Real Estate Unit 16

is an opinion of value based on supportable evidence and approved methods

Regulations issued by Fannie Mae that must be followed by appraisers to ensure accurate and objective appraisals.

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

Is an independent professional trained to provide an unbiased opinion of value

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

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

Uniform Standards of Professional Appraisal Practice

A set of standards developed by the Appraisal Foundation that details information required for a property appraisal.

USPAP undergoes review and revision in a two-year cycle starting with an even-numbered year

Appraisals of residential property valued at $250,000 or less are exempt and need not be performed by licensed or certified appraisers. Nonresidential properties valued at more than $250,000 require a certified appraiser.

American Society of Appraiserswww.appraisers.org

American Society of Farm Managers and Rural Appraisers, Inc.www.asfmra.org

Appraisal Institutewww.appraisalinstitute.org

International Association of Assessing Officerswww.www.iaao.org

International Right of Way Associationwww.irwaonline.org

National Association of Independent Fee Appraiserswww.naifa.com

A CMA is an estimate of your home’s value done by your real estate broker to establish a listing or offer price when you decide that you want to sell or buy a home or property

A real estate appraisal is done by a licensed real estate appraiser and is most often used by lenders when issuing mortgages for refinancing or buying/selling a home.

recently closed properties (solds),

properties currently on the market (competition for the subject property), and

properties that did not sell (expired listings in the area).

is a less-expensive alternative of evaluating property, that may be used in a nonfederally related transaction that is often used by lenders working with home equity lines, refinancing, portfolio management, loss mitigation, and collections

General data, which covers the nation, region, city, and neighborhood. The appraiser researches the physical, economic, social, and political influences that affect the value and potential of the subject property.

Specific data, which 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.

1. Identify the problem

2. Determine the scope of work

3. Gather, record and verify the necessary data

4. Analyze the data

5. Form opinion of land value

6. Form opinion of value by each of the three approaches

7. Reconcile for final opinion of value

8. Report final opinion of value

Uniform Residential Appraisal Report

is the report required by many government agencies that detailes information required of an appraisal of residential property.

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

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

1the buyer and the seller are unrelated and acting without undue pressure;

2both the buyer and the seller are well informed of the property's use and potential, including both its defects and its advantages;

3a reasonable time is allowed for exposure of the property in the open market;

4payment is made in cash or its equivalent; and

5the price paid for the property is a normal market price, unaffected by special financing amounts or terms, services, fees, costs, or credits incurred in the market transaction.

1. Anticipation

2. Change

3. Competition

4. Conformity

5. Contribution

6. Highest and best uses

The appraisal principle that states the value can increase or decrease based on the expectation of some future benefit or detriment produced by the property.

The income approach to value is based on the principle of anticipation.

The appraisal principle that states that no physical or economic condition remains constant.

The appraisal principle that states excess profits generate competition.

The appraisal principle that states the greater the similarity among properties in an area, the better they will hold their value.

The appraisal principle that states the value of any component of a property is what it gives to the value of the whole or what its absence detracts from that value.

The appraisal principle that states the legally permitted and physically possible use of a property that would produce the greatest net income and, thereby, develop the highest value.

Applies as long as money being spent on property improvements produces an increase in the property’s income or value.

Point at which additional property improvements do not increase the property’s income or value.

The increase in value or utility resulting from the consolidation (assemblage) of two or more adjacent lots into one larger lot.

The process of merging two separately owned lots under one owner

appraisal principle that statesvthe value of a better-quality property is affected adversely by the presence of a lesser-quality property.

appraisal principle that the value of a lesser-quality property is favorably affected by the presence of a better-quality property.

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.

When the supply of similar properties increases, their value decreases and when demand for such properties increases, their value increases.

1. The Sales comparisons approach

2. The cost approach

3. The Income approach

Value is obtained by comparing the property being appraised—the subject property—with recently sold comparable properties—properties similar to the subject in location and features.

This approach is a good example of the principle of substitution

Property rights. An adjustment must be made when less than fee simple—the full legal bundle of rights—is involved. An adjustment could be made because of the presence of a land lease, ground lease, life estate, easement, deed restriction, and/or encroachment.2Financing concessions. The 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.3Market conditions. Interest rates, supply and demand, and other economic indicators must be analyzed.4Conditions of sale. Adjustments must be made for motivational factors that would affect the sale, such as foreclosure, a sale between family members, or some nonmonetary incentive.5Market conditions since the date of sale. An adjustment must be made if economic changes occur between the date of sale of the comparable property and the date of the appraisal.6Location or area preference. Similar properties might differ in price from neighborhood to neighborhood or even between locations within the same neighborhood.7Physical features and amenities. Physical features, such as the structure's age, size, and condition when compared to the subject property, may require adjustments.

Accrued depreciation

The process of estimating the value of a property by adding to the estimated land value the appraiser’s estimate of the reproduction or replacement cost of the building, less depreciation.

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(loss in value) resulting from the property's physical deterioration, external depreciation, and functional obsolescence.

4. Deduct the accrued depreciation estimated in Step 3 from the construction cost estimated in Step 2.

5. Add the estimated land value from Step 1 to the depreciated cost of the building and site improvements derived in Step 4 to arrive at the total property value.

For example:Value of the land = $50,000Current cost of construction = $180,000Accrued depreciation = $20,000$180,000 – $20,000 = $160,000$50,000 + $160,000 = $210,000

Loss in a property’s value resulting from physical deterioration, external depreciation, and functional obsolescence.

is a loss in value for any reason.

Physical deterioration

Functional obsolescence

External obsolescence

A reduction in a property’s value due to a decline in physical condition; can be caused by action of the elements or by ordinary wear and tear.

means a loss in value because of something within the property line

Means a loss in value due to reasons outside the property lines

The number of years during which an improvement will add value to land.

value is based on the present value of the right to future income.

It assumes that the income generated by a property will determine the property's value.

1. Estimate the property's annual potential gross income.

2. Deduct an appropriate allowance for vacancy and rent loss, based on the appraiser's experience, and arrive at the effective gross income.

3. Deduct the annual operating expenses from the effective gross income to arrive at the annual net operating income (NOI).

4. Estimate the price a typical investor would pay for the income produced by this particular type and class of property.

5. Apply the capitalization rate to the property's annual net operating income to arrive at the estimate of the property's value.

The rate of return a property will produce on the owner’s investment.

The income projected for an income-producing property after deducting anticipated vacancy and collection losses and operating expenses.

Can be determined monthly or annually. Is how the price of the property relates to the rent amount

usually used for single-family residential property.

A figure used as a multiplier of the gross annual income of a property to produce an estimate of the property’s value; usually used for commercial property.

Sales price ÷ monthly gross rent = gross rent multiplier

Sales price ÷ annually gross rent = gross income multiplier

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

For example, in appraising a home, the income approach is rarely valid, and the cost approach is of limited value unless the home is relatively new. Therefore, the sales comparison approach is usually given greatest weight in valuing single-family residences. In the appraisal of income or investment property, the income approach normally is given the greatest weight. In the appraisal of churches, libraries, museums, schools, and other special-use properties, where little or no income or sales revenue is generated, the cost approach usually is assigned the greatest weight. From this analysis, or reconciliation, a single opinion of market value is produced

Net annual income ÷ Market value = Capitalization rate