When are appraisers needed?
to set asking/offering prices, settle estates, refinance, divorce, taxes, rental rates, valuation, condemnation & foreclosure
Appraiser
One who is expected to perform valuation services competently & in a manner that is independent, impartial & objective.
Attributes of an Appraiser
competent, independent, impartial, objective, prompt, organized, educated, honest & diligent
Appraiser must be knowledgeable in...
history, economics, construction, math, statistics, ethics, psychology, sociology, urban planning & land use
What are some adversarial situations that require an appraisal?
tax appeals, relocation, casualty loss, purchase offers, partnership breakups, division of assets, negotiation of leases, condemnation & estate settlements
Appraisal Report
The written or oral communication of an appraisal. Most residential appraisal reports for mortgage lending purposes are completed using a standardized app. report form that is approved by Fannie Mae & Freddie Mac.
Narrative Report
A written report presented in narrative style or "long hand" & are used most for commercial, industrial or income producing properties.
What are the 4 components of the real property appraiser qualification criteria?
1) Continuing Education: 14 class hrs/year + 7hr National USPAP Update Course every 2 years
2) Experience:
3) Examination: successful completion valid for 24 months
4) Qualifying Education: changed in 2008 & 2015, increased classroom hours, college level
Requirements for a Trainee
-75 classroom hours
-no college degree
-no prior experience
-may have multiple supervisors
Requirements for a Licensed Residential Appraiser
-150 classroom hours
-30 college hours or associates degree
-non-complex one to four residential units with a transaction value less than $1,000,000 & complex units with a value less than $250,000
-2,000 hours experience in no less than 12 months
Requirements for a Certified Residential Appraiser
-200 classroom hours
-Bachelor's Degree
-All one to four residential units without regard to transaction value or complexity
-2,500 hours experience in no less than 24 months
Requirements for a Certified General Appraiser
-300 classroom hours
-Bachelor's Degree
-All types of real estate
-3,000 hours experience in no less than 30 months of which 1,500 hours must be in non-residential appraisal work
Employment Opportunities for Appraisers
-A majority work for themselves or in an office
-Most specialize in residential work (mortgage appraisals)
-General appraisers specialize in income-producing properties & are more likely to appraise in a widespread area
-Banks, accounting firms, real esta
Housing Markets in 1950
relatively tranquil with steady growth in housing, a healthy economy & stable interest rates
Housing Markets in 1960
no established appraisal standards nationwide, but there were professional appraisal organizations providing education programs & touting codes of ethics, membership was optional
Housing Markets in 1970
turbulent decade, major swings in the economy & housing market lending made at local levels with risk & underwriting determined by local lenders/banks. Late 1970s Fannie & Freddie developed uniform underwriting rules & the first universally accepted appra
Housing Markets in 1980
Home sales soared & then tapered off. Appraisers were busy, no generally accepted standards of ethics & performance. Underwriting standards were lax (especially in commercial lending). The situation culminated with the "Saving and Loan Crisis" in the mid-
The Development of Appraisal Standards
In light of the Barnard Report, 8 US based professional organizations plus 1 from Canada for the Ad Hoc Committee on Uniform Standards to develop appraisal standards; their initial focus was on developing a common definition of "market value". In 1987 the
The Appraisal Foundation
-a not-for-profit organization established exclusively for educational & scientific purposes
-not a professional appraisal organization or society
-membership is reserved for organizations not individuals
-is a private entity which has no enforcement auth
Board of Trustees (BOT)
-acts as an executive board
-composed of 26 individuals responsible for funding TAF & appointing members of the ASB, AQB & APB
Appraisal Standards Board (ASB)
responsible for creating standards of ethics & performance of appraisers, which is accomplished through the Uniform Standards of Professional Appraisal Practice (USPAP), in short ASB is responsible for USPAP
Appraiser Qualifications Board (AQB)
responsible for creating requirements for licensure, certification & re-certification of appraisers
Appraisal Practices Board (APB)
formed in 2010 it is responsible for issuing voluntary guidance on recognized valuation methods & techniques.
Uniform Standards of Professional Appraisal Practice (USPAP)
-developed by an Ad Hoc Committee in 1986/7 & was copyrighted in 1987 by The Appraisal Foundation
-January 1989 ASB adopted USPAP as the governing document
-USPAP may be amended, interpreted, supplemented or retired only by the ASB
-Appraisal review, mass
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)
-authorized federal financial institution regulatory agencies to reference USPAP in their regulations. Title XI also authorized USPAP to be the basis for standards for the states to use in licensing appraisers
-FIRREA, aka the "Savings and Loan Bailout Bi
The 2000s
-unprecedented housing and lending boom, interest rates were low & mortgage money was easy to obtain
-2007 the bubble burst, economic recession & increasing foreclosures led to a dramatic decrease in property values
-Fannie Mae & Freddie Mac became insolv
Advisory Councils to The Appraisal Foundation
1) The Appraisal Foundation Advisory Council (TAFAC): comprised of 75 non-profit organizations and government entities; it serves to involve the public in the appraisal standards & qualifications development process; makes recommendations to the ASB, AQB
The Appraisal Subcommittee
-The ASC is a federal entity and has significant enforcement authority
-created under Section 1103 of Title XI of FIRREA to: monitor state licensure & certification, maintain national registry of state certified and licensed appraisers eligible to perform
The Fair Housing Act
-originally passed in 1968 and amended in 1988
-prohibits discrimination in housing because of: race, origin, religion, sex, familial status (1 or more persons not yet 18 living with a guardian) & handicap (physical or mental impairment that limits a pers
Fair Lending
-application of the fair lending laws to financial institutions
-everyone should have equal access to credit, based only on their financial characteristics
-violations may include denying access to credit through: intentional grounds, selective encouragin
Fair Lending Federal Institutions
1) Department of Treasury: OCC, FDIC, FRB & NCUA
2) Department of Housing and Urban Development (HUD): has regulatory authority in most civil rights legislation such as the Fair Housing Act (FHA ) and the Equal Credit Opportunity Act (ECOA)
-If a regulato
Routine Provider versus Provider on Request
-Routine Providers give a copy of the appraisal report to the applicant in every case (regardless of loan approval); this practice may increase possibility of a fair lending complaint.
-Provider on Request, lenders give the applicant notice of a right to
Equal Credit Opportunity Act (ECOA)
-applies to all types of lending (mortgages, credit cards & business loans)
-appraisers are considered creditors and ECOA applies to the appraisal of all dwellings (one to four units, condos, co-ops & manufactured homes)
-ECOA applies to first mortgages a
HUD
-regulates mortgage bankers & brokers dealing with fair lending
-they have authority but only act on a complaint
-current emphasis is one one to four family residential loans. These are covered under the Fair Housing Act, while ECOA covers all types of lo
Fair Lending and Appraisers
-appraisers MUST be careful to avoid discriminatory practices when developing and reporting real property appraisals
-Fannie Mae & Freddie Mac appraisal reports state: Race and the racial composition of the neighborhood are not appraisal factors
-DO NOT u
Advantages to joing a Professional Society
-specialized education courses
-networking with fellow appraisers
-access to professional journals
-access to seminars
-benefits of national advertising
Ethics
-relating to what is good or bad; having to do with moral -duty and obligation
-Dr. Albert Schweitzer says: in a general sense, ethics is the name we give to our concern for good behavior. We feel an obligation to consider not only our own personal well-b
Moral
relating to the principle of right and wrong
Bias
-a preference or inclination that precludes an appraiser's impartiality, independence or objectivity in an assignment
-bias is not allowed when an individual is performing as an appraiser
USPAP Compliance
An appraiser must comply with USPAP when obligated by law or regulation or by agreement with the client or intended users. Basically appraisers should always comply with USPAP
Is it necessary to certify that the appraiser has not been coerced in the appraisal report?
Not in such blatant terms; however a statement such as, "my engagement in this assignment was not contingent upon developing or reporting predetermined results" should be added to each appraisal report.
Should an appraiser perform an assignment where there might be a conflict of interest?
Yes, as long as the appraiser specifies the particulars in a situation where they have any present or prospective interest with respect to the parties involved in the property that is the subject of the report. If the appraiser has an interest but could p
Does an appraiser need to disclose prior services performed on the same property?
Yes, if the appraisal was done within 3 years of the date of the acceptance of the assignment. This is not a violation of the ethics rule on confidentiality.
Is it ethical for an appraiser to pay a fee to be included on a lender's approved appraiser list provided the appraiser discloses payment of a fee in his or her appraisal report?
Yes; an appraiser can pay a fee to be on a lender's approved appraiser list, as long as payment of this fee is appropriately disclosed in the certification section of every appraisal report prepared for that client.
Is it ethical for an appraiser to offer a client a reduced fee on an appraisal if the client's loan does not close?
Would the result be different if the client agreed to pay extra for other assignments?
Neither practice would be ethical. Offering a client a reduced fee on an appraisal if the client's loan does not close is a violation of the Ethics Rule.
Does an appraiser have to comply with USPAP if they are not charging a fee?
Yes, compliance with USPAP is not contingent upon a fee.
Electronic Data Interchange (EDI)
electronic appraisal report including maps, sketches, photos and digital signatures that can be sent directly to clients
What changes did Fannie/Freddie make in 2011 to the appraisal industry?
They launched the Uniform Collateral Data Portal (UCDP) which changed the way lenders transmitted loan documentation and they adopted the Uniform Appraisal Dataset (UAD) that provides standardized formats and responses for many of the fields on the most p
List some useful information an appraiser would find on the internet?
-demographics and trends
-tax rates
-maps
-aerial photos
-subject property information
-listing information
-sales and lease information
-census tract numbers
-zoning and other land-use ordinances
-various appraiser data
A list of some helpful websites include:
-www.usa.gov
-www.census.gov
-www.stats.bls.gov
-www.fedstats.gov
-state.ok.us
-county assessors office
-county clerks office
Geographic Information Systems (GIS)
a computerized mapping system for encoding, retrieving, analyzing and presenting geographic or spatial data
Appraisal
1) the act or process of developing an opinion of value
2) an opinion of value
So an appraisal is no more or no less than an opinion developed by an appraiser.
As an opinion, an appraisal is not to be construed as a guarantee or a very precise number.
Assignment (as it refers to an appraisal)
1) An agreement between an appraiser and a client to provide a valuation service
2) The valuation service that is provided as a consequence of such an agreement
Client
1) The party or parties who engage an appraiser (by employment or contract) in a specific assignment.
The client is the one we work for and owe our confidentiality to.
The client may remain anonymous on the report but must be included on the workfile
Real Estate
1) An identified parcel or tract of land, including improvement, if any
2) Land and all things that are a natural part of the land as well as things that are attached to the land by people. All permanent building attachments (plumbing, heat/air untis). Re
Land
1) The earth's surface, both land and water, and anything that is attached to it whether by the course of nature or human hands; all natural resources in their original state (mineral deposits, wildlife, timber, soil, water)
2) In law, the solid surface o
List some important characteristics of land:
1) Unique Location: different topography, access, subsoil & orientation
2) Immobility: fixed in location & sensitive to its immediate surroundings
3) Durability: classified as a long-lasting asset & has a longer physical and economic life than other asset
Subsurface Rights
1) The rights to the use and profits of the underground portion of a designated property; usually refers to the right to exact coal, minerals, oil, gas or other hydrocarbon substances as designated in the grant; may include a right of way over designated
Air Rights
The right to undisturbed use and control of designated air space above a specific land area within stated elevations. Such rights may be acquired to construct a building above the land or building of another or to protect the light and air of an existing
Fixture
An article that was once personal property but has since been installed or attached to the land or building in a rather permanent manner so that it is regarded in law as part of the real estate.
A fixture could be a shrub or tree but generally fixtures ar
Personal Property
1) Identifiable tangible objects that are considered by the general public as being "personal" (furnishings, machinery, artwork); all tangible property that is not classified as real estate.
2) Consists of every kind of property that is not real property;
Real Estate versus Personal Property
-Typically personal property is not included in the appraisal of residential properties for mortgage loans.
-Financing of personal property may be more common in commercial or income properties; where the personal property may be essential to the operatio
Trade Fixtures
-Articles placed in or attached to rented buildings by a tenant to help carry out the trade or business of the tenant (shelves, display cases, bars, pizza ovens, etc.)
-Found only in rented space and for use in commercial property
-Installed by the tenant
Real Property
1) The interests, benefits and rights inherent in the ownership of real estate
2) All the rights, interests and benefits related to the ownership of real estate. Real property is a legal concept distinct from real estate, which is a physical asset. There
Bundle of Rights Theory
The concept that compares property ownership to a bundle of sticks with each stick representing a distinct and separate right of the property owner; the right to use, sell, lease, give away, transfer by will/trust or do nothing.
4 Public Restrictions
1) Taxation
2) Eminent Domain
3) Police Power
4) Escheat
Taxation
all real property is subject to taxation at the local level; this tax creates a lien against your property and failure to pay the tax could result in your property being transferred to the taxing authority to be sold.
Eminent Domain
1) The right of government to take private property for public use upon the payment of just compensation. The Fifth Amendment, aka the 'taking clause', guarantees payment of just compensation upon appropriation of private property.
-The process of taking
Police Power
1) The right of government, through which property is regulated, to protect public safety, health, morals and general welfare
Ex: zoning, building codes, subdivision regulations, electrical codes, plumbing codes & energy codes
Escheat
1) The right of government that gives the state titular ownership of a property when its owner dies without a will or any ascertainable heirs
-Considered a public restriction on real property ownership
4 Private Restrictions
1) Mortgages
2) Mechanic's Lien
3) Deed Restriction
4) Conditions, Covenants & Restrictions (CC&RS)
Mortgage
1) A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions
*Mortgage Note: A document or a clause in a document in which the borrower accepts responsibility for the repayment of a
Mechanic's Lien
1) A legal claim placed on real estate by someone who is owed money for labor, services or supplies contributed to the property for the purpose of improving it. Typical lien claimants are general contractors, subcontractors and suppliers of building mater
Deed Restriction
1) A provision written into a deed that limits the use of land. Deed restrictions usually remain in effect when title passes to subsequent owners
2) Lawful limitations which run with the land and may affect the use, development and conveyance of ownership
CC&Rs
1) A list of expresses assurances and limitations on land use; often found in contracts between a land subdivider and a lot purchaser. CC&Rs should be specified in the conveyance
-Similar to deed restrictions but are applied to more than one property; typ
Legal Description
1) A description of land that identifies the real estate according to a system established or approved by law; an exact description that enables the real estate to be located and identified.
-The description must be unique enough to delineate a particular
Lot and Block
1) A system for the legal description of land that refers to parcels' lot and block numbers, which appear on recorded maps and plats of subdivided land; may also be used for assessment maps
-The most recent system of legal description, became common in 19
Metes and Bounds
1) A system for the legal description of land that refers to the parcel's boundaries, which are formed by the point of beginning (POB) and all intermediate points (bounds) and the courses or angular direction of each point (metes)
-The earliest system of
Metes
-refers to bearing or direction relative to North or South
1 Full circle = 360 degrees
1 degree = 60' (60 "minutes")
1' = 60" (60 "seconds")
1 degree = 3,600" (60 seconds per minute x 60 minutes per degree)
Ex: A property boundary is North 33degrees10'12
Bounds
-the distances that a boundary runs at that prescribed angle; distances are indicated by feet
1 Mile = 8 Furlongs
1 Furlong = 660 Feet, or 10 Chains
1 Chain = 66 Feet, or 4 Rods
1 Rod = 16.5 Feet, or 25 Links
1 Link = 7.92 Inches, or 0.67 Feet
Gunter's Chain
-many modern units of measurement based on Gunter's Chain
-1607 designed a chain 4 perches in length divided in 100 links
-In Gunter's combination system an acre was 10 square chains
How many square feet in an acre?
43,560
How many feet in a mile?
5,280
How can a chain and link measurement be converted to feet?
multiply the number of chains by 66 and the number of links by 8 inches or 0.67 feet.
Rectangular Survey System
1) A land survey system used in Florida, Alabama, Mississippi and all states North of the Ohio river or West of the Mississippi river except Texas; divides land into townships and ranges approx. six miles square, each normally containing 36 one-square-mil
A Farmer owns 6 full sections, 3 half sections and 5 quarter sections. How many acres is that?
5,600 acres
A lot measures 187.64 feet by 316.35 feet. How many acres is that?
1.36 acres
A lot measures 12 chains and 48 links by 3 chains and 24 links. How many acres is that?
4.05 acres
A lot contains .85 acres. It sells for $72,000. How much did it sell for per square foot?
$1.94
Estate
1) A right or interest in property. Defines an owner's degree, quantity, nature and extent of interest in real property.
Types of estates: freehold (fee simple, determinable fee and life estate) and leasehold
2) To be an estate in land, an interest must a
Fee Simple
1) An absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power and escheat.
2) Absolute ownership subject only to limitations imposed by t
Partial Interest
1) Divided or undivided rights in real estate that represent less than the whole (a fractional interest)
- If one or more of the bundle of rights is missing it results in partial interest or partial estate
Ex: life estates, leased fee estates & leasehold
Life Estate
1) Rights of use, occupancy and control, limited to the lifetime of a designated party, sometimes referred to as the life tenant.
Ex: When an elderly person transfers ownership of the property to another party (relative) but retains the right to live in t
Leased Fee Interest
1) A freehold (ownership interest) where the possessory interest has been granted to another party by creation of a contractual landlord-tenant relationship (lease).
Leasehold Interest
1) The tenant's possessory interest created by a lease
- A leasehold interest may have value if the contract rent stipulated in a lease is less than the property's market rent.
- It is considered a non-freehold estate
Easement
1) The right to use another's land for a stated purpose
2) Nonpossessory interest in landed property conveying use, but not ownership, of a portion of that property
- Someone else is allowed to enter a property and therefore the owner has relinquished the
Easements in Gross
1) An easement that benefits a legal person or entity (individual, corporation, partnership, LLC, government entity, etc.) and not a particular tract of land; an easement having a servient estate but no dominant estate)
Ex: easements for railroads, pipeli
Easement Appurtenant
1) An easement having both dominant and servient estates. The easement interest passes with title to the dominant estate and continues to burden the servient estate. An easement appurtenant contrasts with an easement in gross, which has a servient estate
Affirmative Easement
1) The right to perform a specific act on a property owned by another
-This is the good kind of easement, it works in your favor
- Sometimes called dominant estate
Negative Easement
1) An easement preventing a property owner from certain, otherwise permitted, uses of his or her land (ex: agreeing not to do something such as building a wall or fence blocking an adjoining property's view.
- Can be punitive in nature and create losses i
Conservation Easement
1) An interest in real property restricting future land use to preservation, conservation, wildlife habitat. May permit farming, timber harvesting or other uses of rural nature to continue, subject to the easement.
- These easements are generally granted
Drainage Easement/Drainage Right of Way
1) The right to drain surface water from one owner's land over the land of one or more adjacent owners
- Normally the drainage right of way can have no structures or improvements, the land must be kept free and clear for the water to flow across it
Historic Preservation Easement
- Includes various kinds of controls on historically designated properties; which are imposed by cities, towns or villages
- Restrictions include: controls over exterior (doors, windows, and roof lines), choice of materials and paint colors that may not b
Facade Easement
1) Traditionally considered a type of preservation easement that protected only the facade of a building, not the entire structure. It has the effect of prohibiting alteration of the exterior of an existing improvement. Must be certified as a historic str
License
1) For real property, a personal, unassignable and typically revocable privilege or permit to perform some activity on the land of another without obtaining an interest in the property
- License can be terminated at any time and is considered personal pro
Encroachment
1) Trespassing on the domain of another
- Physical in nature, occurs when someone builds something over the property line of another property
- FHA will insure a loan on a property that is subject to an encroachment if a perpetual encroachment easement is
Tenancy in Severalty
1) An estate in real estate held by one owner
Tenancy
1) The holding of property by any form of title
Concurrent Ownership
- Property that is concurrently owned by more than one individual
Ex: tenancy in common, joint tenancy & tenancy by the entirety
Tenancy in Common
1) An estate held by two or more persons, each of whom has an undivided interest
- The most basic example of concurrent ownership
- No limit to the number of tenants in common a property can have
- Ownership does not have to be in equal amounts & each ten
Joint Tenancy
1) Joint ownership by two or more persons with the right of survivorship
- If one joint tenant dies, that person's interest in the property automatically passes to the other joint tenant(s)
- Joint tenant must have an equal ownership interest
- To create
Tenancy by the Entirety
1) An estate held by a husband and wife in which neither has a disposable interest in the property during the lifetime of the other, except through joint action
- Has the same right of survivorship provisions as joint tenancy, but the survivor must be the
Land Trusts
1) A legal vehicle for partial ownership interests in real property in which independently owned properties are conveyed to a trustee; may be used to effect a profitable assemblage or in some cases to facilitate the assigning of property as collateral for
Partnership
1) An association of two or more persons who carry on as co-owners of a business for profit
- Partnerships are commonly found in acquisitions of real estate, it affords an opportunity for pooling of funds and to share the risk
- The two types of partnersh
General Partnership
1) An ownership arrangement in which all partners share in investment gains and losses and each has personal and unlimited responsibility for all liabilities
- This is the most common kind of partnership where each partner has an individual designated per
Limited Partnership
1) An ownership arrangement consisting of general and limited partners. General partners manage the business and assume full liability for partnership debt, while limited partners are passive and liable only to the extent of their own capital contribution
Corporation
1) In law, an organization that acts as a single legal entity in performing certain activities, usually business for profit; also includes charitable, educational and religious organizations
- Ownership of the corporation is divided into partial interests
Syndication
1) A private or public partnership that pools funds for the acquisition and development of real estate projects or other business ventures
- Can be used to purchase, develop, manage and dispose of real estate
- Created when someone purchases real property
Real Estate Investment Trust (REIT)
1) A corporation or trust that combines the capital of many investors to acquire or provide financing for all forms of real estate. Like a mutual fund for real estate. The shares are freely traded. SEC requires REITs with over 300 investors to make their
Specialized form of ownership
- A person may own something in fee simple along with shared rights of certain common properties
Ex: condos, cooperatives, PUDs and timeshares
Condominium
1) A for of ownership in which each owner possesses the exclusive right to use and occupy an allotted unit plus an undivided interest in common areas.
- you are a fee simple owner of certain parcel plus you are an owner in common of other specified common
Cooperative Ownership
1) A form of ownership in which each owner of stock in a cooperative apartment building or housing corporation receives a proprietary lease on a specific apartment and is obligated to pay a monthly maintenance charge that represents the proportionate shar
Planned Development Unit (PUD)
1) A type of residential, commercial &/or industrial development in which buildings are clustered or set on lots that are smaller than usual, and large, open, park-like areas are included within the development
- individual ownership of a parcel combined
Timesharing
1) Limited ownership interests in, or the rights of use and occupancy of, residential apartments or hotel rooms.
- Two types of timeshares: fee and nonfee timeshares
- It is critical that the appraiser identify whether the subject and the comparables are
Fee Timeshares
- Where the purchaser receives a deed that conveys title to a unit for a specific part of a year
- May be based on timeshare ownership or interval ownership
- Fee timeshares in which legal title and deed are conveyed are generally more valuable
Nonfee Timeshares
1) A limited interest in real property in which the purchaser receives only those rights specifically granted by the developer, usually the right to use a timeshare unit and the related premises; does not impart legal title to the property
Deed
1) A written. legal instrument that conveys an estate or interest in real property when it is executed and delivered
-Grantor is the seller
-Grantee is the buyer
-Title officially passes when the deed is delivered by the grantor and accepted by the grante
Grant Deed
1) A deed in which the grantor warrants that he or she has not previously conveyed or encumbered the property; does not ensure that the grantor is the owner of the property or that the property is unencumbered; conveys any after-acquired title of the gran
Quitclaim Deed
1) A form of conveyance in which any interest the grantor possesses in the property described in the deed is conveyed to the grantee without warranty of title
-Weakest for of a deed
-Makes no claims or warrants to the quality of the title, "buyer beware
Bargain and Sale Deed
1) A deed that conveys real property from a seller to a buyer but does not guarantee clear title; used by court officials to convey property they hold by force of law, but to which they do not hold title
-Step up from quitclaim, does not guarantee a clear
Tax Deed
1) A deed that conveys title to a property purchased at a tax sale; may or may not convey absolute title, free of all prior claims and liens, depending on state law
-Essentially a bargain and sale deed but used specifically for tax sales where properties
Warranty Deed
1) A deed that conveys to the grantee title to the property free and clear of all encumbrances, except those specifically set forth in the document
-Best and most powerful deed
-Grantor guarantees free and clear title and if any issues or claims are made
Deed of Trust
1) A legal instrument similar to a mortgage document, except that three parties are involved in securing the debt; the borrower, a lender and a trustee who holds property title when the deed of trust is executed and delivered. The trustee transfers title
Reconveyance
1) Passing of title to real property back to the original owner. Ex: in a deed of trust arrangement, upon liquidation of the debt the property is reconveyed from a third-party trustee to the trustor (borrower)
-If a deed of trust is recorded and then the
Do deeds need to be recorded in order to be valid?
No, but it is in the best interest of the parties to record the deed in public records (county clerk)
Contract
1) A legally binding agreement between two or more persons that represents their promise to do or not to do a particular thing.
2) An agreement between persons which obliges each party to do or not to do a certain thing
3) An agreement with specific terms
Promise
1) A firm agreement to perform an act, refrain from acting or make a payment or delivery
-As in a promissory note, we promise to repay something
-Contracts are promises that the law will enforce
Oral vs Written Contracts
-An oral contract may be just as valid as a written agreement, but proving its existence and clarifying its terms may be difficult
-An oral contract is sometimes provable by action taken by one or both parties and it works as long as both parties agree
-S
Mutual Assent
-consent of both parties to a contract should be free, mutual and communicated by each to the other
-established by the process of offer and acceptance
Offer
1) A manifestation of willingness to enter to into a bargain, which creates in the offeree the power of acceptance
2) A specific proposal to enter into an agreement with another
-Offers remain open until they are: accepted, rejected, retracted, countered
Acceptance
1) A manifestation of willingness to be bound by the terms of an offer made in a manner invited or required by the offer
-All terms of the offer must be accepted without change or condition
-May occur as express or implied
Express Contract
-the existence of the contract and its terms are stated in words or writings of the parties
-may be either oral or written
Ex: listing agreements, purchase offers, mortgages, leases & installment contracts
Implied Contract
-the existence of the contract and its terms are inferred or implied from the conduct of the parties
-the distinction between an express and implied contract is only in the manner in which the agreement is shown
Ex: if you order food at a restaurant you i
Bilateral Contract
-both parties have made promises to each other, one promise in exchange for another
-most commercial contracts of any substance are bilateral
Ex: a real estate sales contract
Unilateral Contract
-one party makes a promise in order to induce another party to do something, the second party is not legally obligated to comply
Executed Contract
-one that has been fully performed & all promises fulfilled according to the terms of the contract
Executory Contract
-one that has not been fully performed or completed
Ex: a listing contract or a mortgage
Valid Contract
-one that is binding and enforceable on all parties
Ex: a real estate deal that has cleared all contingencies but has not closed
Void Contract
-one that has no legal force or effect even though it contains the elements of a valid contract
-"null and void" because it contains some illegal element that could not be enforced (racial discrimination) or some act in violation of legal use or an act of
Voidable Contract
-one that results from the failure of the parties to meet some legal requirement
-parties are not required to void the contract
Unenforceable Contract
-one that appears to be valid but would not be enforceable in court
Ex: one party tries to enforce an otherwise valid contract after the statute of limitations has expired, contracts that are vague or poorly worded, verbal contracts where written ones are
List the 5 elements that make a valid contract binding and enforceable
1) Competent parties
2) Mutual agreement
3) Consideration
4) Lawful objective
5) In writing and signed
Competent
1) in general, able to act in the circumstances, including the ability to perform a job or occupation, or to reason or make decisions
*Competency: the mental ability to understand the general effect of a transaction or document
-a contract is voidable if
Duress
1) feebleness on one side, overpowering strength on the other
2) if a party's manifestation of assent is induced by an improper threat by the other party that leaves the victim with no reasonable alternative, the contract is voidable by the victim
Consideration
1) payment or money. a vital element in the law of contracts, consideration is a benefit which must be bargained for between the parties and is the essential reason for a party entering into a contract. Consideration must be of value (to the parties) and
Parol Evidence Rule
-written contracts take precedence over oral agreements
1) if there is evidence in writing such as a signed contract the terms of the contract cannot be altered by evidence of oral (parol) agreements purporting to change, explain or contradict the written
Contracts can be terminated by:
-agreement of parties
-performance of the contract
-impossibility of performance
-operation of law
Agreement of the Parties - Release
1) to give up a right as releasing one from his/her obligation to perform under a contract, or to relinquish a right to an interest in real property
2) to give freedom
3) the writing that grants a release
Agreement of the Parties - Assignment
1) the act of transferring an interest in property or some right to another. Used commonly by lawyers, accountants, business people, title companies and other dealing with property
Agreement of the Parties - Novation
1) agreement of parties to a contract to substitute a new contract for the old one.It cancels the old agreement. Often used when the parties find that payments or performance cannot be made under the terms of the original agreement or the debtor will be f
Performance of Contract - Execute
1) to finish, complete or perform as required, as in fulfilling one's obligations under a contract or a court order; to sign otherwise complete a document
Performance of Contract - Time is of the essence clause
1) a phrase often used in contracts which in effect says:the specified time and dates in this agreement are vital and thus mandatory and 'we mean it'. Therefore any delay-reasonable or not, slight or not, will be grounds for canceling the agreement
-could
Impossibility of Performance - Impossibility
-if a law changed after the contract was arranged but before the full performance of the contract
-if a party dies or a property is destroyed this could be considered impossibility to perform
Operation of Law
-the application of law may change the rights and liabilities of the parties without their consent
-contracts can be terminated by operation of law under: bankruptcy, statute of limitations & alteration of contract
Interpretation
1) where the parties attach the same meaning to the term used in their agreement, the interpretation of the agreement should be in accord with that meaning even if a third party might interpret the language differently
-no contract arises unless both part
Breach of Contract
1) failing to perform any term of a contract, written or oral, without a legitimate legal excuse
-one of the most common causes of lawsuits for damages or court ordered "specific-performance" of the contract
-does not relieve the obligations of the breach
Rescission
1) the cancellation of a contract by mutual agreement of the parties
-may be applied when the contract has not been performed and there is a breach by one party
Reformation
1) the correction or change of an existing document by court order upon petition of one of the parties to the document. Reformation will be ordered if there is proof that the parties did not intend the language as written or there was an omission due to m
Injunction
1) a writ issued by a court ordering someone to do something or prohibiting some act after a court hearing
Ex: prohibitions against cutting trees, creating nuisances or polluting a stream
-'mandatory' injunctions may include returning of property, keeping
Specific Performance
1) the right of a party to a contract to demand that the defendant be ordered in the judgment to perform the contract
Ex: when a defendant was to sell a property and did not, a judge may order the defendant to actually complete the sale
-It is the opposit
Compensatory Damages
1) damages recovered in payment for actual injury or economic loss, which does not include punitive damages
Consequential Damages
1) damages claimed and/or rewarded in a lawsuit which were caused as a direct foreseeable result of wrongdoing
-foreseeable means that each side should have reasonably known at the time of the contract that there would be potential losses in the event of
Attorney's fees and costs
-only recoverable if they are expressly provided for in the contract
Liquidated Damages
1) an amount of money agreed upon by both parties to a contract which one will pay to the other upon breaching the agreement or if a lawsuit arises due to the breach
Punitive Damages
1) damages awarded in a lawsuit as a punishment and example to others for malicious, evil or particularly fraudulent acts
-these damages are reserved for the more serious acts such as fraud
-they are not recoverable for breach of contract even if the brea
Earnest Money
1)something of value given by a buyer to a seller to bind a bargain
If a seller defaults, a buyer may:
1) Rescind the contract and recover the earnest money deposit
2) File a suit calling for specific performance, to force the seller to sell the property
3) Sue the seller for compensatory damages
If a buyer defaults, a seller may:
1) Declare the contract forfeited
2) Rescind the contract
3) Sue for specific performance
4) Sue for compensatory damages
Real Estate Contracts
1) When the value opinion to be developed is market value, an appraiser must, if such information is available to the appraiser in the normal course of business: analyze all agreements of sale, options and listings of the subject property current as of th
Lease
1) a contract in which the rights to use and occupy land or structures are transferred by the owner to another for a specified period of time in return for a specified rent
-must be in writing & spell out terms of rental
-can be month to month, short term
Flat Rental Lease
1) a lease with a specific level of rent that continues throughout the lease term
-easiest kind, typically for short term periods
Ex: 2 year lease at $500/month or $6,000 annually
Gross Lease
1) a lease in which the landlord receives stipulated rent and is obligated to pay all of the property's operating and fixed expenses; also called full-service lease
Ex: 2 year lease at $500/month plus utilities or $6,000 annually plus utilities
Net Lease
1) a lease in which the landlord passes on all expenses to the tenant
Graduated Rental Lease
1) A lease that provides for specific changes in rent at one or more points during the lease term (step-up or step-down leases)
Index Lease
1) a lease usually for a long term that provides for periodic rent adjustments based on the change in an economic index
-consumer price index is most often the index to which the lease is tied
Revaluation Lease
1) a lease that provides for periodic rent adjustments based on the market rental rate of the space
-usually long term, may be cast as a series of short-term leases with renewal options
Escalator Lease
1) a lease that requires the lessor to pay expenses for the first year and the lessee to pay any necessary increase in expenses as additional rent over the subsequent years of the lease
-sweetheart deal of landlords, they are guaranteed the same return ea
Percentage Lease
1) a lease in which the rent or some portion of the rent represents a specified percentage of the volume of business, productivity or use achieved by the tenant
-typically used for retail properties
-straight percentage lease may have no minimum rent but
Overage Rent
1) the percentage rent paid over and above the guaranteed minimum rent or base rent; calculated as a percentage of sales in excess of a specified breakpoint sales volume
-landlord becomes the risk taker and shares in the business fortunes of the tenant
Items found in a lease agreement that are important to appraisers:
-lease term, occupancy date, rent amount, payment terms, rent concessions, landlord & tenant covenants, right to sublease, option to renew, option to purchase, escape or cancellation clauses, security deposits, casualty loss, non-competition clauses, reva
Market
1) a set of arrangements in which buyers and sellers are brought together through the price mechanism; the aggregate of possible buyers and sellers and the transactions between them.
2) a gathering of people for the buying and selling of things; by extens
Supply and Demand
1) In economic theory, the principle that states that the price of a commodity, good or service varies directly, but not necessarily proportionately, with demand and inversely, but not necessarily proportionately, with supply. In a real estate appraisal c
Real Estate Market
1) buyers and sellers of particular real estate and the transactions that occur among them
-participants in the real estate market include: buyers, sellers, landlords, tenants, agents, appraisers, mortgage officers, underwriters, title company, attorneys,
Active Market
1) a market characterized by numerous transactions
Buyer's Market
1) a market in which buyers have the advantage; exists when market prices are relatively low due to an oversupply of property or reduced buyer demand
Seller's Market
1) an active market in which the sellers of available properties can obtain higher prices than those obtainable in the immediately preceding period; a market in which a few available properties are demanded at prevailing prices by many users and potential
Depressed Market
1) a market in which a drop in demand is accompanied by a relative oversupply and a decline in prices.
Characteristics of a good market: Homogeneous Products
- it is an axiom of real estate that each parcel is unique; differing in style, age, design, condition, topography, land, subsoil & property rights
-real estate is anything but homogeneous, making it difficult to establish a price and say this property is
Characteristics of a good market: Stable Prices
-the real estate market is a dynamic market that is fluid and subject to constant & immediate change
-changes can be triggered by many factors such as factory closing or natural disasters
Characteristics of a good market: Low Prices
-markets work well and effectively if product prices are relatively low
-however, investment in real estate is likewise a substantial investment and a somewhat risky outlay of capital
Characteristics of a good market: Transportable Products
-real estate is unique as an economic good in that it is immovable, making it sensitive to nearby influences
-you buy a piece of real estate you also inherit the neighborhood and the immediate environment surrounding it
Characteristics of a good market: Organized Market Mechanism
Ex: the New York Stock Exchange
-markets should be organized and have a specifically constructed mechanism for bringing together buyers and sellers
-however, real estate is a loose affiliation of disparate components, the definable market is different for
Characteristics of a good market: Large Numbers of Buyers and Sellers
-in spite of marketing efforts there just aren't that many people realistically ready & willing to buy your house or there may be few houses that fit your needs currently available on the market
Characteristics of a good market: Knowledgeable Buyers and Sellers
-buyers and sellers of real estate typically are novices in the marketplace because many people buy/sell homes less than 10x in their lifetime
Characteristics of a good market: Rational Buyers and Sellers
-buyers and seller typically get emotionally involved, find it hard to be dispassionate
Characteristics of a good market: Little Regulation
-markets love freedom
-economic engines that are free to run on their own and react to changing conditions are more productive than those locked into barriers or restraints
-unfortunately real estate is one of the most regulated industries: zoning, buildi
Characteristics of a good market: Supply and Demand Freely Move
-largest problem areas in real estate markets
-supply and demand should be free to move, when unbalanced tends to move towards a point of equilibrium
-in real estate the amount of supply is very rigid and slow to change & demand is dynamic and subject to
Imperfect Market
1) a market in which product differentiation exists, there is a lack of important product or market information, and some of the producers and/or consumers are significant enough to affect the price and quantity of goods by their actions alone
Ex: real es
Market Area: Neighborhood
1) a group of complementary land uses; a congruous grouping of inhabitants, buildings or business enterprises
Market Area: District
1) a neighborhood characterized by homogeneous land use (apartment, commercial, industrial & agricultural)
Market Area
1) the area associated with a subject property that contains its direct competition
-could be local or so broad as international
-look for observable changes in land use, demographic or socioeconomic characteristics
Real Estate Market Cycles
-can be long-term (based on trends in population growth and income levels)
-can be short-term (based on availability of mortgages/credit and level of interest rates)
-long-term cycles are usually caused by national or international changes (outsourcing or
Amenity
1) a tangible or intangible benefit of real property that enhances its attractiveness or increases the satisfaction of the user. Natural amenities may include a pleasant location near water or a scenic view of the surrounding area; man-made amenities incl
Investors on value
-don't give much credence to amenities except for their ability to generate additional income
Return ON and OF Investment
-to compensate for a higher risk investors demand a higher return
-not an investment if there is no expectation of profit
Ex: putting money into a savings account, you are paid interest ON your investment and you get a return OF your money by withdrawing
Money
1) currency (minted coins & paper money) in the hands of the public plus demand deposits at commercial banks
2) a commodity, such as gold or silver, that is legally established as an exchangeable equivalent of all other commodities and is used as a measur
Monetary Policy
1) the Federal Reserve's efforts to influence the level of economic activity by regulating the availability of money and the rate of interest
-the amount of money in the US is regulated by the Fed. Reserve
-the Fed. Reserve can influence both the supply o
Money Market
1) the interaction of buyers and sellers who trade short-term money instruments
-typically for less than a year but can be longer
include: treasury bills (3, 6 months or a year), treasury note (1-10 years), certificates of deposit (up to 7 years), commerc
Capital Market
1) the interaction of buyers and sellers trading long or intermediate-term money instruments
-longer than one year and include: mortgages, bonds & stocks
1930s-1960s what were the primary sources of mortgage capital?
-state or federally chartered saving banks (mutual or stockholder owned)
-savings and loan institutions
-commercial banks
-credit unions
Secondary Mortgage Market
1) a market created by government and private agencies for the purchase and sale of exiting mortgages, which provides greater liquidity for mortgages. Fannie Mae, Freddie Mac and Ginnie Mae are the principal operators in the secondary mortgage market
-The
Mortgage Assumption
-where a buyer purchases a house and takes over its existing mortgage
-only FHA and VA loans are assumable without the permission of the originating lender
-other fixed-rate loans carry "due-on-sale" clauses requiring that a mortgage be repaid in full if
Land Contract
1) a contract in which a purchaser of real estate agrees to pay a small portion of the purchase price when the contract is signed and additional sums, at intervals and in amounts specified in the contract, until the total purchase price is paid and the se
Wrap-around Contracts
-the seller keeps the existing mortgage on behalf of the buyer plus lends additional money to cover the price paid above the balance of the underlying loan
-the difference between a wrap-around contract and a first-mortgage is that with the first-mortgage
Conventional Mortgage
1) mortgages that are neither insured nor guaranteed by an agency of the government, although they may be privately insured
-many high loan-to-value conventional loans have private mortgage insurance (PMI) covering the part of the loan that exceeds 80% LT
Non Conventional Mortgages: Guaranteed Loans
1) mortgages in which a party other than the borrower assumes payment in the event of default
Ex: loans guaranteed by the VA
Non Conventional Mortgages: Insured Loans
1) mortgages in which a party other than the borrower assures payment on default by the mortgagee in return for the payment of a premium
Ex: FHA mortgage; HUD/FHA does no lend money instead they charge the borrower an up-front mortgage insurance premium (
First Mortgage
1) a mortgage that has priority over all other mortgage liens on a property
Junior Lien
1) a lien placed on property after a previous lien has been made and recorded; a lien made subordinate to another by agreement
Ex: second or third mortgages/liens
-if there are second or third mortgages on a property, they carry a higher risk and therefor
Amortization
1) the process of retiring a debt or recovering a capital investment, typically through scheduled, systematic repayment of the principal; a program of periodic contributions to a sinking fund or debt retirement fund
-most mortgages are fully amortized; pa
Fixed-rate Loan
1) a mortgage at a fixed interest rate, with equal payments for each period over the length of the loan
-first & most common type of amortization schedule
-with every payment the amount of principal paid off and interest paid varies
-at the beginning of t
Balloon Mortgage
1) a mortgage that is not fully amortized at maturity, and thus requires a lump sum, or balloon, payment of the outstanding balance
-example of creative financing in the 1970s/80s
-write a loan based on a 30 year payout schedule but require that the loan
Graduated Payment Mortgage
1) a debt secured by real estate in which mortgage payments are matched to projected increases in the borrower's income. The periodic payments start out low and gradually increase.
-for younger people or people with new employment, idea that as mortgage p
Adjustable Rate Mortgages (ARMs)
1) a debt secured by real estate with an interest rate that may move up or down following a specified schedule or in accordance with the movements of a standard or index to which the interest rate is tied
-started in the 1980s in reaction to high interest
Reverse Mortgage
1) type of mortgage whereby senior homeowners systematically borrow against the equity in their home, receiving regular payments from the lender. Borrowed funds and accrued interest come due when the last surviving borrower dies or permanently vacates the
Discount Points
1) a percentage of the loan amount that a lender charges a borrower for making a loan; may represent a payment for services rendered in issuing a loan or additional interest to the lender payable in advance, AKA loan fee.
-when lenders felt they needed to
List the 4 elements of value:
-desire
-utility
-scarcity
-effective purchasing power
*utility & scarcity are supply factors
*desire & effective purchasing power are demand factors
*ALL 4 elements must be present in order for an item to have value
Desire
1) a purchaser's wish for an item to satisfy human needs (shelter, clothing, food, companionship) or individual wants beyond essential life-support needs
Utility
1) in economics, the ability of a product to satisfy a human want, need or desire
-has to be good for something, have a purpose or ba able to use it
Functional Utility
1) the ability of a property or building to be useful and to perform the function for which it is intended according to current market tastes and standards; the efficiency of a building's use in terms of architectural style, design and layout, traffic pat
Scarcity
1) the present or anticipated undersupply of an item relative to the demand for it. Conditions of scarcity contribute to value.
-scarcity usually triggers demand
Effective Purchasing Power
1) the ability of an individual or group to participate in a market; such as acquiring goods and services with cash or its equivalent
-desire must be backed up by the ability to perform
List 4 external market forces that influence real estate value:
-governmental
-economic
-social
-environmental
*Value is created and sustained by external market forces
*Appraiser are to research and analyze the property and the market and develop and report an opinion of this value
List some Governmental Forces that might affect real property value:
-planning, zoning, building codes, environmental restrictions, taxes, utilities, transportation, education, cultural, parks & rec., police, fire protection & public safety
Planning
-planned communities sustain higher real estate values
-planning may occur on a local or countywide basis
-most community planning did not occur until the 1960/70s
-looks at which parts of the community should be residential or retail and where any indust
Zoning
-property's zoning is one of the strongest determinants of value
-first citywide zoning regulations occurred in NYC in 1916
-local zoning laws appeared in most areas in 1960/70s
-zoning regulations will dictate minimum lot sizes
-"exclusionary" zoning wil
Building Codes
-can have an impact on values in an area
-typically dictate requirements for land development, stipulate minimum requirements for road development, water and sewer easements, well and septic systems, footings and foundation specifications
Environmental Restrictions
-they can produce a better quality of life and hence lead to higher property values, but they can halt new construction and restrict certain properties from future development
-can be issued by all levels of government
-National Oceanic & Atmospheric Admi
Taxes
-property taxes generally make up a significant portion of your operating expenses
-there are also state sales & income taxes and county/city taxes
-companies look at the total tax burden when deciding where to move to a certain state, part of the total c
Utilities
-access to public water and sewer versus drilling a well and installing a septic tank
-make sure there is not a moratorium on connecting to the public utilities
-for commercial & industrial properties, utilities are a lifeline and will become a factor in
Transportation
-access can affect the desirability and enhance value of residential properties but are more vital for commercial & industrial properties
-industrial properties can't survive without adequate transportation links
Cultural
-museums, art galleries, theaters & libraries
-trend for baby boomers or empty nesters to move back into the metro area for entertainment purposes
Parks & Recreation
-could function on all levels of government (national, city)
-being within walking distances or minutes from a park could enhance the value of the property
Police
-full time police versus rural area with part-time constable?
-look at the crime rate & reputation of the local police department
-if buyers have a choice among areas, all other things being equal, the safer area will usually win out
Fire Protection
-full time fire station versus volunteer
-closest fire station to the property
-closest fire hydrant; this affects your homeowners insurance
Public Safety
-encompasses electrical & fire codes, are they strictly enforced?
-weather and climate are external forces beyond our control but they may translate into a real impact on real estate values
Economic Forces
-second major category of external forces that influence real estate values
-most powerful & exert the most influence on value
-may include: national economy, CPI, interest rates, availability of financing, wage rates, types of employment, unemployment ra
National Economy
-recession or boom time/economy expanding or receding/national debt on the rise or going down/US dollar versus foreign currency/what is the cost of a barrel of oil?
-all of these factors tend to inspire confidence or spur spending in the economy and can t
Consumer Price Index (CPI)
-one measure of price pressures on inflation
-does track the cost of living in various areas around the country
Interest Rates
-when low it encourages mortgage borrowing
-when high t forces people out of the market and slows demand for home purchases
-common for lenders to restrict mortgage loans so that the total expenses for your mortgage do not exceed 30% of your gross income
Availability of Financing
-in the late 70s early 80s there was a shortage of mortgage money; inflation was raging and interest rates were hitting all-time highs. The cost of money was so high that lenders could not get enough of a return from mortgages
-the loan to value ratio is
Wage Rates
-the more you make the more you can afford; people can afford a mortgage about twice their annual income
-info available from Bureau of Labor Statistics & locally
Types of Employment
-does the local employment consist mostly of: manufacturing, professional, agricultural?
-basic industries consist of the major employers in an area
-much of the service industry income comes from money earned by people in the basic industries
-each job i
Unemployment Rates
-in the US an optimal unemployment rate is around 3-4%
-local employment trends are more important than national when valuing residential real property
-look at the cycle of employment; is it a holiday destination only active in the spring & summer are jo
Cost of Construction
-made up of 3 factors: land, materials & labor costs
-land may be exceedingly expensive in some areas
-materials may be cheap but the transportation cost to get them to remote areas will make the materials expensive
-labor costs vary considerably from one
Rental Rates
-often valued based on income & expenses
-residential appraising considers the amount of rent per apartment; however you may break it down into rent per square foot of living area per month
-a property that is more valuable should attract more rent; a pro
Rental Vacancies
-look at the % of rental vacancies in an area, lower is better
-a well managed property, running under optimal conditions would generate a small vacancy percentage during the year, maybe 4-5% per year
-rental vacancies rates may be published in your area
Expense Levels
-include:utilities, taxes, insurance, maintenance, supplies & employees
-cost of these items varies
Social Influences
-include:population trends, migrations, ages, family formations & lifestyle changes
-shortest list but no less unimportant
Population Trends
-supply and demand; the more people in an area the more houses/apartments are needed
-most accurate information comes from the Census Bureau & American FactFinder
Population Migration
-know your market area & analyze why people are coming or leaving in such proportions
Ages
-can impact the type of housing desired and value of house
-families with young children need more rooms and will effect the school system which might require expansion causing higher tax rates
-young couples with lower incomes may not be ready to buy, lo
Family Formations
-average size of an American family is on the decline
-In 2010 almost 60% of current households are occupied by 1 or 2 people!!!!!!!!
-In 2010 the median sized new house had 2,169 square feet
What are some reasons for smaller households?
-young adults waiting longer to get married
-more adults never marrying
-more divorces
-more single mothers
-more older women outliving husbands
-more unmarried men and women living together
-declining birth rate
Lifestyle Changes
-thought of desirability of energy conservation and environmental concern have permeated the American psyche
-desire for "green construction" is on the rise
-the concept of community living in which residents share responsibilities of common areas and fac
Environmental Influences
-can be a long list of physical or locational influences
-look for "nearness" factors to places such as: shopping, schools, employment, churches, restaurants, police & fire
-look for physical or environmental factors that would affect most areas equally,
Climate
-can have an impact on activities or developments
Topography
-may dictate development patterns or preclude development in areas of severe slopes
-really is a matter of degree whether the land can be developed or left as a nature preserve
Soil Conditions
-may also dictate development
-rocky soil may require blasting for footings & drainage
-sandy soil may require additional footings for support
-if the soil is good with adequate draining it may have greater value for farming than development
Nature of Improvement in the Area
-is the area developed to any extent or is it primarily vacant land?
-is the area many residential development or farming, ranching or forestry?
-how old are the developments in the area?
-any new construction planned or occurring?
Density
-how extensively has the area been developed?
-how many structures per acre and people per sq mile?
Natural Hazards
-can be minor inconveniences or major perils
Ex: hurricanes, tornadoes, floods, forest fires, earthquakes & volcanic eruptions
Man-made Hazards
-may impact a wide area
Ex: landfills, chemical plants, superfund sites, toxic waste storage facilities & refineries
-may result in pollution of the air, water & ground
Value
1) the monetary relationship between properties and those who buy, sell or use those properties. Value expresses an economic concept. As such, it is never a fact but always an opinion of the worth of a property at a given time in accordance with a specifi
Price
1) the amount asked, offered, or paid for a property. Once stated, price is a fact, whether it is publicly disclosed or retained in private. Because of the financial capabilities, motivations or special interests of a given buyer or seller, the price paid
Cost
1) the total dollar expenditure to develop an improvement (structure); applies to either reproduction of an identical improvement or replacement with a functional equivalent, not exchange (price).
2) the amount required to create, produce or obtain a prop
Market Value
1) the most probable price that the specified property interest should sell for in a competitive market after a reasonable exposure time, as of a specified date, in cash or in terms equivalent to cash, under all conditions requisite to a fair sale, with t
Arm's-Length Transaction
1) a transaction between unrelated parties under no duress
-two parties are standing at arm's length and negotiating freely with no attachments
Ex: job transfer, death, sale to relative/friend/business partner, sale due to foreclosure, condemnation or tax
Exposure Time
1) the time a property remains on the market
2) USPAP: the estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the a
Value in Exchange
1) attribution of value to goods or services based on what can be obtained for them in exchange for other goods and services
2) the value as recognized by a market in which exchange of asset ownership hypothetically or notionally, takes place
-market valu
Value in Use
1) the value of a property assuming a specific use, which may or may not be the property's highest and best use on the effective date of the appraisal. Value in use may or may not be equal to market value but is different conceptually
2) the present value
Investment Value
1) the value of a property interest to a particular investor or class of investors based on the investor's specific requirements. Investment value may be different from market value because it depends on a set of investment criteria that are not necessari
Insurable Value
1) a type of value for insurance purposes
-coming up with the value of the part of a property that would be replaced in the event of a total loss by fire, hurricane, or other catastrophic event
-means the building improvements only and does not include th
Assessed Value
1) the value of a property according to the tax rolls in ad valorem taxation; may be higher or lower than market value, or based on an assessment ratio that is a percentage of market value
-assessed value may not be reliable as an estimate of market value
Intangible Value
1) a value that cannot be imputed to any part of the physical property, such as the excess value attributed to a favorable lease or mortgage, the value attributable to goodwill
Ex: a long term lease for a property at $10/sq ft when the market rate is now
Going Concern Value
1) the market value of all the tangible and intangible assets of an established and operating business with an indefinite life, as if sold in aggregate; more accurately termed the market value of the going concern
2) the value of an operating business ent
Public Interest Value
1) monetary worth attributed to features that have no measurable worth in the market but may benefit the public or a specific segment of the public. Sometime used to rationalize payment of a price that exceeds market value based on benefits to society res
Book Value
1) the capital amount at which property is shown on the account books of a corporation or individual. The net amount at which an asset is carried on the books or reported in financial statements; the asset's cost at acquisition, reduced by the amount of a
Liquidation Value
1) the most probable price that a specific interest in real property should bring under the following conditions:
*consummation of a sale within a short period of time
*property subjected to market conditions prevailing as of the date of valuation
*both t
Salvage Value
1) the price expected for a whole property, such as a house or part of a property
Ex: a plumbing fixture that is removed from the premises usually for use elsewhere
2) describes the value of an asset that has reached the end of its economic life for the p
Anticipation
1) the perception that value is created by the expectation of benefits to be derived in the future
-strongest application in the valuation of income producing properties
Change
1) the result of the cause and effect relationship among the forces that influence real property value
-change is constant
-real property values are capable of dramatic and instant change
-change can be subtle and hard to recognize or may have just occurr
Competition
1) between purchasers or tenants, the interactive efforts of 2 or more potential purchasers or tenants to make a sale or secure a lease
2) between sellers or landlords, the interactive efforts of 2 or more potential sellers or landlords to complete a sale
Substitution
1) the appraisal principle that states that when several similar or commensurate commodities, goods or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which
Contribution
1) the concept that the value of a particular component is measured in terms of its contribution to the value of the whole property, or as the amount that its absence would detract from the value of the whole
-used when determining how much to adjust for
Externalities
1) the principle that economies outside a property have a positive effect on its value while diseconomies outside a property have a negative effect on its value
2) in appraisal, off-site conditions that affect a property's value. Exposure to street noise
Balance
1) the principle that real property value is created and sustained when contrasting, opposing or interacting elements are in a state of equilibrium
Ex: a property owner might build an $800,000 new home on a lot that is only worth $25,000; this would resul
Conformity
1) the appraisal principle that real property value is created and sustained when the characteristics of a property conform to the demands of its market
-properties fare better when they meet the expectations of the market
-unusual or atypical houses may
Progression
1) in appraisal, the concept that the value of an inferior property is enhanced by its association with better properties of the same type
-this situation is good for the owner of the inferior property; your value will be dragged upward
Regression
1) in appraisal, the concept that the value of a superior property is adversely affected by its association with an inferior property of the same type
-not good for the owner of the largest & nicest home in the neighborhood
-may lose value because of the
Opportunity Cost
1) the cost of options forgone or opportunities not chosen
-closely tied to the principle of substitution; what must be given up in order to receive something else?
Agents of Production
1) land, labor, capital and entrepreneurial coordination
-based on a production theory by Alfred Marshall in 1890
-presumes that the value of real estate is influenced by the cost of producing it
-Marshall postulated that each component required a return
Surplus Productivity
1) the net income that remains after the costs of various agents of production have been paid
-anything left over after agent of production, the excess profit would be returned to the land; the most basic component without which nothing would be possible
Increasing and Decreasing Returns
1) the concept that successive increments of one or more agents of production added to fixed amounts of the other agents will enhance incomes, in dollars, benefits or amenities, at an increasing rate until a maximum return is reached. Then, income will de
Highest and Best Use
1) the reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible and that results in the highest value.
-each piece of real estate has at least 1 highest and best
Legally Permissible
-highest and best use may be restricted by zoning; may investigate possibility of getting a zoning change or variance
-you may also have to consider private restrictions, such as deed & environmental restrictions
Physically Possible
-must be physically possible to do that on the site; level enough, deep enough, adequate frontage & subsoil conditions
Economically Feasible
-must result in a viable investment, must be a demand for that type of use
-investigate supply and demand
Maximally Productive
-Among all the possible uses, which one will bring the highest return?
-process of elimination; starting from the widest range of possible uses
Highest and Best Use of Land or a Site as Though Vacant
1) among all reasonable, alternative uses, the use that yields the highest present land value, after payments are made for labor, capital and coordination. The use of a property based on the assumption that the parcel of land is vacant or can be made vaca
Highest and Best Use as Improved
1) the use that should be made of a property as it exists. As existing improvement should be renovated or retained as is so long as it continues to contribute to the total market value of the property, or until the return from a new improvement would more
Illustration 1: A new interchange is being planned for an interstate highway that curves around the western edge of the city. This has been widely publicized and several public meetings were held. At a press conference last week, the State Transportation
1) Anticipation: there is a new set of facts in the marketplace & buyers and sellers are reacting accordingly
2) Change: 2 weeks ago this wouldn't have happened
3) Competition
4) Highest and Best Use
5) Opportunity Cost: 1 investor was willing to take the
Pete and Sally have live in their house 14 years. They have 3 young children, Pete got a promotion and Sally is working 30 hrs/week as a hygienist. Feel secure in their jobs and have saved a little money. The house feels cramped and needs some updating. L
1) Anticipation: any future actions or investments, anticipated costs versus benefits
2) Balance: don't overimprove an old house
3) Competition: value of new house in subdivision
4) Conformity: value is created & sustained when a property conforms to dema
Appraise a 25 year old one-story concrete block vacant retail building with a flat roof and 8,000 sq ft. Vacant over 1 year, last used as a garden center, has 4 acres with 600 ft frontage on a state highway & is located north of city in a neighborhood of
1) Anticipation: investigate what uses would be legally permissible (zoning & change variation) & deed restrictions; physical possibilities seem good; possibility of subdividing
2) Competition: investigate rental rates & vacancies
3) Highest and Best Use:
Appraise a 3 acre parcel of vacant land; owner says that the minimum lost size in that area, allowed by zoning, is 1 acre. What principle(s) do we need to consider when undertaking this appraisal assignment?
1) Anticipation
2) Competition
3) Conformity
4) Externalities
5) Highest and Best Use
6) Substitution
7) Supply and Demand
I am considering making you an offer on your property listed at $220,000. My agent shows me recent sales of similar properties in the neighborhood ranging from $190,000 to $210,000. What is the primary economic principle that I will employ when making a d
Substitution
A landowner has been dumping tires on his property over the last 6 months. The adjoining property owners have contacted a lawyer to get the tires cleaned up; citing that the tires are breeding grounds for mosquitoes and constitute a fire hazard. What econ
1) Externalities: it postulates that a loss in value may be incurred from influences that are outside the boundaries of your own property
Market Analysis
1) a process for examining the demand for and supply of a property type and the geographic market area for that property type
-studies the market for any particular economic good
Market Area Analysis
1) the objective analysis of observable &/or quantifiable data indicating discernible patterns of urban growth, structure and change that may detract from or enhance property value; focuses on four sets of considerations that influence value: social, econ
Macroeconomics
1) study of the economy as an aggregate system, focusing on national/domestic production & income, the supply of money, rate of inflation, national budget, balance of trade & the interrelationships among constituent sectors
-the BIG picture; look at major
Microeconomics
1) the study of the economics of individual spheres of activity or patterns and behaviors
Ex: a firm, an industry, retail market, consumer segment, pricing, local employment
-focuses more on a local market
Submarket
1) a division of a total market that reflects the preferences of a particular set of buyers and sellers
Ex: fast food restaurants as a submarket of the overall restaurant market
-within a total residential market there could be submarkets that consist of:
Market Segmentation
1) the process by which submarkets within a larger market are identified and analyzed
Disaggregation
1) the differentiation of a subject property from other properties on the basis of subclassifications with differing product characteristics
-actual process by which we separate and define some markets
-pick 3 or 4 most important factors that you are tryi
Demand Analysis
-in residential properties, research and analyze factors such as: population trends, income and wage levels, employment types & patterns, unemployment rates, mortgage info, land use patterns, physical factors & local government
- in commercial properties,
Supply Analysis
investigate: existing stock, volume of new construction, planned construction (new building permits), availability and price of vacant land, costs of construction, properties offered for sale, conversions in progress & availability of financing
Existing Stock
-existing housing stock is the starting point
-represents the max supply of any kind of real estate at any given moment
-a call to the assessor's office may yield an accurate count of residential properties or the census bureau website
Volume of New Construction
-How much construction is currently going on? How many new units have been built in the last 5 or 10 years?
-sometimes that info is available in a local paper or the NAHB 's website
Planned Construction - New Building Permits
-the amount of building permits issued provides the best estimate of how many new units will be coming soon; this info can be found at the local building department
Availability and Price of Vacant Land
-How much land is realistically available for development for different types of properties?
-How much of that available land can be purchased at a reasonable price? Developers must make a profit.
Costs of Construction
-more rural locations will cost more for labor & materials
-both labor & material costs in more specialized types of construction for commercial/industrial properties may be prohibitively expensive in some areas due to a lack of suppliers or knowledgeable
Properties Offered for Sale
-impossible to get a precise count, but your best measure is looking on MLS,
-for commercial properties, rely on commercial brokers or internet sites
Conversions in Progress
-converting apartments & condos into residences, creating more housing units but decreasing rental units or vice versa
Market Study
1) a macroeconomic analysis that examines the general market conditions of supply, demand and pricing or the demographics of demand for a specific area or property type; may also include analyses of construction and absorption trends.
-concentrate on mark
Absorption Rate
1) the rate at which properties for sale or lease have been or are expected to be successfully marketed, sold or leased in a given area over a duration of time
Absorption Period
1) the actual or expected period required from the time a property, group of properties or commodity is initially offered for lease, purchase or use by its eventual users until all portions have been sold or stabilized occupancy has been achieved
-this is
Marketability Study
1) a microeconomic study that examines the marketability of a given property or class of properties, usually focusing on the market segment(s) in which the property is likely to generate demand. Useful in determining a specific highest and best use, testi
Feasibility Analysis
1) an analysis undertaken to investigate whether a project will fulfill the objectives of the investor. The profitability of a specific real estate project is analyzed in terms of the criteria of a specific market or investor. Often interchangeable with i
Case Study: Client had 60 acres of land in a good location with no zoning & no legal restrictions. What is the highest and best use for this parcel of land? List some possible date sources & the kind of information that would need to be analyzed.
-Data Sources: real estate agents, builders, developers, investors, bankers, assessors, other appraisers, local planning agencies, trade journals, MLS & the internet
-Information to accumulate: # of sales of residential properties in the last 3 years, # o
There are 27 three bedroom houses in the development. This amounts to 15% of the total. How many houses are there in the development?
Formula: Total = Part/Percent
27/.15=180
There are 27 three bedroom houses in the development. There are 180 houses in the development. What percent are three bedroom?
Formula: Percent = Part/Total
27/180=.15 or 15%
A share of stock was purchased for $124. It was sold 3 years later for $156. What was the percentage change?
Formula: Percent change = new amount/base amount
156/124=1.26 or 126% The stock increased 26% above the base amount
The area of a rectangle is equal to:
base x height or length x width
Formula: A = B x H
Ex: a patio is 12 ft by 24 ft. What is the area in sq ft?
12 x 24 = 288 sq feet
Scenario 1: A lot measures 417 feet x 614.8 feet. What is the area in square feet?
417 x 614.8 = 256,371.60 sq ft
Scenario 2: How many acres are in that lot?
256,371.60/43,560 = 5.89 acres
Scenario 3: A lot contains 3.32 acres. How many square feet is that?
3.32 x 43,560 = 144,619.20 sq ft
Scenario 4: A lot measures 168 feet by 276 feet. It sold for $45,000. What did it sell for per acre?
168 x 276 = 46,368 sq ft
46,368/43,560 = 1.06 acres
$45,000/1.06 = $42,452.83
Scenario 5: A lot has 95 feet frontage on a lake and runs back 225 feet. It sold for $120,000. How much did it sell for per front foot?
$120,000/95 = $1,263,16
Statistics
1) a body of principles and methods concerned with extracting useful information from numerical data.
Inferential Statistics
1) the process of drawing conclusions about population characteristics through analysis of sample data.
Mean
1) a measure of central tendency. The sum of values for a variable in a sample or population divided by the number of items in the sample or population. The arithmetic average.
Median
1) a measure of central tendency identified as the middle value in an ordered array of numerical values.
Mode
1) a measure of central tendency; the most frequent or typical value in an array of numbers; a positional average that is not affected by extreme values. It is the most descriptive average and easily identified when the number of items is small; if the sa
Problem 1: A rectangular lot contains 2.34 acres. It has a frontage of 379.22 feet. What is its depth?
2.34 x 43,560 = 101,930.40 acres
101,930.40/379.22 = 268.79
Problem 2: Your living room measures 14 x 24 feet. It will cost $15.50 per sq yard plus $2.75 per sq yard for the pad. How much will it cost you? (There are 9 sq ft in a yard)
14 x 24 = 336 sq ft
336/9 = 37.83 yards
37.83 x 18.25 = $681.27
Problem 3: You want to buy a house for $188,500. You can get a loan for 95% of value. You will also have to pay 2.5 points on the loan. How much will you have to put down at the closing?
$188,500 x .95 = $179,075 mortgage loan
$179,075 x .025 = $4,476.88 in points
$188,500 x ,05 = $9,425 down payment
$9,425 + $4,476.88 = $13,901.88
Problem 4: Your house is valued at $214,000. You want to insure it for 80% of value and the insurance will cost $5.50 per thousand. How much will your insurance cost per quarter?
$214,000 x .80 = $171,200
171.20 x 5.50 = 941.60
941.60/4 = $235.40
Problem 5: You sold your house for $260,000. You agreed to pay 2 points on the 90% mortgage that the buyer received. You had to pay $600 in legal fees plus a 5.5% sales commission. How much did you net for the property?
Problem 6: now assume you purchased
5) $260,000 x .90 = $234000
$234,000 x .02 = 4,680 (in points)
$260,000 x .055 = 14,300
600 + 4680 + 14,300 = 19,580
$260,000 - 19,580 = $240,420
6) $240,420/$185,000 = 1.30 or 30% gain
.30/3.5 = .0857 or 8.57%
Problem 7: You apply for a mortgage and the lender will allow you to spend up to 29% of your annual income for housing costs. These housing costs will include your mortgage, property taxes and insurance. Your income is $1,635 every two weeks. If you apply
$1,635 x 26 = $42,510 annual income
$42,510 x .29 = $12,327.90
$12,327.90/12 = $1,027.33
Problem 8: Two years ago, you bought a property for $375,000. Values increased in that area by 8% the first year and 6% the second year. How much is your property worth today?
$375,000 x 1.08 = $405,000
$405,000 x 1.06 = $429,300
Problem 9: A rectangular lot has 128 ft frontage on a commercial highway and runs back 342 feet deep. It sold for $250,000. What did it sell for per front foot? What did it sell for per sq ft?
$250,000/128 = $1,953.13 per front foot
128 x 342 = 43,776 sq ft
$250,000/43,776 = $5.71 per sq ft