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Real Estate
Principles
A Value Approach
Sixth Edition

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 Final PDF to printer

Preface

T
he study and practice of real estate draws on a multitude of disciplines including
architecture, urban and regional planning, building construction, urban econom-
ics, law, and finance. This diversity of perspectives presents a challenge to the
instructor of a real estate principles course. Depending on their backgrounds and
training and on the interests of the students, some instructors may choose to emphasize
the legal concepts that define and limit the potential value of real estate. Other instructors
may focus more on licensing and brokerage issues (popular topics with many students) or
on the investment decision-making process. Still others may feel that real estate market
and feasibility analysis should be the core topics in a principles class. In short, one of the
difficulties in teaching an introductory real estate course is that there appear to be too many
“principles.” The critical question thus becomes: What framework should be used to teach
these principles?
Although the subject of real estate can be studied from many perspectives, we have
adopted the value perspective as our unifying theme. Why? Because value is central to vir-
tually all real estate decision making including whether and how to lease, buy, or mortgage
a property acquisition; whether to renovate, refinance, demolish, or expand a property; and
when and how to divest (sell, trade, or abandon) a property. Thus, whether a person enters
the business of real estate in a direct way (e.g., development and ownership), becomes
involved in a real estate service business (e.g., brokerage, property management, consulting,
appraisal), or simply owns a home, he or she must continually make investment valuation
decisions or advise others on their decisions. The key to making sound investment decisions
is to understand how property values are created, maintained, increased, or destroyed.
Once value is established as the central theme, all other concepts and principles of
real estate analysis can be built around it. Legal considerations, financing requirements and
alternatives, income and property tax considerations, and local market conditions all are
important primarily in the context of how they affect the value of the property. For example,
in Part 2 students will study growth management and land use regulations. Although these
concepts have great interest from a political and public policy perspective, they are import-
ant from a real estate view primarily because of their potential effects on property rents and
values. Similarly, the “imperfections” in real estate markets discussed in Part 3—such as the
lack of adequate data, the large dollar value of properties, and the immobility of land and
structures—are of interest primarily because of their effects on market values. Our objective
is to provide the reader with a framework and a set of valuation and decision-making tools
that can be used in a variety of situations.

The Sixth Edition

Since the publication of Real Estate Principles: A Value Approach, Fifth Edition, continued
changes have come upon the world of real estate. This is true in transactions and broker-
age with continued advancement of electronic marketing and the arrival of completely new
forms and procedures for most real estate transactions, it is true in valuation with the expan-
sion of automated valuation systems, a new version of the Uniform Residential Appraisal
Report, and of new residential and commercial property data sources, and it is true in
development and construction with the shift to “green” building. But it is still more true in
real estate finance and capital sources where the dramatic advancement of internet lend-
ing and the implementation of the “Dodd-Frank” Act have displaced traditional practices,

viii

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Preface ix

procedures and players, in mortgage finance. In addition, there continues to be change with
profound and far-reaching implications in a world where we now understand that both res-
idential and commercial property values can go down as well as up. This realization colors
the demand for home ownership as well as every aspect of real estate investment, finance,
and transactions for the foreseeable future.

Changes in This Edition

• The Test Bank has been expanded by 5 to 10 questions per chapter.
• Industry Issues are updated throughout the text to reflect current issues and concerns in
the real estate industry.
• All web links and web search exercises are revised and updated.
• Data, charts, and graphs have been updated wherever possible throughout the text.
• Chapter 1: The discussion of land use in the United States is updated.
• Chapter 2: Numerous clarifications and updates have been made throughout the
chapter.
• Chapter 3: Updated information on implied easements, and a new Industry Issues.
• Chapter 4: New sections added on traditional and new methods of land use control.
Reorganized to better reflect the evolution of land use controls.
• Chapter 5: Industry Issues examples are extensively updated.
• Chapter 6: All content is updated. Additional clarification added around Real Estate
application example, and Industry Issues boxes are extensively updated.
• Chapter 7: The chapter is updated to reflect recent changes in Uniform Standards for
Professional Appraisal Practice (USPAP) that governs the appraisal process. The latest
version of the Uniform Residential Appraisal Report (URAR) is included.
• Chapter 8: All content is updated. Industry Issues boxes have been completely rewritten.
• Chapter 9: All charts are updated.
• Chapter 10: All the data and examples are updated. Chapter has been extensively
reorganized, rewritten, and updated. New section on home mortgage “adventurism.”
• Chapter 11: Numerous topics have been clarified and all tables, charts, and examples
have been updated. The terminology is updated to reflect current industry usage. Dis-
cussion of mortgage banking has been updated to reflect changes in the nature of that
industry. Finally, discussion is added on the new public policy focus in home mortgage
lending: ability to pay.
• Chapter 12: The example listing agreement form has been replaced with an updated
version. All information and examples are updated and discussions are expanded or
clarified.
• Chapter 13: All forms have been replaced and updated. Also, a new section has been
added on the increasingly common use of electronic documents in closings.
• Chapter 15: There is a new emphasis on using Excel to make calculations. A new
exhibit shows the difference in interest rates between adjustable-rate and level-payment
mortgages.
• Chapter 16: Revisions reflect ongoing changes in the typical permanent loan origi-
nation process, recourse versus nonrecourse loans, the level of available commercial
mortgage rates, and other typical loan terms. The discussions of preferred equity and of
maximum loan size have been expanded. A discussion of bridge loans has been added.
• Chapter 17: There is expanded discussion of private equity funds, including debt funds,
to reflect their surge in importance in recent years. The section on real estate invest-
ment trusts (REITs), including their recent return performance, has been completely
updated. Updated data support the revised discussion of the sources of commercial
real estate debt and equity.
• Chapters 18 and 19: The discussion of financial risk ratios, including the increased use
of debt yield ratios by lenders to size loans, has been updated, as are the data on capi-
talization rates.

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x Preface

• Chapter 20: All tax rates and data are updated. The Tax Cuts and Jobs Act of 2017
has been integrated into the text narrative and Exhibits. There is a new section on tax
deferral strategies, and another on opportunity zones.
• Chapter 21: There is a new Industry Issues about green buildings.
• Chapter 22: The discussion of lease terms and conditions is updated to reflect recent
changes and industry standards. There is a new discussion of ground leases.
• Chapter 23: All data and examples have been updated.

Intended Audience
Real Estate Principles is designed for use in an introductory real estate course at both the
undergraduate and graduate levels, though some chapters may be used by instructors teach-
ing courses focused on real estate market analysis, finance, and investment. In terms of
background or prerequisites, some familiarity with basic economics and business finance
principles is helpful and will allow the instructor to move more quickly through some of
the material (especially Parts 1, 3, 6, and 7). However, the book is designed to be largely
self-contained. As a result, students with different backgrounds will find the text accessible.
In particular, the direct use of discounting and other time-value-of-money techniques is lim-
ited to Parts 6 to 8, allowing the text to be used by students with little or no background in
time-value-of-money techniques.

Organization
Part 1 of the book provides an overview of real estate and real estate markets. In Part 2, we
provide an overview of the legal foundations of value and discuss the significant influence
that federal, state, and local governments and agencies have on real estate decision-making
and property values. In Part 3, we discuss the market determinants of value, how the bene-
fits and costs of ownership can be forecasted, and how real estate appraisers convert these
estimates of future cash flows and expenses into estimates of current market value.
Part 4 discusses the financing of home ownership, including the law that underlies
residential mortgage contracts, the most common types of mortgages used to finance home
ownership, and the lenders and other capital market investors that provide funds for resi-
dential mortgage loans. In addition to financing their real estate acquisitions, owners must
navigate the often time-consuming and complex waters associated with acquiring and dis-
posing of real property. The brokering and closing of real property transactions is presented
in Part 5.
Parts 1 to 5 (Chapters 1 to 13) do not require knowledge of discounting and time-value-
of-money techniques; thus, these chapters are accessible to students with limited or no back-
ground in finance and economics. Although basic time-value concepts are at the heart of
this book, not every student studies them before encountering a real estate course. We have
separated the formal application (though not the underlying ideas) of time-value into one
section (Part 6). This enables the instructor to choose when and how these concepts will be
put before the student—whether before, parallel with, or after the student is introduced to
the real estate content. Indeed, one option is for the student to complete Chapters 1 to 13
without interjection of formal time-value instruction. Further, this nontechnical approach
can be extended to Chapters 16 to 18, as noted below.
In Part 6, we introduce the formal applications of compound interest and present value
that are often key to a deeper understanding of mortgage calculations and the valuation of
income-producing properties, such as office buildings and shopping centers. For students
who have had basic economics and business finance courses, Chapters 14 and 15 of Part 6
may contain substantial review. For others, these chapters contain new concepts that will
require study and practice to master. Instructors wishing to bypass Part 6 can move directly
from Part 5 to Chapters 16 to 18. However, instructors wishing to dig more deeply into com-
mercial real estate financing and investing should review or cover in detail Chapters 14 and

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Preface xi

15 before proceeding with coverage of Part 7. We note that the three chapters contained in
Part 8 also do not assume knowledge of time-value-of-money techniques.
Although we recommend the material be covered in the order presented in the text,
Parts 2 through 8 can generally be covered in any order, depending on the preferences of
the instructor and the primary focus of the course. For example, instructors who prefer to
cover the investment material first may elect to move directly to Parts 6 and 7 immediately
after Part 1.
Regardless of the emphasis placed on the various chapters and materials, we believe
strongly that an introductory course in real estate should be as substantive and challeng-
ing as beginning courses in fields such as accounting, economics, and finance. The course
should go beyond definitions and the discussion of current professional practice. More-
over, its focus should be on real estate principles and decision tools, not simply the current
rules and practice for transactions that are so important to real estate sales licensing and
brokerage.

David C. Ling

Wayne R. Archer

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Confirming Pages

Main Features
Chapter 5 PART THREE

We have included many pedagogical features in this book

that will be valuable learning tools for your students. This
overview walks through some of the most important
elements. Market Determinants
of Value
Confirming Pages
Learning Objectives
LEARNING OUTLINE
OBJECTIVES Introduction
Each chapter begins with a summary of the
After reading this chapter you will be able to: objectives of the chapter and describes the
Market Misjudgments in Real Estate

1 Explain the role of transportation modes material to be covered, providing students

Minimizing Market Errors
The Creation, Growth, and Decline of Cities
and natural resources in the location and Where Cities Occur with an overview of the concepts they
PART THREE
evolution of cities. should understand after reading the
The Economic Base of a City
Resources of a City: The Supply Side of Urban
2 Define economic base activities, distinguish Growth chapter.
them from secondary activities, and explain The Shape of a City
the role of both in the growth or decline of a Demand for Proximity and Bid-Rent Curves
city. Bid-Rent Curves, Urban Land Uses, and Land Value
Contours

Determinants 3 Identify supply factors influencing the growth

of a city.
Changing Transportation, Changing Technology, and
Changing Urban Form
Differing Location Patterns of Urban Land Uses
4 Demonstrate how demand for access Convenience “Goods” and Central Place Patterns
influences the value of urban land and Comparison Goods and Clustering
Industry Economies of Scale and Clustering
determines the patterns of location of
The Role of Urban Analysis in Real Estate Decisions
activities within a city.

5 Explain what effects evolving transportation

Chapter Outlines
OUTLINE
technology, evolving communications
S Introduction technology, and changing production A chapter outline is featured among each
er you will be able to: and retailing
Market Misjudgments methods
in Real Estatehave had on chapter opener. Each outline lists the chap-
Minimizing urban
Marketform.
sportation modes
Errors
The Creation, Growth, and Decline of Cities
ter headings and subheadings for a quick
n the location and Where6CitiesDistinguish
Occur between “convenience goods” reference for both professors and students.
The EconomicandBase
“comparison
of a City goods” in their urban
Resources location
of a City: patterns.
The Supply Side of Urban
activities, distinguish Growth
ctivities, and explain The Shape 7 of a Define
City industry economies of scale and
growth or decline of a Demand foragglomeration economies
Proximity and Bid-Rent of scale, and offer
Curves
examples
Bid-Rent Curves, UrbanofLand
each.Uses, and Land Value
Contours Confirming Pages
nfluencing the growth Changing Transportation, Changing Technology, and
Changing Urban Form
Differing Location Patterns of Urban Land Uses
and for access Convenience “Goods” and Central Place Patterns
urban land and Comparison Goods and Clustering
Chapter 4 Government Controls and Real Estate Markets 71
Industry Economies of Scale and Clustering
s of location of
The Role of Urban Analysis in Real Estate Decisions
Introduction
Inanidealeconomicworldmarketcompetitionwouldcompelthemostdesirableusesof
Chapter Introductions
olving transportation landforsociety.Ifrealestatemarketsworkedwell,unregulatedcompetitivebiddingwould
ommunications bringaboutthemostproductiveuseofeachparcel,andthepricepaidfortheparcelwould The first section of each chapter describes
ng production exactlyreflectitsusefulness,muchasdescribedinChapter5.Butthisdoesnotcompletely the purpose of reading each chapter, and
happenforseveralreasons.Oneofthereasonsisbecauseofexternalities:Theunintended
have had on andunaccountedforconsequencesofonelanduseruponothers.Forexample,thecreation provides links between the different
ofashoppingcenteronasitemaycauseharmtoneighborsthroughincreasedtrafficdelays,
noise,increasedstormrunoffacrossneighboringland,“lightpollution,”orothervisualor
concepts.
onvenience goods” environmentaldeterioration.Anotherproblemthatarisesisthatbuyersofpropertysuffer
lin13936_ch05_100-129.indd 100 09/09/1911:41AM
fromincompleteinformation.Onceastructureisbuiltitisdifficult,andsometimesimpos-
s” in their urban
sible,todeterminethesturdinessandsafetyofthestructure,aproblemthattoofrequently
hasledtotragicfiresorbuildingcollapsesinplaceswherebuildingregulationisweak.Still
anotherkindofproblemthatarisesinatotallyprivatelandmarketislocationalmonopoly.
mies of scale and Forexample,whenlandisneededforaroad,certainspecificparcelsarerequired,forwhich
ies of scale, and offer thereisnosubstitute.Theownerofthesecriticalparcels,ineffect,hasamonopolyonthe
supplyandcanextractunreasonablepricesfromothertax-payingcitizens.
Insummary,anunregulatedprivatemarketforlandwouldbefraughtwithproblems
resultingfromexternalities,fromincompleteinformation,andfromlocationalmonopolies.
Thesekindsofproblemshavepersuadedmostpersonsthatgovernmentmustintervenein
theuseofland.
Inthischapter,wesurveythreebasicpowersofgovernmentthatlimitprivateproperty
xiii
useandaffectpropertyvalue.Wefirstdiscussthegovernment’srighttoregulatelanduseand
setminimum standards forsafe construction throughitsbroadpolice powers. Second,we
lookatthepowerofgovernmenttoacquireprivatepropertyforthebenefitofthepublicusing
itspowerofeminentdomain.Finally,weexaminetherightofgovernmenttotaxproperty.All
ofthesegovernmentinterventionscanhaveprofoundeffectsonthevalueofprivateproperty.

The Power of Government to Regulate Land Use

Theauthorityofstateandlocalgovernmentstoregulatelanduseandenforcedevelopment
lin13936_fm_i-xxx.indd xiii 03/05/20 11:13 AM
1
andconstructionstandardsisvestedinitspolicepower. Thispowerestablishestherightof
 Standards of Professorial Appraisal Practice
(USPAP), establishing the minimum ethical
requirements and standards of practice on
an industry-wide basis. All 50 states require
real estate appraisers to be licensed or certi-
fied and the standards set by the AQB repre-
sent the minimum requirements each state
must implement for individuals applying for a
real estate appraiser license or certification.
clients that the appraiser has obtained
even more education and/or professional
experience in the field than is required for
state certification. The Appraisal Institute
(www.appraisalinstitute.org) offers the res-
idential Senior Residential Appraiser (SRA)
designation and the prestigious Member of
the Appraisal Institute (MAI) designation for
commercial appraisers.
Source: Real Estate Career Paths, University of
Cincinnati, https://business.uc.edu/faculty-and
-research/research-centers/real-estate/ Final PDF to printer
career-paths.html; the Appraisal Institute,
www.appraisalinstitute.org; and the Appraisal
Foundation, www.appraisalfoundation.org.

Main Features
www.rics.org
The Royal Institute of Chartered
Surveyors is the largest profes-
sional association of appraisers
(valuers) outside the United States.
Wenextdiscusstherelationshipsamongmarketvalue,investmentvalue,andtransac-
tionprices.Thisisfollowedbyanoverviewoftherealestateappraisalprocess,including
thethreeconventionalapproachesusedtoestimatethemarketvalueofrealestate.Wethen
focusonthetwomethods(approaches)thatprovideameansforestimatingaproperty’s
market value without directly considering the property’s income-producing potential: the
salescomparisonapproachandthecostapproach.Theincomeapproachtovaluationisthe
focusofChapter8.

Key Terms www.iaao.org

International Association of Assess-
ing Officers. A nonprofit, educa-
Key terms are indicated in bold within the
tional, and research association for
text for easy reference. A list of key terms
tax assessors.
from each chapter plus page references can
be found in the end-of-chapter material.
The glossary contains the definitions of all
key terms.
Market Value, Investment Value, and Transaction Prices
Beforediscussingtheframeworkforestimatingthemarketvalueofrealestate,itisimportant
todistinguishamongtheconceptsofmarketvalue,investmentvalue,andtransactionprice.
Real estate appraisers generally define the market value of a property as its most probable
sellingprice,assuming“normal”saleconditions.1Alternatively,itcanbeviewedasthevalue
thetypical(imaginary)participantwouldplaceonaproperty.Theconceptofmarketvalue
restsuponthepresenceofwillingbuyersandsellersfreelybiddingincompetitionwithone
another.Itistheresultoftheinteractingforcesofsupplyanddemand.Ifrealestatemarkets
wereperfectlycompetitive,marketvaluewouldequaltheproperty’smostrecenttransaction
1.Inprofessionalappraisalpractice,marketvaluedefinitionsmayvaryastotheprecisemotivations,terms,
andconditionsspecified.

163
Confirming Pages

Industry Issues 1-2 INDUSTRY ISSUES

R
lin13936_ch07_161-191.indd 163 09/09/1912:48PM
eal estate auctions often experience virtually all long-term carrying costs, 329,000 properties sold to date, and more

These boxes, located in almost all chapters, unfounded negative images in the
marketplace. The majority of auctions
passing the savings directly to the
purchaser in the form of a reduced price.
than 15,000 auctions per year in all 50
states.

feature current and interesting real-world today don’t result from

foreclosure of dis-
The result is often a win–win situation:
sellers obtain immediate cash and buyers
The National Association of Realtors
(NAR) can help you understand the basics

applications of the concepts discussed in

tress situations, purchase properties at fair market value, and benefits of a real estate auction. Learn
but rather are the price determined by open, competitive about different auction types, how you can
the result of a bidding. get involved, find online training, locate an
the chapters. Real Estate
Auctions
seller choosing
a cost-effective
Auction.com (www.auction.com) mar-
kets its auction platform as the nations’
auctioneer and more at www.nar.realtor/
auctions.
method to sell a largest online auction marketplace. As of
property. early 2019, Auction.com’s transaction plat- Source: Authors, Auction.com (www.auction.com),
Auctions allow form had resulted in $39 billion in sales, and the National Association of Realtors (www.nar.
sellers to eliminate 4.4 million registered buyers on Auction.com, realtor/auctions).
First Pages

Exhibit 1-5 The Four Quadrants of Real Estate Capital Market Participants for
Income Property

Chapter 12 Real Estate Brokerage

Private Markets and Listing Contracts
Public Markets 331
Equity/owners Individuals,partnerships,limited Publicrealestateinvestmenttrusts
Exhibit 12-6 Continued An Exclusive Right of Sale Listing Agreement
liabilitycorporations,private (REITs)andrealestateoperating
equityfunds companies
Debt/lenders Banks,insurancecompanies, Commercialmortgage-backedsecu-
financecompanies,private rities(CMBS)andmortgage
lenders REITs

Real Estate The Role of Government

Applications Governmentaffectsrealestatemarkets,andthereforevalues,inahostofways.Localgov-
ernmenthasperhapsthelargestinfluenceonrealestate.Itaffectsthesupplyandcostof
realestatethroughzoningcodesandotherlanduseregulations,feesonnewlanddevelop-
ment,andbuildingcodesthatrestrictmethodsofconstruction.Further,localgovernment

These boxes, located in select chapters, offer affectsrentalratesinusermarketsthroughpropertytaxes.Finally,itprofoundlyaffectsthe

case applications of key topics.
www.uli.org
The Urban Land Institute is an influ-
ential U.S. organization for those
engaged in development and land
use planning.
supply and quality of real estate by its provision of roads, bridges, mass transit, utilities,
flood control, schools, social services, and other infrastructure of the community. (The
influenceoflocalgovernmentonrealestatevaluesthroughlandusecontrols,propertytax
policy,andservicesisexpandeduponinChapter4.)
Stategovernmentsalsoaffectrealestatevalues.Throughthelicensingofprofessionals
and agents, states constrain entry into real estate–related occupations (see Chapter 12).
Throughstatewidebuildingcodes,theycanaffectbuildingdesignandcost.Throughdis-
closurelawsandfairhousinglaws,statesaffecttheoperationofhousingmarkets.Inaddi-
tion,statestypicallysetthebasicframeworkofrequirementsforlocalgovernmentlanduse
controls,andeveninterveneintherealmoflandusecontrolsforspecialpurposessuchas
protectionofenvironmentallysensitivelands.Finally,statesaffecttheprovisionofpublic
servicesimportanttoacommunity,includingschools,transportationsystems,socialser-
vices,lawenforcement,andothers.
Thenationalgovernmentinfluencesrealestateinmanyways.Incometaxpolicycan
greatlyaffectthevalueofrealestateandthereforetheincentivetoinvestinit.(Theexten-
Confirming Pages
siveeffectofincometaxesonrealestatevalueisdetailedinChapter20.)Federalhousing
subsidyprogramscanhaveenormouseffectsonthelevelandtypeofhousingconstruction.

10

CAREER FOCUS

P
lanners develop land use plans to
provide for growth and revitaliza-
lin13936_ch01_001-017.indd
10
tion of communities, while helping
Urban and regional planners often similar course of study. Planners must be
confer with land developers, civic leaders, able to think in terms of spatial relation-
09/11/1909:23AM
and public officials. They may function ships and visualize the effects of their

Career Focus
local officials make decisions ranging from as mediators in community disputes and plans and designs. They should be flexible
broad urban problems to new community present alternatives acceptable to oppos- and able to reconcile different viewpoints
infrastructure. They may participate in deci- ing parties. Planners may prepare material and to make constructive policy recom-
sions on alternative public transportation for community relations programs, speak mendations. The ability to communicate
system plans, resource at civic meetings, and appear before leg- effectively, both orally and in writing,
These boxed readings provide students development, and islative committees and elected officials is necessary for anyone interested in
protection of to explain and defend their proposals. this field.
with valuable information on the many dif- ecologically sen-
sitive regions.
Planners rely heavily on sophisticated
computer-based databases and analytical
In 2015, 80 percent of planners earned
between about $45,180 and $114,170,
ferent career options available to them, and Urban and Regional Planners also
Planners may be involved
tools, including geographical information
systems (GISs).
with a median of $73,050.

what those positions entail. with drafting

legislation con-
Most entry-level jobs in federal, state,
and local government agencies require
Source: Summarized from The Occupa-
tional Outlook Handbook. U.S. Department
cerning local com- a master’s degree in urban or regional of Labor.
munity issues. planning, urban design, geography, or a

Industry Economies of Scale. Economists have long recognized that the growth of an
xiv industry within a city can create special resources and cost advantages for that industry.
Thisphenomenoniscalledindustry economies of scale.InWichita,forexample,theestab-
lishment of Beech and Cessna created an infrastructure of management and production
knowledge,partsvendors,astrongaeronauticalengineeringprogramatthelocaluniversity,
andotherresources.Suchresultingresourcesapparentlywerematerialinattractingother
aircraftcompaniestothecity.Thus,formerlySeattle-basedBoeingplaceditslargestplant
outsidethestateofWashingtoninWichita,andLearJetwaslaunchedinthecityseveral
decadesafterthebeginningofBeechandCessna.Morefamiliarexamplesofwhereindustry
economiesofscalehavepropelledcitygrowthincludetheautomobileindustryinDetroit,
the motion picture industry in the Los Angeles area, the petrochemical industry in the
Houstonarea,and,morerecently,thecomputerandsoftwareindustryin“SiliconValley”
lin13936_ch12_304-338.indd 331 intheSanFrancisco–SanJoseregionofCalifornia,musicinNashville,andthecomputer 08/21/1910:50AM
industryinAustin,Texas.
lin13936_fm_i-xxx.indd xiv Agglomeration Economies.
03/05/20 11:13 AM
Ascitiesgrow,theydevelopalargerarrayofresources.Import-
 discussedinChapter3.)Examplesofresidentialsubdivisionrestrictions
164 Part 3 Market Valuation and Appraisal Final PDF to printer
Setbacklineand/orheightrestrictionforhouses.
2 Minimumfloorarea.
price.Therewouldbenoneedforvalueestimates. Asdiscussedabove,theproblemofmarket
Nofreestandinggarage.
valueestimationarisesbecauseoftheexistenceofimperfectionsintherealestatemarket.
Incontrasttomarketvalue,investment valueisthevalueaparticularinvestorplacesona
Nofreestandingutilitybuilding.
property.Investmentvalue,discussedindetailinChapters18and19,isusefultobuyersand
Nochain-linkfences.
sellersformakinginvestmentdecisions.Itisbasedontheuniqueexpectationsoftheindividual
Norecreationalvehiclesorboatsparkedinviewofthestreet.
investor,notthemarketingeneral.Abuyer’sinvestmentvalueisthemaximumthatheorshe

Main Features
Nogaragedoorfacingthestreet.First Pages
wouldbewillingtopayforaparticularproperty.Theseller’sinvestmentvalueistheminimum
Requiredarchitecturalreviewofnewstructuresormajoradditions.
he or she would be willingto accept.Investment values generally differ from market values
becauseindividualinvestorshavedifferentexpectationsregardingthefuturedesirabilityofa
Noexternalantennae,satellitedishes,orclotheslines.
property, different capabilities for obtaining financing, different tax situations, and different
Nohabitualparkingofcarsinthedriveway.
returnrequirements.Althoughthemethodsusedtoestimateinvestmentvalueandmarketvalue
394 Part 6 Time, Opportunity Cost, and Value Decisions
Requirementtouseprofessionallawnservice.
aresimilar,analystswhodetermineinvestmentvalueapplytheexpectations,requirements,and
assumptionsofaparticularinvestor,nottheexpectationsofthetypicalmarketparticipant.
Traditionally,restrictivecovenantsarestrictlyprivate;thatis,theycanbeenforcedonly
Inthisexample,theinvestorwillinvestatotalof$1,000peryearregardlessofwhetherpay-
Finally,transaction pricesarethepricesweobserveonsoldproperties.Theyaredifferent,
www.houstontx.gov/ bythosewhoholdalegalinterestintheproperty.9Inthecaseofanisolateddeed restriction,
mentsaremademonthlyorannually.However,ifpaymentsof$83.33aremademonthly,
butrelated,totheconceptsofmarketvalueandinvestmentvalue.Weobserveatransaction Website Annotations
legal/deed.html theownerwhocreatedtherestrictionorthatowner’sheirsaretheonlypersonswhocan
theinvestorwillaccumulate$5,666.95attheendoffiveyearscomparedwith$5,525.63
onlywhentheinvestmentvalueofthebuyerexceedstheinvestmentvalueoftheseller.Real
withannualinvestments.Whyistherea$141.32differenceinfuturevaluesiftotalpayments Websites are called out in the margins in
enforcetherestriction.Theywoulddosobysuingforaninjunctionagainstaviolation.Such
estateappraisersandanalystsobservetransactionpricesandusethemtoestimatethemarket
An unusually descriptive local
overthefive-yearperiodarethesamewithbothstrategies?Noticethattheinitialinvestment
valueofsimilarproperties.However,thereisnoguaranteethatanobservedtransactionprice every chapter and include a notation of
individualrestrictionsusuallymustbeenforcedpromptly.Forexample,ifasellerofprop-
government explanation of deed
occursattheendofmonth1inthemonthlycompoundingscenario,whereasitoccursat
isequaltothe(unobservable)truemarketvalueofthesoldproperty.Itsimplyrepresentsthe what can be found by visiting them.
ertycreatedarestrictionthatthepropertymustbeusedforresidentialpurposes,andthe
theendofyear1intheannualcase.Thus,themonthlyinvestmentsbegintoaccumulate
restrictions, their use and enforce-
priceagreeduponbyonewillingandprudentbuyerandonewillingandprudentseller.
interest11monthsearlierthantheannualcase. sellerseekstoenforcetherestrictiononlyafteracommercialestablishmenthasbeencre-
ment in Texas, where deed restric-
Insummary,marketvalueisanestimateofthemostprobablesellingpriceinacompetitive
atedandisoperating,thecourtsmaybeunwillingtoupholdtherestriction.10Courtdeci-
market.Marketvaluecanbeestimatedfromobservedtransactionpricesofsimilarproperties.
tions can replace zoning.
✓ Conceptprices
These transaction Check are negotiated in an sions
imperfect market between
concerning buyers and sellers,
enforcement seem to reflect the common law tradition that property
eachhavinghisorherowninvestmentvalueoftheproperty.Investmentvalueandmarketvalue
14.3 You purchase a parcel of land shouldbeproductive,withlessrestrictionbeingbetter.Whenrestrictionsareambiguous,
today for $50,000. For how much
thusarelinkedthroughthecompetitivemarketprocessthatdeterminestransactionprices.3
thecourtislikelytointerpretinfavorofthecurrentowner.
Concept Check
will you have to sell the property in 15 years to earn a 10 percent
annual return on both your initial $50,000 outlay and the expected
Enforcementofsubdivisionwiderestrictionsissimilartoenforcementofanisolateddeed
annual payment of $1,000 for property taxes and insurance?
these funds could be restriction.However,byadoctrineofrightsknownas“equitableservitude,”subdivisionwide
Assume
Concept Check invested at comparable risk to earn a
Every major section contains one or more
10 percent annual return. restrictionsaredeemedtoservetheinterestofallownerspresentandfutureinthesubdivision questions for review. This feature helps
7.2 Assume a house is listed for sale for which you would be willing to
lots,aswellasotherswithinterestsintheland,suchasmortgagelenders,andevenrenters.
pay up to $200,000. The seller has put the property on the market students test their understanding of the
Future Value
withofan
anasking
Annuityprice $180,000. Anyofthese“partiesatinterest”cansueforinjunctionagainstviolationofarestriction.
Due. ofWhatiftheinvestorplanstoinvest$1,000atthebegin-
List some possible reasons why material before moving on to the next sec-
your investment value exceeds thatWhethertherestrictionisinanisolateddeedorpartofageneralsetofsubdivision
of the seller. Is the price you pay
ningofeachyearforfiveyears?Thesesituationsarereferredtoas“futurevalueofanannu- tion. Solutions to each Concept Check are
likely to be closer to $200,000restrictions,thecourtshavebeenreluctanttomaintainthemforanunreasonablylongtime.
or $180,000? Explain.
itydue”problems.Becausetheinitialandsubsequent$1,000annualpaymentsareshifted
forwardayear,thetotalamountofinterestearnedoverthefive-yearperiodwillincrease. provided at the end of each chapter so stu-
Eveninstateswherenotimelimitexists,courtsmayrefusetoenforcerestrictionsdueto
FinancialcalculatorsandExcelreadilypermittheusertospecifythatcashflowswillbe dents can check their answers.
changingneighborhoodcharacter,abandonment(neglectofenforcement,sometimescalled
invested or received at the beginning of each period (“begin mode”) instead of the end
www The Appraisal Process4
(“endmode”).Thekeystrokesotherwiseremainthesame.Thefuturevalueofthisannuity
.appraisalfoundation.org dueis$5,801.91,or$276.28greaterthanthe$5,525.63accumulatedvalueassumingyear-
Contains links to updated USPAP
How dodeposits.
end real estate
Whatappraisers do their job?
is the relationship Professional
between the appraisal
standard futuregroups haveand
value result
annuitydueresult?Notethatthe$5,801.91annuityduesolutioncanbeobtainedbymulti-
ported strict standards of ethics and practice
long
among their members. Maintained by the
sup-
the
beenusedinplaceofpubliclandusecontrols,statelawhasbeenenactedtoallowlocalgovernmenttoenforce
Calculator Keystrokes
9.Thestrictlyprivatecharacterofdeedrestrictionscanbeblurred.InTexas,wheredeedrestrictionshave

information.
AppraisalFoundation,theUniform Standardscertaindeedrestrictions(seeIndustryIssues4-1).Theactionstillisbycivilsuit,throughthecourts.
plyingthesolutiontotheregularannuityproblemby1plustheperiodicinterestrate[i.e.,
of Professional Appraisal
Confirming Pages Practice (USPAP) Found in applicable chapters, calculator
$5,801.91=$5,525.63×(1+0.05)].
arerequiredandfollowedbyallstatesandfederalregulatoryagencies.USPAPimposesboth
10.Thisculpablenegligenceindelayingenforcementisformallyknownaslaches. keys are shown with values to help guide
ethicalobligationsandminimumappraisalstandardsthatmustbefollowedbyallprofes-
sionalappraisers.Atpresent,USPAPisupdatedbiannually. 5 students through numerical calculations.
✓
Concept Chapter
Check3 Conveying Real Property Interests 57

Exhibit 3-2 Creating Evidence of Title

14.4 Assume the owner of a 10-unit apartment building will deposit
2.Studentsofeconomicsmaynotethatthedefinitionofmarketvalueadoptedbyappraisersissimilar,but
$2,000 per year, or $200 per unit, in an interest-bearing reserve
notidentical,tothedefinitionofvalueunderperfectcompetition.
Figures & Tables
Statute of Frauds:

3
account.Real These
estate contracts
(incl. deeds) must
fundsRecording
will be used to refurbish the apartments at the
Statutes:
Market andend
investment
of fivebevalues
in writing are but two
years. If the kinds of value
Implement doctrine of
deposits
constructive notice:
of potential
are made at the concern to the real
beginning estate analyst.
of each
Othervaluesthatsometimesmustbeestimatedincludethevalueassignedtothepropertyforpropertytaxcalcu-
year and will earn 5 percent
contracts conveying a real
interest, compounded annually, what
estate interest must be

This text makes extensive use of real data

placed in public records
lations;thevalueoftheinsurableportionundertheprovisionsofaninsurancecontract;thevalueofaproperty
will be the accumulated value of the reserve account at the end of
thatincludesthevalueoftheassociatedbusinessesoccupyingtheproperty;thevalueofapropertyforaspecific
Public records

use;andothers.
five years?provide information
for title search and presents them in various exhibits.
lin13936_ch02_018-044.indd
4.ThissectiondrawsfromChapter4ofThe30 Appraisal of Real Estate,14thed.(2013).
Title search
creates “chain of
Explanations in the narrative, examples, and
09/09/1910:36AM
5.TheAppraisalStandardsBoardadoptedthe2020–2021editionofUSPAPinAprilof2019.Thisedition
Discounting Operations
title”
 end-of-chapter problems will refer to many
becameeffectiveonJanuary1,2020. Legal professional
ThethirdandfourthbasicTVMoperationsareusedtoconvertfuturecashflowamounts
confirms unbroken
“chain of title”
of these exhibits.
Inspection of
into present values. Thecompeting
concept
property for
claims
underlying theseConfirming operations
Pages is extremely important for

investmentanalysisbecauseconvertingfuturedollaramountsintopresentvaluesisthecor-
(“actual notice”)
Evidence of Title

nerstoneofpropertyvaluation.
148 Part 3 Market Valuation and Appraisal
Present Value of aTitleLump Abstract and Attorney’sThis
Sum. Opinion.operation iswith
The title abstract used toopinion
attorney’s calculate is the the present value of
Exhibit 6-10 traditional evidence of title. Its logic follows closely from the nature of the title search
futurelumpsum(i.e.,one-time)receipts.Assumetheinvestorhasbeenofferedaninvest-
Where People
describedabove.
Work in Orlando

ment opportunityTitle that is expected to provide a $1,276.28 cash inflow at the end of five
Insurance Commitment. Atitle insurance commitmentisdeemedequivalenttothe
University of

lin13936_ch07_161-191.indd 164
years,asshowninpanelAofExhibit14-7.Assumealsothattheinvestorexpectstobeable
traditionalabstractandopinionoftitle.Thelogicofrelyingonatitleinsurancecommit-
Central
Florida
mentasevidenceoftitleisthattheinsurerwouldnotmakeacommitmentbeforeconduct- 09/09/1912:48PM
to earn 5 percent, compounded annually, on similar investments.
ingatitlesearchandassuringagoodtitlebeyondreasonabledoubt.Title insuranceprotects More specifically, the
agrantee(ormortgagelender)againstthelegalcostsofdefendingthetitleandagainstloss
ofthepropertyincaseofanunsuccessfuldefense.Therefore,theinsurerwillrefusetocom-
mitifgoodtitleisindoubt.
www.alta.org Titleinsurancehasbecomethepredominanttypeofevidenceoftitlebecausethetra-
American Land Title Association is
ditionofabstractwithattorney’sopinion,evenifexecutedperfectly,cannotguardagainst
the umbrella organization of the
certainrisks.Amongthesearedefectivedeeds(e.g.,thoseimproperlydelivered),forgeries,
CBD
title insurance industry—a very rich
flawsduetoincorrectmaritalstatus(e.g.,failuretorevealamarriage),andincapacityof
Plane
agrantorduetoinsanityorminorityage.Titleinsuranceprovidesindemnificationagainst
site for information about title insur-
Vista
theserisks,amongothers.Litigationmaybenecessarytodefendevenagoodtitle,andtitle
ance and the industry.
insurancecoversthiscost.
Thereareimportantlimitstotitleinsurance.First,itisnothazardinsurance;thatis,
itdoesnotprotecttheownerfromthethreatofphysicaldamagetotheproperty.Itonly
Airport
protectsagainstlegalattackontheowner’stitlearisingfromeitheracompetingclaimto
Disney World
titlebysomeoneelseoraclaimthatdiminishestheowner’srightsofuse.Restrictionson
usemayarisefromeasementsontheproperty,fromgovernmentrestrictionsaffectingthe
lin13936_ch14_385-410.indd 394 property(discussedinChapter4),orfromencroachments;thatis,intrusionsontheprop- 08/21/1910:35AM
ertybystructuresonadjacentland.Butfortheselegalchallengeseventitleinsurancehas
limits.Forexample,titleinsurancetypicallyexceptsfromcoverageanyrestrictionsthata

allocated the county employment across property parcels in the corresponding industry
usingthepercentoftheindustry’stotalbuildingspaceateachparcel.Fromthis,Sarahwas
abletocreateamapapproximatingwherepeopleworkinOrlando(Exhibit6-10).Sarah xv
walkeduptoAlexwiththemapinhand.“Thisoughttobeworthdinner.”
“Incredible!Thanks!”Hewasimmediatelyengrossedinthemap.Nowtheapartment
clustersbegantomakesomesensebecausejobsweretremendouslyconcentratedjustasthe
lin13936_ch03_045-069.indd 57 09/09/1910:43AM
apartmentswere.Oneapartmentclusterseemedtobejustnorthwestofdowntown,appar-
entlyservingthedowntownemployment.Anothercorrespondedexactlywiththeapparent
concentrationsofjobsinsouthOrlando,andthethirdclusteredaroundtheexploding,and
alreadyhugeUniversityofCentralFlorida(UCF).Butanotheramazingresultwastheiso-
lation of the Plane Vista area. It was a job cluster of its own, set well away from south
Orlando,fromdowntown,andfromUCF.Obviouslythedominatingemploymentwasatthe
airport,the14thbusiestintheUnitedStates,andoneofthefastestgrowinginrecentyears.
InsteadofPlaneVistabeingpartofauniformOrlandolandscape,itwaspartofanemploy-
mentclusterquitesetapartfrommostofthecity,apparentlydrivenbytheairport.Itwas
almostonan“airportisland,”Alexthought.Ashelookedfurtherataerialphotosofthe
lin13936_fm_i-xxx.indd xv
area,herealizedthatacombinationoflakes,olderresidentialareas,andindustrialware- 03/05/20 11:13 AM
houseareasisolatedthePlaneVistaneighborhoodfromtheemploymentcenterstothewest,
 Final PDF to printer

End-of-Chapter Features Confirming Pages

96 Part 2 Legal and Regulatory Determinants of Value

Summary
Chapter Summary This chapter surveys three basic powers of government: its right to regulate land use, its
right to take private property for public use, and its right to tax property. The power of
Each chapter ends with a short section that federal,state,andlocalgovernmentstoregulatelandusethroughplanning,zoning,building
codes,andothermeansisvestedintheirpolicepower.Communitiesusethesetoolstolimit
Confirming Pages

highlights the important points of the chap- the negative effects of market failures such as monopolies, externalities, and incomplete
ter. This provides a handy study tool for stu- structureinformation,thusattemptingtoincreasemarketefficiencyandequity.
Planning is the process of developing guidelines for controlling growth and develop-
dents when they review the chapter. Chapter 7 Valuation Using the Sales Comparison and Cost Approaches
ment.Zoningassignsspecificpermittedusestoindividualparcelsoflandtocarryoutthe
187

comprehensiveplan.Otherconventionaltoolsoflandusecontrolincludebuildingcodes
Summary
andsubdivisionregulations.NewerlandusecontroltoolsincludePUDs,performancestan-
Appraisalistheprocessofdevelopinganopinionofthevalueofrealestate.Professional
appraisersusethreegeneralmethods,orapproaches:salescomparison,cost,andincome
dards,impactfeesandform-basedzoning.Statesandlocaljurisdictionsexperiencingrapid
(thetopicofChapter8).
growthhaveadoptedawidevarietyofmeasurestomanagesuchgrowth.Somestatespass
Appraisingone-tofour-familyresidentialpropertieshasbeenanimportantactivityfor
lawsrequiringcitiesandcountiestodevelopcomprehensiveplans,requireeconomicand
manyappraisers,andthemostapplicablemethodfortheseappraisalsisgenerallythetra-
ditionalsalescomparisonapproach.However,theappraisalofsmallresidentialproperties
environmental impactisbecomingincreasinglycomputerized,andthetraditionalsalescomparisonapproachis
statements in large development proposals, prohibit new develop-
mentunlessconcurrencyprovisionsaremet,andrequireanallocationofaffordablehous-
beingaugmented,ifnotreplaced,bycomputer-aidedstatisticalanalyses.Nevertheless,the
inginnewresidentialdevelopments.Additionally,somestatesgivelocalcommunitiesthe
sales comparison approach will continue to be important in the appraisal of residential
properties.
right to establish urban service areas, or to plan and control urban development outside
Appraisersusingthesalescomparisonapproachadjustthesalepriceofeachcompa-
theirboundaries.Thoughlawsuitshavechallengedzoningandgrowthmanagementfroma
rablepropertytoreflectdifferencesbetweenitandthesubjectpropertyforeachelement.
Theyfollowasequenceofadjustmentscalculatedeitheraspercentagesordollaramounts.
varietyofstandpoints,courtsgenerallyhaveuphelditsvaliditywhenitisreasonable,nonex-
Theproperselectionofcomparablesalesisessentialtothesuccessfulimplementationof
clusionary,andcomprehensive.
www.mhhe.com/lingarcher6e

thesalescomparisonapproach.
Environmentalhazardshavebecomeanimportantconsiderationinlanduseregulation
Inthecostapproach,theappraisersubtractsthebuilding’sestimatedaccrueddeprecia-
tionfromthecosttoconstructthepropertytoday.Threetypesofaccrueddepreciationmay
inrecentyears.Asbestos,fiberglass,LUSTs,leadpaint,radongas,andmoldaresomeofthe
exist:physicaldeterioration,functionalobsolescence,andexternalobsolescence.Thecost
mostcommonthreats.Realestateinvestorsmustprotectthemselvesfromthesehazardsby
to construct the building today less accrued depreciation equals the building’s indicated
havingenvironmentalinspectionsandbyrequiringwrittenstatementsofindemnification
value.Theestimatedsitevalue(plusthecurrentvalueofsiteimprovements)isthenadded

www.mhhe.com/lingarcher6e
toobtaintheindicatedpropertyvaluebythecostapproach.
fromdevelopersandpreviousowners. Confirming Pages
Eminentdomainisthepowerofgovernmenttoacquireprivatepropertyforpublicuse
Key Terms
inexchangeforjustcompensation.Courtshaveinterpretedthetermpublic
Accrueddepreciation 181 Indicatedvalue 170 Reproductioncost usebroadlyto
180
includepropertytakenforapublicpurpose.Justcompensationisthemarketvalueofthe
Adjustments 171 Investmentvalue 164 Restrictedappraisalreport 169
property.Courtshavegenerallyruledthatregulationsimposinglimitsonpropertyrightsdo
Appraisal 162
126
Marketconditions 173
Part 3 Market Valuation and Appraisal
Subjectproperty 162
Appraisalreport 162 Marketvalue 163 Transactionaladjustments 172
notneedtobecompensated;however,ifregulationgoes“toofar”itwillberecognizedasa
Arm’s-lengthtransaction 170 Nonrealtyitems 175 Transactionprice 164
Test Problems
takingandsubjecttocompensation.
Comparableproperties 169 Physicaldeterioration 181 UniformStandardsof
Thepowerofgovernmenttotaxrealpropertyownersisamajorsourceofrevenuefor
Elementsofcomparison 176 Propertyadjustments 172 d. Laborforcecharacteristics.
Answerthefollowingmultiple-choiceproblems: ProfessionalAppraisalPractice
1. The“gravity”thatdrawseconomicactivityintoclustersis: e. Educationsystem.
(USPAP) 164
localgovernments.Thetaxisleviedonthevalueofallpropertyinthetaxingjurisdiction,
Externalobsolescence 181
a. Commonlawsandregulations.
Reconciliation 169
7. Whichstatementsaretrueaboutagglomerationeconomies?
Functionalobsolescence 181 Repeat-saleanalysis 173
less exempt property.
b. Commonlanguage.
Highestandbestuse 166
A property’s value for tax
Replacementcost 180
purposes is usually equal to, or a direct
a. Theyresultfromdemandcreatedbymultipleindustries.
c. Demandforaccessorproximity. b. They create a readily available supply of highly special-
functionof,itsmarketvalue.
Test Problems
d. Costofland. izedgoodsandlabor.
Test Problems
e. Streets. c. Theytendtoreducerisksinrealestate.
2. Spatialordistancerelationshipsthatareimportanttoaland d. Theyoccurinlargercities.
Answerthefollowingmultiple-choiceproblems: c. Marketvalue.
usearecalledits: e. Alloftheabove.
1. Thefinalpriceforeachcomparablepropertyreachedafter d. Indicatedopinionofvalue.
Key Terms a. Linkages. 8. Whichoftheseinfluenceswilldecreasethelevelofabid-rent
Because solving problems is so critical to a
alladjustmentshavebeenmadeistermedthe: 4. A new house in good condition that has a poor
b. Agglomerations. curveatthecenterofthecity?
a. Finalestimateofvalue. f loorPublicuse
plan would suffer86from which type of accrued
Advaloremtaxes 89 Extraterritorialjurisdiction 79
c. Facets.
b. Finaladjustedsaleprice.
a. Fastertraveltime.
depreciation?
student’s learning, approximately 10 d. Dimensions.
Affordablehousingallocation 79c. Marketvalue. Form-basedzoning 82
e. Attractions.
Weightedprice.
d. 3.
b. Higheraveragewagerate. 88
Regulatorytaking
a. Physicaldeterioration.
c. Increasednumberoftripsperhousehold.
b. Functionalobsolescence.
Smartgrowth 80
­multiple-choice problems are provided per
Citieshavetendedtogrowwhere: d. Largernumberofhouseholdsbidding.
Assessedvalue 91 Homesteadexemption 91
2. Whichofthefollowingisnotincludedinaccrueddeprecia-
a. Transportationmodesintersectorchange.
c. Externalobsolescence.
e. Noneofthese.
9.Specialassessments 92
tionwhenapplyingthecostapproachtovaluation? d. Replacementcostobsolescence.
Boardofadjustment 78 Impactfee 82
b. Transportationisuninterrupted. Inasystemofbid-rentcurves,assumingthathouseholdsare
chapter to help students master important Comprehensiveplan 78
a. Physicalobsolescence.
c. Peopleareconcentrated.
Inversecondemnation 87
b. Functionalobsolescence.
d. Thereisamplelandandenergy.
5. Toreflectachangeinmarketconditionsbetweenthedateon
Taxablevalue
identical except for the92
feature noted, which of these pro-
whichacomparablepropertysoldandthedateofappraisal
spectivebidderswillbidsuccessfullyforthesitesnearestto
chapter concepts. Concurrency 79
c. Externalobsolescence.
Justcompensation 87
e. Thereisdemandforeconomicgoods.
Taxdepreciation.
d. 4. Theeconomicbasemultiplierofacitytendstobegreaterif
Taxassessor
theCBD?
ofthefollowing?
91
ofasubjectproperty,anadjustmentmustbemadeforwhich
a. Households with the greatest number of commuting
Condemnation 84 Millagerate 91
3. Inthesalescomparisonapproach,thevalueobtainedafter Taxbase
a. Conditionsofsale. 90
www.mhhe.com/lingarcher6e

thecityis: workers.
reconciliationofthefinaladjustedsalepricesfromthecom- b. Marketconditions.
Dedicated(property) 77 a. Larger.
Mills 91
parablesalesistermedthe:
Tax-exemptproperties
b. Householdswiththelowestincome.
c. Location.
91
b. Older. c. Householdswiththefastesttransportation.
Economicandenvironmentalimpact a. Adjustedprice.
Newurbanism 80
c. Lessisolatedfromothercities. Taxrate
d. Financingterms. 90
d. Householdsthatarriveinthecitylast.
b. Finaladjustedsaleprice. e. Noneoftheabove.
statements 79
d. Newer.
Nonconforminguse 76 Toxicwaste 83
e. Householdsrequiringmoreland.
e. Lessdiversified. 10. Alargeuniversityisanexampleofwhatkindofeconomic
Effectivetaxrate 92 5. Thebestexampleofabaseeconomicactivitywouldbea:
Performancestandard 81 Urbanservicearea
phenomenon? 79
a. Supermarket. a. Convenienceactivity.
Eminentdomain 84 Plannedunitdevelopment
b. Departmentstore.
Variance 76
b. Comparisonactivity.
Exclusionaryzoning 76 c. Firedepartment.
(PUD) 81 Zoning 71
c. Industryeconomiesofscale.
d. Largeapartmentcomplex. d. Secondaryorlocaleconomicactivity.
Externalities 71 Publicpurpose 86
e. Multi-stateregionalsalesoffice. e. Qualityoflifeactivity.
6. Importantsupplyfactorsaffectingacity’sgrowthorgrowth
potentialincludeallofthefollowingexceptthe:
lin13936_ch07_161-191.indd 187 09/09/1912:48PM
a. Unemploymentrate.
b. Businessleadership.
c. Presenceofanyindustryeconomiesofscale.

Study Questions
1. List five major economic base activities for your city of 4. Identifyatleastfivelocationalattributesthatyoubelieveare

Study Questions lin13936_ch04_070-099.indd 96

residence.
2. Find the historical population figures for your community
for the 20th century. Create a chart with 10-year intervals.
importantinthelocationofafast-foodrestaurant.Compare
noteswithsomeoneintheindustrysuchasalocalrestaurant
managerorowner. 09/11/1909:32AM
Determinethemostrapidperiodsofgrowth,andtrytodis- 5. Perfect Population Projections Inc. (PPP) has entered into

Each chapter contains 10–20 study questions

coverwhatcausedthem.(Formostcities,youcangotothe acontractwiththecityofPopular,Pennsylvania,toproject
Wikipediapageforthecityandscrolltoatableofpopula- thefuturepopulationofthecity.Inrecentyears,Popularhas
tionsbyCensusyear.Anotherwayisto“google”yourcity. become a desirable place to live and work, as indicated by
that ask students to apply the concepts they Usuallyyougetachartformultipledecades.)
3. On the U.S. Census website, use the approach shown in
thetableonthenextpage.
ThecontractstatesthatPPPmustprojectPopular’spop-
have learned to real situations and problems ExploretheWeb(nextpage)toaccesstheAmericanCom-
munitySurvey.Foryourcountyandforyourstatefindthe
ulationfortheyear2020usingbothasimplelinearmethod
and an economic base analysis. The ratio of population to
to reinforce chapter concepts. distributionofincomeforallhouseholds.Graphthedistri-
butionsusingpercentageforeachincomeinterval.Whichis
totalemploymentis2.0833.
Yourhelpisneeded!
higher,countyorstate?

xvi
lin13936_ch05_100-129.indd 126 09/09/1911:41AM

lin13936_fm_i-xxx.indd xvi 03/05/20 11:13 AM

 enforcedby:
a. Subdivisionresidents.
b. Lenderswithmortgageloansinthesubdivision.
Study Questions
1. Explain how rights differ from power or force, and from
permission.
2. A developer of a subdivision wants to preserve the open
spaceandnaturalhabitatthatrunsalongthebackportion
of a series of large lots in the proposed subdivision. He is
debatingwhethertouserestrictivecovenantstoaccomplish
thisortocreateahabitateasementonthesamespace.What
aretheprosandconsofeachchoice?
End-of-Chapter Features
3. Whyarerestrictivecovenantsagoodideaforasubdivision?
Cantheyhaveanydetrimentaleffectsonthesubdivisionor
itsresidents?Forexample,arethereanylistedinthischap-
ter,whichmighthavequestionableeffectsonthevalueofa
residence?
4. Thetraditionalcommonlawconceptofthelandlord–tenant
relationship was that the landlord’s obligation was simply
to stay
68 off the property and the tenant’s
Part 2 obligation
Legal andwasRegulatory
to
paytherent.Explainwhythisisanobsoletearrangementfor
apartmentresidentsinanurbansociety.
Study Questions
5. Afriendhasanelderlymotherwholivesinahouseadjacent
to
1.her church. The church is growing, and would welcome
Explainhowtitleinsuranceworks.Whatrisksdoesitcover?
Who pays for the insurance, and when? What common
exceptionsdoesitmake?
2. Ifagranteeobtainstitleinsurance,whatvalue,ifany,isthere
inthecovenantofseizininawarrantydeed?
EXPLORE
3. The use of Torrens certificates, neverTHE largeWEB
in the United
States,hasdiminishedinrecentyears.Explainhowmarket-
Choosetwostatesofinteresttoyou.Usingyourfavoritesearchengineenter“your
abletitlelaws,recentlyadoptedinmanystates,mighthave
virtuallyallstatesareonlineandsearchable,althoughallhavedifferentsearchformats.Forthetwostatesyouhave
madeTorrenscertificateslessinterestinganduseful.
chosen,compareandcontrastthestatutesonissuessuchas:
4. Nameatleastsixadverse(conflicting)claimstopropertyor
othertitledefectsthatwillnotbeevidentfromasearchof
1. Timesharelaws.
propertyrecordsbutwhichmightbedetectedbyinspection
2. Lawspertainingtopropertyobtainedduringmarriage.
ofthepropertyanditsoccupants.
3. Lawsregardingtenant–landlordrelationships.
5. Whymightitbeadvisabletorequireasurveyinpurchasinga
4. Whenmechanics’liensbecomeeffective(atcontractsigning?startofconstruction?).
20-year-oldhomeinanurbansubdivision?
6. Describetheshadedpropertyinthediagrambygovernment
rectangularsurvey.
7. Somepeopleintherealestateindustryhavesuggestedthatit
isgoodtorequireatitleinsurancecommitmentasevidence
of title for rural property, but that it is satisfactory to use
the less costly abstract with attorney’s opinion as evidence
www.mhhe.com/lingarcher6e
oftitleforaresidenceinanurbansubdivision.Discussthe
meritsorrisksofthispolicy.
lin13936_ch02_018-044.indd 43
EXPLORE THE WEB
Mostlocalgovernmentpropertyappraisers(orassessors)havemadetheirrecordsandmapsavailabletodayonthe
Internet.Findthewebsiteofyourlocalpropertyappraiser.Selectapropertyofinteresttoyouandseewhatinforma-
tionisavailableforit.Findthepropertydescription.Doesthesitegivetheareaoftheparcel?Isthereamapofthe
parcel?Doesthesitealsoprovideaerialphotos?
190 Part 3 Market Valuation and Appraisal
Basedontheabovediscussionoftheelementsofcompar-
Solutions to Concept Checks
ison,completeanadjustmentgridforthethreecomparable
properties.Whatisthefinaladjustedsalepriceforcompara-
1. Three features of real property that introduce special chal-
bles1,2,and3?
lengesfortheorderlytransferofownershipare:
14. Assume the market value of the subject site (land only)
a. Realpropertyinterestscanbeverycomplex.
is $120,000. You estimate that the cost to construct the
b. Ownershiphasaverylonghistory.
c. All real property is bounded by other properties, so
descriptionerrorsalwaysmatter.
Solutions to Concept Checks
2. Inanormalcontract,allpartiesmustbelegallycompetent,
whereasinadeedonlythegrantormustbelegallycompetent.
1. Afewexamplesofrealestatedecisionsthatrequireaformal
3. Thethreecovenantsthatdistinguishthe“quality”ofdeeds
appraisalincludeajudgeattemptingtodeterminetheappro-
are:
priatedivisionofassetsinadivorce,lenderscontemplating
a. Seizin, which promises that the grantor actuallyesti-
holds
a mortgage
matingtitle.
loan on a property, government officials
the costs of acquiring the right-of-way to construct
b. No encumbrances, which promises that there are no
roadways,orlocaltaxofficialsdeterminingtheappropriate
undisclosedencumbrances.
propertytaxonaproperty.
c. Quietenjoyment,whichpromisesthatnosuperiorclaim
2. Apotentialpurchasermayplaceahighervalueontheprop-
totitlewillappear.
ertythanthesellerbecauseindividualshavedifferentexpecta-
4. Any property interest not being conveyed to the grantee is
tionsregardingthefuturedesirabilityofaproperty,different
statedintheexceptionsandreservationsclause.
capabilities for obtaining financing, different tax situations,
5. The highest-quality deed is the general warranty deed. A
and different return requirements. The price paid for the
deed that businesses often use to convey real estate is the
homeshouldbecloserto$180,000.Althoughaninvestormay
bewillingtopay$200,000,thishouseand,presumablyother
www.mhhe.com/lingarcher6e
closesubstitutes,areavailableat$180,000.Althoughwilling,
investorsshouldnotgenerallypaymorethanmarketvalue.
3. The highestandbestuse of theproperty asthoughvacant
is the four-unit rental housing structure, which is valued
at $600,000 compared with $450,000 for the single-family
home. However, the highest and best use of the property
as improved is the single-family home. After subtracting
the demolition and construction
lin13936_ch03_045-069.indd 68 costs, the four-unit rental
structure’s value is only $300,000, which is less than the
single-familyhomevalueof$450,000.
4. Under these circumstances, an appraiser would typically
exclude the sale because the sale was not at arm’s length.
More than likely, the daughter paid a price below market
value. If included, an upward adjustment of the compara-
blesalepricewouldlikelyberequired,thoughtherequired
adjustmentwouldbedifficulttoquantify.
5. Although a similar property in the neighborhood sold
recently,itisverydifficulttomeasuretheimpactonvalue
oftheconditionthatthepropertynotbesoldforthreeyears.
Therefore,thispropertyshouldbedroppedasacomparable.
Ifretained,anupwardadjustmentwouldneedtobemadeto
thecomparablesaleprice.
Additional Readings
Thefollowingbookscontainexpandedexamplesanddiscussions
ofrealestatevaluationandappraisal:
Appraisal Institute. The Appraisal of Real Estate, 14th ed. Chi-
cago:AmericanInstituteofRealEstateAppraisers,2013.
AppraisalInstitute.2020–2021 Uniform Standards of Professional
Practice.Chicago:AppraisalInstitute,2019.
Betts, R. M. Basic Real Estate Appraisal, 6th ed. Florence, Ky:
CengageLearning,Inc.,2013.
lin13936_ch07_161-191.indd 190
lin13936_fm_i-xxx.indd xvii
e. Allthree:a, b,andc.
Final PDF to printer
www.mhhe.com/lingarcher6e
the opportunity to obtain her house for its use. She would
liketosupporttheneedsofherchurch,butshedoesn’twant
tomoveandfeelsstronglyaboutowningherownhome.On
theotherhand,yourfriendknowsthatshewillnotbeableto
remaininthehousemanymoreyears,andwillbefacedwith
movingandsellingwithinafewyears.Whatoptionscanyou
suggestaspossibleplanstoexplore?
6. Afriendhasownedandoperatedasmallrecreationalvehicle
camponalakeinDaytonaBeach,Florida.Itisclosetothe
oceanandclosetotheDaytonaSpeedway,homeoftheDay-
Confirming Pages
tona500andahostofotherprominentraces.Theoccupants
areveryloyal,makingreservationsfarinadvance,andreturn-
ingyearafteryear.Sheisaskingyourthoughtsonwhetherto
continuethecampasashort-termrentaloperation,tocon-
vertitandselltheparkingspacesascondominiumparking
spaces,ortoconverttocondominiumtimesharelots.What
Determinants of Value
thoughtswouldyouoffer?
7. IntheUnitedStates,thebundleofrightscalledrealproperty
seemstohavegottensmallerinrecentdecades.Explainwhat
hascausedthis.Whyisitgood?Whyisitbad?
R20 E R21 E
T 10S
statestatutes.”Thestatutesof
Explore the Web
These boxes contain Internet activities that
Township T 11S
weave the Web, real data, and practical
applications with concepts found in the
chapters.
Section
09/09/1910:36AM
Confirming Pages
improvements to the subject property would be $428,000
Solutions to Concept
today.Inaddition,youestimatethataccrueddepreciationon
the subject is $60,000. What is the indicated value of the
bargainandsaledeed.Adeedusedtorelinquishambiguous
subjectusingthecostapproach?
orconflictingclaimsisthequitclaimdeed.
Checks
6. When property is conveyed to heirs in accordance with a
will, it is said to be conveyed testate or by devise, whereas
whenpropertyisconveyedtoheirswithoutawill,itissaidto
beconveyedintestateorbydescent.
Located at the end of each chapter, answers
7. Foureventsthatcancauseanownertoconveyrealproperty
involuntarilythroughsometypeofdeedarecondemnation,
6. Thecomparablesalepriceshouldbeadjusteddownwardby
percent (0.25 × 12) to find the value of the subject
bankruptcy,foreclosure,anddivorce.
to each Concept Check question are pro-
three
8. Twotypesofeasementsthatarecreatedwithoutadeed,but
property.
withtheknowledgeofthegrantor,areanimpliedeasement
7. Iftheadjustmentfortheroofreplacementcomesfirst,the
andaneasementbyestoppel.
adjustedsalepriceofthecomparableis: vided to help the student understand the con-
9. Real property can convey to a new owner without a deed,
 $350,000
cepts and the reasoning behind them.
andwithouttheconsentorknowledgeoftheoriginalowner.
+20,000 Expectedcostofroofreplacement
Afeesimpleinterestbeingconveyedinthismannerissaid
  $370,000
toconveybyadversepossession,whileaneasementissaidto
+5,550 Adjustmentfromchangesinmarketconditions
conveybyprescription.
 10.
 $375,550 Adjustedsaleprice
Allpersonsarepresumedtobeinformedoflegaldocuments
Ifthe1.5percentadjustmentforchangesinmarketcondi-
placed in public records according to the doctrine of con-
tionsiscomputedfirst,theadjustedsalepriceis:
structivenotice.
  $350,000
+5,250 Adjustmentforchangesinmarketconditions
  $355,250
+20,000 Expectedcostofroofreplacement
  $375,250
Thus,whenusingpercentageadjustments,theordermatters.
8. Because the value of the subject property is unknown,
09/09/1910:43AM
adjustments are made to the observed transaction prices
of the comparables to adjust for how they vary from the
subject.
9. Thereproductioncostofabuildingisthecosttoconstruct
thebuildingtoday,replicatingitinexactdetail.Thereplace-
mentcostisthemoneyrequiredtoconstructabuildingof
equal utility. The reproduction cost estimate is generally
greaterthanthereplacementcost.
10. Estimatingaccrueddepreciationisgenerallythemostdiffi-
cultstepinthecostapproachtovaluationbecauseitisvery
difficulttoquantifythedollarvalueofphysicaldepreciation
andoftenevenmoredifficulttoquantifythedollarvalueof
functionalandexternalobsolescence.
Additional Readings
Carr,D.H.,J.A.Lawson,andJ.C.Schultz,Jr.Mastering Real
& Websites
Estate Appraisal. Chicago: Dearborn Financial Publishing,
Inc.,2003.
Fanning,S.F.Market Analysis for Real Estate.Chicago:Appraisal Each chapter is followed by a list of books
Institute,2014.
Lusht, Kenneth L. Real Estate Valuation: Principles and Applica- and articles to which interested students
tions.NewYork:McGraw-Hill,1997.
can refer for additional information and
research.
09/09/1912:48PM
xvii
03/05/20 11:13 AM
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 Final PDF to printer

xx Supplements

Supplements
Instructor supplement files for this edition are available in Connect.

Instructor’s Manual, prepared by Benjamin Scheick, Villanova University

Developed to clearly outline the chapter material as well as provide extra teaching support,
the instructor’s manual contains a number of valuable resources. Sections include: a chap-
ter overview, a listing of chapter concepts, presentation strategies, and presentation out-
lines that reference the accompanying PowerPoint slides for easy classroom integration.
Solutions Manual, prepared by Wayne R. Archer and David C. Ling, University of Florida
This manual provides detailed answers to the end-of-chapter problems.
Test Bank, prepared by Benjamin Scheick, Villanova University
With hundreds of multiple-choice questions in Microsoft Word format, this Test Bank pro-
vides a variety of questions to meet any instructor’s testing needs.
PowerPoint Presentation, prepared by Wayne R. Archer and David C. Ling, University of
Florida
Prepared by the authors, more than 500 full-color slides of images and tables from the text,
lecture outlines, and additional examples are available with this product.

Acknowledgements
We take this opportunity to thank those individuals who helped us prepare this sixth edition
of Real Estate Principles. A special debt of gratitude goes to Dr. Halbert Smith, Professor
Emeritus at the University of Florida. Professor Smith has been a long-time mentor and
colleague to us both. His book Real Estate and Urban Development (Irwin 1981), coauthored
with Tschappat and Racster, significantly influenced our approach to the teaching of real
estate principles over the last 35 plus years. Many of the ideas first put forth in Real Estate
and Urban Development can be found in this text. Dr. Smith served as Contributing Editor
on the first edition of this book, providing detailed comments and suggestions during each
phase of the book’s original development.
Our good friend and colleague, Dean Gatzlaff, was to have joined us in the creation
of this book, but found it to be infeasible. We are grateful to him for his substantial contri-
bution in providing initial drafts of Chapters 1, 4, 7, and 8. We would also like to thank Jay
Hartzell (University of Texas-Austin) for providing some of the ideas and material for the
revision of Chapter 17.
We are grateful to the following individuals for their thoughtful reviews and suggestions
for this text:

Paul Asabere John Crockett

Temple University George Mason University
Candy Bianco Jon Crunkleton
Bentley University Old Dominion University
Donald Bleich Charles Delaney
Steven Bourassa Baylor University
Florida Atlantic University John Demas
Dan Broxterman University of San Diego
Florida State University David Downs
Jay Butler Virginia Commonwealth University
Arizona State Mike Eriksen
Steve Caples University of Cincinnati
Charles Corcoran Tom Geurts
University of Wisconsin-River Falls George Washington University
Barbara Corvette

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 Final PDF to printer

Supplements xxi

Richard Ghidella Ed Prill

Fullerton College Colorado State University
Paul Goebel Sid Rosenberg
Texas Christian University University of North Florida
W. Michael Gough Jeff Rymaszewski
DeAnza College University of Wisconsin-Milwaukee
Chris Grover Ben Scheick
Victor Valley College Villanova University
Matthew Haertzen Marion Sillah
University of Arizona South Carolina State University
Daniel Ham David Sinow
California State University-Long Beach Carlos Slawson
Tom Hamilton Louisiana State University
Roosevelt University Brent Smith
Dana Harrell Virginia Commonwealth University
Bentley University Bruce Southstone
Michael H. Harrity Cabrillio College
Babson College Tom Springer
Darren Hayunga Clemson University
University of Georgia Wei Sun
Don Johnson University of Memphis
Florida International University Thomas Thompson
Michael LaCour-Little University of Texas, Arlington
Fannie Mae James Thorson
Han Bin Kang Southern Connecticut State University
Illinois State University Ciro Trotta
George Lentz New York University
Cal Poly Pomona Steven Tufts
Danielle Lewis University of Florida
Southeastern Louisiana University Neil Waller
Mallory Meehan Sally Wells
Pennsylvania State University Columbia College
Walt Nelson John Wiley
Missouri State University Georgia State University
Joseph Ori Alex Wilson
Santa Clara University University of Arizona
Thomas Ortell Kip Womack
Steven Ott University of North Carolina, Charlotte
University of North Carolina-Charlotte Chris Yost-Bremm
Jane Patterson San Francisco State University
Missouri State University Alan Ziobrowski
Melina Petrova Georgia State University
Syracuse University

In addition to the helpful suggestions and detailed reviews we have received from
the academic community, we are extremely grateful for the interest, help, and guidance
we have received from dozens of industry professionals. In particular, we would like to
thank Tom Arnold, Abu Dhabi Investment Authority; Steve Mench, Mench Real Estate
Capital; Nathan Collier and Andy Hogshead, The Collier Companies; T.J. Ownby, Tav-
ernier Capital Partners, LLC; Steve Deutsch, Frank, Weinberg & Black; Stumpy Harris,
Harris, Harris, Bauerle & Sharma; Andrew Davidson, Andrew Davidson & Company; Don
Emerson, Emerson Appraisal; Ralph Conti, Ra Co Real Estate Advisors, LLC; Michael
Giliberto, Giliberto-Levy Index; Todd Jones, RealAdvice Valuation & Advisory Services;

lin13936_fm_i-xxx.indd xxi 03/05/20 11:13 AM

 Final PDF to printer

xxii Supplements

Carl Velie, Velie Appraisal; Amy Crews Cutts, Equifax; Melissa Murphy, Attorneys’ Title
Fund Services, LLC; David Ginn, retired mortgage banker; David Arnold, Crosland; Larry
Furlong, Old Republic National Title Insurance Company; Dirk Aulabaugh, Green Street
Advisors; Steve DeRose, Starwood Mortgage Capital; Angel Arroyo, Banyan Realty Advi-
sors; Michael White, Harbert Management Corporation; Ted Starkey, Wells Fargo Real
Estate Banking Group; Robert Love, ARC Real Estate; A. Yoni Miller, Quickliquidity; Rob-
ert Klein, Monday Properties; John Ebenger, Berkowitz Dick Pollack & Brant; Ken and
Linda McGurn, McGurn Investment Company; Kelley Bergstrom, Bergstrom Investment
Management LLC; and Jerry Tate, Rosemark Commercial Facilities Management. Thanks
also to the Gainesville, Alachua County Association of Realtors for providing the listing
agreement in Chapter 12. Also we thank the Florida Association of Realtors for granting
use of the exemplary “FAR-BAR” sales contract form in Chapter 13. In addition, thanks
are due to Jeffrey Conn, Hallmark Partners, Inc., and to Dr. Wayne W. Wood, retired, for
extremely valuable assistance with Jacksonville aerial photo information used in Chapter 5.
Last (but not least), we must thank Mike Harris for his work on the Chapter 14 appendix.
Special thanks go to Penny Archer for extensive internet research leading to many
of the photos and material used in the Industry Issues. We would also like to thank our
graduate and undergraduate students who provided numerous suggestions and corrections
through the first two editions.
We would especially like to thank Dr. Ben Scheick, Villanova University, for revising
the Instructor’s Manual and expanding the Test Bank. Dr. Kent Malone contributed to pre-
vious versions of the test bank and has provided numerous helpful suggestions for improv-
ing the content and readability of the text. Also, Ben Simons, at the Warrington College of
Business, U.F., provided graphics for Chapters 2 and 6. Carol Bosshart, Kim Bosshart and
Lem Purcell of Bosshart Realty; J. Parrish and Michael Kitchens of Coldwell Banker M.M.
Parrish, Realtors, and Patricia Moser of Horizon Realty of Alachua Inc. all have made spe-
cial contributions to Chapters 12 and 13 over various editions of the book. Jeff Siegel, local
realtor and friend, also contributed to Chapters 12 and 13, and Marla Buchanan, J.D., of
Blue Ocean Title, assisted with modern electronic transaction procedures. Nicholas Kasta-
nias and Ben Scheick contributed significantly to the development of the glossary and to
the solutions for the end-of-chapter problems. We are confident that users of the book will
find these ancillary materials to be first rate.
Finally, we are grateful to the late Steve Patterson of McGraw-Hill for encouraging us
to undertake this project and for his help in developing the book’s theme, style, and target
market.
We are also grateful to the talented staff at McGraw-Hill who worked on the book:
Charles Synovec, Director; Jennifer Upton, Senior Product Developer; Jeni McAtee, Proj-
ect Manager; Trina Maurer, Senior Marketing Manager; Natalie King, Marketing Direc-
tor; Jamie Koch, Assessment Project Manager; and Karen Jozefowicz, Content Project
Manager.

David C. Ling

Wayne R. ArcherReal Estate Principles

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 Final PDF to printer

Contents

Preface viii Rights to Oil, Gas, and Minerals 41

part 1 SETTING THE STAGE 1

Summary 41

1 The Nature of Real Estate and Real 3 Conveying Real Property Interests 45
Estate Markets 1 Introduction 46

Introduction 1 Deeds 46
Requirements of a Deed 47
Real Estate: Some Basic Definitions 2 Types of Deeds 49
Real Estate: A Tangible Asset 2
Real Estate: A Bundle of Rights 4
Modes of Conveyance of Real Property 50
Voluntary Conveyance by a Deed 51
Real Estate: An Industry and Profession 5
Involuntary Conveyance by a Deed 51
Real Estate and the Economy 5 Voluntary Conveyance Without a Deed 52
Land Use in the United States 6 Involuntary Conveyance Without a Deed 53
Real Estate and U.S. Wealth 6
Real Property Complexity and Public
Real Estate Markets and Participants 7 Records 54
User, Capital, and Property Markets 9 The Doctrine of Constructive Notice 55
The Role of Government 10 Statute of Frauds 55
The Interaction of Three Value-Determining Recording Statutes 55
Sectors 11 Actual Notice 55
The Production of Real Estate Assets 11 Title 56
Characteristics of Real Estate Markets 13 Title Search, Title Abstract, and Chain
Heterogeneous Products 13 of Title 56
Immobile Products 13 Evidence of Title 56
Localized Markets 13 Land Descriptions 59
Segmented Markets 14 Metes and Bounds 60
Privately Negotiated Transactions with High Subdivision Plat Lot and Block Number 60
Transaction Costs 14 Government Rectangular Survey 62
Summary 15 Summary 66

part 2 LEGAL AND REGULATORY

DETERMINANTS OF VALUE 18 4 Government Controls 
and Real Estate Markets 70
2 Legal Foundations to Value 18 Introduction 71
Introduction 19
The Power of Government to Regulate Land
The Nature of Property 19 Use 71
The Nature of Rights 19 Monopolies, Externalities, and Other Market
Real Property and Personal Property: The Problem Distortions 71
of Fixtures 22
Traditional Methods of Land Use Control 74
The Real Property Bundle of Rights 23 Building Codes 75
Possessory Interests (Estates) 24 Zoning 75
Nonpossessory Interests 27 Subdivision Regulations 77
Forms of Co-Ownership 33 Zoning and Planning Administration 77
Indirect Co-Ownership Through a Single The Revolution in Land Use Controls: Planning,
Entity 33 New Tools 78
Direct Co-Ownership 34 Comprehensive Planning: The Idea and
Timeshare 38 Elements 78
Rights Related to Water 40 The Elements of Planning 78

xxiii

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 Final PDF to printer

xxiv Contents

Challenges to Comprehensive Planning 79 6 Forecasting Ownership Benefits 

Modern Tools of Land Use Control 81
and Value: Market Research 130
Environmental Hazards 83
Introduction 131
Types of Hazardous Materials 83
Implications for Real Estate Investors 83 Market Research: Slipperiest Step in Real Estate
The Government’s Power of Eminent Valuation 131
Market Segmentation 132
Domain 84
Public Use or Public Purpose 86 Real Estate Market Research as
Just Compensation 87 Storytelling 132
Inverse Condemnation and Regulatory The Beginning Point: A Market-Defining
Takings 87 Story 133
The Power of Government to Tax Real Initial Collection of Data 134
First Analysis 134
Property 89
Refining the Research 134
Mechanics of the Property Tax 90 A Reverse to Conventional Market Research 134
Determining a Jurisdiction’s Budget and Tax
Three Important Techniques in Market
Rate 90
Tax-Exempt Properties 91 Analysis 134
Homestead and Other Exemptions 91 Three Examples of Market Research 136
Calculating Tax Liability 91 Market Research Example 1: Elysian Forest,
Special Assessments 92 a Planned Unit Development 136
Nonpayment of Property Taxes 93 Market Research Example 2: Palm Grove Office
Criticisms of the Property Tax 94 Complex 141
Market Research Example 3: Plane Vista
Overview of Restrictions on Real Property Apartments 143
Ownership 95
Some Final Notes on the Process of Market
Summary 96 Research 152
Improving One’s Capacity in Real Estate Market

part 3 MARKET VALUATION 

Research 152

AND APPRAISAL 100 Market Projections and Real Estate Cycles 152
Some Tools of Market Research 154
5 Market Determinants of Value 100 Geographical Information Systems (GIS) 154
Introduction 101 Psychographics 155
Market Misjudgments in Real Estate 101 Survey Research 156
Minimizing Market Errors 102 Summary 157
The Creation, Growth, and Decline of
Cities 102
Where Cities Occur 102 7 Valuation Using the Sales Comparison
The Economic Base of a City 103 and Cost Approaches 161
Resources of a City: The Supply Side of Urban
Introduction 161
Growth 107
Market Value, Investment Value, and Transaction
The Shape of a City 109
Prices 163
Demand for Proximity and Bid-Rent Curves 109
Bid-Rent Curves, Urban Land Uses, and Land The Appraisal Process 164
Value Contours 114 Identify the Problem 166
Changing Transportation, Changing Technology, Determine the Scope of Work 166
and Changing Urban Form 114 Collect Data and Describe Property 166
Perform Data Analysis 166
Differing Location Patterns of Urban Land
Determine Land Value 167
Uses 121
Apply Conventional Approaches to Estimate Market
Convenience “Goods” and Central Place
Value 167
Patterns 121
Reconcile Indicated Values from Three
Comparison Goods and Clustering 122
Approaches 169
Industry Economies of Scale and Clustering 122
Report Final Value Estimate 169
The Role of Urban Analysis in Real Estate
Traditional Sales Comparison Approach 169
Decisions 124 Comparable Sales Data 170
Summary 125 Sources of Market Data 171

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Contents xxv

Adjustments to Comparable Property Transaction Demand Clause 223

Prices 171 Inclusion of Mortgage Covenants by
Types of Adjustments 175 Reference 223
Sequence of Adjustments 175 The Mortgage or Deed of Trust 223
A Note on the Selection of Comparables and Description of the Property 224
Adjustments 179 Insurance Clause 224
Reconciliation to an Indicated Value Escrow Clause 224
Estimate 179 Acceleration Clause 225
The Cost Approach 179 Due-on-Sale Clause 225
Estimating Cost 180 Hazardous Substances Clause and Preservation
Accrued Depreciation 181 and Maintenance Clause 225
Deed of Trust 225
Final Reconciliation 183
Summary 187 When Things Go Wrong 226
Default 226
Nonforeclosure Responses to Default 226
8 Valuation Using  Foreclosure 228
the Income Approach 192 Deficiency Judgment 229
Introduction 192 The Effect of Default on the Borrower 229
Direct Capitalization Versus Discounted Cash Judicial Foreclosure Versus Power of Sale 230
Flow 193 Bankruptcy and Foreclosure 231

Estimating Net Operating Income 194 Acquiring a Property with an Existing

Potential Gross Income 195 Debt 232
Effective Gross Income 196 Real Estate Debt Without a Mortgage 233
Operating Expenses 198
Capital Expenditures 199 Regulation of Home Mortgage Lending 235
Net Operating Income 200 Equal Credit Opportunity Act 235
Truth-in-Lending Act 235
Using Direct Capitalization for Valuation 200 Real Estate Settlement Procedures Act 236
Abstracting Cap Rates from the Market 201 Home Ownership and Equity Protection
Understanding Capitalization Rates 203 Act 237
Income Multipliers 204 The Dodd-Frank Wall Street Reform and
Using Discounted Cash Flow Analysis  Consumer Protection Act of 2010 237
for Valuation 206 Other Laws Regulating Discrimination in Home
A Word of Caution 207 Mortgage Lending 238
Estimating Future Sale Proceeds 207 Summary 238
Valuing Future Cash Flows 208
Other Approaches 209
10 Residential Mortgage Types 
Final Reconciliation 209 and Borrower Decisions 243
Valuing Partial and Other Interests 210 Introduction 244
Summary 211 The Primary and Secondary Mortgage
Markets 244

part 4 FINANCING HOME OWNERSHIP 216 Prime Conventional Mortgage Loans 245
Forms of Prime Conventional Mortgages 245
9 Real Estate  Private Mortgage Insurance 247
Finance: The Laws  Adjustable Rate Mortgages 248

and Contracts 216 Government-Sponsored Mortgage

Introduction 217 Programs 249
FHA-Insured Loans 250
The Note 217 VA-Guaranteed Loans 252
Interest Rate and Interest Charges 217
Adjustable Rates 218
Other Mortgage Types and Uses 253
Purchase-Money Mortgage 253
Payments 220
Home Equity Loan 254
Term 221
Reverse Mortgage 255
Right of Prepayment 221
Prepayment Penalties 222 Home Mortgage Adventurism 258
Late Fees 222 Interest-Only Mortgage and Balloon
Personal Liability 222 Mortgages 258

lin13936_fm_i-xxx.indd xxv 03/05/20 11:13 AM

Another random document with
no related content on Scribd:
 PART I.

The Relations of the Railroads to the Public, or Vital Facts

from the Railway History of the United States.

Chapter
The Railway Empire I.
The Allied Interests II.
Railway Favoritism III.
Railways in Politics IV.
Fostering Monopoly V.
Watered Stock and Capital Frauds VI.
Gambling and Manipulation of Stock VII.
Railroad Graft and Official Abuse VIII.
Railways and the Postal Service IX.
The Express X.
The Chaos of Rates XI.
Taxation without Representation XII.
Railways and Panics XIII.
Railway Strikes XIV.
Railway Wars XV.
Defiance of Law XVI.
Nullification of the Protective Tariff XVII.
Railway Potentates XVIII.
The Failure of Control, How Far and Why XIX.
The Irrepressible Conflict XX.

PART II.

The Railroad Problem in the light of Comparative Railroad History

covering the Leading Systems of Three Continents.

Chapter
The Problem XXI.
The Supreme Test XXII.
Lessons from Other Lands XXIII.
The Aim XXIV.
Contrasts in General Policy XXV.
Location.—Construction.—Capitalization, etc.
Management XXVI.
Safety.—Service.—Economy.—Progress.
The Rate Question XXVII.
General Policy.—Rate Level under Public and Private
Management.—Zone System.
Employees XXVIII.
Political, Industrial, and Social Effects XIX.
Remedies Proposed XXX.
Pooling.—Consolidation.—Regulation.—Public Ownership.
 AMERICAN RAILROAD RATES

By JUDGE WALTER C. NOYES

Author of “The Law of Intercorporate Relations,” etc.

A masterly work, reviewing the most highly controversial

economic issue of the day in this country.—New York Commercial.
Judge Noyes is the possessor of a thorough knowledge of the
complicated subject of rate-making.—Chicago Record-Herald.
The most intelligent discussion of the subject which has
yet appeared.—New York Law Journal.
Judge Noyes’ handling of the question is clear, impressive, and
indicative of a mastery of the legal or constitutional side of the
subject.—Springfield Republican.
A careful reading will help toward a solution of the problem of
federal regulation of railway rates.—Railway Age.
We know of no book which will give the lay reader so
clear and so authoritative a statement of the fundamental
legal principles which must govern in the determination of
the pending question concerning government regulation of
railway rates.—Outlook, New York.
It is truly refreshing to turn to the book. Every aspect, historical or
actual, of the question is dealt with, including discrimination,
pooling, competition.—Chicago Evening Post.
A book covering completely a field heretofore only touched in
spots.—Indianapolis News.
A remarkable book, considered from every point of view
—economic, practical, legal.—Edgar J. Rich, General Solicitor
of the Boston & Maine R. R.
 For readers desirous of reaching a clear understanding both of the
legal and economic questions involved in the fixing of railroad rates
there is probably no better handbook. His whole attitude is
eminently judicial, open-minded, and impartial.—St. Paul Pioneer
Press.
The author is an expert in railroad management and his opinions
are judicial and wholly unbiased.—American Law Review.

PRICE, $1.50 net. Sent Postpaid on Receipt of $1.64 by

LITTLE, BROWN, & CO., Publishers, BOSTON

 TRANSCRIBER’S NOTES
1. Silently corrected obvious typographical errors and
variations in spelling.
2. Retained archaic, non-standard, and uncertain spellings
as printed.
3. Re-indexed footnotes using numbers and collected
together at the end of the last chapter.
*** END OF THE PROJECT GUTENBERG EBOOK THE HEART OF
THE RAILROAD PROBLEM ***

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