MBA 590 Real Estate Analysis

! College of BusinessAlfaisal

UNIVERSITY

Country Index

World Bank 3U.S. 3New York 6.1London 6.5Hong Kong 11.4Saudi Arabia - Public 14Saudi Arabia - Private 29

Home Ownership Multiple of Annual Income

From: Abdullah Al Shehri Source: 7th Annual Demographia International Housing Affordability Index

Chapter 6

Market Research

Market Research effective real estate market research is often a matter of

excluding the irrelevant.

Market Research general to specific

zoom in specific to general

zoom out

Write a storyWhat is the property? Who are the users?

Where are the users? What do they care about? Who are the competitors?

GIS

Graphic Information System Data Maps

Chapter 7

Sales Approach and

Cost Approach

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

Identify ProblemIdentify 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

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

Perform Data AnalysisMarket 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

!

Highest and Best Use(1) legally permissible,

(2) physically possible,

(3) financially feasible,

(4) maximally productive

Legally Permissible

Physically Possible

Financially Feasible

Max

Highest and Best Use

Apply Three Approachs

Sales Approach

Cost Approach

Income Approach

Market Valuethe 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.

!

Market ValueImplicit 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:

!

Market Value -1

buyer and seller are typically motivated.

!

!

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

best interests. !

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

!

Market Value - 4payment is made in terms of

cash in U.S. dollars or in terms of financial arrangements

comparable thereto.

Market Value - 5the 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. .!

Investment Valuevalue to an individual

not to the market in general .!

Sales Approach

What is the market suggesting the subject

property is worth?

Regression?

sample size is usually too small

Comparables

inferior add superior deduct

Location Map

Faisal Street

Kha

lid S

tree

t

Subject Property 12,000

1

Sale 1 1,000,000 8,000 SM

125.00 PSM Oct 14

2

Sale 2 800,000 8,000 SM

100.00 PSM Oct 13 3

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

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

Matched Pairs

Same expect for one factor

Date of Sale 100 to 125 in 12 months

25% in 12 months around 2% per month

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 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%

80

90

100

110

0 4000 8000 12000 16000 20000 24000

Slope = 83.33 -100.00 24000 - 8000

-0.00104 -16.67 16000 = =

Price = 108.33 -(0.00104 x size) 95.83 = 108.33 -(0.00104 x 12000)

95.83

100 to 96 = 4% down and 83.33 to 96 =15% up

-4% +15%

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%

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

1,000,000 ÷ 700,000 = 1.43 Add 43%

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%

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 121.63Indication 120

Size in SM 12,000

Rate Per SM 120

Indication 1,440,000

Sales Approach

Location Map

Faisal Street

Kha

lid S

tree

t

Subject Property 12,000

1

Sale 1 1,000,000 8,000 SM

125.00 PSM Oct 14

2

800,000 8,000 SM

100.00 PSM Oct 13 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

Indication 120 PSM 1,440,000

Cost Approach

Cost to replace Land Value

Improvement Value

Subject Property

Land 12,000 SM Building 5,000 SM

Land Value

Sales Approach Other Approaches

Improvement Value

Cost New Less: Depreciation

Accrued Depreciation

Physical Deterioration Functional Obsolescence External Obsolescence

Improvement Value

Economic Life Effective Age

Improvement ValueEconomic Life = 40 years Effective Age = 10 years Age ÷ Life = Depreciation Age ÷ Life = 25% Remaining Economic Life 30 years

Improvement Value

Cost New PSM = 2,000 Less Depreciation 25% Effective Cost PSM = 1,500

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%

Cost Approach