1. Chapter 14 Qualifying the Property

2. I. The Lender’s Perception of Value

3. The Lender’s Perception of Value Lenders utilize Licensed and Certified Appraisers to provide a professional opinion of market value for each residence they loan upon. By both state and federal law appraisers are required to provide an unbiased and independent analysis of the property. MARKET VALUE is the price paid by a typical buyer; it is based on the analysis of a group of actual sales that occurred in the marketplace. It is this true market value that a lender seeks, because if a foreclosure is ever necessary, the lender has some assurance that the property can be sold for an amount that can enable them to recover most, if not all, of their investment.

4. A. LTV AND MAXIMUM LOAN AMOUNT Loans are generally made at a loan-to-value ratio of from 80% to 90% of the value of the property. Example: $180,000.00 Sales Price $150,000.00 Appraised Value x.80 Loan to Value Ratio $120,000.00 Maximum Loan In the example, the maximum loan is predicated on the lower appraised value, not the higher sales price. In the example, the maximum loan is predicated on the lower appraised value, not the higher sales price. If the lender were to base the loan on the higher of the two figures, it would be loaning an amount that would be 96% of the appraised market value.

5. B. ESTIMATING MARKET VALUE It is not necessary for agents and loan officers to be able to appraise properties. However, it is helpful to understand the mechanics of the appraisal process and to know something about the reasoning and logic that underlies many of the appraiser’s conclusions. For real estate agents, an understanding of how lenders and their appraisers perceive value will enable them to write and arrange financing for sales that will hold together.

6. II. Market Approach

7. Market Approach The market approach to value is the most easily understood by the layman. The MARKET APPROACH involves a comparison of the property being appraised against other similar properties in the same neighborhood that have recently sold or are currently being offered for sale. Appraisers know that no informed buyer who is acting free of pressure will pay more for a particular property than he or she would have to pay for an equally desirable substitute property. An informed seller is not likely to sell for less than is necessary, and if he or she is objective, the selling price will be based on the results of recent sales in the neighborhood. An informed seller is not likely to sell for less than is necessary, and if he or she is objective, the selling price will be based on the results of recent sales in the neighborhood. The property sales that appraisers actually use are those that have closed escrow.

8. A. IDENTIFYING LEGITIMATE COMPARABLES When utilizing the market approach, the appraiser must be certain that the sales used as a basis for comparison are, in fact, relevant in terms of the factors that have the most impact on value

9. 1. Metropolitan Statistical Areas A METROPOLITAN STATISTICAL AREA is an area with a core city population of 50,000 people and the area surrounding it. A METROPOLITAN STATISTICAL AREA is an area with a core city population of 50,000 people and the area surrounding it. The information obtained from these areas is considered to be significant to business, industry and consumer groups. Bar graphs may be combined with a frequency curve to provide what is known as a HISTOGRAM. Bar graphs may be combined with a frequency curve to provide what is known as a HISTOGRAM. FREQUENCY CURVES FREQUENCY CURVES BELL CURVE BELL CURVE

11. 2. Multiple Regression Analysis Another tool consists of the use of MULTIPLE REGRESSION ANALYSIS, which is a statistical procedure that attempts to assess the relationship between a dependent variable and two or more independent variables.

12. 3. Automated Valuation Models Currently, a popular tool for the selection of comparable sales, the AUTOMATED VALUATION MODEL (AVM), which is a computer generated valuation report, has become the darling of the lending industry. Many residential lenders accept AVM reports in lieu of traditional appraisals for both first and second mortgages. An AVM can review and select from hundreds of properties within seconds. If the AVM is combined with a regression analysis program it can provide a bottom line value in seconds.

13. AVMs (cont.) Well, it turns out that most AVMs are only accurate about 65% of the time. All economic and appraisal modeling programs require proper calibration by the user. In addition, the raw data put into many models is often unverified and incorrect. For example, most county data is anywhere from 10-15 years old and may not include homeowner upgrade information. The AVM program assumes that every residence in your area is of the same quality and condition. The question might be asked: “Why do we need an appraiser?”

14. 4. Appraiser Assisted AVMs To try to answer these problems the industry has developed the APPRAISER ASSISTED AUTOMATED VALUATION MODEL (AAAVM). These programs are modified to allow an appraiser to manually input information, make some adjustments, and do minimal calibration. Also, the appraiser signs off on the result which takes care of who is liable for the accuracy of the AVM.

15. 5. Sale Date of the Comparable Sale The sale should be recent—within the past six months, if possible. Recent sales are used because they most accurately reflect what is occurring in the current market and do not require adjustments for time.

16. 6. Location of the Comparable Sale Comparables should be selected from the neighborhood of the subject property. In the absence of any legitimate comparable sales in the neighborhood, the appraiser can select comparables from nearby similar neighborhoods. In the absence of any legitimate comparable sales in the neighborhood, the appraiser can select comparables from nearby similar neighborhoods. Care must be taken that the properties and the neighborhoods have similar physical and demographic characteristics.

17. 7. Physical Characteristics To qualify as a comparable, a property should have physical characteristics that are essentially similar to the subject property. To qualify as a comparable, a property should have physical characteristics that are essentially similar to the subject property.

18. 8. Terms of Sale With the increase of seller participation in financing today, the terms of sale have become much more of a factor when estimating value. Buyers have demonstrated a readiness that often borders on foolishness to pay inflated prices for housing. Often, eager sellers have provided extended payment terms and below market rates while adjusting the price of the house upwards to recover the difference in interest. The appraiser is required to research the terms of sale of comparables to determine what influence they had on the sale price.

19. 9. Arm’s Length Transaction Before a sale can be relied upon as an indication of what the subject property is worth, it must be an ARM’S LENGTH TRANSACTION. This means that buyer and seller are both well informed, under no pressure to either buy or sell, and that the property is offered for a reasonable time on the open market. This means that buyer and seller are both well informed, under no pressure to either buy or sell, and that the property is offered for a reasonable time on the open market.

20. III. Cost Approach

21. Cost Approach The cost approach is based on the presumption that buyers will not pay more for an older property than the cost of purchasing a newly constructed residence at the site. Residential appraisers keep abreast of current construction costs in their areas and refer to them when using the cost approach. There are three steps in the cost approach: There are three steps in the cost approach: 1. Estimate the cost of replacing the house with a new home that is similar to the existing one utilizing the information from the cost handbook. 2. Estimate and deduct accrued depreciation from all sources. 3. Add the value of the lot to the depreciated value of the house.

22. (cont.) The appraiser will then deduct all sources of accrued depreciation from the cost new. Appraisers also make adjustment on the presumption that a used home is not as valuable as a new home and that it may have suffered a loss in value for one of the following three reasons: Appraisers also make adjustment on the presumption that a used home is not as valuable as a new home and that it may have suffered a loss in value for one of the following three reasons:  PHYSICAL OBSOLESCENCE  FUNCTIONAL OBSOLESCENCE  ECONOMIC OBSOLESCENCE  CURABLE/ NOT CURABLE

23. IV. Income Approach

24. Income Approach The majority of single-family residences are not income producing properties (rentals), so traditional income analysis and appraisal techniques do not apply. However, some single-family residences are rented, for which lenders will request an income approach. Generally, this is provided by using a GROSS RENT MULTIPLIER (GRM) which is determined by dividing the sales price of a series of at least three recent sales of similar single family rental properties by their monthly rental income. Example: Sales price $100,000 ÷ $900 monthly rent = 111 gross rent multiplier. The appraiser will then select a multiplier from the range that has been developed. He or she will then multiply that multiplier by the subjects rent to determine the value by the income approach.

25. V. Understanding the Appraisal Process

26. Understanding the Appraisal Process Real estate agents and loan brokers need to understand the basic steps in the appraisal process because it will help them eliminate, or at least minimize, a prevalent problem that has plagued the industry—both agents and loan brokers tend to overvalue properties.

27. A. HOW TO SOLVE PROBLEMS CAUSED BY LOW APPRAISALS Of course the best way to eliminate the problems created by low appraisals is to avoid them in the first place by pricing properties realistically. Of course the best way to eliminate the problems created by low appraisals is to avoid them in the first place by pricing properties realistically. A seller should not be given an unrealistic estimate of his property’s worth. Regardless of how objective an appraiser may be, there are some subjective considerations and conclusions in every report. Regardless of how objective an appraiser may be, there are some subjective considerations and conclusions in every report. An appraisal is an opinion of value. If you are affected by a low appraisal and sincerely believe that the appraiser has made a mistake, you can appeal his or her decision and, with the proper documentation sent to your lender, get the appraisal increased, possibly to the figure originally requested. If you are affected by a low appraisal and sincerely believe that the appraiser has made a mistake, you can appeal his or her decision and, with the proper documentation sent to your lender, get the appraisal increased, possibly to the figure originally requested.

28. VI. Key Considerations to a Residential Appraiser

29. Key Considerations There are many things to consider during the residential appraisal process. Some of them are very important, others are not. Some of them are very important, others are not. The following is a summary of property features that are considered important by appraisers. The following is a summary of property features that are considered important by appraisers. Location Owner-Occupied Vacancies Rental Levels Construction Activity Conformity Changing Land Use Size and Shape of Lots Contour of the Land Street Patterns Utilities Nuisances Proximity to Services Zoning Site/View Design and Appeal Construction Quality Age/Condition Functional Utility Energy-Efficient Items Room Count Square Footage

30. VII. Rural and Suburban Homes

31. Rural and Suburban Homes Properties in outlying areas are eligible for maximum financing by both the primary and secondary market subject to the following conditions. 1. The value of the land is not more than 49% of the overall value of the property. 2. There are adequate public or private utilities in service on the property. 3. The property is accessible by a federal, state, or county highway or an all-weather secondary road. 4. The present or anticipated use of adjacent real estate does not unfavorably affect the value of the property as a residence.

32. VIII. Atypical Property and Loan Types

33. Atypical Property and Loan Types ATYPICAL PROPERTIES, which are also called non-conforming properties, include, but are not limited to, manufactured homes, dome homes, and log cabins. These must be appraised by a Certified Level Appraiser only. Licensed Level Appraisers are only permitted to appraise conforming properties and loans.

34. Alert

35. IX. CHAPTER SUMMARY Lenders demand professional appraisals because they want an entirely objective opinion of the true market values of the properties they loan upon. Loan-to-value ratios are based on the sales price or the appraised value, whichever is lower. Loan-to-value ratios are based on the sales price or the appraised value, whichever is lower. All appraisers, and those who use their appraisals for federal loan transactions, must adhere to the Uniform Standards of Professional Appraisal Practice (USPAP) as well as state and federal lending and appraisal regulations. The appraiser is required to follow the appraisal process. For loans, the appraiser is asked to determine the “Market Value” of the property. This is a specifically defined value that may be either higher or lower than the actual selling price of a property.

36. Chapter Summary (cont.) Appraisers use the market approach, the cost approach, and the income approach when valuing properties. The market approach is the most useful for residential properties, as it reflects what actually is occurring in the marketplace. Comparables used in this approach should be recent sales in the same general neighborhood or area as the subject and as similar to the subject as possible. They must be real closed sales at “arm’s length.” The market approach is the most useful for residential properties, as it reflects what actually is occurring in the marketplace. Comparables used in this approach should be recent sales in the same general neighborhood or area as the subject and as similar to the subject as possible. They must be real closed sales at “arm’s length.” The cost approach is carried out with the use of cost handbooks. Appraisers estimate the overall accrued depreciation of a property by taking into account any physical, functional, or economic obsolescence that it may have incurred. The income approach is seldom used unless the property is a rental. Then a Gross Rent Multiplier is used to determine value. It is useful for agents, brokers, and others to understand the appraisal process in order to keep from overvaluing properties and losing sales as a result. It is useful for agents, brokers, and others to understand the appraisal process in order to keep from overvaluing properties and losing sales as a result.