Real Estate Appraisal Licensing Laws and Professional Affiliation

Nightly Trivia  Q) What celebrity’s home recently sold for a reported $5.5 million, despite its yellow- and-rust striped paint job?  A) The Hollywood Hills residence that was the former home of Madonna

Real Estate Appraisal  Approaches to the Process  Regulations  Formats  Value and Market Conditions

What is an Appraisal?  An estimation of value  Information appraisal –A simple estimate of value  Formal appraisal –An independently and impartially prepared written statement expressing an opinion of a defined value of an adequately described property as of a specific date, that is supported by the presentation and analysis of relevant market information

The Process  Define the appraisal problem  Conduct a preliminary analysis including planning and data collection  Estimate best use  Estimate land value  Estimate improved property value  Reconcile results  Report results

Types of Valuation Approaches  Market approach –Locate similar properties and look at their recent sale value  Cost approach –Add up the cost of all the pieces  Income approach –Look at potential profits and appreciation for the property

The Market Approach  Fair market value – all things equal, the expected open market price of a property  Comparables – “comps” – common features of a similar property used to estimate value  Sales records: –Date of sale, sales price, financing terms, location of the property, description of physical characteristics and features

More About the Market Approach  Verification – important to be sure your information is accurate  How many comparables? 3-5 are the standard  Adjustments – changes to the sale price of a comparable based on time and/or differences between the comparable and the property being appraised

Price Conditions  The better the terms are for the buyer, the higher the price, and vice versa  Adjusted market price – value of comparables after additions/deductions  Indicated value – adjusted market price multiplied by the appropriate weighting factor  Condos, etc. work the same way, only easier  Vacant land – usually appraised and sold on a square foot or front- foot basis

Competitive Market Analysis  Works like the market comparison approach only includes for-sale and unsold properties  Difficulty – FHA and VA appraisals are often slow to catch up to changes in market price

Gross Rent Multiplier  Uses the rent produced by a property to determine its price  Monthly rent is the standard basis  Does not account for vacancy rates, expenses, etc.

Cost Approach  Estimate the value of the land  Estimate cost of constructing a similar building  Calculate the money that represents the subject building’s condition vs. step 2 cost  Subtract depreciation from current cost  Add to the land value  Subtract depreciation

Construction Costs  Reproduction cost – expense of building an exact replica  Replacement cost – expense of building an equivalent replica  Square foot method – calculates cost of equivalent structures by square feet constructed  Cost handbooks – provide information for building expenses of various features per unit by region to estimate construction costs

Depreciation  Physical – stuff wears out  Functional – equipment or utilities become outdated –Curable – can be fixed –Incurable – must be lived with  Economic – loss of value due to external events  Fictional – deduction allowed by the U.S. treasury for tax purposes

The Income Approach  Estimates current fair market value of a property based on projected returns  Income/Rate = Value  Important part is estimating income created by a property and comparing capitalization of similar properties –Capitalize – convert future income to current value  $1 error in projected annual income can change estimated market value by $8-$15

Projecting Income and Expenses  Projected or scheduled gross – the estimated yearly rents for a property  Operating expenses – cost of maintaining income production  Capital expenditures are not operating costs  Net operating income (NOI) – gross minus operating expenses

More About the Income Approach  Operating expense ratio – total operating expenses divided by effective gross income  Using the income/rate = value formula: –Look up the overall rate on a mortgage-equity table –Divide the overall rate into the NOI to determine a value

Appraisal Regulation  Appraisal foundation – a private organization to establish and approve: –Uniform appraisal standards –Appropriate criteria for certification and recertification –Appropriate systems for certification and recertification  Financial institution’s reform, recovery, and enforcement act of 1989 (FIRREA)  Establishes standards for the appraisal industry

Developing the Appraisal  Uniform standards of professional appraisal practice (USPAP standards)  Analysis of market data must consider all sales,options, or listings –Within one year for a one- to four-family residential property –Within three years for all other property types

Not Following the Rules - Departures  Prerequisites:  Must not confuse the client or other users of the report  Client has been advised of the departure  Client has agreed it is appropriate  Complete appraisal – the act or process of estimating value without invoking the departure provision  Limited appraisal – the act or process of estimating value performed under and resulting from invoking the departure provision

Reporting Options  Self-contained appraisal report – longest and most detailed  Summary report – information and procedures are summarized rather than described in detail  Restrictive report – least detailed, must contain a prominent use restriction that limits reliance

Report Formats  Letter report – least formal, 1-5 pages  Form report – made on a preprinted form  Narrative – longest and most formal detailing a step-by-step presentation of facts

Real Estate Analysis  Act or process of providing information, recommendations, and/or conclusions on diversified problems in real estate other than estimating the value  Guidelines: –Clearly identify the client’s objective –Define the problem, use, and scope –Collect, verify, and reconcile data –Appropriately analyze collected data –Base projections on the analysis of reasonably clear and appropriate evidence

Value  Demand – a need or desire combined with the purchasing power to obtain it  Scarcity – short supply relative to demand  Transferable – has value to anyone other than the person possessing it  Principle of anticipation – what a person will pay depends on their expected benefits  Principle of substitution – max value on the market is set by the cost of acquiring a comparable property

More on Value  Highest and best use – most profitable utilization of property  Principle of competition – competition is encourage where profits are being made  Principle of supply and demand – ability to pay for land coupled with land scarcity  Principle of change – real property uses are always in a state of change  Principle of conformity – max value is realized when there is a degree of homogeneity in a neighborhood

Diminishing Marginal Returns  As more money is invested in a property, the increased value of that property for each dollar invested decreases

What Does Value Mean?  Estate tax value – taxable amount of a deceased person’s property  Insurance value – the cost of replacing damaged property  Loan value – value set on a property for the purpose of making a loan  Assemblage – two or more pieces of land joined together  Plottage value – increased value of assemblage over individual properties  Rental value – value in terms of the right to use it for a specific period of time

More Kinds of Value  Replacement value – cost of building an equivalent structure  Salvage value – worth of a building if removed and taken somewhere or disassembled for parts  Buyer’s market – excess supply  Seller’s market – excess demand  Broad market – many buyers and sellers are in the market at the same time

Licensing Laws and Professional Affiliation  Who needs to be licensed?  Examinations

Licensing History  First tried in California in 1917 but voted down as unconstitutional  Passed in 1919 in California, Michigan, Oregon, and Tennessee

Who Needs a License?  A person who, for compensation or the promise of compensation, lists or offers to list, sells or offers to sell, buys or offers to buy, negotiates or offers to negotiate either directly or indirectly for the purpose of of bringing about a sale, purchase or option to purchase, exchange, auction, lease, or rental of real estate, or any interest in real estate is required to hold a valid real estate license

Types of Licenses  Real estate broker – licensed to act independently in conducting a real estate brokerage business  Sales associate – not a category, but a broker can work for a broker  Real estate salesperson – employed by a real estate broker to list and negotiate the sale, exchange, lease, or rental of real property under the direction of a broker

Licensing Exams  2 parts – the uniform test for national knowledge and the state test for state- specific knowledge  multiple-choice questions for the national test, for the national  If you sell a property in a different state from your home state office you do not need to be licensed in that state

Business Out of State  License reciprocity – states permit a broker and staff to work in another state without a nonresident license  Full reciprocity – acceptance of real estate licenses from other states  Partial reciprocity – credit to the licensees of another state for experience, education, and examination

What to do Out of State  Notice of consent – permits the secretary of state to receive legal summonses on behalf of the nonresident broker

Licensing a Business  Many brokers do business under their own name  Doing business under another name requires registration of a fictitious business name statement  Branch offices require independent licenses and licensed brokers

Government Regulation  Real estate commission – group established by a state legislature to deal with real estate regulation, usually 5-9 members  Executive director – appointed by the state to oversee real estate regulation  Real estate department – staffed to answer correspondence and handle exams, fees, etc.

Bad Things – Losing Your License  States can suspend or revoke a license as an enforcement device – suspensions are temporary, revocations are permanent  Reasons can include violation of operating regulations, false advertisings, or fraud in any aspect of the business  Investigations are conducted by the real estate department

Paying Wronged Parties  4 states require a real estate broker to maintain a bond to cover losses to customers  Others maintain a state-sponsored recovery fund from license fees  These systems may not be able to fully compensate wronged parties

Securities License  The sale of real estate contracts as opposed to real estate may require a securities license