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Why does the underwriter qualify the property?
- -to see if it is worth enough to serve as collateral for the loan; price measures up to the value; make sure the applicants are not paying over the value
- -concerned about the present value of the property and whether it is likely to maintain its value in the years to come.
An underwriter's evaluation of a property is based on an _________, which is the estimate of the value of a piece of real estate depending on market value.
Market value is the most ________ price, not the highest price, that the property should bring in, no _________.
A purchase agreement often reflects what, that matter to a buyer and seller, but that aren't pertinent to the property's market value. It's the true ________ that the lender cares about.
- emotional or subjective considerations
- market value
What are the seven "Principals of Value" an appraiser takes into account when appraising a property?
- 1.) Highest and Best Use: the use which is most likely to produce the greatest net return from the property over a given time: located in residential or commercial area?
- 2.) Change: value in response to social, economic, and governmental forces.
- 3.) Anticipation: Value is created by the expectation of benefits to be received in the future.
- 4.) Supply and Demand: value varies
- 5.) Substitution: max value of property is set by how much it would cost to obtain another property that is equally desirable.
- 6.) Conformity: max value of property is realized when there is a reasonable degree of social and economic homogeneity in the neighborhood.
- 7.) Contribution: value of real property is greatest when the improvements produce the highest return commensurate with their cost (the investment).
Lenders use appraised value to help determine how much money to loan with property as security. The ________________ expresses the relationship between the loan amount and the property's value.
loan-to-value ratio (LTV)
The lower the LTV, the _________ the loan amount and the bigger the ___________.
Borrowers are less likely to default on loans with ____ LTVs. The ______ the LTV, the greater the lender's risk.
Loans with ______ LTVs usually carry higher interest rates.
Lenders base the maximum loan amount on the sale price or the appraised value, whichever is less.
true; this is an universal policy
Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) does what?
- -requires states to implement licensing and certification standards for appraisers.
- -in response to 1980s foreclosures; overvalued properties
FIRREA requires all appraisers to be licensed or certified.
- false; FIRREA requires appraisers to be certified or licensed if they are going to be part of federally related loan transactions; most of real estate loans are federally related; bank or S&L association.***Exemption for some loans less than $250,000; the appraisals may be prepared by unlicensed appraiser
- ***Major Secondary Market entities generally require all the mortgages they purchase to be based on appraisals by licensed or certified appraisers, no matter what the loan amount.
Dodd-Frank Act, makes it illegal to do what?
-attempt to influence an appraiser and requires lenders to compensate appraisers at reasonable rates.
If an agent understands how appraisers estimate market value, it makes arranging sales that will hold together much easier.
What are the steps in the appraisal process?
- 1.) Define the problem: identify subject property, purpose of appraisal, and find the "as of" date; is the date the appraisal is performed.
- 2.) Determine the scope of work: type and quantity of info needed, and type of analysis for the appraisal assignment.
- 3.) Collect and verify data: general data; info concerning factors outside the property; region's economy and info of neighborhood. specific data; info concerning property itself; the site, the house, other improvements.
- 4.) Analyze data: judge the relevance of each piece of info collected; data that indicates the value
- 5.) Determine site value: an estimate of the value of a property, excluding the value of any existing or proposed improvements.
- 6.) Apply the appropriate methods of appraisal: three methods (sales comparison method, replacement cost method, the income method) that result in value indicator, a figure that the appraiser treats as an indication of the subject property's value.
- 7.) Reconcile the results to arrive at at final value estimate: final estimate of subject property's market value
- 8.) Issue an appraisal report: presenting the value estimate and summarizing the underlying data for client (lender).
Appraisers can appraise a property by which two ways?
- -walk-through: takes notes walking through house; most
- -drive-by: collects info from online source (MLS) and looks at exterior; cookie cutter houses
What are the three ways to appraise real estate?
- -the sales comparison
- -the replacement cost method
- -the income method
- **All three methods, or only one or two, may be applied in valuing a particular property, depending on the purpose of the appraisal and the type of property in question.
Sales Comparison Method of the Appraisal Methods is what...
- -sales prices of comparables used to estimate market value of subject property; similar property compare; most recently sold
- -preferred by appraisers
When evaluating a sale to see if it qualifies as a legitimate comparable in the sales comparison method, the appraiser is concerned these five issues, explain what they are.
1.) The date of the sale
2.) the location of the property sold
3.) the physical characteristics of the property
4.) the terms of the sale
5.) the condition of the sale.
- 1.) most recent sales possible; longer than 6 months, appraiser includes an explanation; adjustments for inflation or deflation trends
- 2.)comparables should be selected from same or similar neighborhood; location affects value
- 3.) similar characteristics; adjust the price for lack or increase in features of comparables
- 4.) affect the price a buyer will pay for a property; attractive financing concessions can make a buyer willing to pay a higher price, common in slow markets; appraiser has to take into account the influence the terms of the sale may have had on the price paid for a comparable property; The Uniform Standards of Professional Appraisal Practice, an appraiser giving an estimate of market value must state whether it is the most probable price in terms of cash, in terms of financial arrangements equivalent to cash, or in other precisely defined terms.
- 5.) the sale of the comparable was under normal conditions: the sale was between unrelated parties, both parties were acting free of unusual pressure, both parties were informed of the property's attributes and deficiencies, and were acting in their own best interests, and the property was offered for sale on the open market for a reasonable length of time.
How many comparables does the appraiser need when using a sales comparable method?
Location contributes more to the value of real estate than any other characteristics.
true; location of comparable sales for using the sales comparison method is extremly important.
Under the Uniform Standards of Professional Appraisal Practice, an appraiser giving an estimate of market value by conducting a __________________, must state whether it is the most probable price in terms of cash, in terms of financial arrangements equivalent to cash, or in other precisely defined terms.
Sales Comparison Appraisal
Reconciliation is the process of
analyzing the adjusted selling prices of the comparables to arrive at a value indicator; the more adjustments an appraiser has to make, the less reliable the resulting estimate of value will be.
Appraisers in many transactions are required to complete Form 1004MC, the Market Conditions Addendum to the Uniform Residential Appraisal Report. This is true for all loans secured by one- to four-unit residential properties that are FHA- or VA-backed, or that are conventional loans being sold to one of the GSEs. The purpose of this form is to give lenders..
- a more accurate picture of the subjects property's local market.
- -analyze supply and demand in the local housing market, analyze changes in median home prices, average number of days on the market, and changes in the listing -to-sale ratios, etc.
What are some key neighborhood considerations in a Sales Comparison Appraisal?
- -percent of home ownership: more owner-occupied or rental properties; owner-occupied neighborhoods are better maintained
- -Foreclosures/Vacant homes and lots; low level of interest in area; low property values
- -Conformity; homes are similar in style, age, size, and quality
- -Changing land use; residential to commercial??
- -Contour of the land; flat, hilly, etc.
- -Streets; wide, gently curving streets are more appealing than narrow or straight streets; should be well maintained
- -Utilities; serviced by electricity, water, gas, sewers, and telephones?
- -Nuisances; odors, eyesores, industrial noises, etc.
- -Prestige; how is the neighborhood compared to other neighborhoods; better, worst?
- -Proximity; how far from traffic arterials
- -Schools; any close schools, good or bad
- -Public services; public transportation, police, and fire units
- -Government influences; zoning, tax rates, etc.
What are some key property features that are considered in a Sales Comparison Appraisal?
- -Site; lot's size, shape, and topography, and how much street frontage it has; rectangle lots are better; drainage, landscraping, view, easements or encroachments, zoning, private restrictions, etc.
- -Design and appeal; is the home's appeal good, average, or poor; style of house, two-story, one-story
- -Construction quality; materials used
- -Size of hous (sq ft); gross living area (GLA), excludes garage, basement, pourches
- -Interior layout; functional?
- -Number of rooms;
- -Number of bedrooms
- -Number of bathrooms
- -Air conditioning
- -Energy efficiency
Replacement Cost Method of appraisal is based on... and what are the steps involved in the method?
- -the assumption that the value of a house or other building is limited by the cost of building a new one.
- 1.) estimate the cost of replacing the building(s) and any other improvements on the property
- 2.) estimate and deduct any accrued depreciation
- 3.) Add the value of the lot to the depreciated value of the improvements
What is a building's replacement cost? And how is it estimated for the appraisal replacement cost method?
- -is how much it would currently cost to construct a new building with the same features and same use
- -number of ways to estimate replacement cost: comparative-unit method; square foot method; simplest; average cost of sq ft of comparables to estimate cost of replacing subject property. When there are not any recently built comparabe homes available the appraiser relies on current cost manuals to estimate the basic construction costs.
What is the difference between replacement cost and reproduction cost?
- -replacement cost is building a new house that is similar
- -reproduction cost is building the exact same house
How is depreciation estimated in the appraisal replacement cost method?
- -loss in value from
- --Physical deterioration; wear and tear
- --Functional obsolescence; a loss in value due to inadequacies such as poor design; not enough bedrooms compared to bathrooms
- --External obsolescence; loss in value due to factors outside the property, such as deteriorating neighborhoods, declining market values, zoning changes, etc.
- -Depreciation is considered curable it the cost of correcting it could be recovered in the sales price when the property is sold; deferred maintenance; curable physical deterioration
- -After estimating the depreciation in each of the three categories, the appraiser deducts the depreciation from the estimated replacement cost of the improvements.
- -Appraisal may be "as is" (curable repairs) or "subject to" (estimate represents what the market value of the property would be if the deferred maintenance were corrected.).
- -Adding Land Value; land value estimated by the sales comparison method.
Replacement cost method for appraisal is not really for _____________ or condos.
Income Method for appraisal is...
- -a relationship between the income that a property generates and its value to a potential investor (buyer).
- -Gross income multiplier method; used to estimate value of rental homes.
- -appraiser uses the market, similar rentals, and repairs needed to estimate the value
How is the gross income multiplier method used for calculating the monthly rental income? amount of payments and percent of the payments are what of the sales price.
Sales price: $246,000
Monthly rent: $2,000
Monthly rent is equal to what of the sales price?
The sales price is approximately how many times the monthly rent?
-2000/246000= 0.0081 = .81% (paying .81% of sales price every time they pay rent)
-246000/2000= 123 (123 payments of the 2000 monthly rent will pay off the sales price)
Gross income multiplier method: what is the monthly rental income and the annual monthly income?
sales price: $346,000
monthly rent: $2,000
Monthly rental income: 346000/2000= 173 (payments are needed to pay off sales price)
Annual rental income: 346000/24000= 14.42 (yrs are needed to pay off the sales price)
Because markets can change, an appraiser, when conducting an income method appraisal for an invest property should use _________ of the subject property, not ___________.
- -economic rent/market rent: the rent the property could command in the current marketplace if it were available for lease today
- -contact rent: the rent the owner is actually receiving.
EX: The owner leased the home two years ago for $1,850 a month and the lease contract has another year to go. Market rents have risen sharply over the past two years, so that the property could now command a much higher rent--probably about $2,175 a month. If the appraiser were to use the $1,850 contract rent in the gross income multiplier method, it would distort the estimate of value.
What is reconciliation or correlation?
-a conclusion about the property's value from appraisal.
The appraiser's experience and judgment play a critical role in the reconciliation process.
What appraisal method is the most reliable for residential property?
Sales comparison method
What are four possible solutions after low appraisal?
- -buyer pays over value
- -seller lowers price to appraised value
- -compromise price
- -request for reconsideration of value
How can real estate agents prevent low appraisals?
- -Perform careful CMA (competitive market analysis) informal version of a sales comparison appraisal.
- -Price personal property separately
Who does the agent contact to get results of the appraisal asap? If the appraisal comes back low, what info should the the agent ask for?
- -agent must contact the loan officer or underwriter; appraiser cannot give info out because of fiduciary relationship with lender.
- -if appraisal comes in low ask for:
- --the final value estimate
- --the value indicated by the sales comparison method,
- --the addresses of the three comparables the appraiser used.
After receiving the appraisal information of a low appraisal, in order for an agent to prepare a request for reconsideration of value, what all does the agent have to do?
- -support your request with at least three comparable sales that indicate a higher value estimate; have to be similar or more similar to the subject property than the other comparables the appraiser used.
- -complete the form for request for reconsideration of value (check to see if lender has their own forms), along with a cover letter.
Federal law prohibits anyone from improperly influencing an appraisal such as, giving anticipated value, conditioning the payment of the appraiser's fee on the appraisal result, or otherwise encouraging a specific outcome. However, the law specifically permits asking an appraiser to:
- -consider additional comparables or other info
- -provide more info about the value conclusion
- -correct errors in the appraisal report.
A lender asks a residential appraiser to:
estimate the market value of the home
A sales comparison appraisal is mainly based on:
The most difficult step in the replacement cost method of appraisal is:
If a home sold for $175,000 and rents for $1,150 per month, then its monthly gross income multiplier is:
A real estate agent is helping the Martins set a listing price for their home. The Martins have some furniture they would like to sell along with the home. The agent should advise the Martins:
to price the furniture separately from the home
In the event of a low appraisal, the listing agent should:
-evaluate the appraisal, update the CMA, and submit a request for reconsideration only if there is a good possibility that it will be granted.