Module 1 The Appraisal Process Flashcards
What is an appraisal?
It is the professional opinion of a property’s market value.
Loan-To-Value
LTV tells you what portion of a home’s price or value a bank is willing to lend you money for. It’s a percentage.
What is a desk review?
A checklist of items an appraiser uses to analyze the appraisal report for completeness and acceptable conclusions.
What is a field review ?
A review of the appraisal verifying the accuracy of the data, elements and procedures used by the original appraiser. used for high LTV or high risk Loans
What is a Limited Appraisal?
These are quicker and cheaper. They might just look at the outside of the house. Used for low LTV or low-risk loans.
What is the most important appraisal principle
Highest and best use
Principle of Highest and Best Use
This refers to the legal use of a property that gives the greatest return. For example, a residential plot would best be used for single-family housing.
Example: Imagine a piece of land in the city center. The best use might be a shopping mall, not a single house, because a mall would make the most money there.
Principle of Contribution
This principle says an amenity’s value is not based on its cost but on how much it contributes to the property’s overall value.
Example: Building a swimming pool might cost $20,000, but if it only makes your house worth $10,000 more, then its contribution is only $10,000.
Principle of Change
This acknowledges that market conditions can change quickly, affecting property values.because of this appraisals have a short shelf life
Example: If a big company moves nearby, home prices might go up. If the company leaves, prices might fall. The market always changes!
Principle of Anticipation
This means the purchase price may be affected by expectations of future appeal, like a new freeway offramp or a company opening nearby.
( Usually starts with did you hear? ie did you hear they’re building a new Costco?)
Example: If people hear a new school will be built, they might pay more for houses nearby, expecting them to be worth more in the future.
Principle of Substitution
This says that the value of a property is influenced by the cost of a similar or substitute item. But emotions can sometimes affect this, as illustrated by the story of a buyer willing to overspend on a loved property.
The Principle of Substitution is like shopping for a toy that comes in different colors. Each color might have a slightly different price, but you would usually buy the cheaper one if they’re all the same otherwise.
Principle of Conformity
This principle states that maximum value is found when properties in a neighborhood are similar to each other.
It’s the idea that a house fits in best and is worth the most when it’s like the other houses in its neighborhood.
Examples of Conformity
Size: If most houses on a street are small, a really big house won’t fit in. Even though it’s bigger, it might not be worth more money.
Why is the Principle of conformity so important?
Predictable Market Behavior: When houses are similar, people know what they’re looking for and what a house should cost.
Impact on Resale: Properties that significantly deviate from the norm might be more challenging to sell in the future because they don’t meet the typical buyer’s expectations for that area.
Influence on Appraisal: Appraisers often use comparable sales (comps) in the immediate vicinity to value a property. If a house does not conform to its surroundings, finding appropriate comps can be more challenging, possibly affecting the appraisal value.
Example:Imagine you live on a street where all the houses are blue. You decide to paint your house bright red. Even though you love it, others might not, and they might not want to pay extra for it. Your red house doesn’t fit in with the blue ones, so it doesn’t follow the Principle of Conformity.
Principle of Increasing and Decreasing Returns
This is about investing in property only when the cost of adding amenities is at least equal to the increase in value they create. Over-improving can lead to diminishing returns.
Example: Adding a new kitchen might make your house worth more, but adding five more kitchens won’t keep making it worth more and more.
Principle of Supply and Demand
Basic economics – when demand is high and supply is low, prices go up, and vice versa.
Example: If everyone wants a popular toy and there are only a few, the price goes up. If there are lots of toys but no one wants them, the price goes down.
Principle of Competition
This reflects how competition among buyers or sellers affects prices.
Example: If there are many sellers of ice cream, they compete by lowering prices. If there are many buyers, they compete by offering higher prices.
Principle of Regression and Progression
This suggests that a property’s value can decrease or increase depending on whether it’s surrounded by lower or higher-valued properties, respectively.
Example: If you have the fanciest house in a simple neighborhood, the other houses might make yours worth less.
Principle of Progression Example: If you have the simplest house in a fancy neighborhood, the other houses might make yours worth more.
What are the Characteristics of Value (DUST)
Demand: People must want the item and be able to buy it. Imagine a popular toy at Christmas; lots of people want it, so it’s in demand.
Example: Think of the latest video game console. If everyone wants it and there aren’t enough to go around, the demand is high. It’s like when a new game system comes out, and everyone wants to buy it. The more people want it, the more valuable it becomes.
Utility:The item must be useful or fulfill a need. A hammer, for instance, is valuable because it has the use of driving nails.
Example: A pair of scissors has utility because it can be used to cut paper. If something doesn’t have a use or fulfill a need, then it’s not valuable. Like a broken watch that can’t tell time, it has lost its utility and therefore its value.
Scarcity: If there aren’t many items available, they become more valuable. Think of a rare baseball card. Since there aren’t many, it’s worth more.
Example: Imagine a special edition toy with only 100 made in the world. Because there are so few, it becomes more valuable. It’s like having a unique collector’s item that nobody else has. The fewer there are, the more special and valuable it is.
Transferability:The item or property must be able to change ownership. If you have a car but can’t legally sell it, its value is pretty much zero.
Example: If you own a bike but there’s a law that says you can’t sell it to anyone else, then it’s not transferable. Even if the bike is in great condition and rides well, if you can’t sell it, it doesn’t have much value to anyone else.
What is Market Value?
What a property should sell for in a fair and open market.
Or the amount of money that a buyer might reasonably pay for a house if it were for sale.
Different appraisers might give different values for the same property, and they could both be right.
Market value is not always the same as the price. The seller might sell for less to meet a deadline, or a buyer might pay more for a reason special to them.
What are the three categories sales conditions fall into?
The relationship, knowledge, and motivation of the parties (i.e., seller and buyer)
The terms of sale (e.g., cash, cash equivalent, or other terms)
The conditions of sale (e.g., exposure in a competitive market for a reasonable time prior to sale)
Why Do Different People See Different Values?
Different Needs and Wants: Some buyers might value a big backyard because they have a dog, while others might not care about the yard but want a big kitchen.
Different Knowledge: Some buyers might know that a certain neighborhood is about to become very popular, so they might pay more for a house there.
Different Financial Situations: Some buyers might be able to pay more because they have more money saved up.
Ad valorem
Means “according to value,” but it’s not the market value. It’s a value set by the local government for taxing purposes. So, your property taxes are based on this value, not what the property might sell for on the open market.
The appraiser considers Which outside forces when preparing the appraisal report.
economic, political, social, governmental, and environmental factors can influence value.
Appraisers follow appraisal standards called _________
Uniform Standards of Professional Appraisal Practice (USPAP)
