Unit 16 Real Estate Appraisal

Front 1

Appraisal

Back 1

An estimate or opinion of market value supported by an analysis of relevant property data

Front 2

Appraisers must be _________ according to state law and in accordance with federal regulations.

Back 2

Licensed or certified

Front 3

What other designations May an appraiser have?

Back 3

MAI - Member of the Appraisal Institute

Or

SRA - Senior Residential Appraiser

Front 4

Purpose and function of appraisals

Back 4

Seek to estimate market value on behalf of a lender but could be used by sellers estimating the market value of their property

Front 5

An appraisal is required for all ____________ from federal regulated lenders: conventional, insured conventional, FHA, and VA loans

Back 5

Federally related loans

Front 6

When is an appraisal not required?

Back 6

Seller financed or contract for deed

Front 7

Appraisals are also used for insurance, condemnation proceedings, and when the borrower wants to stop paying ____________ (80% LTV is reached).

Back 7

Private Mortgage Insurance (PMI)

Front 8

What can a licensed real estate agent perform and not perform?

Back 8

Can perform - CMA (competitive market analysts)

Can not perform - appraisal

Front 9

A broker may charge a fee for the CMA/BPO/BOV but should make it clear that it is __________.

Back 9

NOT an appraisal

Front 10

What is market value?

Back 10

The most probable price that a property should

Front 11

What is market price?

Back 11

Actual sale price or what someone actually paid

Front 12

Essential Characteristics of Value

Back 12

Remember DUST

Demand

Utility

Scarcity

Transferability

Front 13

Essential Characteristics of Value:

Demand

Back 13

Desire and affordability

Front 14

Essential Characteristics of Value:

Utility

Back 14

Property’s usefulness for its intended purpose

Front 15

Essential Characteristics of Value:

Scarcity

Back 15

Their is a finite supply of land

Land in specific areas is limited (scarce)

Front 16

Essential Characteristics of Value:

Transferability

Back 16

Must have marketable title

Front 17

Principles of Value

Back 17

1. Highest and best use

2. Anticipation

3. Supply and Demand

4. Substitution

5. Conformity

6. Contribution

Front 18

Principles of Value:

Highest and Best Use

Back 18

Is the use that produces the highest value over time.

Front 19

Principles of Value:

The appraiser must show current _____________ in the appraisal.

Back 19

Highest and best use

Not includes in a CMA/BPO/BOV

Front 20

Principles of Value:

Anticipation

Back 20

Future benefits determined the present value

Front 21

Principles of Value:

Supply and Demand

Back 21

1. Supply: number of avails is me properties

a) price moves opposite of supply; when supply goes up, prices goes down

2. Demand: number of properties that will be purchased

a) price moves with demand; when demand goes up, price goes up.

Front 22

Principles of Value:

Supply and demand determine _______________.

Back 22

Sale price and rental rates

Front 23

Principles of Value:

Substitution

Back 23

The most important principle in appraisal!!!

It is the basis of the sale comparison approach and used in all three approaches.

The lowest price with the highest value will sell first.

Front 24

Principles of Value:

Conformity

Back 24

Values tend to move toward surroundings.

Front 25

Principles of Value: Conformity

Regression

Back 25

The value per square foot of over improved property declines

Front 26

Principles of Value: Conformity

Progression

Back 26

The value per square foot of under improved property increases

Front 27

Principles of Value: Conformity

Values are most stable when ___________.

Back 27

All properties are similar

Front 28

Principles of Value:

Contribution

Back 28

The value of an improvement is not what it costs to build but what it adds to the market value of the property

Front 29

Principles of Value: Contribution

____________: improvements add more value than they cost (rare)

____________: improvements add less value than they cost (common)

Back 29

Increasing returns

Decreasing returns

Front 30

Methods of Valuation

Back 30

1. Sales comparison/market data approach

2. Cost approach

3. Income approach

Front 31

Methods of Valuation:

Sales Comparison/market data approach

Back 31

The most important method for residential property and vacant land

The estimate of value is based on adjusted sale prices of similar properties the recently sold.

Front 32

Methods of Valuation: Sales Comparison/market data approach

Area of Improvement

Back 32

Area is determined by the exterior dimensions of the finishes, heated living area

Front 33

Methods of Valuation: Sales Comparison/market data approach

Subject Property

Back 33

Property being appraised

Never adjust the subject property

Front 34

Methods of Valuation: Sales Comparison/market data approach

Comparable Sales (comps)

Back 34

Similar properties that have recently sold.

Adjustments always made to the comparable or comps

Most recent comps preferably sold within 6 months and no more then 12 months

Front 35

Methods of Valuation: Sales Comparison/market data approach

Property elements of comparison and adjustment

Back 35

1. Lot size

2. Area of the improvement based upon exterior dimensions

3. Configuration (number of beds, baths, fireplaces, garage stalls, etc)

4. Date of sale of the comparable

5. Days on market

6. Amenities

7. Not the agreed upon purchase price or initial acquisition cost of subject property

Front 36

Methods of Valuation: Sales Comparison/market data approach

Adjustments

Back 36

Adjustments are only made to the comparables

If comps is superior to the subject, subtract

If comps are inferior to the subject, add

Front 37

Methods of Valuation

Cost Approach

Back 37

The most important method for unique or special purpose properties, such as churches and schools

Front 38

Methods of Valuation: Cost Approach

Formula

Back 38

Cost to build - accrued depreciation + land value = estimated value

Front 39

Methods of Valuation: Cost Approach

Reproduction Cost New

Back 39

Cost to rebuild an exact replica with same or highly similar material

a) used for historic properties and rarely used

Front 40

Methods of Valuation: Cost Approach

Replacement Cost New

Back 40

Cost to replace improvement with the same functionality/utility

Commonly used

Front 41

Methods of Valuation: Cost Approach

Depreciation

Back 41

Is the loss of value

Does not affect land

Front 42

Methods of Valuation: Cost Approach

What are the 3 types of depreciation?

Back 42

Physical (deterioration)

Functional obsolescence

Economic obsolescence

Front 43

Methods of Valuation: Cost Approach

Physical (deterioration)

Back 43

1. Deferred maintenance

2. Wear and tear

Front 44

Methods of Valuation: Cost Approach

Functional Obsolescence

Back 44

Design or other inadequacies: obsolete equipment, poor floor plan; etc

Examples: outdated electrical system and plumbing fixtures or a four bedroom home with one bathroom

Front 45

Methods of Valuation: Cost Approach

Economic Obsolescence ( locational or external obsolescence)

Back 45

1. External factors (location or surroundings)

Example: property is in a flight path from a nearby airport

2. Outside the property boundaries - typically not curable

Front 46

Methods of Valuation

Income Approach

Back 46

Used for properties that generate income

Example: apartment buildings, shopping centers, or office buildings

Front 47

Methods of Valuation: Income Approach

Investors determine what they will pay based on the rate of return or ____________.

Back 47

Capitalization rate

Front 48

Methods of Valuation: Income Approach

The capitalization rate can be determined by complaining the ________ and _______.

Back 48

Net income and selling price

Front 49

Methods of Valuation: Income Approach

Capitalization

Back 49

Process of converting estimated future net income into present value

Front 50

Methods of Valuation: Income Approach

Calculation of annual net operating income (NOI)

Back 50

Back (Definition)

Front 51

Methods of Valuation: Income Approach

Capitalization Math Formula

Back 51

Income = rate x value

Or

I = R X V

I = net operating income (NOI)

R = capitalization rate

V = value

Front 52

Methods of Valuation: Income Approach

Gross rent multiplayer

Back 52

A simple alternative to capitalization and primarily for single - family rental homes

Front 53

Methods of Valuation: Income Approach

Gross rate multiplier formula

Back 53

Value = GRM x RENT

Front 54

Methods of Valuation: Income Approach

To solve GRM problems what must match?

Back 54

Rent must match the given multiplier

A) if given an annual multiplier and a monthly rent, convert monthly rent to annual rent (x 12)

B) if given monthly multiplier and annual rent, convert annual rent to monthly rent (/12)

MATCH THE MULTIPLIER

Front 55

Reconciliation

Back 55

The appraiser reconciles the three approaches to value to arrive at a final estimate of value

Front 56

How does the appraiser determine a subjects estimated value?

Back 56

Each approach is weighed.

It is not an average.

Front 57

The appraiser consider all three approaches but gives the most weight to the approach that is the __________________.

Back 57

Most appropriate for the property type.