Real Estate Analysis and Commentary in Florida

November 11th, 2013 10:36 AM

Price vs. Value and Highest & Best Use

In common usage, price, cost, and value mean essentially the same thing. However, when used for real estate appraisal purposes, each means something different.

Price refers either to the asking price or selling price—the dollar amount that actually was asked or offered for a property, either now or in the past. Price, therefore, represents one person’s individual assessment of value. It is not the broader, more objective, assessment for which appraisers strive.

Cost is either the actual dollar amount paid for a property in the past or the dollar amount needed to build or improve a property at a specific time. Cost may or may not equal the market value of the improvement, depending on market conditions, which may inflate or depress rents, vacancies, or interest rates.

Value traditionally is defined as the power of a good to command other goods or services when exchanged in the marketplace.

Cost, price, and value are rarely equal. However, in some cases, such as new construction representing the highest and best use of a site, cost, price, and value could be equal.

Types of Value

Within the broad definition of value, numerous types of value are given to real property. They include investment, insurable, assessed, liquidation, reproduction or replacement, and market value.

Investment value is the value to a specific investor, based on that investor’s requirements, tax rate, and financing.

Insurable value is the value of portions of a property that are physically destructible. It is used for determining insurance coverage.

Assessed value is the value the tax assessor establishes to levy local real estate taxes.

Liquidation value is the likely price that would result from a forced sale, such as a foreclosure or tax sale. It is used when a sale must occur with limited exposure time to the market or with restrictive sale conditions.

Reproduction value or replacement value is the value of constructing a substitute property, either identical (a reproduction) or substantially the same utility (a replacement).

Market value is generally the value used for loan underwriting purposes. As adopted by the Appraisal Foundation and as published in the Uniform Standards of Professional Appraisal Practice (USPAP), "market value is the most probable price a property would bring in a competitive and open market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimuli."

Implicit in this definition is the consummation of a sale on a specified date and passing the title from seller to buyer under conditions whereby:

• Buyer and seller typically are motivated

• Both parties are well informed or well advised and are acting in what they consider their own best interests

• A reasonable time is allowed for exposure in the open market

• Payment is made in cash in U.S. dollars or in terms of comparable financial arrangements

• 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.

A single property may have any or all of the types of the above values, with no two values necessarily being equal. However, before a property’s value can be determined for appraisal purposes, the property’s highest and best use must be identified.

Highest And Best Use Considerations

Highest and best use (HABU) is the legal use of a property that yields the highest present value (PV). HABU analysis is an attempt to identify a property’s most productive use.

The HABU analysis begins with a discussion of legally permitted uses for the property, primarily considering the zoning ordinance that determines legally permissible uses for the property, as well as any applicable federal laws. Other factors include deed restrictions and adjoining uses.

From the legally permitted uses, physically possible uses are considered. These uses are determined by examining location, access, and physical characteristics of the site, such as size, topography, and layout.

Next, for the uses that are legally permissible and physically possible, financial feasibility is examined. The influence of economic conditions, financing availability, and market demand is examined for each potential use.

Finally, the financially feasible use that produces the highest financial return is the HABU.

In summary, determination of HABU is traditionally a narrowing process, designed to identify the maximally productive use for a property. The HABU must meet four criteria: physically possible, legally possible, financially feasible, and maximally productive.

Improved properties are analyzed for HABU as if both vacant and improved. The analysis of examining an improved property as if it were vacant is designed to identify possible superior uses. The HABU of a property, as improved, examines the improvements for adequacy for intended use and obsolescence. Potential modifications to the improvements that could increase financial return then are explored.

Sometimes, mostly on older structures, the current use contradicts with the zoning and legally permitted use requirements set forth on the property. This usually occurs when the local planning board changes the zoning and use for an area, after the property has been developed, causing the property to be contradictory to current uses. In this case, determining if the property has a "grandfathered use" exception, and if there is a distinct benefit or detriment to the property, will be necessary to determine the proper HABU and how to structure the appraisal report.

In closing, in Part's 1 & 2 we have discussed the necessary procedures that need to occur BEFORE an appraiser can even start the research and analysis of a specific property to have a credible appraisal assignment. We have discussed that the Scope Of Work is necessary to determine the "Who, What, Where, When, Why, and How" the report will be used, we have determined which Report Type is necessary for the client and intended users, we have determined what Type Of Value is needed, and we have determined the property's Highest And Best Use... Now, and only after all of these initial processes are complete, can the appraiser start the process of determining how to develop the appraisal.

Stay tuned for Part 3, where we will be discussing "The Three Approaches To Value"

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Posted by D. Jeff Smith on November 11th, 2013 10:36 AMLeave a Comment

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November 4th, 2013 12:31 PM

I have been asked how appraisers determine what a property is "worth" so I have decided to begin a series of posts once a week (or so) dedicated to valuation techniques. Here is part 1, I hope you all enjoy.

PART 1 - The Beginning Of The Appraisal Process

Scope Of Work

The Scope of Work is the first step in any appraisal process. Without a strictly defined Scope of Work an appraisal's conclusions may not be viable. By defining the Scope of Work, an appraiser can properly develop a value for a given property for the intended user, and for the intended use of the appraisal. The whole idea of "Scope of Work" is to provide clear expectations and guidelines for all parties as to what the appraisal report does, and doesn't, cover; and how much work has gone into it.

Appraisers are expected to identify six key parts of the appraisal problem at the beginning of each assignment:

  • Client and other intended users
  • Intended use of the appraisal and appraisal report
  • Definition of value (e.g., market, foreclosure, investment)
  • Any hypothetical conditions or extraordinary assumptions
  • The effective date of the appraisal analysis
  • The salient features of the subject property

Based on these factors, the appraiser must identify the scope of work needed, including the methodologies to be used, the extent of investigation, and the applicable approaches to value.

Once the details of the Scope Of Work are determined, the appraiser and client (and/or intended users) can decide on the reporting requirements.

Appraisal Reports

Appraisal reports fall into three basic categories: oral reports, form reports and narrative reports, all of which must comply with the USPAP requirements to:

1) clearly and accurately set forth the appraisal in a manner that will not be misleading;

2) contain sufficient information to enable the intended users of the appraisal to understand the report properly; and

3) clearly and accurately disclose any extraordinary assumption, hypothetical condition or limiting condition that directly affects the appraisal and indicate its impact on value. 

Oral reports are not as typical in everyday appraisal practice as are written reports. Testimony presented in a court of law or during a deposition, for instance, is an example of an oral appraisal report. What might be surprising, however, is that anytime someone who is clearly representing him/herself to be an appraiser states an opinion of value, they are required to have the data and analysis to support their verbal conclusion. 

Form reports are classified as summary appraisal reports and are typically used for residential or smaller mixed-use properties. They are simply an appraisal report presented on a form instead of written in a narrative format. They are typically the chosen deliverable for clients such as financial institutions, insurance agencies and governmental agencies who deal with the purchase and sale of mortgages in the secondary mortgage markets. The standardization of this report format allows for greater efficiencies in the review process. 

Narrative reports are the most typical deliverable requested for commercial appraisals. The narrative format falls into three categories:
  • Restricted-Use appraisal report 
  • Summary appraisal report 
  • Self-contained appraisal report
A restricted-use appraisal report is a short written document that essentially states all pertinent data as well as an opinion of value. Because of the absence of supporting data and analysis, this report is less common than the summary or self-contained report. A restricted-use appraisal report has limited reliability for other than the intended user because it cannot be understood properly without the additional information retained in the appraiser's work file.

A summary report is a written narrative which provides a moderate level of detailed information and analysis, greater detail than the restricted-use report but less than the self-contained. The summary report states all of the pertinent information but additionally summarizes details, analysis and conclusions that are not included in the restricted-use report. 

The self-contained appraisal report contains the highest level of detail of the narrative formats, going into greater descriptive detail than either the restricted-use or summary formats.
That's all for this week. Next week in part 2 we will discuss Price vs. Value and Highest And Best Use Analysis

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Posted by D. Jeff Smith on November 4th, 2013 12:31 PMLeave a Comment

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November 2nd, 2013 2:00 PM

Mike Vogel | 10/31/2013

» Tampa retail lags much of the state with half the rental rates of Miami.

» Sweetbay Supermarket, now owned by Jacksonville-based Bi-Lo, shuttered 22 stores in the Tampa Bay area in 2013 while Trader Joe’s, Sprouts and Earthfare are moving in.

» Retail center owners and alternative users have found common ground. Owners want tenants whose businesses don’t conflict with those of existing tenants, generate traffic for existing tenants and fill space. Charter schools and quick-care medical operations, orthopedic offices and other medical specialties, in which proximity to the patient matters more than proximity to a hospital, want locations near consumers. “It’s a great backfill use,” says Andrew Wright, CEO of commercial real estate firm Franklin Street.

»  Fitness centers and restaurants also are driving absorption, rather than merchandise retailers, but Dick’s Sporting Goods opens next year in an old Saks store in the Westshore Plaza. Movie theater company Cinemark moved into the Lakeland Square Mall on U.S. 98.

» Southeast Hillsborough has among the better retail occupancy rates in the bay area.

» The bay area’s industrial market is struggling. Rental rates are flat, creating opportunity for tenants. Tenants are upgrading to more efficient, modern space. A hefty share of existing inventory is obsolete or well on its way there. But with little new product coming, occupancy rates should increase.

»  Northeast Tampa has the highest vacancy rates.

» The anticipated arrival of Amazon is the 800-pound gorilla in the industrial market.

» In office, Westshore, downtown Tampa and downtown St. Petersburg are the only submarkets generally commanding lease rates north of $20 per square foot.

» Raymond James submitted plans for a 1-million-sq.-ft. campus on the Wiregrass Ranch site in Pasco County. A long approval process awaits. Raymond James says it is “evaluating our occupancy requirements and believe the Wiregrass Ranch property is a good future development opportunity.”

Ryan Cos. expects to deliver a 75,000-sq.-ft. office building this month at Citrus Park Crossing in northwest Hillsborough, a rare major new office building in Tampa Bay. Invest Financial has signed to take 40,000 square feet of it, says CBRE’s Brian Devlin.

Tampa Bay - Commercial Market
  Vacancy Rate Avg. Asking Rent
Sector Quarter 2 2012 Quarter 2 2013 Quarter 2 2012 Quarter 2 2013
Industrial 10.8% 10.2% $4.54 $4.57
Retail 8.8% 9.1% $14.43 $14.11
Office 15.2% 15.4% $19.20 $18.93
Source: Colliers International


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Posted by D. Jeff Smith on November 2nd, 2013 2:00 PMLeave a Comment

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From Climate Central's Andrew Freedman:

Nearly one year after Hurricane Sandy ravaged the East Coast, the 2013 Atlantic Hurricane Season has not produced a single land-falling hurricane in the U.S. Instead of having above-average storm activity, as the seasonal hurricane outlooks unanimously called for, the season has been quiet — notable for its inactivity.

The tropical season doesn’t officially end until November 30, but it would take a barrage of late-season storms to bring the season up to average levels, let alone above average, something that forecasters say is unlikely.

“It’s not only quiet, but it’s got the potential to be near record quiet for the Atlantic Basin,” Chris Landsea, a meteorologist at the National Hurricane Center in Miami, said.

So far, there have been just 11 named storms, two of which have been hurricanes, and none that have been major hurricanes.

While pre-season outlooks rarely, if ever, have pinpoint accuracy, they don’t usually miss by such a large margin. In May, the National Oceanic and Atmospheric Administration (NOAA) projected that there would likely be between 13 and 20 named storms (with sustained winds of at least 39 mph). Of those storms, NOAA projected that between seven and 11 would achieve hurricane status (winds of at least 74 mph); and that three or four would become major hurricanes of category 3, 4 or 5 (winds of at least 111 mph).

By one measure, 2013 so far ranks as the 7th quietest season in the past 70 years. That measure uses an index known as Accumulated Cyclone Energy, which incorporates how many storms formed, how long they lasted, and how strong they became. If no additional storms were to form before the end of the season, 2013 would be the 4th quietest.

There has not been a major hurricane in either the North Atlantic Basin or the eastern Pacific this year, something that hasn’t happened since 1968, according to Philip Klotzbach, a hurricane researcher and seasonal forecaster at Colorado State University.

Subsidence and the Sahara

The scant number of storms is surprising given some of the favorable conditions that exist that would normally fuel tropical cyclones. The ocean waters throughout the North Atlantic are warmer than average, the trade winds are lighter, and there is no El Niño event in the Pacific to ramp up high altitude winds that can tear nascent storms apart.

Forecasters say that three main features loom large for the inactivity: large areas of sinking air, frequent plumes of dry, dusty air coming off the Sahara Desert, and above-average wind shear. None of those features were part of their initial calculations in making seasonal projections. Researchers are now looking into whether they can be predicted in advance like other variables, such as El Niño and La Niña events.

hurricane ike texas
In this handout provided by the U.S. Air Force, an Air Force Reserve pararescueman from the 920th Rescue Wing scans the landscape of Nederland, Texas in the aftermath of Hurricane Ike, 13 September 2008. (Photo by Paul Flipse/US Air Force via Getty Images)

Brian McNoldy, a senior research associate at the University of Miami, said that across the Atlantic this season “you had air sinking through a pretty large depth of the atmosphere.” Sinking air inhibits storm formation by causing air to become drier and more stable, thereby stunting the growth of thunderstorms that require moist, unstable air in order to thrive.

Tropical weather systems depend on a plentiful supply of warm, moist air to form and intensify, and when these storms ingest exceptionally dry air, as many of the storms have this year, they can choke to death in a matter of hours or days. For example, Tropical Storm Karen formed in the Gulf of Mexico, where landfall in the U.S. or Mexico is virtually assured, but died before reaching land because of the presence of dry air and strong wind shear.

Some of the dry air across the Atlantic Basin came from large areas of dusty air that originated in the scorching Sahara Desert. However, such outbreaks of dusty air are fairly typical during hurricane season. What has been unusual has been the broad expanse of sinking and drying air throughout the North Atlantic basin, McNoldy said.

This season, the dry air “made a huge difference” and “squashed all the other factors that looked good,” he said.

Klotzbach said the area where most tropical storms and hurricanes form had the driest mid-to-lower atmospheric conditions during the Aug. 1 to Sept. 25 period since reliable records began in 1970.

In addition to the dry air, Landsea and Klotzbach pointed to above-average wind shear as another key reason. Wind shear is the difference in wind speed and direction between the ocean surface and the mid-to-upper atmosphere. Strong shear can knock storms off balance, essentially tearing them apart and allowing dry air to enter their circulation.

Landsea said that NOAA’s seasonal outlooks focused on the other pieces of the puzzle that argued in favor of an above average to average season, namely the absence of El Nino and the presence of warm sea surface temperatures. The seasonal outlook won’t be correct every time, Landsea said.

Klotzbach, who along with William Gray pioneered the art of forecasting the severity of hurricane seasons, said future outlooks will need to incorporate more variables.

“We will be looking at ways to be able to incorporate more moisture data into our models, in hopes to not make a similar mistake in future years,” he said in an email interview.

Record Major Hurricane Drought Continues

The absence of a major hurricane in the U.S. this season means the continuation of a record-long streak. On Oct. 24, it will be exactly 8 years since the last major hurricane of Category 3 strength or greater made landfall. Scientists fear this streak of good luck is leading to more severe cases of “hurricane amnesia,” which can complicate emergency preparation efforts the next time a monster storm threatens.

“When it doesn’t happen often you certainly become a little more lax,” McNoldy said, noting that in the 8 years since Hurricane Wilma struck Florida, tens of thousands of people have moved to the Sunshine State, many of whom have never before experienced a major hurricane. These residents, McNoldy said, may be less willing to evacuate their homes before the next major storm strikes.

“People who have never experienced it . . . don’t really know what they’re in for,” McNoldy said.

tropical storm karen
In this GOES satellite handout photo provided by National Oceanic and Atmospheric Administration (NOAA), Tropical Storm Karen churns in the Gulf of Mexico on October 05, 2013. (Photo by NOAA via Getty Images)

Klotzbach said the “fear of complacency” grows as the major hurricane gap lengthens. “One statistic that people should remember is that on average, about 1 in every 3 major hurricanes makes landfall at major hurricane strength (in the U.S.)” he said. Klotzbach noted that since 2005, 22 major hurricanes formed in the Atlantic, yet none of them made landfall in the U.S. as major hurricanes.

Even without a major hurricane reaching land, the U.S. has seen its fair share of damaging storms in recent years. Hurricane Ike devastated the Galveston, Texas area in 2008 as a strong Category 2 storm, and Sandy was one of the strongest and most destructive storms to ever strike the Jersey Shore.

“I think anybody living along the Jersey coast or Long Island or in New York City would attest that they had a major event even though it wasn’t a major hurricane,” Landsea said.

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Posted by D. Jeff Smith on October 22nd, 2013 2:30 PMLeave a Comment

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Tampa - Average price per square foot for Tampa FL was $121, an increase of 18.6% compared to the same period last year. The median sales price for homes in Tampa FL for Jul 13 to Oct 13 was $161,000 based on 2,123 home sales. Compared to the same period one year ago, the median home sales price increased 8.8%, or $13,000, and the number of home sales decreased 2.7%. There are currently 4,431 resale and new homes in Tampa on Trulia, including 10 open houses, as well as 10,485 homes in the pre-foreclosure, auction, or bank-owned stages of the foreclosure process. The average listing price for homes for sale in Tampa FL was $285,381 for the week ending Oct 09, which represents a decrease of 3.4%, or $10,169, compared to the prior week.

St Petersburg - Average price per square foot for Saint Petersburg FL was $124, an increase of 14.8% compared to the same period last year. The median sales price for homes in Saint Petersburg FL for Jul 13 to Oct 13 was $136,950 based on 988 home sales. Compared to the same period one year ago, the median home sales price increased 12.3%, or $15,050, and the number of home sales decreased 7.3%. There are currently 2,406 resale and new homes in Saint Petersburg on Trulia, including 8 open houses, as well as 4,426 homes in the pre-foreclosure, auction, or bank-owned stages of the foreclosure process. The average listing price for homes for sale in Saint Petersburg FL was $229,983 for the week ending Oct 09, which represents an increase of 2.5%, or $5,680, compared to the prior week.

Clearwater -Average price per square foot for Clearwater FL was $89, an increase of 7.2% compared to the same period last year. The median sales price for homes in Clearwater FL for Jul 13 to Oct 13 was $119,900 based on 534 home sales. Compared to the same period one year ago, the median home sales price increased 9%, or $9,900, and the number of home sales decreased 12.5%. There are currently 1,218 resale and new homes in Clearwater on Trulia, including 3 open houses, as well as 83 homes in the pre-foreclosure, auction, or bank-owned stages of the foreclosure process. The average listing price for homes for sale in Clearwater FL was $184,755 for the week ending Oct 09, which represents an increase of 1.5%, or $2,805, compared to the prior week.   

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Posted by D. Jeff Smith on October 14th, 2013 1:40 PMLeave a Comment

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October 14th, 2013 1:29 PM

The government closure that ended its second week Friday is beginning to weigh on one of the most important parts of the U.S. economy — the housing market.

Housing lenders rely on a variety of government data, such as verification of borrowers' income, which are unavailable with the partial closure of the Internal Revenue Service and other agencies.

The mortgage industry has found creative ways to work around the shutdown. Banks are getting data from other sources. Sometimes they're simply taking the risk of making loans without some information.

Nevertheless, the shutdown is delaying loans around the country. And some experts warn that home lending could be much more severely disrupted if the political stalemate in Washington persists much longer.

The biggest effect so far has been on nontraditional specialty loans.

Many FHA-backed reverse mortgages and property improvement loans have run into trouble. So have home loans in rural areas that are guaranteed by the U.S. Department of Agriculture.

Most jumbo loans are going through. But a few providers are declining to write them without IRS tax transcripts. Jumbos are loans that are too big to be backed by housing finance giants Fannie Mae and Freddie Mac or by the Federal Housing Administration.

The fear is that more types of loans will be affected by a prolonged shutdown. For example, the availability of FHA loans, a key source of lending throughout the US, could be threatened because most agency workers have been furloughed.

Lenders are continuing to use automated systems at Fannie, Freddie and the FHA to process loans, and so far delays have been slight, bankers say. But they can do that for only so long before backlogs develop.

As for income verification, many lenders are writing mortgages without getting tax returns from the IRS. Instead, they have the borrowers show them the returns, which they plan to confirm with the IRS when the agency fully reopens.

For the time being, banks are funding deals themselves. They can't sell the loans to Fannie and Freddie, as they normally do. Lenders run the risk of being stuck with a bad loan if the borrowers lie about their income.

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Posted by D. Jeff Smith on October 14th, 2013 1:29 PMLeave a Comment

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