© 2012 Cengage Learning

Residential Mortgage Lending: Principles and Practices, 6e Chapter 14 Residential Real Estate Appraisal

© 2012 Cengage Learning Objectives After completing this chapter, you should be able to: – Define residential appraisal – List six reasons for appraising real estate – Define market value – Name the three approaches to value and state how each computes estimated value. – Distinguish between reproduction cost and replacement cost – Describe three types of depreciation – Explain how the gross rent multiplier technique is used to estimate value in residential property – Compare and contrast the application or uses of the three approaches to value – Understand the different appraisal types used in residential lending – Be aware of regulatory and compliance restrictions affecting all lending and appraisal personnel

© 2012 Cengage Learning Uniform Residential Appraisal Report (URAR) Subject: address, ownership rights, legal description, occupancy Contract: price, date, seller, sales concessions Neighborhood: market conditions, price ranges, land use, boundaries Site: dimensions, zoning, off-site improvements, utilities, flood zone Description of improvements: exterior, foundation, room count, interior, heating and venting and air conditioning (HVAC), kitchen, amenities Cost approach: site value, reproduction cost, depreciation Sales comparison analysis and value: three or more comparable sales, detailed value adjustments, sources, prior sales data Income approach: estimated market rent, gross rent multiplier Reconciliation: final reconciliation, estimate of market value, appraiser signature(s)

© 2012 Cengage Learning Uniform Standards of Professional Appraisal Practice sets the guidelines by which the appraiser completes this or any other appraisal form and makes an estimate of market value.

© 2012 Cengage Learning Principles of Real Estate Value A. Market value B. Market price C. Factors changing value D. Basic value determinants 1. Supply and demand 2.Highest and best use 3.Diminishing returns 4. Substitution

© 2012 Cengage Learning Forms Required Single family property - URAR (Fannie Mae Form 1004 /Freddie Mac Form 70) 2-4 family property - Small Residential Income Property Form (Fannie Mae Form 1025 / Freddie Mac Form 72) Condominium or cooperatives - Individual Condominium Form (Fannie Mae Form 1073 / Freddie Mac Form 465) PUD properties - URAR Form or Individual Condominium Form For all appraisal forms - Market Conditions Addendum (Fannie Mae Form 1004MC/Freddie Mac Form 71)

© 2012 Cengage Learning Required Report Attachments Original photos of the subject property (front, rear, and street) Original photos of the comparable sales (front) Location map showing the subject and the comparable sales Exterior sketch of the subject dwelling, with measurements Certification and Statement of Limiting Conditions (Fannie Mae Form 1004B) Addendum warranting compliance with all pertinent FIRREA requirements

© 2012 Cengage Learning What Do You Think? Explain the appraisal process an appraiser would follow developing a traditional appraisal report. Identify the approach to value summarized in each of the following formulas. What factors can affect the market value of the subject property?

© 2012 Cengage Learning What Do You Think? Why are sales comparable adjustments necessary to estimate the value of the subject property? How do other appraisal forms differ from the Uniform Residential Appraisal Report (URAR)? Why are these differences significant?

© 2012 Cengage Learning Check Your Understanding 1.The appraised value of a piece of real estate will be the same regardless of the purpose of the appraisal. 2.An appraisal is an estimate of value as of a certain date. 3.Market value is the price for which a piece of real estate actually sells. 4.The use of a property that produces the greatest net return over a period of time is called the highest and best use. 5.Real estate is similar to all other marketable commodities because its value is affected by supply and demand.

© 2012 Cengage Learning Check Your Understanding 6.The principle of substitution says that the value of the subject property should not exceed the value of a similar property. 7.The cost approach involves adjusting market value of comparables for physical differences between the comparables and the subject property. 8.The market data approach is used mainly for appraising single-family residential property. 9.The depreciation in value due to a loss of economic life caused by wear and tear is known as economic obsolescence. 10.To determine the gross rent multiplier, the appraiser must know the sales price and gross monthly rental income.