Chapter 11 The Collateral

Learning Objectives Describe the appraisal process List the data that must be collected and analyzed to appraise a property List the forms needed to process a loan and explain the purpose of each List he guidelines that must be observed in processing a loan Describe the FHA direct endorsement program 11-1

Property Appraisal Lender wants to know property’s market value Ordering the appraisal –Lenders are generally free to choose an appraiser –Appraiser must be state-certified or licensed Monitoring the appraisal –Performed within HUD or secondary market guidelines 11-2

Appraisal Con’t Evaluating the appraisal –Lender receives a conditional commitment (FHA) or a certificate of reasonable value (VA) –Repairs may be required for FHA –VA value is “ as is” Review appraiser reviews the appraisal for conventional loans 11-3

Cost Approach to Value Buyer will not pay more for a property than to construct a property with the same utility StepsSteps –Estimate value of land as vacant –Estimate cost of replacing the improvement –Estimate physical, functional, and economic depreciation –Subtract step 3 from step 2 –Add step 1 and step 4 to determine total value 11-4

Market Approach to Value Based on premise that selling prices of similar properties are good indicators of value Selling prices of “comparable” properties are adjusted for physical, financing, and other differences Other factors include location, time on the market, market conditions, etc. Adjusted selling prices of comparables are used to estimate value of subject property 11-5

Income Approach Value of property is a function of the income that accrues to it Value is determined by “capitalizing” income Overall capitalization rate is net operating income divided by the value of the property 11-6

Reconciliation Phase Estimates produced by the three approaches are reconciled into one estimate of value Appraisal becomes a “subjective art” rather than “exact science” Appraiser evaluates the reliability of each approach 11-7