Unit 16, Real Estate Appraisal

Front 1

An appraisal is

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an opinion of value based on supportable evidence and approved methods

an evidenced, educated guess at the value of the property

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An appraiser

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an independent professional who give an unbiased, objective opinion of value

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Appraiser legislation

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Fannie Mae set up Appraiser Independence requirements (AIR) Dodd-Frank set up legislation in the Truth in Lending Act to prevent influence on appraisersTitle XI of the Financial Institutions Reform, Recovery and Enforcement Act FIRREA states that all appraisers must be state licensed.

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Appraisal happens

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to any property exchange involving a federal

finanicial or regulatory agency is involved.

Also financing, refinancing, or use of real property as security for a loan or mortgage

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State licensing and certification criteria

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come from the requirements of the Appraisal Subcommittee of the Federal Financial Institutions Examination Council, as recommended by the AQB - appraiser qualifications board, part of the Appraisal Foundation.

They follow the Uniform Standards of Professional Appraisal Practice (USPAP)

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Comparative Market Analysis (CMA)

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is prepared by real estate professionals.

Based on recently sold properties (solds)

properties currently on the market

properties that did not sell

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An appraisal is based on

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an analysis of market conditions, the features of the subject property and comparable properties in the neighborhood, recent sales, and listing, land value and current construction costs.

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Broker's Price Opinion (BPO)

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less-expensive alternative of evaluating property that is often used by lenders working with home equity lines and other forms of RE finance

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the Appraisal Process

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see page 293 for a chart

Uses three types of data

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Test question

General Data

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nation, region, city, neighborhood

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Test question

Specific Data

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Subject Site, Improvements

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Test question

Data for both Specific and General approaches

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Sales Data

Cost Data

Income and Expense Data

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test question

Form opinion of land value

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First major principal is 1st major principle is highest and best use of land.

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Reconciliation

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Reconciling all the information gathered to make an educated opinion of market value.

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Uniform Residential Appraisal Report

URAR

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the form required by many government agencies

Technology has helped this field do a more

efficient, faster job with appraisals

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Test question:

What is NOT a factor in appraisals

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Race and the racial composition of the neighborhood

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Test question:

An important point on the appraisal form -

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Is this the highest and best use of this property?

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Appraisals must have comps

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A minimum of 3 comparison properties

recently sold properties

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To have value in the RE market,

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a property must have DUST

Demand - the need or desire of ownership

Utility - the property's usefulness for its intended purposes

Scarcity - a finite supply

Transferability - the relative ease with which owner's rights are transferred

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Market Value

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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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Your value vs

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Market Value - an opinion of a property's worth

Market price - the asking, offer, or sales price of a property

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Cost

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Cost and Market value may be the same.

Adding an improvement such as a swimming pool may not add the cost of the improvement to the value of the property

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Basic principles of Value

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Anticipation

Change

Competition

Conformity

Contribution

Value includes the idea of "scarcity"

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Anticipation

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Value is created by the expectation of certain events in the future, both positive and negative

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Change

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no physical or economic condition remains constant

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Competitition

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Supply and demand creates competition.

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Conformity

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means the maximum value is created when a property conforms to existing neighborhood standards

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Contribution

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

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Highest and Best Use

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the most profitable single use of a property is its highest and best use. The use must be

physically possible

legally permitted

economically or financially feasible

the most profitable or maximally productive

can change with social, economic, or political forces.

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Law of increasing returns applies

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when money spent on improvements produces an increase in income or value

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Law of diminishing returns

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when improvements do not increase income or value

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Plottage

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the consolidation of adjacent lots into a single larger one produces a greater total land value than the sum of the two separately.

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Regression

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when a better-quality property is valued less

because of the presence of a lower value

property.

When the property doesn't really "fit" into the neighborhood.

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Progression

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the value of a modest home is increased by its location in a neighborhood of larger, well-maintained homes

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Principle of substitution

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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 basis of the sales comparison approach to appraisal

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Supply and Demand

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the value of a product depends on the supply.

When supply goes up, price goes down.

When supply goes down, price goes up.

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Three methods of valuation

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Sales Comparison Approach

the Cost approach

Income approach

Often more than one method is used

Each method is most useful with a specific type of property

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Sales Comparison Approach

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compares the subject property with recently sold comparable properties

most reliable method for single family homes

the difference in the original cost is NOT part of this approach.

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the Cost Approach

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used for special purpose buildings such as schools, churches, community buildings.

Few comps so values land separately, then building by value of square footage, considering deterioration and obsolencence

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The Income Approach

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for investment property

Uses acronym GIVEN -Gross, Income, Vacancy, Expenses, Net operating income

How much can I make with this property?

Uses a rate of investment return to compute

value of property

It does not use accrued depreciation

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Functional obsolescence

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outmoded or unacceptable physical or design features

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External Obsolescence

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depreciation caused by negative factors not on the property like power lines placed close by, or social or economic factors.

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Depreciation

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loss of value for any reason, either external or functional

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straight line depreciation method

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value of the building without the land. building is expected to last 60 years. value divided by number of years equals the straight line depreciation for each year.

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front footage

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a foot measured along the front of a piece of property —called also foot front.

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Reconciliation

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the act of analyzing and effectively weighing the findings from the three approaches, taking into account that each method is better for specific types of properties