’t...

Sources of General Data Government

U.S. Dept of Commerce, Bureau of the Census U.S. Dept. of Labor, Bureau of Labor Statistics State and Local planning agencies Local University and College Research centers

Trade Associations Appraisal Institute Urban Land Institute (ULI) Building Owners and Managers Association (BOMA)

Private Sources Multiple Listing Services

Computer databases Personal Appraisal Files

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Specific Data The subject property

Description of the Land Description of the Improvements Zoning

Potential legal uses allowed on the land Comparable Sales Comparable Rentals Improvement Cost Data Income and Expense Data Capitalization Rate Data Specific Data are used to:

Determine the highest and best use of the property Set the stage for the application of the three approaches to

value

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Specific Data, con’t...

Investigation of Market Transactions the degree of comparability with the subject property the quantity of information available the reliability of the data

Sources of Specific Data Public records

examples are recorded deeds, assessors records, zoning ordinances Published news

trade publications, local business journals People in the industry

brokers, bankers, property managers, developers, appraisers Multiple listing records

sources of information on specific property transactions and details

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Supply and Demand Data Supply Data

inventory includes all properties like the subject property that is for rent, rented, sold, on the market, and properties that will likely to be developed.

Demand Data analyze the prospective demand for property like the subject

analysis of population trends residential and retail properties

analysis of employment trends office and industrial properties

Sources of the Data Interviews Public Records

Building permits, development plans Demographic data

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Neighborhood - Market Area

Why Analyze The Market Area? To identify the submarket in which the subject

competes for buyers and tenants. The property appraised is “fixed” in its location and

subject to location influences (External forces) To help identify which sales are “comparable” To help forecast conditional sales price of subject;

an appraisal is a conditional forecast, To help establish the submarket Helps to determine the stability of an area. May also

indicate future land uses and value trends.

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The Market

A “Submarket” may be described in terms of: Potential users Potential buyers Price or rental amount range Product type Geographic Area

Market Area defined: The defined geographic area in which the subject property

competes for the attention of market participants; the term broadly defines an area containing diverse land uses.

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Neighborhood aka Market Area

Definition: A group of complementary land uses; a related grouping of

inhabitants, buildings, or business enterprises. Concepts

An area of similar or compatible land uses (zoning) An area of similar building types, ages or styles An area within which any change has an immediate direct

influence on the value of the appraised property. The area within which the subject competes with other

properties. Population characteristics, in habitants of similar age or

economic profile These concepts apply to any property type

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Neighborhood aka Market Area

Definition: District: A type of neighborhood characterized by

homogeneous land use.

Distinctions between Neighborhoods and Districts A neighborhood may contain several uses that complement one

another. Example: a neighborhood may contains single family homes and commercial

properties that provide services to local residents.

A district contains one predominant land use An apartment or industrial district, or office park

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Neighborhood Boundaries The area in which the forces that influence value operate on

all surrounding properties in the same way that the forces operate on the property being appraised.

Boundaries may be: Physical

Natural - rivers, lakes, mountains, ocean Man-Made - streets, highways, different uses, railroads Political - city, county, district

Use Change from Single family to multifamily residential use. Change from residential to commercial, industrial or agricultural use.

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Identification of Neighborhood Boundaries

Examine the physical characteristics of the area Look for type of structures, land use, topography, access, etc.

Draw preliminary boundaries on a map.

Test the preliminary boundaries against demographic data

obtains information about the people living within the area

Ask people who know the area Such as residents, brokers, businesspeople, other appraisers The people who live and work in the neighborhood have the

best understanding of the market area.

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Neighborhoods and Districts Are constantly changing (principle of change)

Questions to ask regarding the changes Are there new Uses? Are there changes in density? Is there an increase in commercial influence in a residential

neighborhood? Are many properties on the market? Relationship between owner and tenant occupancy.

Rapid changes in one neighborhood may impact another.

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Neighborhood Life CyclesFour Stages

Growth A stage in a neighborhood’s life cycle in which the neighborhood

gains public favor and acceptance

Stability experience equilibrium without gains or losses

Decline diminishing demand

Revitalization renewal, modernization, increasing demand

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Neighborhoods and Districts

Four Broad Categories for Analysis

Physical (Environmental) Consideration of any natural or man-made features Location within the community Linkages

Transportation systems Proximity to employment, shopping schools, recreation

Topography, soil, climate, view Land use patterns Age, type, condition and appearance of structures Adequacy, cost and quality of services

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Neighborhoods and Districts Legal-governmental

Taxation and special assessments Public and Private Restrictions Schools Police and Fire Protection Planning and Development Activities

Economic - financial Profile of the Residents Type of financing (and terms) available Price and Rent Levels Construction, conversion, and vacant land Extent of Owner Occupancy Vacancy Rates Changes in use or economic base

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Neighborhoods and Districts Social - market

Relates to the status, physical environment, services affordability and conveniences of a location

Population Density

Age and Income Levels of occupants

Crime Rate

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Districts Apartment districts

generally subject to the same influences as single-family residences emphasis on parking and vacancy rates

Commercial districts1. Central Business District (CBD)

Definition: The core, or downtown area, of a city where the major retail, financial, governmental, professional, recreational, and service activities of the community are concentrated.

Transportation in most communities oriented to CBD Many of the CBD’s are undergoing changes

Revitalization Changes in Land Use; from commercial to office or entertainment Decline; lose business to suburbs

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Districts2. Regional Shopping center

Definition: A shopping center that offers a variety of general merchandise, apparel, furniture, home furnishings, services, and recreational facilities and is built around one or more full (anchor) department stores of at least 100,000 square feet each.

Analyze Trade Area and Competition (both existing and proposed)

3. Community Shopping centerDefinition: A shopping center of 100,000 to 300,000 square feet that

usually contains one junior department store, a variety store or discount department store, a supermarket, and specialty stores.

Trade area generally 10 to 20 minutes driving time

4. Neighborhood Shopping CenterDefinition: The smallest type of shopping center, generally with a

gross leaseable area of less than 100,000 square feet. Anchors are generally a supermarket and drug store, and possibly a bank

Trade area generally 5 to 10 minutes driving time

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Districts Office Districts

Include planned office parks and strip developments on major arteries

Sensitive to access and support services (restaurants, hotels and convention facilities

Industrial Districts Many forms

large old complexes with heavy industry modern new complexes with light manufacturing or distribution warehousing

Availability of Labor Availability of Raw material Distribution facilities

Linkages such as highway system, rail, water, air

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Districts Agricultural Districts

Soil type, land use, crops grown and water supply

Specialty Districts Medical

hospitals, health care facilities, medical buildings Research and Development Parks

Universities, departments of large companies High Technology Parks

electronics and computer firms Education Districts

Colleges, Universities, or community colleges supporting housing and services

Historic Districts

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Neighborhood aka Market Area example items to know

Example items to consider, understand, and know about a neighborhood:

Age Income Levels

Rents typical equity

cleanliness reputation

property condition, repair status

typical time on the market to sell (or lease) the property

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Neighborhood aka Market Areaexample items to know, con’t

Prices, rents Vacancy Turnover Parks Schools Government services

police, fire, trash, etc. Occupant attitudes

Proximity to employment, recreation, shopping

Views Design, layout Zoning, use restrictions Common areas Homeowners association cost and

benefits Crime Relative direction of growth

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So That’sData Collection, Market Areas and Neighborhoods

Wayne Foss, MBA, MAI, CRE, Fullerton, CA USAPhone: (714) 871-3585 Fax: (714) 871-8123 Email: [email protected]