Chapter 11 - Appraisal Contingencies Flashcards
(42 cards)
Who usually purchases the property appraisal?
The buyer
Why is correct appraisal / pricing one of the most important requirements?
For example – If a list price is greater than the property’s market value, and a buyer makes a full-price offer that is accepted by the seller, the agreed upon purchase price will be greater than the market value of the property, and it will not appraise for the purchase price. In this case– the lender will usually not fund the loan and the purchase transaction will fall apart.
Appraisal Valuation Outcomes
Appraisal valuation ABOVE purchase price = Buyer happy
Appraisal valuation AT purchase price = BOTH buyer and seller happy
Appraisal valuation BELOW purchase price = Lender not happy because property is not sufficient collateral for a loan.
If the appraised value of the property comes in BELOW the purchase price, the lender will usually not fund the loan. What 4 possible actions can be taken at this point:
- Buyer increases down payment
- Buyer and seller agree to a purchase price reduction
- Buyer challenges appraisal valuation
- Transaction cancelled
Value
Relationship between a thing desired and the potential purchaser or desirous person, maximum utility of available resources, present worth of future benefits, and ability of one commodity to command another commodity in exchange.
Elements of Value
"DUST" Demand Utility Scarcity Transferability
Value Variation
Price Terms Conditions Market Timing Location
Market Value
Primarily based upon the willing buyer and willing seller concept.
It is what the market believes a property is worth an dis the value an appraiser tries to determine when making an appraisal.
Market value is the value a buyer (under no duress) places on a parcel of real property.
Marketability and Acceptability
A property can be sold and is acceptable to the target market.
Marketability is the ultimate test of functional utility.
Highest and Best Use
The use of a parcel of real property that will provide the greatest return to the owner.
Interim Use
The present use of a property before it is converted to its highest and best use.
Strip Commercial Development
Strip of retail stores along a business corridor
Principle of Conformity
Conformity helps a well-planned community to maintain property values.
Principle of Contribution
Occurs when an improvement increases the value of a property more than the cost of the improvements.
Principle of Regression
Occurs when a substandard building causes the properties around it to sustain a loss in value.
Principle of Assemblage
Assembling 2 or more parcels of real property into 1 property.
Plottage Increment
The increase in value that results from combing lots through assemblage.
Unearned Increment
An increase in value due to nothing provided by the property owner.
Principle of Anticipation
Occurs when an investor purchases an income property in anticipation of a future income stream.
Principle of Substitution
Substituting one property for another.
Principle of Balance
The relationship between:
Cost
Added cost
The value it returns
What are the 3 appraisal approaches to value property?
- Comparison Approach / Market Data Approach
- Income Approach / Capitalization Approach
- Cost Approach
Differences between:
- Comparison Approach / Market Data Approach
- Income Approach / Capitalization Approach
- Cost Approach
- Comparison Approach / Market Data Approach – Uses the principle of substitution; Most readily adaptable and useable approach. // Most often used with single-family homes and unimproved land.
- Income Approach / Capitalization Approach – Used to appraised the value of income producing properties by converting an income stream into value. // Commonly includes multi-unit residential apartment buildings and leased investments.
- Cost Approach – Looks at the cost to build a building (e.g., house) on a parcel of land and adds it to the land value to determine the overall property value. // Good for special purpose and service buildings, new residences, new construction, and older homes.
Types of Comparision Approach/ Market Data Approach
Sales Comparables – An appraiser uses sales comps to value a subject property. Using similar properties that have recently sold near the subject property in relation to Location, Size, Amenities, and other characteristics.
Rental Comparables – Similar properties that have recently rented near the subject property. Market data method of real property appraisal is most often used to determine rents for apartment buildings and leased investments (shopping centers, office buildings, and industrial properties)
