Module 2 - Appraisal & Valuation

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Basic Economic Principals Of Value

Appraisal

An appraisal is an estimate or opinion of value based on supportable evidence and approved methods. An appraiser is an independent person trained to provide an unbiased estimate of value. (the appraiser works for the lender, to protect them)

Comparative Market Analysis (CMA)

A Comparable Market Analysis is a comparison of prices of recently sold homes that are similar to a listing in terms of location, style and amenities. (We can only do one if there is an intention to list, sell or help a buyer prepare to make an offer)

Broker Price Opinion (BPO)

Can only be made by a licensed Broker in Idaho, either the associate or designated broker, ans may not be done for lending purposes. Any payment for a BPO must be made to the associate's designated broker, who in turn pay the licensee who made the BPO.

Elements of Value

Demand with purchasing Power - Desire alone does not equal purchasing power.

Utility - Must satisfy some want or need of potential buyers.

Scarcity - Even if it has utility, it will not have value if overabundant

Transferability - Has to have ability to will, lease, give away or sell the property.

Market Value, Versus Market Price, Versus Cost

Market Value is an estimate of value based on an analysis of data.

Market Price is what the property actually sold for.

Cost is the price to build the structure, including land costs.

Market Value and Market Price should be equal.

Market value may not reflect cost.

Principle of Regression and Progression

Does the property conform to its:

Surroundings

Your neighbors can have an effect on your value (positively or negatively)

Over improvement: Land improvement that is more extensive than the surrounding neighborhood justifies or that can be economically warranted.

Value in Exchange

Most closely related to market value, this principle states that the present worth of goods and services is the current value a person will exchange other goods and services for today.

Value in Use

Value/Importance of object to a particular owner who may have no intention of exposing it on the open market.

Principle of Substitution

The value of a property cannot exceed the cost of equivalent substitute properties that are available in the market. Reasonable buyers comparable similar properties on the market and choose the least expensive one that meets their needs.

Principle of Highest and Best Use

Most profitable single use for property. Look at physically possible uses, legally permissible uses, economically feasible uses and most profitable use. I.E Is the proposed use the most profitable use?

Physically possible uses

Legally possible uses

Economically feasible uses

Plottage: The increase in value or utility resulting from the consolidation (assemblage) of two or more adjacent lots into one larger lot.

Forces Influencing Value

Physical Forces - Items like location, climate, water, transportation, view, soil, size and shape, exposure, environmental hazards, odors, traffic and topography.

Economic Forces - Items like the local economy, major employers, interest rates, rents and vacancy factors, plottage, parking and corner influence.

Social Forces - Items like prestige, recreation, culture, family orientation and homeowner restrictions can effect value.

Political Forces - Items like taxes, zoning, rent control, growth limitations, environmental restrictions and building and health codes.

Types of Appraisal Reports

Form report - Most common, 4 pages plus any supporting material if necessary.

Narrative Appraisal -Long, comprehensive method. Expensive and thorough.

Oral Report

Three Approaches to Value

Actual appraisers traditionally use all 3 approaches in each appraisal thy perform. They are:

Market Data Approach (Sales Comparison Approach) - Use comparable ales in the marketplace to establish price of the property.

Cost Approach - This would be most applicable in a new structure build appraisal or a custom structure such as a museum, library, factory, etc. Also f special use buildings such as public schools, churches, and public buildings.

Income Approach - Based on the current / present value of the rights to the future income. Used for a valuation of income-producing properties such as an apartment complex., shopping center, office building. Ultimately, you want the NOI.

Working With Buyers

Buyer Representation Disclosure (Blue Brochure) - Idaho law requires that all prospective buyers and sellers be provided a copy of the agency disclosure brochure at the first substantial business contact.

Agency Representation / Client Customer - All buyers start out as customers and can become clients.

Real Estate Finance - Part 1

Lending Concepts

Mortgagor = Borrower/Buyer

Mortgagee = Lender

Lien Theory States - Idaho

The Mortgagor retains both legal and equitable title to the mortgagee and the buyer retains only equitable title. Legal title is returned to the buyer only when the debit is paid in full. Upon default, the lender has the right to immediate possession.

Loan Instruments - Mortgages, Deeds of Trust and Notes

Mortgages and Deeds of Trust are security instruments. They attach the property to the loan making it the collateral. Deeds of trust are a 3-way agreement created by the bank in which a 3rd party has some rights to protect both trustee and the trustor. These parties are:

Trustor - Borrower / Buyer

Trustee - Title Company (they release when paid off arrange for foreclosure)

Beneficiary - Bank / Lender