Chapter 8 Flashcards
When to make adjustments?
Adjustments only need to be made when there is a significant, measurable difference between the subject property and a comparable sale.
How many lines in the sales comparison grid in the URAR appraisal form?
22 lines.
Unacceptable appraisal practices as states by fannie mae:
Development of and/or reporting an opinion of market value that is not supportable by market data or is misleading
Selection and use of inappropriate comparable sales
Failure to use comparable sales that are the most locationally and physically similar to the subject property
Use of adjustments to comparable sales that do not reflect market reaction to the differences between the subject property and the comparable sales
Not supporting adjustments in the sales comparison approach
Failure to make adjustments when they are clearly indicated
We cannot let the power of the ______ overrule our own judgment and decision making. It’s easy to plug numbers into an equation or software so that the resulting answer is 100% accurate.
math
The order in which quantitative adjustments are applied to the sale prices of comparable properties
Sequence of adjustments
an example of an acceptable sequence that is illustrated in The Appraisal of Real Estate
Property rights conveyed Financing terms/cash equivalency Conditions of sale Expenditures made immediately after purchase Market conditions Location Physical characteristics Economic characteristics Legal characteristics Non-realty components of value
The most commonly-used appraisal report form.
the URAR form, created jointly by Fannie Mae and Freddie Mac,
The adjustment factors presented in the URAR adjustment grid:
Sale or financing concessions Date of sale/time Location Property rights Physical characteristics
Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat
Fee Simple Estate`
Divided or undivided rights in real estate that represent less than the whole, i.e., a fractional interest such as a tenancy in common, easement, or life interest.
Partial Interest
the highest and most complete form of ownership.
Fee simple
Rights of use, occupancy, and control, limited to the lifetime of a designated party, sometimes referred to as the life tenant
Life Interest
The ownership interest held by the lessor, which includes the right to receive the contract rent specified in the lease plus the reversionary right when the lease expires.
Leased fee interest
The right held by the lessee to use and occupy real estate for a stated term and under the conditions specified in the lease.
Leasehold Interest
If you are appraising a multi-unit property where at least one unit is rented, the property rights appraised consist of a
Leased fee interest
Partial interests are created when some part of the fee simple estate is taken away by:
Easements Encroachments Transfer of subsurface rights Transfer of air rights Exercise of transferable development rights (TDRs) Private restrictions Deed restrictions Conditions, Covenants, and Restrictions (CC&Rs)
The most common types of ownership that require specialized forms:
Condominiums
Cooperatives
PUDs
Timeshares
An estate in property held by one owner
Tenancy in Sevralty
Concurrent ownership includes forms of ownership such as:
Tenancy in common
Joint tenancy
Tenancy by the entirety
Any time a property has a mortgage or is encumbered by a lien, for example, the owner no longer has a
fee simple interest
You must record the type of property rights for the subject and all comparables on
the URAR
Uniform Residential Appraisal Report
A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions.
Mortgage
A mortgage that is neither insured nor guaranteed by an agency of the government, although it may be privately insured.
Conventional Loan
A mortgage in which a party other than the borrower assures payment in the event of default, e.g., a VA-guaranteed mortgage or a SBA-guaranteed mortgage
Guaranteed Mortgage
A mortgage in which a party other than the borrower assures payment on default by the mortgagor in return for the payment of a premium, e.g., FHA-insured mortgages, private mortgage insurance (PMI)
Insured Mortgage
The most common example of an insured loan would be
FHA
A two-unit property can be purchased for $400,000. Typical financing terms would require a 20% down payment, with a fully-amortized mortgage at 5.5% for a term of 30 years, with monthly payments. What is the amount of the monthly payment?
We will work through this one together. Here are the keystrokes on the HP12c.
f CLEAR FIN
30 g n
5.5 g i
320000 CHS PV
PMT
1816.92
The monthly payment for a $320,000 loan at 5.5% interest would be $1,816.92.
A percentage of the loan amount that a lender charges a borrower for making a loan; may represent a payment for services rendered in issuing a loan or additional interest to the lender payable in advance; also called points. Each discount point is 1% of the original loan amount.
Discount points
A _____ is one percent of the amount of a mortgage loan
point
The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress
Market value
Do most properties sell for cash?
No
It is important to note that a mortgage does not automatically mean that an _______ for financing terms is required.
adjustment
These usually are a one-time charge that can affect the sale price.
Sale concessions
A lump-sum payment (or series of payments) to the lender that reduces the interest payments of the borrower. The cost of the buydown is usually reflected in the price paid and can be expressed as a percentage of principal
buydown
Suspicious types of sales might include:
Distressed sales (e.g., "short sales") Foreclosure sales Auctions FHA sales VA sales
When we use the sales comparison approach to develop an indication of market value, we are assuming that the comparable sales were:
Purchased by a “typically motivated” buyer; and
Paid for in cash or its equivalent, such as financed with a conventional mortgage that was obtained on the open market
Here’s how you might adjust in the case of a home that cost $200,000. The first mortgage was $150,000, and the seller paid 1.5 points
Selling price of home $200,000 - Less value of points (0.015 x $150,000) 2,250 =
Adjusted selling price $197,750
Let’s assume that a purchaser has agreed to buy a property for $125,000 and will put down $25,000. The current interest rate for mortgages is 10% and most loans are available for a 30-year period. The seller has agreed to provide a 30-year mortgage at only 8% interest. What is the cash equivalent value of the sale due to the favorable financing?
Let’s use the HP12c calculator again to calculate the mortgage payments. We enter in the known information and then solve for the payment (PMT). We will use a shortcut (g) to calculate the monthly payments. The g shortcut divides the interest rate you enter by 12 and multiplies the time period by 12.
f CLEAR FIN 30 g n 10 g i 100000 CHS PV PMT 877.57
The monthly payment for a $100,000 loan at 10% interest would be $877.57.
f CLEAR FIN 30 g n 8 g i 100000 CHS PV PMT 733.76 The monthly payment for a $100,000 loan at 8% interest would be $733.76.
Susan owns a home on leased land. Which term best describes her ownership interest in the property? condominium fee simple leased fee leasehold
Leasehold
True or False: According to the Fannie Mae Selling Guide, an appraiser must make dollar-for-dollar adjustments for the amount of the sales concession.
False
The acronym UAD stands for Unfortunate Appraisal Decision Universal Appraiser Description Uniform Appraisal Dataset Unconfirmed Appraisal Delivery
Uniform Appraisal Dataset
Bob grants his aunt, Mary, the right to occupy a property he owns for the rest of her life. In this situation, Mary is the remainderman temporary owner life tenant owner of record
Life tenant
In a UAD-compliant appraisal report, how would the date October 30, 2018 be formatted? 30-OCT-2018 30/10/18 10/30/2018 10-30-18
10/30/2018
According to Fannie Mae, all of the following are unacceptable appraisal practices EXCEPT
not supporting adjustments in the sales comparison approach
selection and use of inappropriate comparable sales
use of comparables that are over six months old
failure to make adjustments when they are clearly indicated
Use of comparables that are over six months old
A VA mortgage is an example of a predatory loan a conventional mortgage a guaranteed mortgage an insured mortgage
Guaranteed mortgage
Tenancy in severalty means the property is owned by one person two people spouses a corporation
One Person
An element of comparison in the sales comparison approach; comparable properties can be adjusted for differences in the motivations of either the buyer or a seller in a transaction
Conditions of sale
A transaction between unrelated parties who are each acting in his or her own best interest
Arms-length transaction
Figure out what the property would have sold for under normal conditions, then take what it actually sold for and adjust accordingly.
A property sold for $190,000, but we discover that the seller was in a hurry because of a job transfer.
Hopefully, we could employ a paired data analysis technique. It’s our lucky day and we are able to find another nearly identical property that sold under normal conditions for $200,000.
How would it be adjusted?
It would need to be adjusted upwards by $10,000 for conditions of sale. That would equate it to the other sale that occurred at $200,000 with a normal time for exposure to the market.
An element of comparison in the sales comparison approach; comparable properties can be adjusted for any additional investment (e.g., curing deferred maintenance) that the buyer needed to make immediately after purchase for the properties to have similar utility to the subject property being valued
expenditures made immediately after purchase
Changes in a real estate market may be:
Cyclical - rising and falling with the fates of the local industries (aerospace, defense, etc.) that go through big hiring phases followed by layoffs
One-time only - related to an event, either good or bad, which is unlikely to reoccur
Seasonal - in a resort town, all real estate purchases might occur within a narrow three-month window of opportunity
Exponential - continuously increasing at a rapid rate, such as what was experienced in the early to mid-2000s in the fast-growing parts of California, Nevada or Florida
Market areas typically go through four distinct phases of their life cycle:
Growth, stability, decline, and revitalization
Growth - Lots of new construction and development activity, speedy sales, increasing prices, a “seller’s market”
Stability - Slowing down of new construction, prices remain steady and high, excitement is cooling
Decline - Prices start to fall, new construction halts, more existing homes flood the market, creating a “buyer’s market”
Revitalization - Prices have bottomed, sales stagnate, and hopefully the area receives new interest and renewal
What indicators can help you determine if market conditions are changing?
Changes in the area’s demographics
Changes in typical exposure time on the market
Foreclosure rates in the area
Increases or decreases in residential rents
Instances of seller financing
Nearby development
Market conditions adjustments (and location adjustments) are generally calculated on a _________basis.
percentage
True or False: Adjustments for market conditions are always negative.
False
True or False: An appraiser can adjust a comparable sale to account for differences in the motivation of the buyer or seller in the transaction.
True
A property sold for $183,950, and the purchaser made no significant improvements. One year later it sold again for $195,000. What is the percentage of increase indicated by this sale?
4%
5.6%
6%
7.1%
6%
A property was put on the market on January 10th, and an agreement of sale was signed on February 8th. Due to issues with the home inspection, the sale did not close until July 15th. An appraiser is using this property as a comparable sale on an appraisal with an effective date of October 19th. The appraiser’s market conditions adjustment should reflect the change in market conditions between
January 10th and October 19th
February 8th and July 15th
February 8th and October 19th
January 10th and February 8th
February 8th and October 19th
Obviously, staying within the market area is preferable when searching for comparable properties. You might have to make exceptions, however, when:
Few sales have occurred in the neighborhood
The subject is in a rural area
The subject is unusual (a geodesic dome, or log cabin in a neighborhood of traditional ranches, for example)
Traditionally, appraisers have rated location as:
Poor Fair Average Good Very Good Excellent
B, N, or A stands for
Beneficial, Neutral, and adverse
For residential mortgage lending appraisals for Fannie Mae and Freddie Mac lenders, as well as HUD and VA, appraisers are required to use the protocols of the
Uniform Appraisal Dataset (UAD)
uality ratings are assigned to the subject on a scale from Q1 to Q6. What do Q1 and Q6 mean?
Q1 = Best Q6 = Worst
The Fannie Mae/Freddie Mac UAD protocols require an appraiser to rate the condition of the subject property and comparables using a scale from
C1 (best) to C6 (worst).
A unit of comparison used primarily in residential appraisal. No national standard exists on what constitutes a room. The generally accepted method is to consider as separate rooms only those rooms that are effectively divided and to exclude bathrooms
Room Count
Total area of finished, above-grade residential space; calculated by measuring the outside perimeter of the structure and includes only finished, habitable, above-grade living space. (Finished basements and attic areas are not generally included in total gross living area. Local practices, however, may differ.)q
Gross Living Area
GLA is used for
Single-family residences
GBA is used for
2-4 family properties
The primary difference between GBA and GLA is that
GBA can include finished below-grade area, while GLA does not.
Rooms that are below grade are noted separately on the URAR form, and must be
finished (have ceiling, walls and floor)
Adjustments for physical characteristics could include all of the following items EXCEPT busy street room count construction quality design and appeal
Busy Street
When completing an appraisal using the Uniform Appraisal Dataset, in the “Age” section of the sales comparison grid, the appraiser is required to enter
effective age only
actual age only
neither actual and effective ages
either actual or effective age, at the appraiser’s discretion
Actual age only
For appraisals prepared using the UAD, quality of construction for the subject and comparables is rated using
Great, Average, Fair, and Bad
N, B, or A
a scale from Q1 through Q6
whatever scale the client asks you to use
Q1-Q6
According to the requirements of the Uniform Appraisal Dataset, an appraiser is required to rate a location as N, B, or A Good, Average, Fair, or Poor satisfactory or unsatisfactory L1 through L6
N, B, or A
Gross building area (GBA) is used as a unit of measurement for single family detached homes condominium units manufactured homes 2-4 unit properties
2-4 unit properties
The ability of a property or building to be useful and to perform the function for which it is intended according to current market tastes and standards; the efficiency of a building’s use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms.
Functional Utility
Energy-conservation features should be noted in a home, as they can add
considerable value
Economic characteristics include all the attributes that influence income. This would include such items as:
Operating expenses
Tenant mix
Lease terms
The URAR provides space for the appraiser to record all basic data about a property, its improvements and its neighborhood. It also gives you space to report the results of all three valuation approaches:
cost, sales comparison, and income
Fannie Mae includes list of required exhibits for an appraisal that includes interior and exterior inspection:
Street map Exterior building sketch of improvements Clear, descriptive, original photographs Interior photographs Any other data
The sum of the positive and negative adjustments made to a comparable sale price.
Net adjustment
The total adjustment to each comparable sale price calculated by adding the absolute values of all positive and negative adjustments
Gross Adjustment
As you consider the data you have used in the sales comparison grid, ask yourself three questions:
Do I have a sufficient quantity of comparables to justify a value conclusion? (With unusual properties, it’s not uncommon to need six or more!)
Is my data of reliable quality? (Does it reflect standardization of measurements and reputable sources of data?)
Is each comparable appropriate? (Does each reflect an arm’s-length sale that occurred on the open market?)
Which of these items is NOT required by Fannie Mae to be included as an exhibit in an appraisal report?
exterior photographs of the front, rear, and street of the subject property
an exterior building sketch of the improvements
a copy of the deed or legal description
photos of the front of each comparable sale
A copy of the deed or legal description
The Fannie Mae URAR form is designed to report an appraisal of a manufactured home a one-unit property with accessory unit a condominium unit a unit in a cooperative project
A one-unit property with accessory unit
An appraisal of which of these types of properties would NOT be reported using the Fannie Mae URAR form?
a unit in a shopping mall
a unit in a planned unit development
a one-unit property with an accessory unit
a one-unit property
A unit in a shopping mall
Fannie Mae's guideline for net adjustments is \_\_\_\_\_% of the sale price of the comparable. 10 15 There is no set amount 25
There is no set amount
With real property, the value of the whole __________ the sum of the separate estates or parts.
is always equal to
is always less than
may be equal to, or less than
may be equal to, more than, or less than
May be equal to, more than, or less than
LA includes ___________ but not____________.
covered porches, patios
above grade heated area, garages
finished basements, attics
below grade heated area, unfinished basements
above grade heated area, garages
If your net adjustments exceed _______% when using a URAR form, Fannie Mae requires an explanation.
1%
15%
25%
There is no longer a threshold amount for net adjustments
There is no longer a threshold amount for net adjustments
Market condition adjustments to comparable sales should always be calculated from the time of the _________ to the ____________.
closing, contract
contract, effective date of the appraisal
closing, date of the appraisal report
Contract, closing date
contract, effective date of the appraisal
Assume that a house needed a new roof and siding. A buyer has a contractor’s estimate of $10,000 to install the roof and siding. An offer of $110,000 for the property was accepted. The work was done immediately after the closing and it wound up costing $12,500. How much should you adjust the sale if you use it as a comparable?
$2,500
$7,500
$10,000
$12,500
10,000
Expenditures Made Immediately after Purchase. The adjustment should still be $10,000 – that was the expected cost that influenced the sale price.
According to Fannie Mae, all of these are unacceptable appraisal practices EXCEPT
not supporting adjustments in the sales comparison approach
selection and use of inappropriate comparable sales
use of comparables that are over six months old
failure to make adjustments when they are clearly indicated
use of comparables that are over six months old
Fannie Mae and Freddie Mac require an appraiser to base his or her analysis and any adjustments to comparable sales on predetermined dollar adjustments standard formulas personal opinions market data
market data
What type of mortgage includes a party other than the borrower who assures payment in the event of default?
subprime
guaranteed
conventional
assumable
guaranteed
A “point” is equal to \_\_\_\_\_% of a \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. 10, mortgage loan amount 1, mortgage loan amount 1, property sale price 10, property sale price
1, mortgage loan amount
In your sales grid, you made adjustments of +$4,000, +$3,500, - $1,500, + $7,000, and - $2,000. How much is your net adjustment?
+$11,000
-$11,000
+$18,000
-$18,000
+$11,000
