Chapter 11 - Appraisal Contingencies Flashcards
Who usually purchases the property appraisal?
The buyer
Why is correct appraisal / pricing one of the most important requirements?
For example – If a list price is greater than the property’s market value, and a buyer makes a full-price offer that is accepted by the seller, the agreed upon purchase price will be greater than the market value of the property, and it will not appraise for the purchase price. In this case– the lender will usually not fund the loan and the purchase transaction will fall apart.
Appraisal Valuation Outcomes
Appraisal valuation ABOVE purchase price = Buyer happy
Appraisal valuation AT purchase price = BOTH buyer and seller happy
Appraisal valuation BELOW purchase price = Lender not happy because property is not sufficient collateral for a loan.
If the appraised value of the property comes in BELOW the purchase price, the lender will usually not fund the loan. What 4 possible actions can be taken at this point:
- Buyer increases down payment
- Buyer and seller agree to a purchase price reduction
- Buyer challenges appraisal valuation
- Transaction cancelled
Value
Relationship between a thing desired and the potential purchaser or desirous person, maximum utility of available resources, present worth of future benefits, and ability of one commodity to command another commodity in exchange.
Elements of Value
"DUST" Demand Utility Scarcity Transferability
Value Variation
Price Terms Conditions Market Timing Location
Market Value
Primarily based upon the willing buyer and willing seller concept.
It is what the market believes a property is worth an dis the value an appraiser tries to determine when making an appraisal.
Market value is the value a buyer (under no duress) places on a parcel of real property.
Marketability and Acceptability
A property can be sold and is acceptable to the target market.
Marketability is the ultimate test of functional utility.
Highest and Best Use
The use of a parcel of real property that will provide the greatest return to the owner.
Interim Use
The present use of a property before it is converted to its highest and best use.
Strip Commercial Development
Strip of retail stores along a business corridor
Principle of Conformity
Conformity helps a well-planned community to maintain property values.
Principle of Contribution
Occurs when an improvement increases the value of a property more than the cost of the improvements.
Principle of Regression
Occurs when a substandard building causes the properties around it to sustain a loss in value.
Principle of Assemblage
Assembling 2 or more parcels of real property into 1 property.
Plottage Increment
The increase in value that results from combing lots through assemblage.
Unearned Increment
An increase in value due to nothing provided by the property owner.
Principle of Anticipation
Occurs when an investor purchases an income property in anticipation of a future income stream.
Principle of Substitution
Substituting one property for another.
Principle of Balance
The relationship between:
Cost
Added cost
The value it returns
What are the 3 appraisal approaches to value property?
- Comparison Approach / Market Data Approach
- Income Approach / Capitalization Approach
- Cost Approach
Differences between:
- Comparison Approach / Market Data Approach
- Income Approach / Capitalization Approach
- Cost Approach
- Comparison Approach / Market Data Approach – Uses the principle of substitution; Most readily adaptable and useable approach. // Most often used with single-family homes and unimproved land.
- Income Approach / Capitalization Approach – Used to appraised the value of income producing properties by converting an income stream into value. // Commonly includes multi-unit residential apartment buildings and leased investments.
- Cost Approach – Looks at the cost to build a building (e.g., house) on a parcel of land and adds it to the land value to determine the overall property value. // Good for special purpose and service buildings, new residences, new construction, and older homes.
Types of Comparision Approach/ Market Data Approach
Sales Comparables – An appraiser uses sales comps to value a subject property. Using similar properties that have recently sold near the subject property in relation to Location, Size, Amenities, and other characteristics.
Rental Comparables – Similar properties that have recently rented near the subject property. Market data method of real property appraisal is most often used to determine rents for apartment buildings and leased investments (shopping centers, office buildings, and industrial properties)
Types of Income Approach / Capitalization Approach
Gross Schedule Income / Scheduled Gross Income – The total amount of rents an owner will collect from an income property that is completely rented and has no vacancy.
Effective Gross Income – Actual rent collected from an income property. The income collected by the property owner, after vacancy, bad debts, and rent collection losses have been deducted from the gross scheduled income.
Operating Expenses
Net Operating Income
Capitalization Rate
Gross Rent Militplier
Contract Rent vs Economic Rent
Contract Rent – Actual rent collected from an income property
Economic Rent – Rent received for a comparable space in the open market and is the highest and best use for the property.
Types of Cost Approach
Cost Approach – Land is valued using the market data approach and then the cost to build a building on the land using the cost approach is added to the land value to obtain an overall value for the existing property.
- Methods used to determine replacement cost of a building
- Applicability of the Cost Approach
- Depreciation
Replacement Cost vs Reproduction Cost
Replacement Cost – the cost to replace a structure with another structure having the same utility. SAME UTILITY
Reproduction Cost – The cost to replace a structure with another structure that is an exact replica. EXACT REPLICA
What are some methods used to determine replacement cost of a building?
- Quantity Survey Method – Considers every unit of material that goes into construction and totals them up to determine the total cost to build the property.
- Unit-in-Place Method – Totals up each component (e.g., wall) to reach a cost to build a replacement building.
- Square Foot / Cubic Foot Method – Considers the cost to build a similar building on a square foot basis for residential and most commercial construction.
Cost Approach applies to:
BUILDING + LAND = PROPERTY VALUE
Special purpose properties / special service buildings – libraries, fire houses
New residences/ new construction – Most accurate when the property is new, has been recently built and the appraisers are able to obtain the exact costs to build the building on the land.
Older home – Best method for older homes because of the effects of depreciation. By using this approach, the appraiser can consider the property’s condition in light of physical deterioration, functional obsolescence, and economic obsolescence.
Depreciation
The loss of value for any reason or from any cause.
Described through:
Physical deterioration - Occurs when the building wears out.
Functional Obsolescence - Loss of value due to styling issues within the property line.
Economic Obsolescence - Anything outside the property line that causes loss of value to a property. (noise, airports, busy roads, traffic congestion, greenbelts)
Economic life vs Physical Life
Economic Life – Number of years a property produces income.
Physical Life – Number of years a property is standing.
Actual age vs Effective age
Actual age – Age of property from the time it was built until present.
Effective age– Age of the property based on its present condition.
Zero Lot Line
The next door neighbor’s home is actually a part of the subject property’s fence line.
Fee appraiser
An appraiser who charges a fee.
Reconciliation
When an appraiser reconciles all three appraisal methods:
- Comparison
- Income
- Cost approaches
To determine a final estimate of value.
Form Appraisal Report
Form used to appraise single-family homes.
Narrative Appraisal Report
Form used to appraise commercial properties.
What are 2 types of appraisal reports?
- Form Appraisal Report
2. Narrative Appraisal Report
The Appraisal Contingency ties in with the ________ Contingency because the lender usually will not ______ a ________ in which the appraised value is not at least the purchase price of the property.
Financing ; Fund ; Loan
Loan-to-value ratio
When a property appraises for less than the purcahse price, the lender may require the buyer to increase the down payment to maintain the LOAN-TO-VALUE Ratio
Loan amount ÷ purchase price/appraised value (whichever is lower) = Loan-to-value ratio
How does scarcity affect supply and demand of real estate
As supply of real estate DECREASES and demands stay the same = property prices will INCREASE
As supply of real estate INCREASES and demand stays the same = property prices will DECREASE
