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Practice of Mortgage Brokerage > Module 3.6 Lenders and property value > Flashcards

Module 3.6 Lenders and property value Flashcards

1
Q

Variables lenders consider for home valuations

A
  • Current condition of real estate market and economy
  • market values for similar property
  • remaining economic life of subject property
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2
Q

what is lenders source of property valuations

A
  • real estate appraiser

- computer-automated valuation system (AVS)

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3
Q

what factors do real estate appraisers value properties from

A
  • value in use
  • market value
  • assessed value
  • investment value
  • other specific kinds of value
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4
Q

Difference between assessed value and market value

A

are the concepts of equity and mass appraisal. These concepts, utilized heavily in the assessment valuation process, are a significant departure from normal real estate appraisal services. The value determined is to be fair and equitable in relation to other properties in the municipality.

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5
Q

what is mass appraisal and which process uses it

A

he assessment valuation process uses mass appraisal. The use of mass appraisal is unique to the assessment field. This is a significant departure from normal real estate appraisal services. Appraisal industry members analyze the specific elements of one property against the other in the comparison approach to value. The appraiser does not take into consideration whether or not the value determined is equitable to other similar properties.

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6
Q

what is assessed value

A

refers to the value of a property as of a certain date (for example, on July 1) and is the value upon which annual property taxes are based. Assessed values represent a snapshot of property value on a particular date, and they are in fact current market values on that date.

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7
Q

what are market values

A

hange frequently because of changing levels of supply and demand and other economic factors. Because of this, the current market value and the municipal assessment value for the same property may be quite different.

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8
Q

what is appraised value

A

is used for many purposes such as establishing a value for taxes or financing needs. Within the context of this course it is used to determine how much a property is likely to sell for compared to other similar properties in a given market.

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9
Q

what docs are used the substantiate value of property

A 
purchase contracts
feature sheets
title documents
real property reports (property surveys)
municipal property assessments
existing mortgage documents
property appraisal reports
condo documents
rental agreements and leases
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10
Q

what are some deal breakers for funding

A
  • private sales
  • verify that the property actually exists
  • verify that the property is legally owned by the person identified to the lender as the owner
  • verify that there are no liens against the property and no legal impediments that could affect purchase or resale, and clarify any covenants or deed restrictions that may affect property use and resale.
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11
Q

what are some deal breakers for funding

A

liens
unpaid taxes
outstanding mortgages or second mortgages
estranged spouse with ownership rights
zoning bylaws that could affect property use
easements and/or easement violations
encroachment issues
boundary disputes
fees for road maintenance or amenities
rules about in-home businesses/commercial use and/or property rentals
rules about pets, animals/livestock, and/or breeding on the property
for new construction, type of construction and fencing allowed, minimum residence size rules, and setback regulations

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12
Q

what are some invisidle or unreported deal breakers

A

If you have access to a home inspection report, read through to see if it identifies any structural defects, known health hazards (asbestos insulation, lead paint, etc.), or illegal alterations.

Does the report mention anything that might make the property uninsurable such as water damage or mould (former grow-op?).

Is the property located in an area prone to natural hazards such as flooding?

Is the property located on or near a former industrial site where there be residual hazardous wastes?

Will the property pass a water potability test?

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13
Q

what are some techniques to take care of deal breakers

A

Advise the applicant and his or her real estate professional of the issue(s).
See if there is any way to remediate the issue(s), e.g., repairs, price reduction, new condition on offer to purchase.
Suggest appropriate experts that the applicant might contact to seek a resolution.
Reset the expectations of the applicant. (“If this property isn’t going to work, look at another . . .”) Keep working the application.

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14
Q

what are some factor of concerns for lenders

A
  • square footage
  • Zoning
  • Acreages
  • Hobby farms
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15
Q

what are some concerns for lenders with square footage

A
  • many lenders require that a property have a min sq ft and will not finance smaller. Properties with low sq ft will not attract many buyers so have limited security and value.
  • log homes, foundation build (like wood) and heat source could also be an issue depending on the area
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16
Q

Lender concerns in regards to zoning current and pending

A
  • zoning bylaws could affect potential lenders and are not normally stated on regular docs. Have to get them from municipality.
  • if buyers are purchasing for a specific purchase they should be aware if there are regs for building decks, extension, addition, sunroom, garage, greenhouse, or pool.

Pending changes to zoning: more prevalent as this could drastically affect the value of property to include nearby construction of roads, changes in density homes, commercial develops, and changes to rental regs and secondary suites

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17
Q

Concerns for acreages

A
  • not all lenders finance acreages
    Special underwriting guidelines: lenders that do finance will have guidelines restricting max land size and may require dwelling represent a % of total property value. may also ask that no income come from farming or commercial activities

Appraisal may be required: may require appraisal to assess current and future value, access by roads, potable water, electrical grid, insurability of dwelling and other buildings, boundary disputes, or land use restrictions preventing resale.

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18
Q

Concerns with hobby farms

A
  • not all lenders will finance.
  • property prices in remote areas flucuate much more than urban
  • takes longer to sell as there are fewer buyers
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19
Q

Special underwriting guidelines with hobby farms

A
  • max land size restrictions
  • large down payment requirements
  • high credit scores
  • may have to prove it is for lifestyle and not for farming.
  • dwelling may have to be worth certain %
  • lenders dont like if land is values more than 40-45% of value
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20
Q

how to verify stated condition of property

A
  • price of property should reflect state or condition that has been reported.
  • Purchase contract to include:
  • conditions
  • schedules
  • addenda
  • amendments
    others to include:
  • feature sheets
  • photos
  • rpr
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21
Q

Things to check on feature sheet for stated condition

A

Do the photos support what is stated?
Does the property appear to have been well maintained?
Does it have any special or appealing features?
Are there recent upgrades or improvements?
If you have access to a home inspection report, read through it to learn the home inspector’s findings and impressions. Were any health or safety issues identified?
Does the industry members website may have video or additional photos of the property that you could use?

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22
Q

potential red flag for stated condition of property

A

reaction to or description of the property by the applicant. will likely have strong emotional response to the property, why they like it, what it looks like, ect… if they cant describe they have likely never seen it.

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23
Q

when are appraisals typically required

A
  • residentail mortgages
  • high - ratio
  • refi
  • commercial and industrial mortgages
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24
Q

who are appraisals normally paid by

A

applicants, but if the insurer orders the appraisal they will normally pay.

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25
Q

what is an appraisal management company

A

have access to national and provincial networks of real estate appraisers as well as lender-approved lists of real estate appraisers. They use an automated random job-bidding process with the lender’s approved list of real estate appraisers, and then automate the ordering process, order tracking, and final delivery of the appraisal to the lender.

With smaller or private lenders, you may have to engage a real estate appraiser directly from an appraisal company. In this case, you need to enter into a written service agreement with the real estate appraiser, and any referral fees need to be approved by and paid for through your brokerage.

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26
Q

when are AVMs used

A

normally in boom markets when appraisal turnaround times can take to long. They are only available to lenders and may incorporate historic market trends, local data and analyses, and future expectations

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27
Q

when conditions do lenders normally have when accepting pre- exisiting appraisals

A

must have been prepared within the last 30 to 60 days
must be accompanied by a transmittal letter from the original real estate appraiser, addressed and directed to the new lender
must show the purpose of the report as “for financing” and no other purpose (such as divorce proceedings)

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28
Q

what standards to appraisers have to follow

A

Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP)
International Valuation Standards
Uniform Standards of Professional Appraisal Practice (USPAP)

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29
Q

What are the 3 recognized appraisers in Alberta

A

Appraisal Institute of Canada (AIC)
Canadian Association of Real Estate Appraisers (CNAREA)
Alberta Assessors Association

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30
Q

what are appraisers in training referred as

A

candidates

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31
Q

can candidates conduct an appraisal

A

yes, in some cases but must be signed off by an accredited appraiser

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32
Q

what is a CRA qualified for

A

This designation qualifies an individual to complete appraisals on residential property of up to four suites.

If a CRA is working to complete his or her AACI, s/he can conduct appraisals on commercial, industrial, or agricultural properties as long as the work is supervised and signed by an AACI designate.

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33
Q

what are the 2 AIC designations

A

CRA (Canadian Residential Appraiser)

AACI (Accredited Appraiser of the Canadian Institute)

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34
Q

what are the 2 CNAREA designations

A

Designated Appraiser – Residential (DAR)

Designated Appraiser – Commercial (DAC)

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35
Q

what is an AACI qualified to appraise

A

This designation qualifies an individual to appraise any type of commercial, recreational, industrial, agricultural, or residential property.

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36
Q

what is a DAR qualified for

A

This designation qualifies an individual to perform appraisal and consultation assignments on residential properties of up to but no more than four housing units.

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37
Q

What is DAC qualified for

A

This designation qualifies an individual to perform appraisal and consultation assignments on all types of real property, including commercial, industrial, and investment properties. The DAR must be completed before getting the DAC designation.

38
Q

what do real estate appraiser do

A

A real estate appraiser typically

specializes in a particular type of real estate (for example, residential or commercial)
performs appraisals on individual properties rather than a neighbourhood

establishes value primarily for the purposes of a loan or purchase

39
Q

what do property assessors and assessments do

A

A property assessor typically

works for a municipal government
performs valuations that apply to entire
neighbourhoods rather than individual properties

establishes value for the purposes of taxation

40
Q

what is main difference between property appraisers and assessors

A

appraisers typically appraise individual properties primarily for lending purpose, as compared to the broader market, and assessors are employmed by a municipality to assess entire neighbourhoods for taxes

41
Q

what factor do real estate appraisers take in account for valuations

A 
location
size
condition
type of construction
comparable sales
Ideally, a real estate appraiser views the subject property in person.
42
Q

what accounts do assessors normally take into account for property valuations

A

A property assessor’s valuation is based on data similar to that used by real estate appraisers, but property assessors use special mass-appraisal computer software with valuation models and formulae that compare, standardize, and statistically test the data so that it can be applied to large groups of properties.

Because assessed values have been mathematically “processed” in this way, they do not represent the interaction between buyers and sellers in the same way that appraised values do. Also, because assessed values represent market value on a single, designated day of the year, they quickly become outdated in a rapidly fluctuating market.

43
Q

what does AIC stand for

A

Appraisal Institute of Canada

44
Q

what does CNAREA stand for

A

Canadian Association of Real Estate Appraisers

45
Q

what does CUSPAP stand for

A

Canadian Uniform Standards of Professional Appraisal Practice

46
Q

what does USPAP stand for

A

Uniform Standards of Professional Appraisal Practice

47
Q

checklist for ordering appraisal

A

Find out the lender’s preference for appraisal services. Be sure to use a lender-approved real estate appraiser if the lender has a list of approved real estate appraisers.
Confirm that the real estate appraiser is licensed by RECA. Go to the RECA website to look up the real estate appraiser and confirm his or her current license status.
Confirm that the real estate appraiser has the correct designation(s) for the type of job to be done (for example, residential, commercial, industrial, or agricultural).
Confirm that the real estate appraiser is geographically competent (that is, s/he is located near your local market and has sufficient experience there).
Verbally verify that the real estate appraiser has no conflict of interest with respect to the property, the transaction, or the parties involved. (Note that a standard written disclosure to this effect is part of the final appraisal report.)

48
Q

what are 3 concepts used by appraisers in determining market value

A

Principle of Substitution
Principle of Conformity
Concept of “highest and best use”

49
Q

what is principle of substitution

A

says that when buyers are presented with several similar, equally desirable properties, they will choose the lowest priced option as long as there are no undue costs associated with buying the lower-priced option.

50
Q

what is the principle of conformity

A

says that property values reflect the degree of homogeneity (sameness) in architectural style and land use compatibility in a given area. So, if the properties in a given market are all similar in type, size, style, age, condition, etc., then each will fetch a price close to the maximum value for that market.

A non-conforming property (for example, a six-bedroom house in a three-bedroom community) will not fetch its full value because the expectation of buyers shopping in an area characterized by general conformity is a property that conforms. The uniqueness of the six-bedroom house will be seen as “differentness” and not appreciated in the same way it would be if it existed in a neighbourhood of six-bedroom houses.

51
Q

what is the concept of highest and best use

A

is another key concept used by real estate appraisers in discussing the value of real property. This refers to the use of a particular piece of land that will support the highest value and will produce the greatest net return over a period of time.

52
Q

what are the 3 steps in the appraisal process

A

Define the purpose and scope of the appraisal.

Collect data using one or more of three different approaches to valuation.

Reconcile the data and render an opinion of value.

53
Q

what is stated purpose

A

For any appraisal that you arrange as a mortgage associate, however, the stated purpose of the report must be to establish an opinion of market value as part of securing mortgage financing on a property.

54
Q

Identifying scope of what will or will not be done

A

a real estate appraiser ay view the property, do the research and interview relevant parties but may not conduct building inspections, land surveys, engineering reports, envir assess, and technical testing.

BE SPECIFIC

55
Q

assumptions and limiting conditions appraisal reports

A

must identify any assumptions, limiting conditions, or hypothetical conditions that might affect the property value if they were or were not present.

56
Q

4 other details for appraisal reports

A

The appraisal report must be addressed to the lender. If a previous appraisal is to be re-used, it must be sent with a transmittal letter from the original real estate appraiser, addressed to the current lender.
The legal description and property rights for the appraised property must match the address and property details found in the property documentation.
The date of the appraisal must fall within the lender’s acceptable time frame. Depending on the lender, appraisal reports are typically no older than 30 to 60 days.
Also remember that the stated purpose of the report must be to establish an opinion of market value as part of securing mortgage financing on a property.

57
Q

what are the 3 approaches by which to conduct a valuation of appraisal

A

cost approach
sales comparison approach
income approach

58
Q

what is the cost approach

A

(also called the bricks and mortar approach) is based on the theory that an informed buyer will not pay more for a used house than what it would cost to buy a similar site and construct a similar house of equal utility.

59
Q

what is the formula for cost approach summarized

A

(Replacement cost of the house, new) MINUS (Depreciation) PLUS (Land cost) = Market value

60
Q

Seperating the costs for land and improvements

A

The cost approach separates the cost of the land from the cost of the “improvements” to the land (that is, the house).

The cost of the land is estimated as though it were vacant, usually from existing sales data of vacant land.

The cost for the house is based either on replacement or reproduction,

61
Q

what does replacement mean for cost approach

A

means to recreate the property at current prices, using current materials, standards, and construction methods.

62
Q

what does reproduction mean for cost approach

A

means to duplicate the original property at current prices but using the materials, standards, and construction methods used at the time the original building was constructed.

63
Q

how is cost of depreciation determined

A

Once the estimated replacement or reproduction cost is determined, the cost of depreciation is estimated and subtracted. This is because applicants and lenders want to know the current property value. Unless a property is newly constructed, it is affected by depreciation. Therefore, a real estate appraiser must always adjust the value to reflect depreciation.

64
Q

what are causes of depreciation

A

Physical deterioration

Depreciation caused by the day-to-day wear and tear, decay, or structural aging of a property. For example, a 20-year-old roof does not have the same value as a brand new roof.

Functional obsolescence

Depreciation caused by the loss of functionality due to an outdated or inadequate design. For example, For example, hallways that have been customized to be four and a half feet in order to accommodate a wheelchair.

External obsolescence

Depreciation caused by factors that are typically outside the control of the property owner such as location and economics. For example, the building of a busy road in front of a property may decrease the value of that property for buyers who prefer a quieter or safer area.

65
Q

how is depreciation and appraised age of the property determined

A

Typical economic life

The length of time that an improvement* can be economically used for its originally intended purpose. Typical economic life = 55 to 60 years.**

Effective age

The observed or maintained age of a structure, closely related to its perceived condition. Effective age is not the same as the actual age of the structure.

Remaining economic life

The length of time that an improvement* will continue to contribute to the property value.

66
Q

what is the relationship between economic life, effective age, and remainng economic life

A

Effective age PLUS remaining economic life = Typical economic life
Typical economic life MINUS remaining economic life = Effective age
Typical economic life MINUS effective age = Remaining economic life

67
Q

What are benefits of the cost approach

A
  • seperates the costs for the building and the land (allows lender to see % of value of house to land)
  • estimates the remaining economic life which can be used for appropriate amort.
68
Q

Disadvantages to cost approach

A
  • determining the effective age of property is subjective. If effective age is wrong, then whole value will be off.
  • may be some variation in the way that different real estate appraisers calculate depreciations and not all are correct. Speciafically the method know as straight-line depreciation is not accurate for this work.
69
Q

what is the most reliable application of cost approach

A
  • when used in a stable market characterized by regular turnover of property and houses that are relatively new. (older the property is the harder it is to quantify depreciation)
  • useful in a slow market where there is insufficient sales activity to justify the use of the sales comparison approach.
  • useful for determining value of unique or special use buildings like schools, hospitals, or jails where there is little market based data to compare.
70
Q

what is sales comparison approach to valuation

A

(also called the direct comparison approach) is based on the theory that each component of a property contributes to its overall value. With this approach, a real estate appraiser looks at local sales data to find three (or more) “sold” properties that are comparable to the subject property.

71
Q

what factors of valuation work into sales comparison approach

A

location
list price, sale price, and date of sale
land parcel size and value
gross (total, not just above grade) living area
age and condition (often using effective age to determine depreciation)
style
room count
basement
garage
extras (special features, improvements/upgrades)

72
Q

what are two techniques for making adjustments to comparison approach

A
  • abstraction method

- paired-sales method

73
Q

what is abstraction method of adjustment

A

involves subtracting the market values of different components of a property from the sale price of the property until the residual is the single, isolated component for which you want to know the value.

74
Q

example of extraction approach

A

real estate appraiser would need to determine the market value of the land (usually from existing sales data of vacant land) and the market value of various components of the property such as garage, deck, fireplace, and basement (usually from construction costs and sale data in the local area). After subtracting the values of the land and feature components from the sale price of the property, what is left is the market value of the house.

75
Q

how to double check absraction method

A

Once the market value of the house is known, and if the real estate appraiser knows the gross living area (GLA) of the house, s/he can divide the market value of the house by the GLA to find the price per square foot for that house. If, when using the sales comparison approach, s/he finds the price per square foot for each of the comparable properties and those values are similar, then s/he can be certain that the comparable properties are truly comparable to the subject property.

76
Q

what is the paired-sales method of adjustment

A

also called matched-pairs analysis) is generally considered a less accurate method of comparison than abstraction. The paired-sales method assumes that if two properties are identical except for one feature, then any difference in price between the two is attributable to that feature.

77
Q

example of paired-sales method of adjustment

A

assume that you could find two recently sold properties that were essentially the same except that one has a two-car garage and the other does not. According to the paired-sales method, any difference in price between these two properties is because of the presence of the garage and in fact represents the market value of the garage.

78
Q

disadvantages of the paired-sales method of adjustment

A
  • difficullt to find two properties in the same area that a super similar and sold at the same time.
  • data of only two properties may not be enough to meritt a proper assessment
79
Q

assumption of sales comparison approach

A
  • market value of a property is directly related to the sale prices of comparable properties
  • validity of approach depends on being able to locate a number of truly comparable properties that have all sold to close enough date
80
Q

most reliable application of sales comparison approach

A

When the market is strong and there is data available from many recent property sales, the sales comparison approach is probably the most reliable way to determine the market value of residential properties.

81
Q

Less reliable application of sales comparison approach

A

When the market is slow, however, and there are not enough sale transactions to show trends in the market, this approach is less reliable.

This approach is also less reliable when the components or physical characteristics of the comparable properties are very dissimilar because this makes it difficult to assign a common value to these components.

82
Q

What is income approach to valuation

A

is based on the theory that the value of a property is determined by its earning power or ability to generate benefits. This is also referred to as the present worth of future benefits.

The income approach to valuation is generally used to determine the market value of larger revenue-generating or investment kinds of properties such as office buildings, shopping malls, restaurants, hotels, and apartment buildings.

83
Q

After all data is collected after appraisal, which approach do they consider

A

all of them but are considered completely independant

84
Q

which approach is best for residential financing

A

sales comparison - and typically provides the best estimate of value

85
Q

what are the three general types of appraisal reports

A
  • Self-contained
  • summary
  • restricted use
86
Q

what is a self contained appraisal report

A

are the most detailed type of appraisal report, also referred to as full narrative reports. A self-contained appraisal generally shows data and analysis for each of the three appraisal methods and includes everything that is in the real estate appraiser’s work file such as maps, plans, charts, photographs, etc.

87
Q

what is a summary appraisal report

A

are a “form type” of report and the most common type used for residential property valuations. A summary appraisal summarizes the data and analysis used to estimate the value of a subject property but does not include everything in the real estate appraiser’s work file.

88
Q

what is a restricted-use appraisal report

A

are the least detailed type of appraisal report and contain very little data analysis. A drive-by appraisal may be written up as a restricted use appraisal because of the limited amount of data collection and analysis that has been done. This type of report may not be acceptable to a lender for mortgage financing purposes.

89
Q

what are commonly included sections for self contained and summary appraisal reports

A

client information
real estate appraiser information
subject property address and assessment information
purpose of appraisal and intended use
neighbourhood description
site description
description of improvements, exterior and interior
room allocation
cost approach analysis*
sales comparison approach analysis*
income approach analysis (commercial properties only)*
reconciliation and comments
opinion of market value, effective date, and signatures
special limitations
appendices that provide information to support the purpose and conclusions of the appraisal such as building sketches, location maps, calculations, photos of the property, narrative descriptions, and environmental data.

90
Q

what are the main concerns when reading appraisal reports

A

to verify that it generally agrees with the information you have already learned
to check that the final opinion of market value is more or less what you expect it to be, given what you already know

91
Q

red flags for appraisal reports

A

Who ordered the appraisal?

If the appraisal was ordered by a party to the transaction, it indicates that the transaction process is not occurring “at arm’s length.” In other words, that person may have a vested interest in or influence on the transaction process, which may mean that there is opportunity to inflate the value of the property.

Purchase price

Is the purchase price substantially higher or lower than the predominant market price in the area? If so, why?

Steep appreciation

Has there been a significant appreciation in value in a short period of time? If so why? Is it related to market conditions or some other reason? Is there an appropriate explanation in the comments?

Excessive depreciated costs

Are there excessive depreciated costs for such things as basement development, landscaping, garages, and extras? If so, what is the source of the cost numbers? Is it a credible source (such as the Marshall & Swift Residential Cost Handbook)? Is the rate of accrued depreciation correct? Are there mathematical errors? Are there appropriate explanations in the comments?

Comparable properties

Are the comparables used current, and do they “bracket” the value of the subject property? Comparables that sold more than six months prior may not accurately reflect the current market value and therefore may result in an inaccurate value for the subject.

Comparable sale dates and prices should be as close to the subject property as possible. Using comparables with significantly higher or lower prices than the subject makes it more difficult to perform an accurate valuation. If the real estate appraiser had difficulty finding suitable comparables, this should be explained or accounted for in the analysis. For example, comparables for large, expensive, or unusual properties may be hard to find.

Large positive adjustments

In the sales comparison approach, positive adjustments are made to increase the value of a comparable to that of the subject, showing that the comparable would have sold for more if it had been more similar to the subject. Appraisals with large positive adjustments can point to an attempt to inflate value.

“For Rent” sign in photographs

If you see a “for rent” sign in photographs of the subject property, it may indicate that the applicant is attempting to qualify as owner-occupied when his or her intention is to rent the property.

If the transaction is a re-finance or sale, you need to find out why the property is being rented and where the owners are residing.

Inconsistencies in the photographs

If the weather conditions in photographs of the property are not consistent with the effective date of appraisal, it may indicate that the appraisal is not current. For example, if the effective date is January 7, and the photographs show green grass and flowers, the appraisal is probably old.

Also check whether the address reflected in the photos matches the property address in the appraisal reports and the mortgage loan application. If not, is it an honest mix-up or an attempt to misrepresent the property?

If the map scale is distorted so that you cannot easily make out the distance from the subject to the comparable properties, or if the photos appear to be taken from an awkward or unusual standpoint, it may indicate an attempt to misrepresent some aspect of the property quality.

Appraisal report pre-dates the sales contract

If this is the case, it may indicate that the sales contract was written to “fit” the appraisal report, and this could inappropriately boost the selling price of the property.

On the other hand, there may be a legitimate reason for an appraisal to be ordered before the drawing up of a sales contract, as is sometimes seen in divorce cases. For example, a divorcing couple may want their property appraised in order to establish a selling price before dividing up the proceeds of the sale.

Practice of Mortgage Brokerage (17 decks)

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