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PLACES, PEOPLE, AND POPULATION CHANGE

by Matthew Roberts, General Certified Real Estate Appraiser

January 2019

Whether you are a lender, a buyer, or a seller, you need to know which areas are thriving and which areas are dying. In this month's newsletter, you'll find the facts on both. The maps below show the percentage change in population from 2010 to 2017 per county, in Missouri, Illinois, and Iowa.  The data was provided by the US Census Bureau, and I made the maps.  It might just be us, but we find data interesting.  I guess to be an appraiser it takes some inner-nerd.  Have a look at the maps and find the county you live and work in.  Are the results surprising?

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These are the counts of counties of either increasing or decreasing trends for each state:

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However, some of these population changes are fairly small. For that reason, I have also provided another set of maps below showing only counties that had an increase or decrease in population of 3% or above.

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In addition to this state-based data, I also have information on national population levels. Per the USDA, the number of people living in rural areas was 46 Million in 2016, which is 14% of all U.S. residents spread across 72% of the Nation’s land area.  They define rural areas as “non-metro”, which are counties outside the commuting zones of cities of 50,000 or more.  From the mid-1990s to 2016, rural counties have had lower population growth than metro/urban counties. 

Measuring county population change includes two components: natural change (number of births vs deaths) and net migration (number of people moving in vs moving out).  Natural change has been trending down gradually over time, while net migration rates can fluctuate depending on economic conditions.  For many years in the rural areas, decreases in population growth due to natural change has been offset by net migration.  Since about 2011, total rural population change has been negative.  This is the first period that the rural areas saw overall population decline.  As seen in the chart below, rural areas are nearing a point where there will be more deaths than births and where net migration is neutral or negative.

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Rural counties may be losing population but urban counties are growing.  Suburban counties have seen substantial increases in population.  For instance, in Missouri, counties with suburban areas northwest of St. Louis County have seen increases of 6-10%; counties containing Springfield and Branson have seen increases of 5-10%; in Iowa, the counties containing Des Moines and surrounding suburban areas have seen as much as 9-32% increases in population; and the counties containing Cedar Rapids and Iowa City have seen increases of 6-14%. 
 
Population changes are sure to affect real estate demand and activity in general.  Are these changes evident in your area?  What are you seeing in your county?  We’d love to hear from you.

Spurgeon Appraisals regularly appraises a variety of property types. We have experience appraising farms, residences, and commercial properties. We pride ourselves on providing excellent customer service and quality appraisals. Contact our team to see how we can meet your appraisal needs and exceed your service expectations.

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GENTRIFICATION

by Matthew Roberts, Certified General Real Estate Appraiser

October 2018

Let’s talk about a bad word: gentrification. 

In 2018, words matter, probably more than they should, especially in their ability to trigger strong emotions and disagreements.  Gentrification is just such a word, but let’s not cast it into the memory hole just yet. 

There are many definitions of gentrification. According to Merriam-Webster, it is, “the process of repairing and rebuilding homes and businesses in a deteriorating area (such as an urban neighborhood) accompanied by an influx of middle-class or affluent people, and that often results in the displacement of earlier, usually poorer residents.” Meanwhile, Wikipedia defines it as, “the transformation of neighborhoods from low value to high value…and is a housing, economic, and health issue that affects a community’s history and culture, and reduces social capital.”

Despite the differences in definitions, gentrification is just a display of normal market forces at work.  And the opposite of gentrification is much worse. 

Gentrification is a story of change.  And it makes sense.  Neighborhoods have a life cycle: growth, stability, and decline.  Gentrification adds a fourth stage to the cycle: renewal.  The story goes that investors buy up cheap real estate in urban centers and renovate to attract higher-paying tenants.  The new tenants are typically higher-income earners or college students (with their parents’ money).  If successful, rents are bid up, occupancy of these new tenants increases, and the investors earn a return.

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Opponents of gentrification point to the poorer, previously renting tenants who, because of new higher rents, must find a new place to live, and argue that this is an injustice.  The previous tenants cannot compete with these much higher rents and therefore are “forced” to move out.  Previous communities vanish, and families and friends go their separate ways. 

Opponents fail to recognize how gentrification affects existing property owners in the affected area. It is important to note the distinction between owners and renters.  If property values and rents dramatically increase, current property owners are in a better position than the renters.  Owners may also leave the area of gentrification, but for them it will be voluntary. That choice will be made even easier by all the new entrepreneurs throwing money at them as they attempt to capture more returns. As opponents often argue that community and history are the be-all and end-all of enjoyable life, property owners often prove them wrong by happily selling for inflated prices. 

The previous renters, however, are not so lucky.  Once their current leases are expired, the asking rent prices will go through the roof.  They then must move and find more affordable housing, in a less desirable area.  While this may sound cruel, and it can be, it could not be prevented without harming markets and real estate values.  The market is constantly in flux, and an attack on gentrification is an attack on the freedom of people to buy and sell.  If prices go down, it is property owners who really suffer as they are the ones taking on all the financial risk.  Renting is less risky.  Renting is an agreement between tenant and landlord, and the tenant cannot be expected to have a greater say over how the property is used once their lease is expired.  Engagement in a voluntary commercial activity, even for a number of years, does not give either party the right to continue it without the others consent.  A long-time tenant does not gain any special property right over the actual property owner.  Nor does the landlord gain the right to compel tenants to stay if they wish to move.

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Things can be much worse without gentrification.  Neighborhoods can deteriorate completely.  People may move out, and no one may move back in.  This anti-gentrification could be much worse for people left behind in these communities.  In neighborhoods that are in decline and are not followed by the cycle of renewal, the result is much worse than rising rents.  Empty houses become homes for illegal activities, squatters, and wild animals. 

So the next time you hear an outcry against gentrification, remember that the lack of gentrification is a much worse fate for a neighborhood.  Property owners who move out of areas experiencing gentrification often leave with extra money in their pockets.  Property owners who move out of areas where no one wants to move back in are left with nothing at all. 

At Spurgeon Appraisals, we are familiar with the forces driving real estate markets and how to apply them to the properties we appraise. Whether your property is affected by gentrification or some other force for change, we have the competency and expertise to assist you in your buying, selling, and financing.

Spurgeon Appraisals regularly appraises a variety of property types. We have experience appraising farms, residences, and commercial properties. We pride ourselves on providing excellent customer service and quality appraisals. Contact our team to see how we can meet your appraisal needs and exceed your service expectations.

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PROFITS ARE GOOD

by Matthew Roberts, Certified General Real Estate Appraiser

March 2018

These days, even in America, profits are viewed negatively.  The common belief is that they are the result of greedy exploitation.  Seeking profit is often seen as shameful, and actually earning a profit is almost criminal.  While holding that view of capitalism may be fashionable, it is flat out wrong.

The truth is, profit is the result of the efficient use of capital.

A capitalist system is one that allows the free exchange of goods and services.  In this type of system, anyone can be an entrepreneur, and it is the entrepreneurs who organize the methods of production.  However, entrepreneurs are completely subject to the will of the masses, that is, consumers.  If entrepreneurs fail to give people what they want and when they want it, they will suffer losses and lose their place as an entrepreneur, and a new entrepreneur who better serves customer demand will take their place.

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Profits are possible when an entrepreneur employs factors of production that are underpriced in relation to the future prices of their respective finished products. When the payment received for the end-user product is more than the total costs of production, the difference is profit.  Conversely, if an entrepreneur misjudges the demand of products in relation to the prices of the factors of production, costs will exceed prices at which the products can be sold, and the result is economic losses. 

Therefore, profit and loss can be indicators of success or failure - in serving consumer demand and employing available resources effectively.  Because consumers make their choices to buy, or not to buy, based on their self-interest, entrepreneurs are automatically forced into the business of customer satisfaction.  With their dollars, customers vote daily on which entrepreneurs are satisfying their demands most efficiently.  When entrepreneurs correctly predict consumer demands and correctly employ necessary capital, they are rewarded with profit.

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Demonizing and punishing profits does not help anyone, and it likely delays or prevents some consumer demands from ever being met.  At the same time people enjoy the things they buy, they also envy and despise the entrepreneur.  One economist put it like this “There would not be any profits but for the eagerness of the public to acquire the merchandise offered for sale by the successful entrepreneur. But the same people who scramble for these articles vilify the businessman and call his profit ill-got.”

When profits are earned in a free market, they should be celebrated. Profit is proof that lives are being improved, both those of consumers and entrepreneurs. 

The same holds true for profit in real estate.  The bringing together of buyers and sellers, construction of improvements, and arrangement of leasable units can all create value.  At Spurgeon Appraisals, we recognize that earning a profit is a sign of economic value being created, and if you are successful, you should hold your head high.

Spurgeon Appraisals regularly appraises a variety of property types. We have experience appraising farms, residences, and commercial properties. We pride ourselves on providing excellent customer service and quality appraisals. Contact our team to see how we can meet your appraisal needs and exceed your service expectations.

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SHEDDING LIGHT ON USPAP

by Staff Appraiser

February 2018

Appraisers are regulated and licensed by a state board in each state. Each state, however, is required to adopt certain standards from The Appraisal Foundation (TAF). Each state is required to adopt the Uniform Standards of Professional Appraisal Practice, referred to as USPAP by most appraisers. USPAP defines what an appraisal is, ethical and competency standards, and a whole host of other rules. The purpose of USPAP is to promote public trust in the appraisal profession through the regulations, and for the most part, USPAP has done a good job of that.

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Every 2 years, the Appraisal Standards Board (ASB, an arm of The Appraisal Foundation) reviews USPAP and decides if changes need to be made by soliciting comments from appraisers, users of appraisal services, and the general public. Currently, the ASB is taking comments for the next revision, which won’t take effect until January 1st, 2020. While I plan to write them a letter, my complaint does not regard the content of USPAP, but its availability. I would like to draw your attention to a problem I have seen with the way TAF provides access to USPAP, so that you also can write them. The following paragraphs are excerpts from my letter, and you are welcome to use them if you agree.
 
I’ve had quite a few interactions with clients or interested parties who are unfamiliar with USPAP, but it wasn’t until recently that a client asked me why my fee couldn’t be contingent upon my opinion of Highest and Best Use of the property. I told him that USPAP prohibits basing a fee on a specific assignment result. He was critical of my explanation and asked where he might read the exact words in the USPAP publication. I referred him to The Appraisal Foundation’s webstore, and he just about blew a gasket when he realized that he would have to pay $75 just to be able to search through a PDF file. He did raise a very good point: we have adopted USPAP to increase public trust in our profession, yet if a member of the public wants to know more about USPAP, they must pay $75 to TAF to be able to read the standards to which we are held! This removes the transparency USPAP was designed to provide. I understand that TAF provides USPAP on their website for free, but that is a wacky, dysfunctional E-book design, which is not user friendly, not searchable, and requires the user to know exactly where to find what they want to find. The problem is that most of my clients are not USPAP experts. In fact, they would be hard-pressed to come up with the full, non-acronymic name. It is imperative that we provide easy, free, downloadable access to a PDF of the most current version of USPAP to the public, or else I fear that many of the benefits of USPAP will erode quickly.

While we are at it, let’s take a minute to examine how USPAP is made available to appraisers as well. Missouri, my home state, formerly provided a copy of USPAP for each appraiser to download free of charge. However, they have stopped doing that. How ridiculous is it that I, an appraiser, must pay a $75 fee to TAF to know the rules that I am required 
by state law to follow? And this is in addition to the portion of licensure fees collected by each state agency that are then passed along to TAF already. There are no other professionals known to me who must pay a fee to understand how they are regulated. I think that there is a very simple solution to this problem: make USPAP available as a free downloadable PDF to whomever wants to read it, thereby removing some of the cloud of mystery that surrounds USPAP for non-appraisers. Transparency is a great way to build public trust.

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Rest assured that, whatever difficulties are presented by USPAP, Spurgeon Appraisals has done the necessary homework for providing appraisal reports fully in compliance with all state and federal regulations. Feel free to call us with any questions about USPAP. If you would like to write your own letter to ASB, use this email address: ASBComments@appraisalfoundation.org

Spurgeon Appraisals regularly appraises a variety of property types. We have experience appraising farms, residences, and commercial properties. We pride ourselves on providing excellent customer service and quality appraisals. Contact our team to see how we can meet your appraisal needs and exceed your service expectations.

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"WHAT IS BITCOIN?"

by Matthew Roberts, Certified General Real Estate Appraiser

November 2017

What is a Bitcoin?
Bitcoin is the first successful digital currency. Instead of physical coins or paper bills, this currency is represented as a long string of numbers and letters. Because Bitcoins are not physical and are not controlled by any central authority they can be instantly transferred to anyone anywhere in the world, and at low or no cost. Digital currency provides a faster, cheaper, and reliable way to transfer money for any reason and to anyone, compared to physical currency exchanges or wire transfers which can be very costly.

If it is just computer code, can someone just create as much as they want?
The short is answer is no. The “block chain” technology prevents any invalidated transactions or creation of new currency.

What is the Block Chain?
The block chain is the coding/accounting system that makes digital currency possible. It is essentially a decentralized ledger. Volunteers and ‘miners’ offer up their computing space to keep track of every transaction made. The systems that keep the ledgers may come and go but the decentralized nature of the networks allow every transaction to be recorded and verified, from the very first to the hundreds that took place while you were reading this. That means Bitcoin can’t be fraudulently copied, and it can’t be shut down.

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Are Bitcoin transactions anonymous?
Yes and no. Every transaction is seen in the block chain. However, each transaction is only identified by the address you use (a random string of numbers and letters) and not your name or identity. So peer-to-peer Bitcoin transactions can be ‘anonymous’. However, some transactions are connected to Bitcoin exchanges and to bank accounts which do contain personal information. This is true for bank accounts you are using to deposit and withdraw money to buy and sell Bitcoin. Also, since all transactions are recorded on the Block Chain, if a handful of your transactions are identified, simple inference can identify other related transactions and identify you.

Who invented it?
What’s weird is that no one really knows. It was created in 2009 by someone (or a group) using the name Satoshi Nakamoto. Many known coders and digital entrepreneurs were recruited as volunteers to help get it started, and even they do not know Nakamoto’s identity with 100% certainty. Many people believe the cryptocurrency was created in response to the 2007-2008 financial crisis as a way to hedge against government and financial corruption.

What is a cryptocurrency?
A cryptocurrency is a digital currency which utilizes encryption to secure and validate transactions and to regulate the creation of new currency units. Bitcoin is an example of this.

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Where can I get it?

Right now, the best place for a beginner to get it is from an exchange on the internet. Coinbase.com currently seems to be the most popular. You can also trade currencies on Poloniex.com.


So what?

Bitcoin is the most well-known digital currency, but now there are hundreds of competing digital currencies available, and more are being created by entrepreneurs. Each has its own purported purpose or gimmick. Some are more secure, faster to transact, or integrated as part of a product or service. For instance, PotCoin, is attempting to be the go-to digital currency for buyers and sellers of legal cannabis. Steemit is a blogging-style social network, like Reddit, but with one major difference: it pays both content creators and curators in Steemit digital currency for popular content. Bitcoin itself may not be the best at everything, but it is the most popular. So while there is a market cap of how many Bitcoin will exist, at 21 million, there are infinite competing digital currency options.

While the technology is relatively new, one thing is for sure, digital currencies are not going away, and you will likely use one much sooner than you think.

Have more questions you want answered? Click here to send us a message.

Spurgeon Appraisals regularly appraises a variety of property types. We have experience appraising farms, residences, and commercial properties. We pride ourselves on providing excellent customer service and quality appraisals. Contact our team to see how we can meet your appraisal needs and exceed your service expectations.

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UNDERSTANDING AND UTILIZING CAP RATES

by Matthew Roberts, Certified General Real Estate Appraiser

July 2016

Capitalization rates, or as many professionals refer to them, cap rates, is a concept in real estate which allows analysis of a property’s value and performance. It is a ratio between annual net operating income and property value, and is most often expressed as a percentage. So, Cap Rate = Net Operating Income / Property Value. For example, if a property has a net income of $50,000 and is worth $500,000, then the cap rate would be .10, or 10%.

While the method may seem simple, its use as a tool in real estate investment and valuation can be very helpful. For example, investors can use cap rates to determine rate of return, income potential, and required cash investment. Income potential and rates of return are common to a variety of property types, not only commercial property, but agricultural properties as well. So cap rates have a broad application across several kinds of real estate.

Cap rates can also be used as a direct calculation of one year’s net income as opposed to the discounted cash flow method (a common alternative), which may be better for long term, irregular, or complex streams of income. The direct cap method is widely accepted and easy to use but is rarely the only factor used in making a real estate investment decision. This method provides a snapshot of a property at a given time but may not be able to take into account expected increases or decreases in potential income or market demand not driven by income.

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Market trends can become clear when analyzing cap rates of certain property types. For instance, a low cap rate tends to indicate low risk and high demand on a market level of net income, and a high cap rate can indicate a high level of risk or lack of potential income for a property. As a side note, cap rates and income multipliers are inversely related.  As a cap rate goes down, the income multiplier goes up.

Furthermore, several components can influence the capitalization rate of a property. Investors take into account several factors: alternative investments and differences in risk, age of the property, risk of tenant default, market demand, required return, etc. However, cap rates do not consider the costs of financing as part of the investment equation. Rather, it helps estimate return on a cash investment, and borrowers will have to anticipate a profitable difference between rates of lending costs and investment returns.

Cap rates can be helpful, but not understanding their purpose and use can lead to misusing or misapplying them, which would result in inaccurate results. Understanding, analyzing, applying, and projecting capitalization rates is something we do every day at Spurgeon Appraisals. We have the knowledge and experience necessary to accurately value the return on your real estate.

Spurgeon Appraisals regularly appraises a variety of property types. We have experience appraising farms, residences, and commercial properties. We pride ourselves on providing excellent customer service and quality appraisals. Contact our team to see how we can meet your appraisal needs and exceed your service expectations.

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