Real Estate Appraisal Flashcards
Appraisal
Highest and best use. An opinion of value based on supportable evidence and approved methods.
Appraisal report
Opinion of market value on a property give to a lender or client with detailed market Information
Appraiser
An independent professional trained to provide an unbiased opinion of value in an imperial and objective manner, following an identified appraisal process.
Dodd-frank act
Required changes to the TILA and other legislation to prohibit the coercion and other activities that influenced appraisals in many cases of fraud.
Appraiser Independence requirements
Took effect October 15, 2010
Financial institutions reform, recovery, and enforcement act of 1989
FIRREA
Requires that any appraisal used in connection with a federally related transaction be performed by a competent individual who is licensed or certified by the state which the appraiser practices.
Appraisals of residential property valued at $250 or less are EXEMPT and need not be performed by licences or certified appraisers.
Non residential properties valued at more than $250 require a certified appraiser.
Uniform standards of professional appraisal practice
USPAP
Established by the Appraisal Standards Board of the Appraisal Foundation.
CMA analysis is based on
- recently closed properties (sold)
- properties currently on the market (competition)
- priories that did not sell (expired listings)
Brokers price opinion
BPO
A less expensive alternative of evaluating property that is often by lenders working with home equity lines, refinancing, portfolio management, loss mitigation, and collections. Not to be confused with an appraisal. Can be used with Fannie Mae program but only in specific ways and using proper forms
Data needed by appraiser
- general data: covers the nation, region, city, and neighborhood. Researched the physical, economical, social, and political Influences that affect the value and potential of the subject property.
- Specific data: covers the type and features of improvements to the subject property as well as comparable properties that are similar to and competitive with the subject property.
Appraisal process
- Identify the problem
- Determine the scope of work
- Gather, record, and verify the necessary data
- Analyze data
- Form opinion of land value
- Reconcile values for final opinion of value
- Report final opinion of value
Uniform residential appraisal report
URAR
The form required by Fannie Mae and Freddie Mac. Illustrates the types of detailed Information required of an appraisal of residential property. Also highlights the extensive list of certifications required of the appraiser
Value
To have this a property must have:
- demand
- utility
- scarcity
- transferability
Market value
Considered the most probable price that a property should bring in a competitive and open market.
Determination of market value
Requires
- the buyer and seller are unrelated and acting without undue pressure
- both buyer and seller are well informed of propertys use and potential; including defects and advantages
- payment is made in cash or équivalant
- the price paid for is of normal market price
Market price
A property’s asking, offer, or sales price
Cost
Cost and value do not always equal to be the same
Anticipation
Value is created by the expectation that certain events will occur.
Change
No physical or economic condition remains constant
Competition
The interaction of supply and demand creates competition
Conformity
Means that the maximum value is created when a property is in harmony with its surroundings.
Contribution
The value of any part of a property is measured by its effect on the value of the whole parcel.
Highest and best use
The most profitable single use of a property. Must be;
-physically possible
-legally permitted
-economically or financially feasible
-the most profitable or maximally productive
Can change with social, political and economical forces.
The law of increasing returns
The law of diminishing return
As long as money spent on improvements provides an increased income of value, increasing returns applies.
When not, the law of diminishing does.
Plottage
A principle that is evident when the consolidating of adjacent lots into a single, larger one produces a greater total land value than the sum of the two sites valued separately.
The amount that the value of the combined properties is Increased by successful assemblage.
Assemblage
The process of merging two separately owned lots under one owner.
Regression
The worth of a better quality property being adversely affected by the presence of a lesser quality property
Progression
The value of a modest home becoming higher due to the larger fancier properties that surround it
Substitution
Most important! The maximum value of a property tends to be set by how much it would cost to purchase an equally desirable and valuable substitute property. This is the foundation of sale comparison approach to appraising.
Sales comparison approach
Aka market data approach
Value is obtained by comparing the property being appraised- the subject property-with recently sold comparable properties.
Most reliable approach to Appraisal
Elements of comparison
In a sales comparison approach
Property rights Financing concession Market conditions Conditions of sale Market conditions since date of sale Location or area preference Physical features and amenities
Sales comparison approach to value
An abbreviated version of the information that an appraiser will provide a client
Cost approach of appraisal
5 steps:
- Estimate value of land
- Estimate current cost of buildings and improvements
- Estimate the amount of accrued depreciation
4: deducts the accrued depreciation from construction cost - Add land value
Accrued depreciation
Loss in value
Goes with cost approach of appraisal
Depreciation
A loss in value for any reason. Land is not considered a depreciating asset.
Considered curable or incurable
3 classes of depreciation
- Physical deterioration: a curable item is one in need of repair. It is incurable if it is a defect causes by physical wear and tear and the correction would not be economically feasible or contribuante a comparable value.
- Functional obsolescence: loss in value from markets response to item. Outmoded or outdated. Curable if can be replaced or redesigned.
- External obsolescence: caused by negative factors not on the property. Environmental, social, economic. Always Incurable
Straight line method
Aka economic age-life method
Of determining depreciation
Easiest but least precise way. It is assumed to occur at an even rate over a structured economic life. Property’s cost is divided by the number of years it’s expected economic life to determine annual depreciation
Economic life
The period during which it is expected to remain useful for original intended purpose.
Income approach of appraisal
Based on the present value of the right to future income. Assumes income generated by property will determine the property’s value. Used for income producing properties.
Income capitalization approach to value
- Estimate property’s annual potential gross income. Made on market studies.
- Deduct an appropriate allowance for vacancy and rent loss and arrive at effective gross income.
- Deduct the annual operating expenses from the effective gross income to arrive at annual net operating income.
- Estimate the price a typical Investor would pay for the income produced by this particular type and class of principal property. Estimate the yield (capitalization rate) demanded
- Apply capitalization rate to property’s annual net operating income.
Income approach formulation
Income \ rate =value
Income /value = rate
Rate x value = income
Gross rent multiplier
GRM
Based on monthly rental income for a 1-4 unit residential rental property
Sales price/monthly gross rent = GRM
Must have data from at least 4 properties similar
GRM x rental income = estimated market value
Gross income multiplier
GIM
Based on annual income for purchasing 5 or more units
Sales price / annual gross income = GIM
Reconciliation
The act of analyzing and effectively weighing the findings from the 3 approaches of appraisal. Not simply taking the average of the 3 estimates of value.
Appraisal
Highest and best use
