Chapter 11 - Appraisal Contingencies

Question 1

Who usually purchases the property appraisal?

Answer 1

The buyer

Question 2

Why is correct appraisal / pricing one of the most important requirements?

Answer 2

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.

Question 3

Appraisal Valuation Outcomes

Answer 3

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.

Question 4

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:

Answer 4

1. Buyer increases down payment
2. Buyer and seller agree to a purchase price reduction
3. Buyer challenges appraisal valuation
4. Transaction cancelled

Question 5

Value

Answer 5

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.

Question 6

Elements of Value

Answer 6

"DUST"
Demand
Utility
Scarcity
Transferability

Question 7

Value Variation

Answer 7

Price
Terms
Conditions
Market
Timing
Location

Question 8

Market Value

Answer 8

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.

Question 9

Marketability and Acceptability

Answer 9

A property can be sold and is acceptable to the target market.

Marketability is the ultimate test of functional utility.

Question 10

Highest and Best Use

Answer 10

The use of a parcel of real property that will provide the greatest return to the owner.

Question 11

Interim Use

Answer 11

The present use of a property before it is converted to its highest and best use.

Question 12

Strip Commercial Development

Answer 12

Strip of retail stores along a business corridor

Question 13

Principle of Conformity

Answer 13

Conformity helps a well-planned community to maintain property values.

Question 14

Principle of Contribution

Answer 14

Occurs when an improvement increases the value of a property more than the cost of the improvements.

Question 15

Principle of Regression

Answer 15

Occurs when a substandard building causes the properties around it to sustain a loss in value.

Question 16

Principle of Assemblage

Answer 16

Assembling 2 or more parcels of real property into 1 property.

Question 17

Plottage Increment

Answer 17

The increase in value that results from combing lots through assemblage.

Question 18

Unearned Increment

Answer 18

An increase in value due to nothing provided by the property owner.

Question 19

Principle of Anticipation

Answer 19

Occurs when an investor purchases an income property in anticipation of a future income stream.

Question 20

Principle of Substitution

Answer 20

Substituting one property for another.

Question 21

Principle of Balance

Answer 21

The relationship between:
Cost
Added cost
The value it returns

Question 22

What are the 3 appraisal approaches to value property?

Answer 22

1. Comparison Approach / Market Data Approach
2. Income Approach / Capitalization Approach
3. Cost Approach

Question 23

Differences between:

1. Comparison Approach / Market Data Approach
2. Income Approach / Capitalization Approach
3. Cost Approach

Answer 23

1. 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.
2. 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.
3. 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.

Question 24

Types of Comparision Approach/ Market Data Approach

Answer 24

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)

Question 25

Types of Income Approach / Capitalization Approach

Answer 25

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

Question 26

Contract Rent vs Economic Rent

Answer 26

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.

Question 27

Types of Cost Approach

Answer 27

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.

1. Methods used to determine replacement cost of a building
2. Applicability of the Cost Approach
3. Depreciation

Question 28

Replacement Cost vs Reproduction Cost

Answer 28

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

Question 29

What are some methods used to determine replacement cost of a building?

Answer 29

1. 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.
2. Unit-in-Place Method – Totals up each component (e.g., wall) to reach a cost to build a replacement building.
3. Square Foot / Cubic Foot Method – Considers the cost to build a similar building on a square foot basis for residential and most commercial construction.

Question 30

Cost Approach applies to:

Answer 30

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.

Question 31

Depreciation

Answer 31

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)

Question 32

Economic life vs Physical Life

Answer 32

Economic Life – Number of years a property produces income.

Physical Life – Number of years a property is standing.

Question 33

Actual age vs Effective age

Answer 33

Actual age – Age of property from the time it was built until present.

Effective age– Age of the property based on its present condition.

Question 34

Zero Lot Line

Answer 34

The next door neighbor’s home is actually a part of the subject property’s fence line.

Question 35

Fee appraiser

Answer 35

An appraiser who charges a fee.

Question 36

Reconciliation

Answer 36

When an appraiser reconciles all three appraisal methods:

1. Comparison
2. Income
3. Cost approaches

To determine a final estimate of value.

Question 37

Form Appraisal Report

Answer 37

Form used to appraise single-family homes.

Question 38

Narrative Appraisal Report

Answer 38

Form used to appraise commercial properties.

Question 39

What are 2 types of appraisal reports?

Answer 39

1. Form Appraisal Report

2. Narrative Appraisal Report

Question 40

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.

Answer 40

Financing ; Fund ; Loan

Question 41

Loan-to-value ratio

Answer 41

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

Question 42

How does scarcity affect supply and demand of real estate

Answer 42

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