Chapter 6 and 7 Market Research, Sales and Cost Approaches

1. MBA 590
Real Estate Analysis
! College
of Business Alfaisal
UNIVERSITY

2. Home Ownership
Multiple of Annual Income
Country Index
World Bank 3
U.S. 3
New York 6.1
London 6.5
Hong Kong 11.4
Saudi Arabia - Public 14
Saudi Arabia - Private 29
From: Abdullah Al Shehri
Source: 7th Annual Demographia International Housing Affordability Index

3. Chapter 6
Market Research

4. Market Research
effective real estate
market research is
often a matter of
excluding the
irrelevant.

5. Market Research
general to specific
zoom in
specific to general
zoom out

6. Write a story
What is the property?
Who are the users?
Where are the users?
What do they care about?
Who are the competitors?

7. GIS
Graphic Information System
Data Maps

8. Chapter 7
Sales Approach
and
Cost Approach

9. The 8-step Appraisal Process
Identify the Problem
Determine the Scope of Work
Collect Data and Describe Property
Perform Data Analysis
Determine Land Value
Apply Approaches to Estimate Market Value
Reconcile Indicated Values from the Approaches
Report Final Value Estimate

10. Identify Problem
Identify client and intended users of appraisal
• Identify the intended use of the appraisal
• Identify the purpose of the assignment (type of value)
• Identify the effective date of the valuation
• Identify the relevant characteristics of the property
• Identify any important assumptions or conditions of
the assignment

11. Collect Data and Describe
• Market area data
General characteristics of region, city, and neighborhood
!
• Subject property data
Site, building, and locational characteristics
!
• Comparable property data
Market information on comparable properties

12. Perform Data Analysis
Market analysis
Demand, supply, and marketability studies
!
• Highest and best use analysis
Highest and best use as though site is vacant
Highest and best use as currently improved
!

13. Highest and Best Use
(1) legally permissible,
(2) physically possible,
(3) financially feasible,
(4) maximally productive

14. Highest and Best Use
Legally
Permissible
Physically
Possible
Financially
Feasible
Max

15. Apply Three Approachs
Sales Approach
Cost Approach
Income Approach

16. Market Value
the most probable price a property should
bring in a competitive and open market under
all conditions requisite to a fair sale, the buyer
and seller each acting prudently and
knowledgeably, and assuming the price is not
affected by undue stimulus.
!

17. Market Value
Implicit in this definition is the
consummation of a sale as of a
specified date and the passing of title
from seller to buyer under conditions
whereby:
!

18. Market Value -1
buyer and seller are
typically motivated.
!
!

19. Market Value - 2
both parties are well informed
or well advised, and acting in
what they consider their own
best interests.
!

20. Market Value - 3
a reasonable time is allowed for
exposure in the open market.
!

21. Market Value - 4
payment is made in terms of
cash in U.S. dollars or in terms
of financial arrangements
comparable thereto.

22. Market Value - 5
the price represents the normal
consideration for the property
sold unaffected by special or
creative financing or sales
concessions granted by anyone
associated with the sale.
.!

23. Investment Value
value to an individual
not to the market in general
.!

24. Sales Approach
What is the market
suggesting the subject
property is worth?

25. Regression?
sample size is usually
too small

26. Comparables
inferior add
superior deduct

27. Location Map
Faisal Street
Khalid Street
Subject
Property
12,000
1
Sale 1
1,000,000
8,000 SM
125.00 PSM
Oct 14
Sale 2
800,000
8,000 SM
100.00 PSM
Oct 13 3
2
Sale 3
2,000,000
24,000 SM
83.33 PSM
Oct 13
4
700,000
8,000 SM
87.50 PSM
Oct 14
5 800,000
12,000 SM
66.67 PSM
Oct 13

28. Subject
Property
Sale 1 Sale 2 Sale 3 Sale 4 Sale 5
Price in SAR 1,000,000 800,000 2,000,000 700,000 800,000
Size in SM 12,000 8,000 8,000 24,000 8,000 12,000
Price Per SM 125.00 100.00 83.33 87.50 66.67
Date of Sale Oct-14 Oct-14 Oct-13 Oct-13 Oct-14 Oct-13
Location Faisal
Street
Faisal
Street
Faisal
Street
Faisal
Street
Khalid
Street
Khalid
Street
Range 66.67 to 125.00

29. Matched Pairs
Same expect for one
factor

30. Sale 1 Sale 2 Sale 3 Sale 4 Sale 5
Price in SAR 1,000,000 800,000 2,000,000 700,000 800,000
Size in SM 12,000 8,000 8,000 24,000 8,000 12,000
Price Per SM 125.00 100.00 83.33 87.50 66.67
Date of Sale Oct-14 Oct-14 Oct-13 Oct-13 Oct-14 Oct-13
Date of Sale
Subject
Property
100 to 125 in 12 months
25% in 12 months
around 2% per month
Location Faisal
Street
Faisal
Street
Faisal
Street
Faisal
Street
Khalid
Street
Khalid
Street
Adjustment for
Date of Sale 0% 25% 25% 0% 25%
Adjusted
Indication
125.00 125.00 104.16 87.50 83.34

31. Adjustment for
Date of Sale 0% 25% 25% 0% 25%
Adjusted
Indication
125.00 125.00 104.16 87.50 83.34
Subject
Property
Sale 1 Sale 2 Sale 3 Sale 4 Sale 5
Price in SAR 1,000,000 800,000 2,000,000 700,000 800,000
Size in SM 12,000 8,000 8,000 24,000 8,000 12,000
Price Per SM 125.00 100.00 83.33 87.50 66.67
Date of Sale Oct-14 Oct-14 Oct-13 Oct-13 Oct-14 Oct-13
Location Faisal
Street
Faisal
Street
Faisal
Street
Faisal
Street
Khalid
Street
Khalid
Street
Adjustment for
Size -4% -4% +15% -4% 0%

32. 110
100
95.83
90
80
-4% +15%
0 4000 8000 12000 16000 20000 24000
Slope =
83.33 -100.00
24000 - 8000
-16.67
-0.00104
= 16000
=
Price = 108.33 -(0.00104 x size)
95.83 = 108.33 -(0.00104 x 12000)
100 to 96 = 4% down and 83.33 to 96 =15% up

33. Subject
Property
Sale 1 Sale 2 Sale 3 Sale 4 Sale 5
Price in SAR 1,000,000 800,000 2,000,000 700,000 800,000
Size in SM 12,000 8,000 8,000 24,000 8,000 12,000
Price Per SM 125.00 100.00 83.33 87.50 66.67
Date of Sale Oct-14 Oct-14 Oct-13 Oct-13 Oct-14 Oct-13
Location Faisal
Street
Faisal
Street
Faisal
Street
Faisal
Street
Khalid
Street
Khalid
Street
Adjustment for
Date of Sale 0% 25% 25% 0% 25%
Adjusted
Indication
125.00 125.00 104.16 87.50 83.34
Adjustment for
Size -4% -4% +15% -4% 0%
1,000,000 ÷ 700,000 = 1.43 Add 43%

34. Subject
Property
Sale 1 Sale 2 Sale 3 Sale 4 Sale 5
Price in SAR 1,000,000 800,000 2,000,000 700,000 800,000
Size in SM 12,000 8,000 8,000 24,000 8,000 12,000
Price Per SM 125.00 100.00 83.33 87.50 66.67
Date of Sale Oct-14 Oct-14 Oct-13 Oct-13 Oct-14 Oct-13
Location Faisal
Street
Faisal
Street
Faisal
Street
Faisal
Street
Khalid
Street
Khalid
Street
Adjustment for
Date of Sale 0% 25% 25% 0% 25%
Adjusted
Indication
125.00 125.00 104.16 87.50 83.34
Adjustment for
Size -4% -4% +15% -4% 0%
Adjustment for
Location 0% 0% 0% +43% +43%

35. Subject
Property
Sale 1 Sale 2 Sale 3 Sale 4 Sale 5
Price Per SM 125.00 100.00 83.33 87.50 66.67
Adjustment for
Date of Sale 0% 25% 25% 0% 25%
Adjusted
Indication 125.00 125.00 104.16 87.50 83.34
Adjustment for
Size -4% -4% +15% -4% 0%
Adjustment for
Location 0% 0% 0% +43% +43%
Net
Adjustments -4% -4% 15% 39% 43%
Indication 120.00 120.00 119.79 121.63 119.17
Range 119.17 to 121.63
Indication 120

36. Sales Approach
Size in SM 12,000
Rate Per SM 120
Indication 1,440,000

37. Location Map
Faisal Street
Khalid Street
Subject
Property
12,000
1
Sale 1
1,000,000
8,000 SM
125.00 PSM
Oct 14
800,000
8,000 SM
100.00 PSM
Oct 13 3
2
2,000,000
24,000 SM
83.33 PSM
Oct 13
4
700,000
8,000 SM
87.50 PSM
Oct 14
5 800,000
12,000 SM
66.67 PSM
Oct 13
Indication
120 PSM
1,440,000

38. Cost Approach
Cost to replace
Land Value
Improvement Value

39. Subject Property
Land 12,000 SM
Building 5,000 SM

40. Land Value
Sales Approach
Other Approaches

41. Improvement Value
Cost New
Less: Depreciation

42. Accrued Depreciation
Physical Deterioration
Functional Obsolescence
External Obsolescence

43. Improvement Value
Economic Life
Effective Age

44. Improvement Value
Economic Life = 40 years
Effective Age = 10 years
Age ÷ Life = Depreciation
Age ÷ Life = 25%
Remaining Economic Life
30 years

45. Improvement Value
Cost New PSM = 2,000
Less Depreciation 25%
Effective Cost PSM = 1,500

46. Cost Approach
Size Effective
Rate
Indication % of
Total
Land 12,000 120 1,440,000 16%
Building 5,000 1500 7,500,000 84%
Indication 8,940,000 100%