Real Estate Appraisal Basics

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Questions and Answers

An investor or property owner might consult with an appraiser when?

Deciding how to use or market a property

Studying the feasibility of developing a property

Reviewing the work of another appraiser

All of the above (correct)

A fee appraiser is normally hired by a third party outside the transaction.

True

The primary market for real estate financing primarily consists of:

Individual borrowers and government-sponsored enterprises

Lenders and government-sponsored enterprises

Lenders and investors

Individual borrowers and lenders (correct)

An estate that lasts for any fixed term is a/an: $________$

estate for years Signup and view all the answers

Eminent domain is the government power to:

Take private property for public use Signup and view all the answers

What is eminent domain?

The power to take private property for public use Signup and view all the answers

Which of the following are common taxes that affect real estate?

Special assessments Signup and view all the answers

What is police power in real estate?

Government's power to make and enforce regulations for public health, safety, and welfare Signup and view all the answers

Which are examples of government-sponsored enterprises? (Select all that apply)

Federal Home Loan Mortgage Corporation (Freddie Mac) Signup and view all the answers

What is the purpose of an appraisal?

To determine the value of a property. Signup and view all the answers

Improvements that are attached to land are always considered fixtures.

True Signup and view all the answers

The ownership of land includes everything above and below the surface and can be visualized as an inverted ______________.

pyramid Signup and view all the answers

What is an appraisal?

An estimate of a property's value. Signup and view all the answers

Match the following rights with their descriptions:

Right to possess = Right to use and control the property Right to encumber = Right to create a mortgage or lien on the property Right to sell or transfer = Right to convey ownership to another party Right to enjoy = Right to use and benefit from the property Right to will = Right to pass ownership to heirs upon death Signup and view all the answers

What's the difference between an appraisal and a competitive market analysis?

An appraisal is more rigorous and performed by a professional appraiser. Signup and view all the answers

What's the role of an appraisal in a typical real estate transaction?

To assure the lender that the property offers sufficient security for the loan. Signup and view all the answers

Who might request an appraisal?

All of the above. Signup and view all the answers

Study Notes

Appraisal

Appraisal is an opinion of value that relies on the appraiser's judgment and expertise
Appraisal practice includes appraisal and appraisal review
History of appraisal profession:
- First professional standards appeared in 1929
- Profession grew in response to appraisal requirements from FHA, VA, and Fannie Mae
- Savings and loan crisis (1980s) led to government regulation, licensing requirements, and uniform standards (USPAP)
Purpose of an appraisal: to estimate a type of value
Intended use of an appraisal: the reason the client wants to know the information
Appraisers may be staff appraisers or independent fee appraisers
Real estate financing industry:
- Depository institutions are chartered by federal or state government
- Primary market: Lenders make loans to home buyers
- Secondary market: Loans sold as investments, often after being packaged as mortgage-backed securities by Fannie Mae or Freddie Mac

Real Estate

Real estate is defined as "an identified parcel or tract of land, including improvements, if any" (USPAP)
Includes land, surface, subsurface, and airspace above
Improvements are also called fixtures
Distinguishing real estate from personal property:
- Personal property is defined as "all tangible property that is not real estate" (USPAP)
- Personal property is usually excluded from a real estate appraisal
- Tests: method of attachment, adaptation, intention of interested parties
- Trade fixtures (installed by a tenant in connection with a business) are not considered part of the real estate

Real Property

Real property includes interests, benefits, and rights inherent in ownership of real estate
Bundle of basic ownership rights:
- Right to use, lease, enjoy, encumber, will, sell, or do nothing
Possessory interests in real property are estates, while nonpossessory interests are encumbrances
Types of estates:
- Freehold estates:
  - Fee simple estate includes entire bundle of rights and is potentially perpetual
  - Life estate terminates automatically upon a designated person's death
- Leasehold estates:
  - Tenancy for years: a lease that will terminate on a specific date
  - Periodic tenancy: a lease that automatically renews itself until one party gives notice to terminate it
  - Tenancy at will: a lease where the tenant has possession for an indefinite period of time
  - Tenancy at sufferance: when a holdover tenant remains in possession without the landlord's permission
  - Leased fee: ownership rights retained by landlord during tenancy
Encumbrances:
- Financial encumbrance (a lien): does not affect the use of real estate, gives a creditor the right to foreclose to collect a debt
  - Voluntary liens (mortgages or deeds of trust) are created by the debtor
  - Involuntary liens (such as a tax lien) are created by operation of law
- Nonfinancial encumbrance: affects the use of real estate
  - Easement: a nonexclusive right to use someone else's property for a specific purpose
  - Profit: the right to enter a property and take away something of value
  - Private restriction: a form of land use regulation, usually created by deed, in which a prior owner limits the future use of a property

Government Restrictions on Property Rights

Power of eminent domain: allows governmental body to take private property for a public use in exchange for just compensation
Power to tax property: general property taxes (ad valorem taxes) and special assessments
Police power: allows governmental body to enact regulations to protect the public health, safety, and welfare### Real Estate Appraisal
An appraisal is the act or process of estimating the value of property, and is an opinion of value.
Appraiser services include estimating the value of property and reviewing the work of other appraisers.

Appraisal Practice

The purpose of an appraisal is the information the client wants, while the use of an appraisal is how the client will use the provided information.
Lenders use appraisals to qualify the property and determine how much the property can be sold for if foreclosure becomes necessary.
Appraisers can be employed by organizations (staff appraisers) or work on a freelance basis for multiple clients (fee appraisers).

Real Estate Financing Industry

The real estate financing industry is divided into primary and secondary markets.
The primary market involves individual borrowers and lenders, with most residential real estate financing provided by depository financial institutions (e.g. banks, credit unions, savings institutions).
The secondary market involves loans being treated as investments, packaged into mortgage-backed securities, and sold to investors.

Real Estate Definitions

Real property is defined as an identified parcel or tract of land, including improvements, if any.
An improvement is something that has been added to or becomes part of the land, while a fixture is a man-made attachment to real property.
Fixture tests are used to distinguish between a fixture and personal property, including the method of attachment, adaptation, intention of the parties, and relationship of the parties.

Real Property Interests

A real property interest is defined as the interests, benefits, and rights inherent in the ownership of real estate.
The complete bundle of rights in real property includes the right to possess, use, enjoy, encumber, will, and sell or transfer.
Appurtenances are things that go along with the ownership of the land, such as air and water rights.

Types of Estates

There are two main categories of interests in land: estate and encumbrance.
An estate is a real property interest that includes possession, while an encumbrance is a real property interest that does not include possession.
Freehold estates include title to the property and are divided into two categories: fee simple and life estates.
Leasehold estates are interests held by tenants under a lease agreement and include tenancy for years, periodic tenancy, tenancy at will, and tenancy at sufferance.

Encumbrances

An encumbrance is a nonpossessory interest in real estate, with two categories: financial (liens) and nonfinancial (easements and private restrictions).
Liens can be voluntary or involuntary, and general or specific.
Easements are nonexclusive rights to use someone else's land for a particular purpose, and can be appurtenant or in gross.

Government Restrictions

Government can affect private ownership through eminent domain, taxation, and police power.
Eminent domain is the power to take private property for public use, with just compensation paid to the property owner.
Taxation includes general property taxes and special assessments, while police power is the basis for zoning and land use regulations.

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Description

Learn the fundamentals of real estate appraisal, including key terms, services, and purposes. Understand the differences between real estate and real property, and more.