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Questions and Answers
An appraisal is an estimate of the value of a property, performed by a professional appraiser.
An appraisal is an estimate of the value of a property, performed by a professional appraiser.
True
Market value is the least probable price a property should bring in a competitive and open market.
Market value is the least probable price a property should bring in a competitive and open market.
False
The loan-to-value ratio is the relationship between the loan amount and the renter's income.
The loan-to-value ratio is the relationship between the loan amount and the renter's income.
False
The sales comparison method is one way to estimate a property's value.
The sales comparison method is one way to estimate a property's value.
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An underwriter evaluates a property based on the buyer's credit score.
An underwriter evaluates a property based on the buyer's credit score.
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What is the primary role of an appraisal in the context of real estate lending?
What is the primary role of an appraisal in the context of real estate lending?
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How does the loan-to-value ratio impact a lender's risk?
How does the loan-to-value ratio impact a lender's risk?
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What is the focus of an appraiser when determining a property's market value?
What is the focus of an appraiser when determining a property's market value?
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What are the three dimensions of income?
What are the three dimensions of income?
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Which of the following is considered stable monthly income for a loan applicant?
Which of the following is considered stable monthly income for a loan applicant?
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How is the net equity in a property calculated?
How is the net equity in a property calculated?
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What is the first step in the appraisal process?
What is the first step in the appraisal process?
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The principle that a property's maximum value is determined by the cost of acquiring a substitute is known as:
The principle that a property's maximum value is determined by the cost of acquiring a substitute is known as:
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When determining a loan amount, lenders will typically base their decision on the:
When determining a loan amount, lenders will typically base their decision on the:
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For a federally related loan, which entity must prepare the appraisal?
For a federally related loan, which entity must prepare the appraisal?
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What is the primary consequence if a property is overvalued during an appraisal?
What is the primary consequence if a property is overvalued during an appraisal?
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What is the primary emphasis of a property appraisal, as viewed by a lender?
What is the primary emphasis of a property appraisal, as viewed by a lender?
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Which ratio does a lender use to assess the relationship between the loan amount and a property's value?
Which ratio does a lender use to assess the relationship between the loan amount and a property's value?
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What is one approach for dealing with a low appraisal?
What is one approach for dealing with a low appraisal?
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What does the replacement cost method involve in appraising a property's value?
What does the replacement cost method involve in appraising a property's value?
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Study Notes
Qualifying the Property
- Learning Objectives: Students will be able to explain the role of appraisals in determining market value, describe how loan-to-value ratios affect lender risk, list the appraisal process steps, discuss sales comparison, replacement cost, and income methods for estimating value, define elements in evaluating comparable properties, understand differences between replacement and reproduction costs, list the three types of depreciation, calculate property value using a gross income multiplier, and prevent/respond to low appraisal problems.
Suggested Lesson Plan
- Exercise 9.1: Review of the previous chapter ("Qualifying the Buyer").
- Chapter 9 Overview: Brief overview of "Qualifying the Property" and review of learning objectives.
Lender's Perception of Value
- Appraisals: An estimate of a property's value, conducted by a professional appraiser.
- Loan-to-Value Ratios (LTV): The relationship between the loan amount and the property's value (or sale price, whichever is lower). Higher LTVs create greater risk for lenders; lenders may impose stricter qualifying standards to compensate. The LTV is based on the sales price or appraised value, whichever is lower.
Appraisal Standards
- Licensing and Certification: The federal government mandates licensing and certification for appraisers to prevent unreliable appraisals, particularly related to “federally related” loan transactions; some states also have these requirements.
- Appraisal Process: The steps involve defining the problem, scope of work, collecting/verifying data, analysis, site value, appropriate appraisal methods, reconciling results, and issuing a report. An exterior-only inspection might be performed for some loan types; interior inspections are required for FHA, VA, and higher risk conventional loans. Lenders and their needs may influence the appraisal.
Appraisal Methods
- Sales Comparison Method: Similar properties' sales prices determine the subject property's value based on several factors (date of sale, location, physical characteristics, terms & conditions of sale); appraisers often adjust for these differences. Comparisons should be from the same neighborhood or with appropriate adjustments. Comparables need to be recent (within 6 months ideally, or adjustments made for slower markets) and meet certain criteria surrounding normal market activity in the area.
- Replacement Cost Method: Estimating the cost to rebuild an equivalent structure to the property, deducting depreciation and adding land value; evaluates physical deterioration, functional obsolescence, and external obsolescence as types of depreciation.
- Income Method: Dividing a property's net annual income by the expected rate of return; simplified for residential properties using a gross income multiplier; uses economic rent (what the property could rent for now, not currently contracted rates) and recognizes that current rental rates may not reflect current market value.
Dealing with Low Appraisals
- Prevention: Accurate pricing, use of CMA (Competitive Market Analysis); separating personal property in pricing; understanding current market conditions. Ensure the property is presented accurately and fairly, with any needed adjustments clearly stated and justified, and comparable sales data is fully vetted.
- Response: Request for reconsideration using alternate comparables; presenting evidence of a higher value, potential problems, and requesting an explanation.
Dealing with Low Appraisals (continued)
- Important considerations: The agent should present a comprehensive competitive market analysis (CMA) accurately to prevent low appraisals; consider asking an appraiser for reconsideration using different comparables; consider whether the property’s value is accurately reflected. If there are concerns about the appraisal, acting in a proactive and responsible manner (e.g., contacting the appraiser, providing data) early on in the process is important.
Exercise 9.1 (Review Exericse - Qualifying the Buyer)
- Review Questions: Focus on financial situation categories, income considerations (quantity, quality, durability), income sources for loan applications, calculating net equity, and financial condition categories. Factors are reviewed in a way to assist in preventing issues when qualifying buyers for loans.
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Description
This quiz focuses on Chapter 9, 'Qualifying the Property', exploring key concepts like appraisals, loan-to-value ratios, and methods for estimating property value. Students will gain insights into the appraisal process, factors affecting market value, and how to address low appraisal issues. Prepare to assess your understanding of the vital elements in property valuation.
