Appraisal Exam 3 Flashcards
how many square feet in an acre
43,560 sqft
reconciliation
The appraiser makes a final determination of the single best supported value in his opinion
cost approach use of reconciliation
- 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
sales comparison approach use of reconciliation
o Land
o Residential Homes (Any Age)
o Commercial Properties in an Active Market
o Sold recently
income approach use of reconciliation
o Commercial income producing properties (Hotels, Storage, etc.)
o Apartments
o Rental homes
o RENT!
process of reconciliation (4 factors)
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
correlation
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
Maplewood Apartments – TX
needs renovations and remodeling, sell
Midtown Mall – MA
EDR needs to be higher than the cap rate, sell
which property dominates the portfolio
Mall dominates the portfolio because it costs a lot, so whatever it makes is what we make
Wilshire Ground Leases – LA
Hold, Because your making 14% with long term leases
Alpha Center – MA
Good location and low vacancy, Diversifies the portfolio, hold
Pathmark Supermarket – NJ
Sell, Some of the most powerful real estate because they bring a lot of people to the area
cause of distressed property
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
why does distressed property still have high market value
someone else could afford it
problems that occur with distressed property
- Low Occupancy
- High Operating Costs
- Low Rent Levels
which of the problems that occur with distressed property are curable
Lack of maintenance, poor financial decisions, and poor design can be fixed
How can operating expenses vary with a distressed property?
They are typically higher, high maintenance and advertising
How would distressed properties due to poor location be shown in the income approach?
Lower market rent
What about poor financial decisions on the income capitalization approach?
Nothing, doesn’t affect the appraisal at all
What is a key to having an effective cost approach with a distressed property?
Depreciation
Would you consider the cost approach to be a reliable indicator of value when a property is distressed in most cases?
No
Cost Approach if distressed
Value of Improvements (New) - Accrued Depreciation (Typically Larger) + Value of Site + “As-Is” Value of Site Improvements = Value Estimate
In distressed markets, are comparable plentiful or scarce?
Scarce, nothing is selling because everyone is scared
With a distressed property, are comparable sales always scarce?
No because you can have a distressed property in good time
REO appraisal – What? Why?
- Real estate owned
- After the property is foreclosed
- Have to go in and estimate repairs for the bank
Drive-by appraisal – What? Why?
- Before a property is foreclosed
- Taking pictures from the street
“As-is” Value
Value is it is sitting in that condition
“As-repaired” Value
Value as it is fixed, value once the repairs are done
o 3 Listings – why?
o 3 interior photos (minimum) – why?
- Tells you current prices in the neighborhood, how much does a good condition property sell for
- Inside of the property might need repairs
Final Value of an REO “Distressed” Property:
Distressed Purchase Price + Repair Costs + Holding Cost + Sales Cost + Profit Demand = Market Value
So after estimating REO Distressed property, what is the “key” to providing a quality estimate to the lender with the REO property?
Repairs and depreciation, the estimation of both
Valuation of Proposed Projects: These are done “subject to” completion per plans and specifications. What is this?
Appraisal is only good if they meet specs
“As-is” Value – Can we appraise anything “as-is” with regards to new construction?
Appraisal the land, value the site
What is “existing construction” appraisals?
- A remodel, renovation, or addition
- Are subject to as well
Are “existing construction” appraisals “subject to” or “as-is”?
Subject to
Construction Loans: These loans often have lower “LTVs” (i.e. 75% as compared to 80%) Why?
More risky
Construction loans are often for 6 months up to 2 years and appraisers may do 2 appraisals. Why?
- Best money
- Before and after its built so they can sell the loan to investors
Construction loans are made in draws, so occasionally appraisers do inspections during construction. What is a construction draw?
- They are done piece meal
- Don’t give you all the money because you have no collateral, just dirt
New Construction Appraising Cost Approach:
o Would physical depreciation be included in the estimate?
o Should functional or external depreciation be included?
- no
- Sometimes external
New Construction Sales Comparison Approach:
- Nothing changes as we are appraising the building as if it were already built.
- Less risk
Why would “quality of construction” be more key than “condition” in an effective proposed construction appraisal?
- 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.
Why might final values on new construction be harder to attain than on existing homes? (not all time periods or locations)
New is more expensive
Residential Appraising: USDA
Rural poor people
Residential Appraising: VA
back veterans
Residential Appraising: FHA
new homeowners
What are the 3 “S”s that need to be observed by Government Loan Appraisers?
- Safety
- Soundness
- Sanitary
Can a Government Loan to be rejected outright?
Yes
What is ethical
In general, it is “moral right and wrong” or “duty and obligation”
What is the difference in ethical versus legal?
The law is required, ethics is because we want to be good people
What can overstand appraisals do to banks and lenders
They may lend to much money and foreclose
What can overstated appraisals do to condemnation and divorce cases
One side gets too much money
What happens to neighborhoods or city blocks with failed real estate projects
Blighted, look nasty and someone has to fix up the whole neighborhood
Ethics rule (3 parts)
- Conduct
- Management
- Confidentiality
Ethics rule: conduct
- Misleading conduct – lack of verification of collected data
- Fraudulent conduct – outright untruths
- Hypothetical assumptions – speculation without stating the appraisal is
“subject to”
ethics rule: management
- 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)
ethics rule: confidentiality
- 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
Record keeping
- Must keep files for 5 years
- 2 more years id the appraisal is needed for a legal case (i.e. bankruptcy, divorce,
condemnation, etc)
Appraisal review
- 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
When conducting appraisal review
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.
