Unit 16 Flashcards
Appraisal
an opinion of value based on supportable evidence and approved methods
Appraisal report
an opinion of market value on a property given to a lender or client with detailed market information
Appraiser
an independent professional trained to provide an unbiased opinion of value in an impartial and objective manner, following an identified appraisal profess
Appraising
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
Organizations for appraisers
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
What’s the biggest organization for appraisers?
Appraisal Institutue
How are most appraisers hired as?
independent constractors
The Appraisal Process
- Define the problem
- Determine the scope of work
- Gather, record, verify, and analyze the necessary data
- form opinion of value by each of the three approaches
- reconcile values for final opinion of value
- report final opinion of value
Who pays for appraisal
buyer
Characteristics of value
- demand
- utility
- scarcity
- transferability
Demand
the need or desire for possession or ownership backed by the financial means to satisfy that need
utility
the property’s usefulness for its intended purposes
Scarcity
a finite supply
Transferability
the relative ease with which ownership rights are transferred from one person to another
value
monetary worth based on desirability
Goal of appraiser
to estimate or express an opinion of a property’s market value
Market value
the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale
What does the determination of market value require
- buyer and seller are unrelated and acting without undue pressure
- buyer and seller are well informed of the property’s use and potential, including both defects and advantages
- reasonable time is allowed for exposure of property to open market
- payment made in cash
- price paid is a normal market price, unaffected by special financing amounts or terms, services, fees, costs, or credits incurred in the market transaction
Market Price
a property’s asking, offer, or sales price
Can cost and market value be the same?
yes
Does Property value prepresent its market value?
no
Does cost equal market value?
no, not usually
When are cost and value likely to be equal?
when improvements on a property are new
Principles of Value
- Anticipation
- Change
- Competition
- Conformity
- Contribution
- Highest and Best Use
- Increasing and diminishing returns
- plottage
- regression and progression
- Substitution
- Supply and Demand
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
Conformity
maximum value is created when a property is in harmony with its surroundings
How is maximum value realized?
the use of land conforms to existing neighborhood standards
Contribution
the value of any part of a property is measured by its effect on the value of the whole parcel
What is the most profitable use of a property?
highest and best use
What must the use be for highest and best use?
- physically possible
- legally permitted
- economically or financially feasible
- the most profitable or maximally productive
What can highest and best use change with?
social, political, economic forces
Principal of Plottage
the individual value of two adjacent properties may be greater if they are combined in an assemblage than if each is sold separately
Law of increasing Returns
as long as money spent on improvements produces an increase in income or value
Law of diminishing returns
the point where additional improvements do not increase income or value
Assemblage
the process of merging two separately owned lots under one owner
Plottage
the amount that the value of the combined properties is increased by successful assemblage
Regression
the worth of a better-quality property is adversely affected by the presence of a lesser-quality property
Progression
the value of a modest home would be higher if it were located among larger, fancier properties
Substitution
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
What is substitution the foundation on?
the sales comparison approach to appraising
The Principle of Supply and Demand
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
3 appraisal methods
- Sales comparison approach
- Cost approach
- income approch
Sales comparison approach
value is obtained by comparing the property being approaced - the subject property - with recently sold comparable properties
Another name for sales comparison approach
market data approach
How is sales price of a comparable adjusted in the sales comparison approach?
adjusted to reflect the impact on value of any differences between teh subject and the comparable
Elements of comparison for sales comparison approach
- property rights
- financing concessions
- market conditions
- conditions of sale
- market conditions since the date of sale
- location or area preference
- physical features and amenities
Property rights
make an adjustment when less than fee simple is involved
Financing Concessions
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
Market conditions
interest rates, supply and demand, other economic indictators
conditions of sale
adjust value if motivational factors that would affect the sale
market conditions since the date of sale
adjust if economic changes occur between the date of sale of the comparable property and the date of the appraisal
location or area preference
similar properties might differ in price from neighborhood to neighborhood or even between locations within the same neighborhood
Physical freatures and amenities
physical features may require adjustments when compared to the subject property
Which is the most reliable approach for appraisal?
sales comparison approach
Cost approach
based on the principal of substitution
5 steps of cost approach
- estimate the value of the land as though it were vacant and available to be put to its highest and best use
- estimate the current cost of constructing buildings and improvements
- estimate the amount of accrued depreciation resulting from the property’s physical deterioration, external depreciation and function obsolescence
- Deduct the accrued depreciation from the construction cost
- add the estimated land valueto the depreciated cost of the building and site improvements to arrive at the total property value
subject property
property being appraised
depreciation
loss in value
2 kinds of construction costs
- reproduction cost
2. Replacement cost
Reproduction Cost
cost of building something on a lot as an exact duplicate of another property
Replacement cost
building an improvement on a lot similar to another one but not necessarily an exact duplicate
Depreciation
a loss in value for any reason; refers to a condition that adversely affects the value of an improvement to real property
Is land a depreciating asset?
no
3 Depreciation Classes
- Physical Deterioration
- Function Obsolescence
- External Obsolescence
Physical deterioration curable
item is in need or repair that would result in an increase in value equal to or exceeding its cost
Physical deterioration incurable
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
Obsolescence
a loss in value from teh market’s response to the item
Economic Life
th period during which something is expected to remain useful for its original intended purpose
Functional Obsolescence curable
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
Functional obsolescence incurable
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
What is the easiest way ot determine depreciation
straight-line method
How do you calculate straight-line depreciation?
cost / # years of expected economic life
What is the easiest way to determine depreciation
straight-line method
Another name for straight line depreciation
economic age-life method
Who determines econoic life of something?
federal government
What’s the most useful approaisal approach for newer or special-purpose buildings?
cost approach
income approach
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
Can you depreciate your personal residence?
no, unless duplex
What is the income approach of appraisal used for?
valuation of income-producing properties (apartments, offices, retail, shopping centers)
What is the income approach of appraisal used for?
valuation of income-producing properties (apartments, offices, retail, shopping centers)
5 steps in income approach (capitalization)
- estimate property’s annual potential gross income
- deduct an appropriate allowance for vacancy and rent loss to arrive at the effective gross income
- calculate net operating income
- estimate a price a typical investor would pay for the income produced by this particular type and class of property by estimating capitalization rate
- apply the capitalization rate to the property’s annual net operating income to arrive ath teh estimate of the property’s value
Capitalization rate
rate of return that an investor will demand for the investment of capital in this type of building
Net Operating Income
effective gross income - annual operating expenses
Debt service
not included as an operating expense
How is cap rate determined?
by comparing the relationship of net operating income with the sales prices of similar properties that have sold in the current market
What does income equal?
value x rate
As rate goes down, what happens to value?
goes up
Gross Rent Multiplier (GRM) use
can be used for a rough approximation of value for a 1-4 unit residential retail property
Gross Income Multiplier (GIM) use
can be used for 5+ unit properties based on annual income
Gross Rent Multipler equaltion
sales price / motnhly gross rent
Gross Income Multiplier equation
sales price / annual gross income
What must an appraiser have to establish an accurate GRM?
recent sales and rental data from at least 4 properties that are similar to the subject property
What is GRM used for?
estimating fair market rental of the subject property to arrive at market value
GRM uses annual or monthly?
monthly
Estimated market value for GRM?
rental income x GRM
Steps of GRM process
- find a comparable property, take its sale price, divide it by current monthly rent. This will equal the GRM
- GRM x monthly rent = value
Reconciliation
the act of analyzing and effectively weighing the findings from the three approaches
What does the appraiser need to explain in reconciliation
- the appropriateness of each approach
- relative reliability of the data within each approach in line with the type of value sought
- explain how the data reflect the current market
Title XI of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)of 1989
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
Federally Related Transaction
any real estate-related financial transaction in which a federal financial institution or regulatory agency is engaged
What to federally related transactions involve?
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
What properties are exempt from FIRREA?
appraisals of residential property valued $250,000 or less
Property Insepction Waiver (PIW)
properties that have had appraisals intered into Fannie Mae’s Collaterial underwriter database are eligible for a PIW
Appraisal Foundation
nonprofit composed of representative of major appraisal and related groups
Uniform Standards of Professional Appraisal Practice (USPAP)
rules appraisers must follow established by the Appraisal Standards Board of the Appraisal Foundation
What do state licensing and certification ceriteria for appraisers need to conform with?
requirements of Appraisal Subcommittee of the Federal Financial Institutions Examination Countil as recommended by the Appraiser Qualititations Board of the Appraisal Foundation
How is Comparative Market Analysis different from appraisals?
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
What is Comparative Market Analysis based on?
- recently closed properties
- properties currently on the market
- properties that did not sell
Broker’s Price Opinion (BPO)
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
What are many BPO’s?
“drive by’s” to verify existance of property
What are the 2 classes of data for appraisers?
- general data
2. Specific data
General Data
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
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
What is in the appraiser’s report?
- identify real estate and real property being appraised
- state the purpose and use of appraisal
- define the value sought
- state the effective date of the value and date of report
- state the extent of the process of collecting, confirming and reporting the data
- list of all assumptions and limiting conditions affecting analysis, opinion and conclusions
- describe information considered, approaches used, reasoning that supports conclusions
- appraiser’s opinion of the highest and best use
- any additional information to show compliance with USPAP
- signed certification
Uniform Residentail Appraisal Report (URAR)
the form required by many government agencies by appraisers
What is the lender looking for from an appraisal?
if there is a loan default what price the property could probably be sold for to recover the remaining loan balance
