© 2016 OnCourse Learning California Real Estate Finance Fesler & Brady 10th Edition Chapter 8 Qualifying the Property

Objectives After completing this chapter, you should be able to: – Discuss the influence of Freddie Mac and Fannie Mae and the new Home Valuation Code of Conduct (HVCC) on a lender’s property qualifying standards. – Describe what an appraiser looks for when analyzing a neighborhood. – Outline the steps used in the market data approach to estimating loan value. – Demonstrate why sales price is not the same as fair market value. – Differentiate the formal classifications of real estate appraisers in California. – Suggest possible ways to communicate with an appraiser within the rules of the new Home Valuation Code of Conduct.

Outline What Does Qualifying the Property Mean? Appraising a Property Using a Standard Appraisal Form Underwriting the Appraisal Planned Unit Developments and Condominiums The Licensing of Real Estate Appraisers Working with Appraisers: The Do’s and Don’ts

What Does Qualifying the Property Mean? (Slide 1 of 2) Lenders’ Property Standards – Availability of funds – Market conditions – Sell in secondary market or retain in portfolio Influence of Freddie Mac and Fannie Mae FHA and DVA Property Standards

What Does Qualifying the Property Mean? (Slide 2 of 2) Procedure for Qualifying a Property – Qualifying for FHA and DVA Meet minimum standards As determined by appraiser Conditional Commitment or Certificate of Reasonable Value given – Conventional Lenders and the New Appraisal Process Complete loan application Appraisal ordered via Appraisal Management Companies Based on lesser of purchase price or appraised value Submitted to loan committee or underwriter Final approval

New Rules Impact Appraisal Time Frames Mortgage Disclosure Improvement Act – Disclosures must be delivered within three days of application – No fee can be collected until deliver of disclosures Lenders now require a “mini” loan package – Loan Application – Credit Report – Starts the three day notification period – Appraisal can be ordered

Time Frame for Acquiring an Appraisal Day 1: Loan application and supporting information sent to selected lender Day 4: Time frame elapses and appraisal can be ordered Day 6: Appraisal assigned through appraisal management company (AMC) Day 8: Appraiser views property, takes measurements and pictures Day 11: Appraiser completes report, including comparable information pictures Day 12: Lender receives completed appraisal from AMC and it is sent for review Day 15: Review process completed and appraisal deemed acceptable

Appraising a Property (Slide 1 of 2) Fair Market Value – “The most probable price in terms of money that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.”

Appraising a Property (Slide 2 of 2) Location, location, location City influence Neighborhood influence – Approach (Curb appeal) – Neighborhood appeal – Neighborhood homogeneity – Neighborhood condition – Neighborhood trend – Adverse influences – Schools and shopping – Other Curbs & gutters Libraries Police and fire protection

Using a Standard Appraisal Form (See Figure 8.1) (Slide 1 of 3) Neighborhood – Supply and demand – Price range – Neighborhood description Employment stability Convenience to employment, shopping and schools Protection from detrimental conditions

Using a Standard Appraisal Form (Slide 2 of 3) Property – Site Zoning The lot Flood area – Improvements – Room list – Interior finish and equipment – Property rating Functional obsolescence – Loss in value from forces within the property Economic obsolescence – Loss in value from forces outside the property – Photographs and Square Footage Measurement

Using a Standard Appraisal Form (Slide 3 of 3) Valuation – Sales comparison (aka market data approach) – Cost approach – Income approach Compare sales price to fair market value – May not be the same Unknowledgeable buyer or seller Financing concessions Personal property included in sale Seller under pressure to sell

Sales Comparison Approach (aka Market Data Approach) Principle of substitution What similar properties have sold recently? (comparables) – Appraiser’s own files – MLS – Other agents – Public records – Web-based sites Often inaccurate and outdated How do they compare with this property? Adjust for differences – Usually <15% – Sales or financing concessions? Arrive at an estimate – Not an average – Usually one with least adjustments Appraisals also need – Short sales – Foreclosure transactions

Cost approach Estimate total cost to reproduce at current prices Subtract estimated depreciation Add estimated value of land

Income Approach (Gross rent multipliers) Relationship between Gross Annual Rent and Sales Price Capitalization method – Calculate gross annual income Assuming 100% occupancy – Deduct reasonable vacancy to arrive at gross operating income – Deduct all expenses to arrive at net operating income – Select capitalization rate Rate of return an investor would seek as reasonable return – Divide market capitalization rate into net operating income to arrive at indicated value

Underwriting the Appraisal Based on lower of sales price or appraised value Property acceptable by lender standards Market value supports loan Loan meets lender’s policies

Planned Unit Developments and Condominiums PUD – Separate, individual fee ownership of lot and dwelling – Proportionate undivided interest jointly in common areas – No one living above you Condominium – Unit plus undivided interest in all land – Fee title interest in airspace – Undivided interest in land and all common areas Home Owners Association (HOA) – Maintains common areas – Sets dues – Monitors CCRs

Appraiser’s view of PUDs & Condos General appearance Recreational facilities Adequate parking Maintenance

The Licensing of Real Estate Appraisers Trainee License – Must work under Licensed Appraiser Residential License – One to four unit residential – Up to $1M – Up to $250K for nonresidential Certified Residential License – Residential regardless of value – Up to $250K for nonresidential Certified General License – All types of property See for more infowww.orea.ca.gov

Working with Appraisers: The Do’s and Don’ts Provide access to property Let appraiser do his/her job at property Provide comps if available Do not try to influence appraiser

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