Appraisal Exam 3

Question 1

how many square feet in an acre

Answer 1

43,560 sqft

Question 2

reconciliation

Answer 2

The appraiser makes a final determination of the single best supported value in his opinion

Question 3

cost approach use of reconciliation

Answer 3

• Special purpose commercial properties (churches, banks, carwashes, oil changes)
• New residential homes
• Property insurance
• Don’t use it past 3 years
• Houses don’t go over 12 months

Question 4

sales comparison approach use of reconciliation

Answer 4

o Land
o Residential Homes (Any Age)
o Commercial Properties in an Active Market
o Sold recently

Question 5

income approach use of reconciliation

Answer 5

o Commercial income producing properties (Hotels, Storage, etc.)
o Apartments
o Rental homes
o RENT!

Question 6

process of reconciliation (4 factors)

Answer 6

o Definition of value sought - (i.e. market, investment, assessed)
o Inherent strengths and weaknesses of each approach
o Amount and reliability of the data collected in each approach – Accuracy and Quantity of Evidence
o Relevance of each approach to the subject property – Appropriateness

Question 7

correlation

Answer 7

The process by which the appraiser gives weights to each approach to derive the final reconciliation
- appraiser does not have to show percentages in the report

Question 8

Maplewood Apartments – TX

Answer 8

needs renovations and remodeling, sell

Question 9

Midtown Mall – MA

Answer 9

EDR needs to be higher than the cap rate, sell

Question 10

which property dominates the portfolio

Answer 10

Mall dominates the portfolio because it costs a lot, so whatever it makes is what we make

Question 11

Wilshire Ground Leases – LA

Answer 11

Hold, Because your making 14% with long term leases

Question 12

Alpha Center – MA

Answer 12

Good location and low vacancy, Diversifies the portfolio, hold

Question 13

Pathmark Supermarket – NJ

Answer 13

Sell, Some of the most powerful real estate because they bring a lot of people to the area

Question 14

cause of distressed property

Answer 14

o Oversupplied Market: properties can’t sell because there are too many of them
o Poor Design
o Poor Location
o Lack of Maintenance
o Poor Financial Decisions

Question 15

why does distressed property still have high market value

Answer 15

someone else could afford it

Question 16

problems that occur with distressed property

Answer 16

• Low Occupancy
• High Operating Costs
• Low Rent Levels

Question 17

which of the problems that occur with distressed property are curable

Answer 17

Lack of maintenance, poor financial decisions, and poor design can be fixed

Question 18

How can operating expenses vary with a distressed property?

Answer 18

They are typically higher, high maintenance and advertising

Question 19

How would distressed properties due to poor location be shown in the income approach?

Answer 19

Lower market rent

Question 20

What about poor financial decisions on the income capitalization approach?

Answer 20

Nothing, doesn’t affect the appraisal at all

Question 21

What is a key to having an effective cost approach with a distressed property?

Answer 21

Depreciation

Question 22

Would you consider the cost approach to be a reliable indicator of value when a property is distressed in most cases?

Answer 22

No

Question 23

Cost Approach if distressed

Answer 23

Value of Improvements (New) - Accrued Depreciation (Typically Larger) + Value of Site + “As-Is” Value of Site Improvements = Value Estimate

Question 24

In distressed markets, are comparable plentiful or scarce?

Answer 24

Scarce, nothing is selling because everyone is scared

Question 25

With a distressed property, are comparable sales always scarce?

Answer 25

No because you can have a distressed property in good time

Question 26

REO appraisal – What? Why?

Answer 26

- Real estate owned - After the property is foreclosed - Have to go in and estimate repairs for the bank

Question 27

Drive-by appraisal – What? Why?

Answer 27

- Before a property is foreclosed - Taking pictures from the street

Question 28

“As-is” Value

Answer 28

Value is it is sitting in that condition

Question 29

“As-repaired” Value

Answer 29

Value as it is fixed, value once the repairs are done

Question 30

o 3 Listings – why? o 3 interior photos (minimum) – why?

Answer 30

- Tells you current prices in the neighborhood, how much does a good condition property sell for - Inside of the property might need repairs

Question 31

Final Value of an REO “Distressed” Property:

Answer 31

Distressed Purchase Price + Repair Costs + Holding Cost + Sales Cost + Profit Demand = Market Value

Question 32

So after estimating REO Distressed property, what is the “key” to providing a quality estimate to the lender with the REO property?

Answer 32

Repairs and depreciation, the estimation of both

Question 33

Valuation of Proposed Projects: These are done “subject to” completion per plans and specifications. What is this?

Answer 33

Appraisal is only good if they meet specs

Question 34

“As-is” Value – Can we appraise anything “as-is” with regards to new construction?

Answer 34

Appraisal the land, value the site

Question 35

What is “existing construction” appraisals?

Answer 35

- A remodel, renovation, or addition - Are subject to as well

Question 36

Are “existing construction” appraisals “subject to” or “as-is”?

Answer 36

Subject to

Question 37

Construction Loans: These loans often have lower “LTVs” (i.e. 75% as compared to 80%) Why?

Answer 37

More risky

Question 38

Construction loans are often for 6 months up to 2 years and appraisers may do 2 appraisals. Why?

Answer 38

- Best money - Before and after its built so they can sell the loan to investors

Question 39

Construction loans are made in draws, so occasionally appraisers do inspections during construction. What is a construction draw?

Answer 39

- They are done piece meal - Don’t give you all the money because you have no collateral, just dirt

Question 40

New Construction Appraising Cost Approach: o Would physical depreciation be included in the estimate? o Should functional or external depreciation be included?

Answer 40

- no - Sometimes external

Question 41

New Construction Sales Comparison Approach:

Answer 41

- Nothing changes as we are appraising the building as if it were already built. - Less risk

Question 42

Why would “quality of construction” be more key than “condition” in an effective proposed construction appraisal?

Answer 42

- You know the condition will be good because it’s a new property - The quality changes so much when being built in terms of material, etc.

Question 43

Why might final values on new construction be harder to attain than on existing homes? (not all time periods or locations)

Answer 43

New is more expensive

Question 44

Residential Appraising: USDA

Answer 44

Rural poor people

Question 45

Residential Appraising: VA

Answer 45

back veterans

Question 46

Residential Appraising: FHA

Answer 46

new homeowners

Question 47

What are the 3 “S”s that need to be observed by Government Loan Appraisers?

Answer 47

- Safety - Soundness - Sanitary

Question 48

Can a Government Loan to be rejected outright?

Answer 48

Yes

Question 49

What is ethical

Answer 49

In general, it is “moral right and wrong” or “duty and obligation”

Question 50

What is the difference in ethical versus legal?

Answer 50

The law is required, ethics is because we want to be good people

Question 51

What can overstand appraisals do to banks and lenders

Answer 51

They may lend to much money and foreclose

Question 52

What can overstated appraisals do to condemnation and divorce cases

Answer 52

One side gets too much money

Question 53

What happens to neighborhoods or city blocks with failed real estate projects

Answer 53

Blighted, look nasty and someone has to fix up the whole neighborhood

Question 54

Ethics rule (3 parts)

Answer 54

- Conduct - Management - Confidentiality

Question 55

Ethics rule: conduct

Answer 55

- Misleading conduct – lack of verification of collected data - Fraudulent conduct – outright untruths - Hypothetical assumptions – speculation without stating the appraisal is “subject to”

Question 56

ethics rule: management

Answer 56

- Performing appraisals and collecting fees based on predetermined values - Multiple job roles in transactions (cant be both appraisal and buyer) - Exaggerated advertising - Kickbacks (referral fees)

Question 57

ethics rule: confidentiality

Answer 57

- Appraiser-client relationship – this is similar to doctors, lawyers, accountants, etc - Who can we provide appraisals for:  Client/lender  Client assigns (who they transfer the loans too, insurance companies, etc)  Government  The court

Question 58

Record keeping

Answer 58

- Must keep files for 5 years - 2 more years id the appraisal is needed for a legal case (i.e. bankruptcy, divorce, condemnation, etc)

Question 59

Appraisal review

Answer 59

- This is the process by which the work of an appraiser is evaluated or audited - It can be done in several ways: o Bank o Peer reviews o Supervisory review where you have an apprentice

Question 60

When conducting appraisal review

Answer 60

o Completeness of the report o The adequacy and relevance of data in the report o The appropriateness of the appraisal methods o The appropriateness of the appraisal conclusion - The reviewers main job is not to give an opinion of market value, but this can be requested.