Do not live a life of fear -- The Appraisal Process

Appraising is an art form not a science. An appraisal gives you the monetary value of real property, all though much more value might go into a property like memories around the Christmas tree or emotional moments that are just as tied into the property as the light fixtures wired to walls. Have you ever heard someone say, "If only the walls could talk?" Well, the walls would say more than the string of title and ownerships. Like in Harry Potter when the paintings tell stories and the wallpaper shows lineage, the homes all around us exhibit the same qualities of families and friends getting together and celebrating life or mourning a death. An appraisal lets you know a dollar worth, but only a person can tell you an abstract worth. For instance, maybe the owner's of the home take coffee on the patio with the curtains drawn and on a too windy day take coffee in the sun room. This paints a picture of living space. Maybe the new owners will teach Spanish lessons in that outdoor space or have a television set and plants in the sun room. Many of the personal properties and personalities provide characteristics to the home. If you want the most value on paper, then install things like fire pits, chandeliers, walk-in closets, and outdoor kitchens to get the highest appraisal rating on your appraisal. Normally a bank will order an appraisal at the buyer's expense before lending a loan. Just because a home is on the market for $200,000 does not mean it is appraised at $200,000. CMA's and appraisals help with solidifying a home's true market value. An appraisal is not just from the bank, an appraisal is from the government in an eminent domain condemnation when the home owner needs a check cut. Appraising helps construct comparative market analyses. As a licensed real estate agent you will mingle with professional appraisers in the field.

• assemblage: combining two or more adjoining properties into one tract; process of consolidating properties. Usually done to increase usability and value of resulting consolidation.
• cost
• cost-depreciation approach
• curable: when you are able to get your money back out from a buyer -- depreciation.
• depreciation
• economic life
• effective age: age indicated by structure's condition and utility.
• effective gross income (EGI): vacancy and collection losses deducted from annual PGI and income from other sources (laundry, vending machines, parking) result is EGI.
• federally related transaction: and real estate related financial transaction that a Federal Financial Institution Regulatory Agency (FFIRA) has contracted for, regulates, or requires the service of an appraiser.
• gross income multiplier (GIM): USED WITH SMALL INCOME PRODUCING PROPERTIES. GRM IS SAME AS GIM (CALC).
• gross rent multiplier (GRM): relates sale price to monthly rental income. 1-4 unit residential properties. Applies to rental income only. Divide the sale price by the gross income monthly rent.
• highest and best use: The most profitable legal way that a property can be used.
• income approach: develops estimated market value based on present worth of future income from subject property. Primary approach for appraising income producing property and for comparing possible investments.
• incurable: when you are unable to get your money out of an addition from a buyer - depreciation.
• investment value: value of property to particular investor based on investor's desired rate of return, risk tolerance. Investors prefer to specify capitalization rate because investor's are free to choose acceptable rate of return desired. When estimated value is investor-driven, minimum rate of return acceptable to investor is frequently used as capitalization rate. Net income divided by specified capitalization rate to obtain investment value of property.
• market value
• net operating income (NOI): income remaining after subtracting relevant operating expenses from EGI. NOI is annual income before mortgage or income tax payments. NOI is annual income expected to occur over remaining economic life of a property. NOI is capitalized into present value. To use NOI appraiser must know annual NOI produced by property to forecast annual NOI based on reasonable estimates. Licensee can project a pro forma NOI from several existing similar properties.
• overimprovement: owner invests more money in a structure than owner can reasonably expect to capture.
• plottage: added value as result of assembling, combining two or more properties into one large parcel.
• potential gross income (PGI): total annual income property would produce if were fully rented and no collection losses were incurred. Some vacancies and collection losses always deducted from PGI.
• price
• principle of substitution: A prudent buyer or investor will pay no more for a property than the cost of acquiring an equally desirable substitute property.
• progression: principle that value of inferior property is enhanced by association with superior properties of same type.
• reconciliation: brings the adjusted values, of several comparable (sales comparison approach, cost depreciation approach, income approach), properties into a single estimate of value.
• regression: principle that value of superior property is adversely affected by its association with inferior property of same type.
• replacement cost: cots depreciation value approach: amount required to replace structure using same functional utility and modern, available, and updated materials.
• reproduction cost: cost depreciation value approach: money required to duplicate the structure exactly.
• sales comparison approach
• situs: people's preferences; both physical and economic, for certain area owing factors to weather, job opps. and transportation facilities.
• subject property: property appraised through comparable values of recent, close, and similar properties. Make adjustments between subject property and comparable properties. Adjustments made on the comparable properties not the subject property. Adjust the comp. to make as similar to subject as possible.
• transaction value: loan amount in most appraisal assignments
• vacancy and collection losses: expected income loss resulting from turnover of renters periodic vacancies as likelihood not all renal income collected.
• value

Appraisals are regulated, just as licensees are regulated and mortgages are regulated. A CMA is a tool for obtaining a listing for a prospective sale. Appraisals can aid CMA's and CMA's can aid appraisals but appraisal is done by a professional appraiser and CMA is done by licensed real estate agent. An agent can conduct an appraisal if it follows the guidelines of the USPAP (uniform standards of professional appraisal practice). CMA's and BPO's are not mentioned in the USPAP. You will be disciplined by the commission if you violate the USPAP in an appraisal. A licensed real estate agent/broker can also be a certified property appraiser. The appraisers are governed by the Appraiser Qualifications Board and the Appraisal Foundation establishes the rules for qualifications as a licensed and state certified property appraiser. You have to have experience and education to be a property appraiser.

Five federal regulatory agencies:

1. Office of Thrift Supervisions
2. Office of Comptroller Currencies
3. Board of Governors of Federal Reserve System
4. Federal Deposit Insurance Corporation
5. National Credit Union Administration

What makes a transaction a real estate transaction?

• sale, lease, purchase, investment of exchange real property including interests in property and financing thereof.
• refinancing of real property or interests thereof
• use of real property or interests in real property as security for a loan or investment including mortgage backed securities.

Unless the requirement of a certified appraisal has been exempted from the contract, then appraisal for real property transaction requires state-certified or licensed appraiser. If property is valued at less than $250,000 then official appraisal not needed. In most appraisals the transaction value is the loan amount. However, sometimes a transaction value is a market value. The $250,000 minimum is called the de minimus requirement. As a licensee, get a statement in writing from your buyer or seller that you are performing the appraisal, or just hire a professional and conform with USPAP. If federally related conform with USPAP. If Fannie Mae or Freddie Mac conform with USPAP.

Current appraisal board standards

Market value. There is paying too much and paying too little but right in the middle there where most people pay is the market value. Market value not only applies to mansions and homes, but do oranges, books, fish, cats, and Bibles as well. Fannie Mae and Freddie Mac give the most comprehensive definition of a market value: "The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus." Don't cheat the system! You will get caught and when you get caught you will be disciplined! You know how they say "all is fair in love and war?" Well I think all is fair in real estate and appraisals. When determining market value remember this:

• What is the full range of the passing of time (date range)
• Can the seller convey you a marketable title (is title full of liens and encumbrances?)
• Buyer and seller share the same motivations to buy and sell and no one is pushy or compulsive
• Buyer and seller acting in individual best interest
• Buyer and seller well informed
• Property has been exposed to the market as for sale for a period of time
• Terms of sale are in US dollars or comparable
• Price is unaffected by creative financing
• Price unaffected by seller contributions or buy downs
• Price represents a normal consideration of the property

Perfect market values:

• Many buyers and sellers
• Homogenous product
• Easy and free entry into the marketplace

A farmer might not have the means to buy more fertile land and a Miami_Beach condo is in high demand so the price increases.

"Demolishing an existing structure and building a new apartment building may generate more monthly income compared with remodeling the existing apartment building. But the highest and best use will be the use with the greatest yield after deducting the costs of renovation or the costs of demolition and new construction."

The Adjustment Process: the appraiser prepares a grid first the address and the sale price for the selected comparables. Adjustments for transactional differences: conditions, financing terns, changes in market, and property characteristics. Adjustments: financing terms appraiser must confirm financing associated with each sale b/c price could reflect special terms -- seller financing or paid points. One financing is conventional typical for the market area. Market condition -- property sold last year may sell more or less today even though physically property same. Criterion for market cond. adjustments whether price paid for comparable prop. if prop. sold today, would differ from price paid during some other time. Adjust the comp. prop. to todays market condition add thousands or subtract thousands. Market condition adjustment for date range .. over a month go ahead and compare market conditions adding or subtracting value. Square footage -- if the comp. has more sq. ft. then a downward adjustment needed so subtract the sq. ft. x price per square foot, similarly is the comp. is less sq. ft. then determine the price per sq. foot and add to comp. value. Landscaping -- if comp. has nicer landscaping (superior) then subtract amount value. If comp. has inferior landscaping then add inferiority amount.
Reconciliation: method of reconciling has three adjusted sale prices. If comparables are all equally suitable, then average adjusted sale prices. If appraiser considers one comparable better indicator to subject prop. than others, then weigh that property more heavily. Weight is a judgment call. Property most similar gets higher weight. Property least similar gets lesser weight. Adjusted sale price multiplied by reconciliation weight producing part of eventual reconciled value.
The comparable sales approach is the real estate market speaking through the past. By using sales already transacted market tells us about a particular type of property. Regardless of what one might wish for a sale price, the market indicates what value buyers and sellers have already established for properties similar to the subject property. You can sales comparison vacant lots. Select 8-10 recent lot sales and from those pick 4-6 lots most similar to subject lot. The reconciled average of all comparable sales gives app. value per square foot or front of subject lot.
Cost-depreciation is hat knowledgeable purchaser will pay no more for a property than the cost of acquiring a similar site and constructing an acceptable structure. The max. value of a property can be measured by determining cost to acquire an equivalent site and to reproduce a structure as though new then subtracting accrued depreciation.
Reproduction costs: quantity survey method: detailed inventory of all labor, materials, products, indirect costs, builder's profit. Number of items multiplied by cost per item. So say 3-bathroom home, multiply cost of 1 bathroom x 3. Man hours are estimated and multiplied by cost per hour. Costs are totaled then added to overhead and indirect costs. Builder's profit it added. Aggregate cost is new cost of reproduced building. Unit in place method, more practical for appraisers and requires less technical ability. Cost of materials + cost of labor calculated for each component of a structure ie. driveway, parking area, roof, foundation, walls, floors. Unit cost for square of roofing (100 sp. ft) because unit cost is multiplied by number of units in entire roof. Each component treated in this manner. Multiply cost of 1 x entire amount. So then add in cost of installed equip. & fixtures & builder's profit and you have total repro. cot of structure. Comparative square foot method. The cost of reproducing a recently built property similar in size and function to the subject property is often used as a basis for estimating reproduction cost. To reduce errors, sq. ft. obtained for a standard (benchmark) house of average size for the locality. Exterior walls used for measurement. Adjustments re made for quality, shape, & extra features. Predominant costing method for appraisal purposes. Limited to small uncomplicated structures such as single family homes and office buildings. Cost calculation publications and computer programs available to assist appraisers determining sq. ft. costs in diff. geographic locations. "Dodge Building Cost Calculator and Valuation Guide, published by McGraw-Hill; Residential Cost Handbook and Residential Cost Explorer CD, by Marshall and Swift; and Boeckh Building Valuation Manual, by the American Appraisal Company"
Cost depreciation approach: Estimate amount of depreciation from causes (physical deterioration, functional obsolescence, external obsolescence) deduct it from repro. or replacement cost. Appraiser gives estimate of cost to reproduce structure today. Subject prop. is usually not a brand new structure. Difference b/w structure repro. cost new and perceived market value of structure today in actual condition is called depreciation. Land is not depreciated in cost-depreciation approach. Only buildings and improvements to land are subject to depreciation because site value is estimated separately, using sales comparison approach. Adjustments to site for size, location, and nonstructural improvements already made when appraiser applied sales comparison approach to estimate site for size, location, and nonstructural improvements were already made when appraiser applied sales comparison approach to estimate site value. When cost to repro. improvements determined, depreciation applied to that portion of property.
Lump sum age life method: appraiser estimate each category of depreciation separately. Vast majority of res. appraisals employing cost-depreciation app. use lump-sum age life method to estimate accrued interest. Estimates single value for accrued depreciation. Lump sum based on ratio of property's effective age to economic life. Effective age is opinion. Divide effective age by economic life x reproduction cost new = estimated total accrued depreciation. Lump sum assumes structure depreciates at constant rate. Lump sum sometimes called straight line. Calculate annual depreciation. Divide reproduction cost by economic life. = annual depreciation. Multiply annual depreciation x effective age = total accrued depreciation. Value of structure today in current condition estimated by subtracting accrued depreciation from reproduction cost new: reproduction cost - accrued depreciation = depreciated structure.
Then, estimate the value of the site and nonstructural site improvements, assuming site is vacant and will be put to highest and best use. Value of land normally determined by sales comparison approach. Derive property's estimated value by adding estimated value of site (including site improvements) to depreciated structure value.
Income approach: also called income capitalization approach is to measure flow of income projected n future. Method is complete departure from sales comparison and cost depreciation approach.
Operating expenses grouped into: fixed (property tax, hazard insurance), variable (utilities, maintenance, management, supplies, janitorial, garbage), reserve for replacements (reserve allowance provides for periodic replacement of building components (roof coverings, heating A/C equip. wear out faster than structural components). All costs of financing, income taxes, personal expenses, and business related expenses (payroll and advertising), that do not contribute to actual operation of property are business expenses, not operating expenses.
Income rate value formula. Income - rate x value. Rate = income / value. Value = income / rate. Property produces net income $8,000 and client wants to know value return of 10% pr year. So V = I / R = 8,000 / .10 = 80,000 (investment value). Sound income and expense data are critical in income capitalization approach. Definite relationship exists between present value, net income, and capitalization rate. If R goes up and I remains constant then V goes down. If I goes up and R constant then V greater.
Gross rent multiplier (GRM) relates sale price to monthly rental income. GRM is a simple sub. for income cap. analysis for one to four res. rental props. GRM applies to rental income only. Although you can use either monthly or annual rent, it is customary to use monthly rent when calculating GRM.
Multipliers must be determined for each local area. Multiplier is market-derived by using comparable properties and averaging the results. To establish a market derived GRM an appraiser must locate recent sales and rental data from at least four rental properties that are comparable to subject property. Sale price of each comparable rental property is divided by property's gross rent to calculate each properties GRM. Market area GRM is used to estimate subject prop. market value.

CMA:
Recently sold: study sale price of similar props in same market area recently sold provides info. concerning what buyers have been willing to pay for similar props. Amount of recent sale activity and average days are valuable info. Currently on the market: study asking prices of props in market area to provide info what sellers of sims are asking in today's market. Prop with equally desirable characteristics available buyer normally choose lowest price. Seller should price prop. taking into consideration average asking price of competing properties. Recently expired: listed but failed to sell often priced too high. Info helps explain consequences of overpricing listings.

Common elements of comparison: props in CMA similar to subject property is size, age, amentities and locations. Differences and comparisons such as swimming pool condition, style... Computer gnerated CMAs -- software programs avaiable organize data into attractive presentations. MLS service providers offer software ofr REALTOR members to download comparable info.