RE Course Section 4 Unit 1

Residential properties in federally related transactions valued at $___________ or less are exempt from these federal appraisal requirements.

$400,000

Plottage

- The joining or assemblage of two neighboring land parcels increases the property value The increase or decrease in land value that occurs when several parcels are combined into one large plot, as that value compares to their combined total value if sold individually Ex. Plottage frequently results in an increase in value over what the individual parcels could sell for on their own.

highest and best use

- This is the most profitable use that is both legal (conforms to zoning) and economically feasible (won't cost more than the increase in value). The legal and feasible use of a property that would return its highest value Ex. When Shane bought the farm property, he knew its highest and best use would be realized by partitioning it into smaller parcels and selling those parcels individually.

Regression

- This is the value a higher-quality property loses by being near a lower-quality property. The loss of value in a property that occurs when a nearby property's value decreases Ex. Mark was unhappy about the decrease in value to his property that occurred when the adjacent property remained vacant for years.

Progression

- This is the value a lower-quality property gains by being near a higher-quality property. Ex. Although David was concerned about the noise from the construction on the neighboring property, he knew that based on the principle of progression, improvements made to an adjacent property would enhance the value of his own property. Ok

contribution

-A change in a property impacts the value as a whole. An appraisal term indicating that the value of a portion of the property is dependent upon the value it brings to the entire property Ex. David learned that just because the garage cost $75,000 to design and build, the property value may not increase by $75,000.

Substitution

-A property's value is determined by what it would cost to purchase a similar substitute property. Ex. Bob offered to sell Sydney a car that was an exact replica of another car she found on Craigslist, but was $3,000 less. Suddenly the Craigslist car fell sharply in her perception of its value.

Competition

-The more similar properties that are on the market, the lower the price will be driven. principle used by appraisers when determining property value; competitive pressures between similar properties influence a property's value. Ex. Because of the number of taco houses in the area had doubled, the principle of competition indicates that Juan's Taco House had decreased in value.

Anticipation

-The value of property today is the current value of the total anticipated future benefits The value of a property depends on the expected utility or income that property will create or accrue for the owner at a future date Ex. An appraiser uses the principle of anticipation when valuing a commercial property by estimating the present worth of benefits (e.g., expected rental income) the property will provide in the future.

Principle of Conformity

-Value is created and maintained when the characteristics of a property conform to the demands of the market A valuation term indicating that a property holds its value when surrounding properties are similar to the subject property. Ex. The principle of conformity says that it's unwise to build a modern home in a neighborhood of Victorians.

The terms "appraisal," "valuation," and "evaluation" are confused by many. Select the proper term for each condition. 1. Unbiased estimate of value of a specific property on a specific date 2. Process of forming an opinion of a property's value 3. Study of a property, potentially for land use or marketability

1. appraisal 2. valuation 3. evaluation

1. In Heather's neighborhood, the ___________________ is stiff. She put her house on the market, and within the week, five more homes were up for sale on their street alone. 2. Ted's house is in the middle of an industrial area. The house is more than 100 years old, and this was not an industrial area when the home was built, but the neighborhood still influences the property's value. This is an example of _____________________.

1. competition 2. conformity

Sort these transactions into the correct area depending on whether it's definitely a federally related transaction, definitely not a federally related transaction, or whether it could be either. 1. Sale or lease of a residential property 2. Investment property sale involving a federal financing agency 3. Residential FHA or VA transaction 4. Residential conventional loan that will be sold to Fannie Mae

1. could be either 2. federally related transaction 3. not a federally related transaction 4. not a federally related transaction

Vladimir tells you about two types of cost: direct and indirect. Sort the costs into the appropriate buckets. 1. Wood for construction 2. Windows 3. Architectural fees 4. Recording fees 5. Electrician

1. direct 2. direct 3. indirect 4. indirect 4. direct

DUST factors can drive values up or down. How do each of these factors influence value? 1. There are more buyers than sellers. 2. The market is flooded with properties. 3. A property needs major renovations. 4. There's a cloud on the title.

1. drives value up 2. drives value down 3. drives value down 4. drives value down

Which of these activities is exempt? Assume each transaction involves a federal financial or regulatory agency. 1. Refinancing a property valued at $150,000 2. Purchasing a duplex valued at $495,000 3. Purchasing a single-family home for $289,000 4. Refinancing an investment property valued at $750,000

1. exempt 2. not exempt 3. exempt 4. not exempt Federal guidelines apply to financing, refinancing, and the use of real property as security for a loan when the property is valued above $400,000. - If the property's value is $400,000 or less, it's exempt from federal appraisal requirements.

What conditions does fair market value imply? 1. Neither the buyer nor the seller is being forced into an agreement. 2. The buyer and seller are acting in their own best interests. 3. The property has had reasonable exposure to the market. 4. The buyer and seller are related. 5. The buyer is using cash or obtaining financing.

1. implied 2. implied 3. implied 4. not implied 5. implied

Select the type of value applicable for each item. (Mortgage value, Investment value, Insured value) 1. Price at which the property can be loaned on or sold at a foreclosure sale 2. Of great importance to a lender 3. Return on investment a property may provide 4. Cost to replace or rebuild a property 5. Value of importance to insurance companies

1. mortgage value 2. mortgage value 3. investment value 4. insured value 5. insured value

Match with Plottage, Highest and best use, or Substitution 1. Mario can't give away a quarter-acre lot. Everyone is looking for more land. So he combines two parcels to make a half-acre lot, which are selling like hotcakes. 2. Jane owns an empty warehouse. She's contemplating whether she stands to profit more by keeping the industrial property or converting it to residential condominiums. 3. Ted will have a hard time getting his asking price, especially now that a similar house with the same floor plan and finishes just sold for $10,000 less.

1. plottage 2. highest and best use 3. subsitution

Match the price, value, and cost with the appropriate description. 1. What the seller accepts and the buyer pays 2. What the property is worth 3. What it would take to recreate the property

1. price 2. value 3. cost

Select the proper individual for each characteristic. (Real estate professional or Appraiser) 1. Usually hired by the buyer or seller 2. Usually hired by the lender or buyer, or sometimes the seller 3. Determines what a buyer may pay for a property 4. Determines a property's worth 5. Provides an estimate of value that may be influenced by the consumer 6. Provides an unbiased estimate of value

1. real estate professional 2. appraiser 3. real estate professional 4. appraiser 5. real estate professional 6. appraiser

Your resource introduced you to the acronym DUST, four factors that influence value. Let's see how well you can recall each of the four factors. Match each factor to its description. 1. The ease with which the deed can be transferred and the property put to the desired use 2. Reflects the market supply, or lack thereof 3. Speaks to the property's function 4. Relates to a property's popularity

1. transferability 2. scarcity 3. utility 4. demand

Demand

A bit of a popularity contest. How attractive and move-in ready is a property? What's the market like? Are there more buyers than sellers, or vice versa?

market value

A price at which a willing buyer and willing seller can strike a deal given ordinary market conditions Ex. When real estate professionals prepare a CMA, they are most interested in determining an appropriate market value. Ok

evaluation

A usability study that does not include or refer to an opinion of value - And keep in mind that there is a difference between valuation and evaluation. An evaluation doesn't even need a value at the end. Ex. One of the most important considerations when evaluating a potential investment property is location. It can help predict whether a stream of ready tenants will be available.

FIRREA has requirements related to the appraisal of federally related transactions. What does FIRREA require? A) That federally related appraisals must be conducted by an appraiser who's either a licensed or certified appraiser B) That federally related appraisals must include two independent appraisals C) That appraisers follow the criteria established by the Appraiser Qualification Board of the Appraisal Foundation

A) That federally related appraisals must be conducted by an appraiser who's either a licensed or certified appraiser

comparative market analysis (CMA)

An estimate of market value based on recent comparable sales for similar properties Ex. Gwen prepared a comparative market analysis for Jolene and told her, "Based on the sales prices of recent similar properties, I suggest a list price of between $235,000 and $250,000."

appraisal

An estimate of value as of a specific date and for a specific use performed by a state-licensed or certified appraiser. Ex. The appraisal on Myra's property was for its use as a bed-and-breakfast today. Ok

appraised value

An estimate of value as of a specific date, and for a specific use Ex. Barbara refinanced her property two years ago. At that time, the appraised value was $450,000. If she puts it on the market today, she can't use the appraised value as list price, because it's no longer valid. Ok

valuation

An estimate of value; an appraisal Ex. Appraisers arrive at a valuation by applying a specified set of criteria. Ok

broker's price opinion (BPO)

An opinion of value prepared by a real estate licensee; similar to a comparative market analysis, but not as detailed; a lender or relocation company generally orders the BPO Ex. Chico's broker's price opinion (BPO) was prepared for XYZ Lending company on a potential foreclosure property. Ok

What is an appraisal?

An opinion or estimate of a property's value as of a specific date

State licensing or certification qualifications must conform to federal requirements, which follow the criteria established by the

Appraisal Foundation's Appraiser Qualifications Board. - Appraisers must follow the Appraisal Standards Board's -Uniform Standards of Professional Appraisal Practice (USPAP). Qualification requirements are defined for the three Es: education, examination, experience.

The agencies referred to in "federally related transactions" include:

Board of Governors of the Federal Reserve System Federal Deposit Insurance Corporation (FDIC)

Four Significant Factors that Influence Value

DUST: Demand Utility Scarcity Transferability

Cost

Expense for labor, materials and items related to construction such as fees and permits Ex. The cost to tear down and build anew was cheaper than renovating the existing building

What type of value may consumers be interested in if they are looking for the potential rate of return?

Investment value

The fewer properties on the market, the greater the scarcity. What's the effect on prices?

Prices are pushed upward.

Appraiser Victor is determining the insured value of a property. What is he evaluating?

The cost to replace or rebuild a property

Price

The dollar amount agreed upon for the sale of a property Ex. If the list price for a property is set beyond what the market will bear, buyers will not buy.

assessed value

The dollar amount to which the local tax rate is multiplied to determine property tax owed -usually 80%-90% of market value Ex. Although the appraised value of Myra's bed and breakfast was $600,000, her tax assessed value was only $475,000. Ok

value in use

The worth of a property as the owner is currently using it Ex. Value-in-use may include cash flow and other benefits that a property generates for its owner under a specific use. Ok

What purpose do appraisers serve?

To determine a property's value

Which of the following terms means the price a property is worth to its owner as currently enjoyed?

Value in use

Value

What a property is worth Ex. The sales comparison approach, the cost approach, and the income approach can be used to determine the value of a property.

The appraisal foundation

a national organization comprised of representatives of major appraisal organizations and those of related industries.

Which economic principle is related to supply and demand?

competition

Which economic principle says that value is created and maintained when the characteristics of a property fit in with its surroundings?

conformity

Growing up, Larry and his siblings spent every summer day splashing around in their in-ground pool. Now that he's responsible for maintaining the pool, it's just not as fun. When a crack developed, he decided to fill in the pool rather than repair it. But now that he's considering selling his childhood home, he's wondering what effect that action had on the property's value. This is an example of ____________________.

contribution

Which economic principle pertains to how a change in a property affects its value as a whole?

contribution

Which of these principles of value is related to how a change to a portion of a property impacts the value as a whole?

contribution

Two types of costs:

direct: labor and materials Indirect: fees and administrative costs

Sure, it may be the cheapest house on the block, but this is one of the most desirable neighborhoods in the city. That alone drives up value. This is an example of _________________

progression

What an eyesore! You'd think if the bank had any interest in selling the property it attained through foreclosure, it'd make it a little more presentable. Broken glass, debris in the yard, overgrown weeds—this house is driving down the value of everything in view. This is an example of ______________.

regression

Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) requires:

that federally related appraisals be conducted by a state-licensed or certified appraiser.

federally related transaction

transactions for sale, lease, purchase, investment, refinancing, or exchange of real property in which a federal financial agency or regulatory authority is involved. -Also included are transactions in which real property or interests in real property are used to secure a loan, including mortgage-backed securities.

Which factor that influences value considers the property's function?

utility

Which of the following can be defined as what a property is worth?

value

Transferability

Refers to the ease with which the seller can convey the property. Factors such as deed restrictions, clouds on title, or tenants in place can make it more difficult to transfer the property, and thus reduce the property value.

Utility

Related to a property's function. Is it habitable in its current condition? Does it need updating? Repairs? Does the current zoning match the intended use? If a buyer wants a commercial property, but the current zoning is residential, this impacts the value.

Scarcity

Related to demand. If you've studied economics, you know that supply and demand are price drivers. The fewer properties there are on the market (the greater the scarcity), the higher the demand. High demand pushes prices upward.

Which economic principle says that a property's value is determined by what it would cost to purchase a similar property?

Substitution