Regulation of Appraising
The Appraisal Foundation (TAF):
- founded in 1987 as a source for advancing professional standards for appraisers
- Private, not-for-profit corporation, responsible for establishing, improving and promoting minimum uniform appraisal standards and appraise
Appraisal Foundation Composition
3 Distinct Boards:
1. Appraisal Qualifications Board (AQB)
- establishes the qualification criteria for state licensing, certification and recertification of appraisers
- Voluntary criteria for personal property appraisers
2. Appraisal Standards Board (AS
Appraisal License Types (3 Types)
1. Registered Trainee Appraiser
2. Certified Residential Appraiser
3. Certified General Appraiser
**Appriasers must provided certified reprots of value which comply with current USPAP requirements
- Reports must be maintained for 5 years after the apprais
1. Registered Trainee Appraiser
Requirements for this license include successfully completing 100 classroom hours of board-approved courses covering the topics required by the FREAB in subjects related to real estate appraisal
2. Certified Residential Appraiser
Requirements for this license include completing 200 hours of board-approved courses covering the topics required by the FREAB in subjects related to real estate appraisal
- MUST include 15 hours of the Uniform Standards of Professional Appraisal Practice
3. Certified General Appraiser
Requirements for this license include completing 300 classroom hours of board-approved courses covering the topicss required by the FREAB in subjects related to real estate appraisal
- MUST include 15 hours of the Uniform Standards of Professional Apprais
Real Estate Pros & Appraisals
Florida statute allows real estate professionals to appraise real estate property for any non-federally related real estate transactions
- Must comply with all USPAP requirements
Comparative Market Analysis (CMA)
CMA:
- provides an insight as to properties currently on the market, pending, sold and the listed prices of expired properties on the market
- May NOT be referred to as an appraisal as its purpose is to provide the seller of a property with a range of pri
Broker's Price Opinion
Broker's Price Opinion:
- property valuation provided to a lending institution for distressed properties on the market
- These opinions became valuable in determining short sale approval prices and foreclosure sale prices during the housing crisis of '08
Determining Value of a Property
- Important for the seller in selling the property
- Important for the buyer in buying the property
- Property taxes require a notice of value and so does property insurance
The Real Estate Appraisal
An appraisal is an estimate or opinion of value
Goal: determine the market value, insurance value, salvage value, and/or the tax value of a property
Compensation of the appraiser is based on time and effort, NEVER on the established price of the property
Appraiser's Ground Rules
1. Payment must be in cash or its equivalent -- the appraiser assumes the buyer is either paying cash for the property or is in the process of obtaining a loan
2. Buyer and Seller must be unrelated and acting without undue influence, menace or duress -- A
Appraisal Process
1. State/Define the problem
2. Gather, record and verify all data
3. Analyze & Interpret Info
4. Estimate Land Value
5. Estimate value of the property
6. Reconcile estimated values for the final value estimates
7. Report final value estimates
1. Appraisal Process - 1. State the Problem
State the Problem:
- appraiser determines why he/she has been hired to make an appraisal on the property
- Purpose to determine market, insurance, salvage and/or tax value
2. Appraisal Process - 2. Gather, Record & Verify All Data
Gather, Record & Verify Data:
- using all the tools available, the appraiser uses the 3 appraisal processes
3. Appraisal Process - 3. Analyze & Interpret
Analyze & Interpret using following info:
a. Neighborhood Analysis:
- a gathering of facts about a neighborhood to determine the appeal to the buyer
- Facts include: employment stability, convenience to employment, convenience to shopping, adequacy of pub
4. Appraisal Process - 4. Estimate of Land Value
Estimate of Land Value
- For an appraisal, land NEVER depreciates in value
5. Appraisal Process - 5. Estimate Value of the Property
Estimate Value of the Property
3 Approaches:
a. Market Data (sales comparison)
b. Cost (or summation)
c. Income
6. Appraisal Process - 6. Reconcile Estimated Values for the Final Value Estimates
Reconcile Estimated Values
- final step in the appraisal process, in which the appraiser reconciles the estimates value received from the sales comparison, cost & income approaches t to arrive at a FINAL estimate of market value
***An appraiser NEVER aver
7. Appraisal Process - 7. Report Final Value Estimates
Report Final Value Estimates:
(Types of Reports):
a. Letter - a short business letter stating that all essential data but not including supporting data
b. Short or Form: contains all basic of a regular appraisal and is used primarily for homes
c. Narrativ
Concept of Value
Many types of Value as it relates to Real Estate:
- Tax Values used for property taxation
- Insurance Values for homeowner's policies
- Value in use is the history of income for a commercial property
- Liquidation value is value of the property if it requ
Market Value
Most important of values to real estate
- This is the definition used in all loans using federal money i.e. for any loans sold on the secondary market to Fannie Mae, Freddie Mac or Ginnie Mae
DEFINITION - Market Value is the MOST PROBABLE PRICE a property
Assumptions of Market Value
Assumption (Market Value):
- Seller can provide marketable title
- Both the buyer & seller are well informed and not related to each other
- Neither buyer or seller are under duress, menace or undue influence
- Market value refers to a specific date
- The
Difference between VALUE, PRICE , COST
Value:
- is the amount brought in an open market under the above assumptions
Price:
- is the amount the buyer will actually pay, sometimes with unusual circumstances
Cost:
- is how much cash it takes to build and improve property
- Cost may be historical,
Characteristics of Value (D.U.S.T.S.)
D. Demand: how much call is there for the property?
U. Utility: how useful is the property in connection with the buyer's needs
S. Scarcity: how hard to find the property, how much of this type of property in this price is there?
T. Transferability: Can t
Principles of Value
1. Highest and Best Use
2. Substitution
3. Law of Supply & Demand
4. Conformity
5. Regression & Progression
6. Anticipation
7. Contribution
8. Assemblage
1. Highest and Best Value - (Principles of Value)
Highest & Best:
- the possible use of a property that would produce the greatest net income and thereby develop the highest value
- Appraiser must look at the property both as if it were vacant and as it now sits as improved property -- sometimes even des
2. Substitution (Principles of Value)
Substitution:
- the maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property
- Similar properties will bring similar values
3. Law of Supply & Demand (Principles of Value)
Supply & Demand:
- value of a property increases when the supply is limited and decreases when there is too much property available
- Similarly, the value increases when the supply is short, and decreases when there is little demand
Lower Supply = Higher
4. Conformity - (Principles of Value)
Conformity:
- an appraisal principle of value baed on the concept that:
"the more a property or its components are in harmony with the surrounding properties or components, the GREATER THE VALUE"
Example: A million dollar home in a $100K neighborhood will
5. Regression & Progression - (Principles of Value)
Regression & Progression:
a. Regression - value of a better quality property is affected by the presence of a lesser quality property
b. Progression - lesser house will benefit from the presence of a larger house
6. Anticipation - (Principles of Value)
Anticipation:
- property can increase or decrease in value in expectation of something in the future such as appreciation or re-zoning
Example: if a person discovers that an airport is going to be built in a certain area
7. Contribution - (Principles of Value)
Contribution:
- means the value of any component may or may not give value to the whole
Example: a fully remodeled kitchen or bathroom ADDS to the value of a property
Swimming pool may cost more than it will bring the property value
8. Assemblage - (Principles of Value)
Assemblage:
- is the combining of two or more adjoining lots into one larger tract to increase their total value
"Plottage Value" - is the increased value resulting from the combining of adjacent lands into one larger lot
9. Competition - (Principles of Value)
Competition:
- is when one business attracts another business of similar type; together they make MORE $$$ than they would have singularly
- Too LITTLE shopping does not draw consumers; too MUCH is ruinous
10. Change - (Principles of Value)
Change:
- real property is constantly changing -- expanding, stabilizing, declining, or rebirth
- A subdivision is built, ages, decays and is reborn with renovation
Shopping areas lose appeal popularity; they revitalize and come back to life again
Housing
3 Approaches to Value
1. Sales Comparison Approach (Market Data)
2. Cost Approach (Summation Approach)
3. Income Approach
1. Sales Comparison Approach
Sales Comparison Approach:
- This approach is used for appraising residential property or vacant land
- This approach compares the subject property to similar properties and make adjustments on the basis of the date, the location, the physical features an
2. Cost Approach (Summation Approach)
Cost Approach
- Used on building which do not have market data because they are unusual properties (school, post office, library, etc. or a building without income)
Reproduction Cost: to replace with the same materials as original construction (much more
Cost Approach Cont'd
3 Methods of Determining Cost:
a. Square Foot Cost - using outside measurement, how many square feet times a cost for either replacement or reproduction
b. Unit in Place - the replacement cost of a structure is estimated based on the construction cost per
Cost Approach Process (Steps)
1. Estimate the value of the land alone as if vacant
2. Determine either the replacement or reproduction cost of the building
3. Deduct all accrued depreciation from the replacement cost
4. Add the estimated land value to the depreciated replacement or re
Cost Approach - Depreciation
Deprecation: a loss in value due to ANY cause - any condition that adversely affects the value of an improvement
3 Classes of Depreciation:
a. Physical Deterioration - a reduction in the utility, usefulness, or value resulting from physical condition
- Ca
Cost Approach: Age
Effective Age:
- differs from the actual age by such variable factors as depreciation, quality of maintenance, and the like
- Remodeling can extend the economic life of a structure by reducing or mitigating the impact of actual age and increasing the stru
Cost Approach: Value
A. Physical Life:
- actual age or life of a structure that is considered habitable as opposed to economic life
Ex: building sitting vacant without a tenant has a "physical life" but there is NO economic life since there is no income
b. Economic Life:
- es
Incurable vs. Curable
When a property has repairs or updating that is economically feasible, it is said to be CURABLE
When the cost is too high, or impossible to fix, or due to outside influences beyond the owner's control, it is said to be INCURABLE
Cost Approach: Math Example
1. Estimate the value of the land alone as if vacant
2. Determine either the replacement or reproduction cost of the building
3. Deduct all accrued depreciation from the replacement cost
4. Add the estimated land value to the depreciated replacement or re
3. Income Approach
Income Approach
- this approach is used for income generating properties such as apartments, retail centers, multi-tenant office buildings, etc.
Know the "stack" :
"Pick Violets Every Other Night"
P - Potential Gross Income
V - Vacancy & Collection Losses
Income Approach: Steps Involved
1. Estimate annual potential gross income
2. Subtract an appropriate allowance for vacancy and collection losses to arrive at an effective gross income
3. Deduct operating expense -- operating expenses are those expenses that contribute directly to the op
Income Approach Cap Rate Example
Potential Gross Annual Income = $60,000
Additional Income = $0
Less Vacancy & Collection Losses (4%) = -$2,424
Effective Gross Annual Income = $57,576
LESS Operating Expenses:
Real estate Taxes = $9,000
Insurance = $1,000
Heat = $2,800
Maintenance = $6,40
Income Approach Cap Rate Example 2
Property is valued at $250,000 and nets $875 / month
What is the annual rate of return??
1. Always find ANNUAL net income: $875 x 12 = $10,500
2. Pick from one of the 3 value formulas depending on what you want to solve for
a. NOI/Cap Rate = Value ($10,50
Gross Rent Multiplier (GRM)
Some appraisers use a technique called gross rent multiplier (for residential) and gross income multiplier (for commercial)
This system is an educated guess because:
a. Hard to find match properties
b. Hard to find properties whose owners price the rent c
Gross Rent Multiplier (GRM) Example
If you have a neighborhood with homes that are all have same number of garages, bedrooms, conditions, etc.
- It is possible to divide the selling price by the monthly rent to get a multiplier -- This is a WHOLE number, not a percent or decimal
Example:
Ho
Gross Income Multiplier (GIM)
Same technique is used for income-producing properties such as a convenience store, grocery store, etc.
Gross ANNUAL income is used instead of MONTHLY
Highly speculative method of determining value and should only be used as a confirming method, not a pri
The CMA (Competitive Market Analysis)
Competitive Market Analysis is a a tool used by real estate professionals to obtain a list price -- NOT AN APPRAISAL
Certain facts must be obtained:
- comparable homes with the same number beds, baths and garages
- comparable homes should be close to the