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CLI Prelicensing > Unit 16 > Flashcards

Unit 16 Flashcards

1
Q

Appraisal

A

an opinion of value based on supportable evidence and approved methods

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2
Q

Appraisal report

A

an opinion of market value on a property given to a lender or client with detailed market information

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3
Q

Appraiser

A

an independent professional trained to provide an unbiased opinion of value in an impartial and objective manner, following an identified appraisal profess

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4
Q

Appraising

A

a professional service performed for a fee; a breach of accepted practice and ethics to collect a commission for an appraisal based on the value of the property appraised

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5
Q

Organizations for appraisers

A

American Society of Appraisers, Appraisal Institute, American Society of Farm Managers and Rural Appraisers, International Association of Assessing Officers, International Right of Way Association, National Association of Independent Fee Appraisers

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6
Q

What’s the biggest organization for appraisers?

A

Appraisal Institutue

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7
Q

How are most appraisers hired as?

A

independent constractors

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8
Q

The Appraisal Process

A
  1. Define the problem
  2. Determine the scope of work
  3. Gather, record, verify, and analyze the necessary data
  4. form opinion of value by each of the three approaches
  5. reconcile values for final opinion of value
  6. report final opinion of value
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9
Q

Who pays for appraisal

A

buyer

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10
Q

Characteristics of value

A
  1. demand
  2. utility
  3. scarcity
  4. transferability
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11
Q

Demand

A

the need or desire for possession or ownership backed by the financial means to satisfy that need

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12
Q

utility

A

the property’s usefulness for its intended purposes

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13
Q

Scarcity

A

a finite supply

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14
Q

Transferability

A

the relative ease with which ownership rights are transferred from one person to another

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15
Q

value

A

monetary worth based on desirability

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16
Q

Goal of appraiser

A

to estimate or express an opinion of a property’s market value

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17
Q

Market value

A

the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale

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18
Q

What does the determination of market value require

A
  1. buyer and seller are unrelated and acting without undue pressure
  2. buyer and seller are well informed of the property’s use and potential, including both defects and advantages
  3. reasonable time is allowed for exposure of property to open market
  4. payment made in cash
  5. price paid is a normal market price, unaffected by special financing amounts or terms, services, fees, costs, or credits incurred in the market transaction
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19
Q

Market Price

A

a property’s asking, offer, or sales price

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20
Q

Can cost and market value be the same?

A

yes

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21
Q

Does Property value prepresent its market value?

A

no

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22
Q

Does cost equal market value?

A

no, not usually

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23
Q

When are cost and value likely to be equal?

A

when improvements on a property are new

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24
Q

Principles of Value

A
  1. Anticipation
  2. Change
  3. Competition
  4. Conformity
  5. Contribution
  6. Highest and Best Use
  7. Increasing and diminishing returns
  8. plottage
  9. regression and progression
  10. Substitution
  11. Supply and Demand
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25
Q

Anticipation

A

value is created by the expectation that certain events will occur

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26
Q

Change

A

no physical or economic condition remains constant

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27
Q

Competition

A

the interaction of supply and demand

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28
Q

Conformity

A

maximum value is created when a property is in harmony with its surroundings

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29
Q

How is maximum value realized?

A

the use of land conforms to existing neighborhood standards

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30
Q

Contribution

A

the value of any part of a property is measured by its effect on the value of the whole parcel

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31
Q

What is the most profitable use of a property?

A

highest and best use

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32
Q

What must the use be for highest and best use?

A
  1. physically possible
  2. legally permitted
  3. economically or financially feasible
  4. the most profitable or maximally productive
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33
Q

What can highest and best use change with?

A

social, political, economic forces

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34
Q

Principal of Plottage

A

the individual value of two adjacent properties may be greater if they are combined in an assemblage than if each is sold separately

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35
Q

Law of increasing Returns

A

as long as money spent on improvements produces an increase in income or value

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36
Q

Law of diminishing returns

A

the point where additional improvements do not increase income or value

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37
Q

Assemblage

A

the process of merging two separately owned lots under one owner

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38
Q

Plottage

A

the amount that the value of the combined properties is increased by successful assemblage

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39
Q

Regression

A

the worth of a better-quality property is adversely affected by the presence of a lesser-quality property

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40
Q

Progression

A

the value of a modest home would be higher if it were located among larger, fancier properties

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41
Q

Substitution

A

the maximum value of a property tends to be set by how much it would cost ot purchase an equally desirable and valuable substitute property

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42
Q

What is substitution the foundation on?

A

the sales comparison approach to appraising

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43
Q

The Principle of Supply and Demand

A

teh value of a product depends on supply; when the supply of a similar properties increase, their value decreases; when demand for such properties increases, their value increases

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44
Q

3 appraisal methods

A
  1. Sales comparison approach
  2. Cost approach
  3. income approch
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45
Q

Sales comparison approach

A

value is obtained by comparing the property being approaced - the subject property - with recently sold comparable properties

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46
Q

Another name for sales comparison approach

A

market data approach

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47
Q

How is sales price of a comparable adjusted in the sales comparison approach?

A

adjusted to reflect the impact on value of any differences between teh subject and the comparable

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48
Q

Elements of comparison for sales comparison approach

A
  1. property rights
  2. financing concessions
  3. market conditions
  4. conditions of sale
  5. market conditions since the date of sale
  6. location or area preference
  7. physical features and amenities
49
Q

Property rights

A

make an adjustment when less than fee simple is involved

50
Q

Financing Concessions

A

financing terms under which a property was sold must be considered, including mortgage loan terms and owner financing or an interest rate buydown by a builder-developer

51
Q

Market conditions

A

interest rates, supply and demand, other economic indictators

52
Q

conditions of sale

A

adjust value if motivational factors that would affect the sale

53
Q

market conditions since the date of sale

A

adjust if economic changes occur between the date of sale of the comparable property and the date of the appraisal

54
Q

location or area preference

A

similar properties might differ in price from neighborhood to neighborhood or even between locations within the same neighborhood

55
Q

Physical freatures and amenities

A

physical features may require adjustments when compared to the subject property

56
Q

Which is the most reliable approach for appraisal?

A

sales comparison approach

57
Q

Cost approach

A

based on the principal of substitution

58
Q

5 steps of cost approach

A
  1. estimate the value of the land as though it were vacant and available to be put to its highest and best use
  2. estimate the current cost of constructing buildings and improvements
  3. estimate the amount of accrued depreciation resulting from the property’s physical deterioration, external depreciation and function obsolescence
  4. Deduct the accrued depreciation from the construction cost
  5. add the estimated land valueto the depreciated cost of the building and site improvements to arrive at the total property value
59
Q

subject property

A

property being appraised

60
Q

depreciation

A

loss in value

61
Q

2 kinds of construction costs

A
  1. reproduction cost

2. Replacement cost

62
Q

Reproduction Cost

A

cost of building something on a lot as an exact duplicate of another property

63
Q

Replacement cost

A

building an improvement on a lot similar to another one but not necessarily an exact duplicate

64
Q

Depreciation

A

a loss in value for any reason; refers to a condition that adversely affects the value of an improvement to real property

65
Q

Is land a depreciating asset?

A

no

66
Q

3 Depreciation Classes

A
  1. Physical Deterioration
  2. Function Obsolescence
  3. External Obsolescence
67
Q

Physical deterioration curable

A

item is in need or repair that would result in an increase in value equal to or exceeding its cost

68
Q

Physical deterioration incurable

A

it is a defect caused by phsyical wear and tear and its correction would not be economically feasible or contribute a comparable value to the building

69
Q

Obsolescence

A

a loss in value from teh market’s response to the item

70
Q

Economic Life

A

th period during which something is expected to remain useful for its original intended purpose

71
Q

Functional Obsolescence curable

A

outmoded or unacceptable physical or design features that are no longer considered desirable by purchases that can be replaced or redesigned at a cost that would be offset by the anticipated increase in ultimate value

72
Q

Functional obsolescence incurable

A

currently undesirable physical or design features that cannot be easily remedied becuase the cost of the cure would be greater than its resulting increase in value

73
Q

What is the easiest way ot determine depreciation

A

straight-line method

74
Q

How do you calculate straight-line depreciation?

A

cost / # years of expected economic life

75
Q

What is the easiest way to determine depreciation

A

straight-line method

76
Q

Another name for straight line depreciation

A

economic age-life method

77
Q

Who determines econoic life of something?

A

federal government

78
Q

What’s the most useful approaisal approach for newer or special-purpose buildings?

A

cost approach

79
Q

income approach

A

value is based on the present value of the right to future income; assumes the income generated by a property will determine the property’s value

80
Q

Can you depreciate your personal residence?

A

no, unless duplex

81
Q

What is the income approach of appraisal used for?

A

valuation of income-producing properties (apartments, offices, retail, shopping centers)

82
Q

What is the income approach of appraisal used for?

A

valuation of income-producing properties (apartments, offices, retail, shopping centers)

83
Q

5 steps in income approach (capitalization)

A
  1. estimate property’s annual potential gross income
  2. deduct an appropriate allowance for vacancy and rent loss to arrive at the effective gross income
  3. calculate net operating income
  4. estimate a price a typical investor would pay for the income produced by this particular type and class of property by estimating capitalization rate
  5. apply the capitalization rate to the property’s annual net operating income to arrive ath teh estimate of the property’s value
84
Q

Capitalization rate

A

rate of return that an investor will demand for the investment of capital in this type of building

85
Q

Net Operating Income

A

effective gross income - annual operating expenses

86
Q

Debt service

A

not included as an operating expense

87
Q

How is cap rate determined?

A

by comparing the relationship of net operating income with the sales prices of similar properties that have sold in the current market

88
Q

What does income equal?

A

value x rate

89
Q

As rate goes down, what happens to value?

A

goes up

90
Q

Gross Rent Multiplier (GRM) use

A

can be used for a rough approximation of value for a 1-4 unit residential retail property

91
Q

Gross Income Multiplier (GIM) use

A

can be used for 5+ unit properties based on annual income

92
Q

Gross Rent Multipler equaltion

A

sales price / motnhly gross rent

93
Q

Gross Income Multiplier equation

A

sales price / annual gross income

94
Q

What must an appraiser have to establish an accurate GRM?

A

recent sales and rental data from at least 4 properties that are similar to the subject property

95
Q

What is GRM used for?

A

estimating fair market rental of the subject property to arrive at market value

96
Q

GRM uses annual or monthly?

A

monthly

97
Q

Estimated market value for GRM?

A

rental income x GRM

98
Q

Steps of GRM process

A
  1. find a comparable property, take its sale price, divide it by current monthly rent. This will equal the GRM
  2. GRM x monthly rent = value
99
Q

Reconciliation

A

the act of analyzing and effectively weighing the findings from the three approaches

100
Q

What does the appraiser need to explain in reconciliation

A
  1. the appropriateness of each approach
  2. relative reliability of the data within each approach in line with the type of value sought
  3. explain how the data reflect the current market
101
Q

Title XI of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)of 1989

A

requires that any appraisal used in connection with a federally related transaction be performed by a competent invidivual who is licensed or certified by the state in which the appraiser practices

102
Q

Federally Related Transaction

A

any real estate-related financial transaction in which a federal financial institution or regulatory agency is engaged

103
Q

What to federally related transactions involve?

A

sale, lease, purchase, investment, or exchange of real property; use of real property as security for a loan or an investment, including mortgage-backed securities

104
Q

What properties are exempt from FIRREA?

A

appraisals of residential property valued $250,000 or less

105
Q

Property Insepction Waiver (PIW)

A

properties that have had appraisals intered into Fannie Mae’s Collaterial underwriter database are eligible for a PIW

106
Q

Appraisal Foundation

A

nonprofit composed of representative of major appraisal and related groups

107
Q

Uniform Standards of Professional Appraisal Practice (USPAP)

A

rules appraisers must follow established by the Appraisal Standards Board of the Appraisal Foundation

108
Q

What do state licensing and certification ceriteria for appraisers need to conform with?

A

requirements of Appraisal Subcommittee of the Federal Financial Institutions Examination Countil as recommended by the Appraiser Qualititations Board of the Appraisal Foundation

109
Q

How is Comparative Market Analysis different from appraisals?

A

appraisal is based on a detailed analysis of market conditions, features of the subject property adn comparable properties in teh neighborhood, recent sales and listings, land value and current construction costs whereas CMA focuses on properties similar to the subject property ins ize, location and amenities to derive a likely listing price or offering price

110
Q

What is Comparative Market Analysis based on?

A
  1. recently closed properties
  2. properties currently on the market
  3. properties that did not sell
111
Q

Broker’s Price Opinion (BPO)

A

a less-expensive alternative for evaluating property that is often used by lenders working with home equity lines, refinancing, portfolio management, loss mitigation, and collections

112
Q

What are many BPO’s?

A

“drive by’s” to verify existance of property

113
Q

What are the 2 classes of data for appraisers?

A
  1. general data

2. Specific data

114
Q

General Data

A

covers the nation, region, city, and neighborhood. Researchs the physical, economic, social, and political influences that affect the value and potential of the subject property

115
Q

Specific Data

A

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

116
Q

What is in the appraiser’s report?

A
  1. identify real estate and real property being appraised
  2. state the purpose and use of appraisal
  3. define the value sought
  4. state the effective date of the value and date of report
  5. state the extent of the process of collecting, confirming and reporting the data
  6. list of all assumptions and limiting conditions affecting analysis, opinion and conclusions
  7. describe information considered, approaches used, reasoning that supports conclusions
  8. appraiser’s opinion of the highest and best use
  9. any additional information to show compliance with USPAP
  10. signed certification
117
Q

Uniform Residentail Appraisal Report (URAR)

A

the form required by many government agencies by appraisers

118
Q

What is the lender looking for from an appraisal?

A

if there is a loan default what price the property could probably be sold for to recover the remaining loan balance

CLI Prelicensing (23 decks)

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