Mlpp3e C12 Appraisal
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View Mlpp3e C12 Appraisal as PDF for free.
More details
- Words: 3,626
- Pages: 60
Chapter 12
Understanding Appraisals
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
1
Chapter 12: Understanding Appraisals
Overview Chapter 12 discusses: • The steps necessary to complete a real estate appraisal • The three appraisal approaches used to arrive at an opinion of value • The elements recorded on a Uniform Residential Appraisal Report (URAR) • How adjustments are made to comparable properties • The impact of the Home Valuation Code of Conduct (HVCC)
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
2
Chapter 12: Understanding Appraisals
Key Terms • Appraisal • Appraisal Management Company (AMC) • Automated Valuation Model (AVM) • Comparables Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
• Contributory Value • Drive-by Appraisal • Elements of Comparison • Gross Living Area (GLA) • Home Valuation Code of Conduct (HVCC) 3
Chapter 12: Understanding Appraisals
Key Terms • Indicated Value Range • Market Value • Matched Pair Analysis • Neighborhood • Recertification of Value
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
• Reconciliation • Sales Comparison Approach • Subject • Substitution • URAR • USPAP
4
Chapter 12: Understanding Appraisals
Real Estate Appraisal • An estimate or opinion of value as of a certain date that is supported by objective data • Not a guarantee of value • Must be supportable and based on facts • Only valid as of its effective date, which establishes terms, conditions, and economic circumstances upon which the value is estimated Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
5
Chapter 12: Understanding Appraisals
Appraisals Performed to Determine Property Value • • • • • • • • • •
Collateral for mortgages or investments Sellers and buyers looking for listing/offer price Civil lawsuits Divorces Bankruptcies Estates and trusts Eminent domain valuations Insurance coverage or claims Tax matters Determining construction or remodeling costs
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
6
Chapter 12: Understanding Appraisals
Approaches • Sales Comparison Approach—compares subject property with other similar properties (comparables or comps) sold recently in the same market area • Cost Approach—calculates the cost of the land, site improvements, and the cost to build the structure on the land • Income Approach—analyzes the revenue, or income, the property currently generates or could generate Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
7
Chapter 12: Understanding Appraisals
Uniform Standards of Professional Appraisal Practice (USPAP) • Established and promoted by the Appraisal Foundation • Dictates a number of standards, rules, and guidelines that licensed appraisers must follow when completing an appraisal report • Requires appraiser to disclose any interest in the subject property or the outcome of the appraisal
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
8
Chapter 12: Understanding Appraisals
Uniform Residential Appraisal Report (URAR) • Most common appraisal report form used in residential mortgages • Referred to as Fannie Mae Form 1004 or Freddie Mac Form 70 • Used for single family homes, individual units in a planned-unit development (PUD), or other one-family properties • Specific forms used for condominiums, multifamily investment properties, and manufactured homes Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
9
Chapter 12: Understanding Appraisals
Sales Comparison Approach • Compares the subject property with other recently sold properties (comparables or comps) in the same location as the subject in order to assign value • Considers only past sales that have actually closed • Considered the most useful and accurate of the three appraisal methods for residential property • Also known as the market data approach
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
10
Chapter 12: Understanding Appraisals
Finding Comparable Sales • Typically use between 3 and 5 comparable sales • A minimum of 3 comps is required by most secondary market lenders • Should be: – Recent sales, usually within 6 months prior to the date of the appraisal – Same market area – Same transfer rights – Part of an arm’s length transaction Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
11
Chapter 12: Understanding Appraisals
Rules for Adjusting Properties • •
•
The subject property is the starting point and never changes If the comparable is missing a feature that the subject has, the appraiser adds to the comparable to make the properties equal If the comparable has a feature that the subject property does not, the appraiser subtracts from the comparable to make them equal
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
12
Chapter 12: Understanding Appraisals
Comparable Chart
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
13
Chapter 12: Understanding Appraisals
Adjustments • As of day the comps were sold • Made only for significant features – Generally physical features – Could be features of the transaction, such as when a sale occurred or financing terms – Only those features that appeared to contribute to any price differences should be noted
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
14
Chapter 12: Understanding Appraisals
Limits on Adjustments • Limited by Fannie Mae and others in the secondary market • Provides a benchmark as to how close the comparables actually are to the subject property • Properties that are too dissimilar can result in excessive adjustments
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
15
Chapter 12: Understanding Appraisals
Fannie Mae Guidelines • The total net value of all adjustments should not exceed 15% of the comparable sale price • Positive adjustments (for missing features) are added together • Negative adjustments (for additional features) are subtracted from that total
• The total gross (absolute) value of all adjustments should not exceed 25% of the comparable sale price • All adjustments are added together, regardless if adjustments are positive or negative
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
16
Chapter 12: Understanding Appraisals
Sequence of Adjustments • • • • • •
Property rights conveyed Financing terms Conditions of sale Market conditions (date of sale) Location Physical characteristics
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
17
Chapter 12: Understanding Appraisals
Sequence of Adjustments • Adjustments that are a percentage of the comparable’s sale price, rather than a set dollar amount must be made first, individually and in sequence: – Property rights – Financing – Condition of sale – Market conditions • Then all other adjustments may be combined Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
18
Chapter 12: Understanding Appraisals
Property Rights Conveyed • Usually involve fee simple, meaning that all property rights typically transferred with real property in the market are being conveyed
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
19
Chapter 12: Understanding Appraisals
Financing Concessions • • • •
Interest rate buydowns Below market rate financing Loan discount points Fees or closing costs paid by the seller (if customarily paid by the buyer) • Refunds or credits for borrower’s expenses • The inclusion of non-realty items
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
20
Chapter 12: Understanding Appraisals
Market Conditions (Date of Sale) • Comparables that sold as recently as possible • Older sale may have fluctuated due to market conditions: – Supply – Demand – Economic trends – Interest rates, etc. • Survey the market to consider whether an adjustment is warranted
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
21
Chapter 12: Understanding Appraisals
Location Considerations • Market area where the comparable is located • Exact position within a neighborhood • If required, may use comps from nearest similar market area with an appropriate explanation and any necessary value adjustments
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
22
Chapter 12: Understanding Appraisals
Physical Characteristics • List of features and amenities may or may not warrant an adjustment • Additional blank spaces where more items can be inserted if other elements of comparison are responsible for value differences between comp and subject • Describe items that are not quantifiable as excellent, good, average, fair, or poor
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
23
Chapter 12: Understanding Appraisals
Researching Property Transfer History • Ensure the integrity of the appraisal process • Applies to the subject as well as the comparables • Validates whether the transactions represent bona fide transfers at market value • If not, the comparables should not be used to support value • Analyze the purchase contract, current listing, and recent prior sales for the past three years
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
24
Chapter 12: Understanding Appraisals
Property Flipping • Fannie Mae: The process of purchasing existing properties with the intention of immediately reselling the properties for a profit • Not necessarily illegal, but has a bad reputation because of fraud potential if property values are inflated
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
25
Chapter 12: Understanding Appraisals
Reconciliation • Determination of a final opinion of market value for the subject property by analyzing all of the data collected during the appraisal process • Weight the comparables appropriately, never average • Results in an indicated value range • Against USPAP rules to steer value to a targeted price
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
26
Chapter 12: Understanding Appraisals
Market Value • The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, buyer and seller, each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
27
Chapter 12: Understanding Appraisals
“As Is” • Must indicate if appraisal was performed “as is,” or subject to other hypothetical conditions or extraordinary assumptions • Typical appraisal is done "as is," meaning that the property value was determined based upon a complete and thorough examination of the subject property as it currently sits and in its present condition
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
28
Chapter 12: Understanding Appraisals
Recertification of Value (Recert) • Used to confirm whether or not certain conditions in original appraisal have been met, as in a “subject to” condition • Does not change the effective date of the appraisal • Validates the original opinion of value
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
29
Chapter 12: Understanding Appraisals
Automated Valuation Models • Provides a probable value range for properties • Performs statistical analysis of available data such as tax records • Not true appraisals – do not give an opinion of value • Best for typical homes • Fannie Mae’s Desktop Underwriter Property Inspection Report-Form 2075
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
30
Chapter 12: Understanding Appraisals
Home Valuation Code of Conduct • Appraisal management company (AMC) accused of conspiring with S&L to inflate real estate appraisals • Agreement between NY attorney general, Fannie Mae, Freddie Mac, and Federal Housing Finance Agency (effective May 1, 2009) • Not a federal law but intended to set standards to ensure real estate appraisers are not coerced in any way – Applies to 1- to 4-family homes – Required for Fannie Mae and Freddie Mac loans – Does not apply to FHA, VA, or USDA loans as originally implemented
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
31
Chapter 12: Understanding Appraisals
Home Valuation Code of Conduct • Only lender or authorized third party may select, retain, and compensate an appraiser • Lenders may not: – Use an appraisal report prepared by an employee – Accept any appraisal report completed by appraiser selected, retained, or compensated in any manner by any other third party, including mortgage brokers and real estate agents – Use any appraisal report that came from AMC owned by lender or its affiliates unless lender owns less than 20% and has no role in day-to-day operations – Use any appraisal report from an entity owned in whole or in part by the lender – Order a second appraisal if attempting to influence outcome of first appraisal.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
32
Chapter 12: Understanding Appraisals
Home Valuation Code of Conduct • Lenders may use an in-house staff appraiser to: – Order appraisals – Conduct appraisal reviews or other quality control – Develop, deploy, or use internal automated valuation models – Prepare appraisals in connection with transactions other than mortgage origination
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
33
Chapter 12: Understanding Appraisals
Home Valuation Code of Conduct • Mortgage brokers may not: – Have any role in selecting, retaining, compensating an appraiser
• Mortgage brokers may: – Initiate appraisal process on lender’s behalf if directed to submit application to authorized AMC previously arranged by lender
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
34
Chapter 12: Understanding Appraisals
Home Valuation Code of Conduct • Lenders must provide borrower with copy of appraisal report no less than 3 business days prior to closing (borrower may waive the requirement) • Lender may charge borrower for appraisal but not for the copy of the report • Lender may accept appraisal report from appraiser for a different lender if: – Obtain written assurance that other lender has adopted the Code – Lender determines that the appraisal conforms to requirements and is otherwise acceptable
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
35
Chapter 12: Understanding Appraisals
Home Valuation Code of Conduct • Lenders required to establish: – Quality control process, random evaluation of 10% – Telephone hotline and email address for complaints about improper influence
• HVCC calls for creation of Independent Valuation Protection Institute
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
36
Chapter 12: Understanding Appraisals
Appraisals on FHA Loans • Selected only by non-commissioned employees or third parties • May use appraisal management company • Loan production staff can have no substantive communication with appraiser • Lenders/third parties may not try to influence appraiser in any way • May order second appraisal only under specific circumstances • Appraisers should only accept assignments in areas with which they’re familiar
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
37
Chapter 12: Understanding Appraisals
Summary 1. Appraisal—An opinion of value of property, as of a specified date, supportable by objective data. Follows a well-defined process to value properties using three different methods: Sales comparison approach, cost approach, and income approach. Uniform Standards of Professional Appraisal Practice (USPAP) rules and guidelines must be followed so work is seen as complete, accurate, and unbiased. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
38
Chapter 12: Understanding Appraisals
Summary 2. Uniform Residential Appraisal Report (URAR)—appraisal report. Communicates the opinion of value and the supporting data. Primary Fannie Mae form used by lenders for residential property appraisal (Form 1004).
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
39
Chapter 12: Understanding Appraisals
Summary 3. The sales comparison approach compares subject property with other recently sold comparable properties in same market area. Fannie Mae requires at least 3 comps. Only past sales may be used. Looking for market value, the most probable price a property should bring in a competitive and open market.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
40
Chapter 12: Understanding Appraisals
Summary 4. Comparables must be similar to the subject, recent sales, and in the same market area. Adjustments are made to comparables for differences; the subject never changes. Add value to comp that lacks something the subject has; subtract value if comp has something extra. Only as of the day a comparable was sold. Only for significant features. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
41
Chapter 12: Understanding Appraisals
Summary 5. Sequence of adjustments is: 1. 2. 3. 4. 5. 6.
property rights conveyed financing terms conditions of sale Market conditions (date of sale) Location Physical characteristics
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
42
Chapter 12: Understanding Appraisals
Summary 6. Total Adjustments are limited by secondary market. Total net adjustments should not exceed 15% of comp’s price. Total gross adjustments should not exceed 25% of comp’s price.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
43
Chapter 12: Understanding Appraisals
Summary 7. Transfer History required by URUR. Requires 3 years to look for inflated prices. One way to detect flipping, buying and selling quickly for a profit. Validates that recent transfer price reflects market value.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
44
Chapter 12: Understanding Appraisals
Summary 8. Reconciliation—process of analyzing values derived from different appraisal approaches to arrive at a final opinion of value. Uses an indicated value range to reach a final value. Values of the different approaches are never averaged to reach a final value.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
45
Chapter 12: Understanding Appraisals
Summary 9. Automated Underwriting—value of the property is initially determined using an automated valuation model (AVM). Provide a probable value range for properties by performing a statistical analysis of available data.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
46
Chapter 12: Understanding Appraisals
Summary 10. Recertification confirms whether or not certain conditions in the original appraisal have been met. Does not change the effective date of the valuation. If appraisal must be updated or readdressed, it must be considered a new assignment by the appraiser.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
47
Chapter 12: Understanding Appraisals
Summary 11. Home Valuation Code of Conduct (HVCC) sets standards on solicitation, selection, compensation, conflicts of interest, and appraiser independence. Applies to 1- to 4-family mortgages intended to be sold to Fannie Mae or Freddie Mac. Only a lender or any thirdparty specifically authorized by the lender may select, retain, and compensate an appraiser. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
48
Chapter 12: Understanding Appraisals
Quiz 1. Which form is used most frequently for residential appraisals? a. b. c. d.
FNMA HVCC URAR USPAP
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
49
Chapter 12: Understanding Appraisals
Quiz 2. Jack has been contracted to determine the value of a large apartment building for a potential investor. Which appraisal method is probably the most useful for this situation? a. b. c. d.
competitive market analysis cost approach income approach sales comparison approach
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
50
Chapter 12: Understanding Appraisals
Quiz 3. Which comparables are given the most consideration when determining the indicated value range with the sales comparison approach? a. any sale that occurred at least six months prior b. same sized homes from different neighborhoods c. those most similar to the subject d. all of the above Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
51
Chapter 12: Understanding Appraisals
Quiz 4. Which is NOT required for an arm’s length transaction? a. buyer and seller were not related b. buyer obtained a conventional mortgage through a lender c. each party was acting in his or her own best interests d. seller made unusual financing concessions Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
52
Chapter 12: Understanding Appraisals
Quiz 5. Which of the following is a correct adjustment? a. The comparable has an extra bedroom, so $3,000 is added to the subject price. b. The comparable has an extra bedroom, so $3,000 is subtracted from the subject price. c. The comparable has an extra bedroom, so $3,000 is added to the comparable price. d. The comparable has an extra bedroom, so $3,000 is subtracted from the comparable price. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
53
Chapter 12: Understanding Appraisals
Quiz 6. Two homes are similar in every respect except one has air conditioning and the other has a heat pump. Both sold for $125,000. What can we conclude? a. A heat pump is more desirable than air conditioning. b. Air conditioning is more desirable than a heat pump. c. Neither a heat pump nor air conditioning is a significant feature. d. There must be some information missing from the question because air conditioning is always worth more. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
54
Chapter 12: Understanding Appraisals
Quiz 7. Which is considered first in the sequence of adjustments? a. b. c. d.
date of sale location physical differences property rights conveyed
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
55
Chapter 12: Understanding Appraisals
Quiz 8. When a percentage adjustment is made for a sale concession, what is the result? a. The comparable price is now the cash equivalency. b. The comparable price is now the time adjusted normal sale price. c. The subject is adjusted to the market. d. Nothing, because sales concessions are never percentage adjustments. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
56
Chapter 12: Understanding Appraisals
Quiz 9. Why are there guidelines on adjustment limits? a. because lenders wanted to limit the number of loans being made b. so appraisers do not adjust the subject too much c. to gauge how close a comparable approximates the subject d. to test which appraisers are more adept at math skills Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
57
Chapter 12: Understanding Appraisals
Quiz 10. On the URAR form, the transfer history for the subject must be reported for a. any suspicious transfers in the public record. b. the past three years. c. the past year. d. the same length as the comparables’ transfer history.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
58
Chapter 12: Understanding Appraisals
Quiz 11. A recert does NOT a. address issues in a “subject to” appraisal. b. change the effective date of the valuation. c. confirm the validity of the original opinion of value. d. verify that conditions stated in the original appraisal have been met. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
59
Chapter 12: Understanding Appraisals
Quiz 12. Under the provisions of the Home Valuation Code of Conduct, who may select and compensate an appraiser for a mortgage? a. the borrower only b. the lender only c. the mortgage broker only d. the real estate agent only
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
60
Understanding Appraisals
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
1
Chapter 12: Understanding Appraisals
Overview Chapter 12 discusses: • The steps necessary to complete a real estate appraisal • The three appraisal approaches used to arrive at an opinion of value • The elements recorded on a Uniform Residential Appraisal Report (URAR) • How adjustments are made to comparable properties • The impact of the Home Valuation Code of Conduct (HVCC)
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
2
Chapter 12: Understanding Appraisals
Key Terms • Appraisal • Appraisal Management Company (AMC) • Automated Valuation Model (AVM) • Comparables Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
• Contributory Value • Drive-by Appraisal • Elements of Comparison • Gross Living Area (GLA) • Home Valuation Code of Conduct (HVCC) 3
Chapter 12: Understanding Appraisals
Key Terms • Indicated Value Range • Market Value • Matched Pair Analysis • Neighborhood • Recertification of Value
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
• Reconciliation • Sales Comparison Approach • Subject • Substitution • URAR • USPAP
4
Chapter 12: Understanding Appraisals
Real Estate Appraisal • An estimate or opinion of value as of a certain date that is supported by objective data • Not a guarantee of value • Must be supportable and based on facts • Only valid as of its effective date, which establishes terms, conditions, and economic circumstances upon which the value is estimated Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
5
Chapter 12: Understanding Appraisals
Appraisals Performed to Determine Property Value • • • • • • • • • •
Collateral for mortgages or investments Sellers and buyers looking for listing/offer price Civil lawsuits Divorces Bankruptcies Estates and trusts Eminent domain valuations Insurance coverage or claims Tax matters Determining construction or remodeling costs
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
6
Chapter 12: Understanding Appraisals
Approaches • Sales Comparison Approach—compares subject property with other similar properties (comparables or comps) sold recently in the same market area • Cost Approach—calculates the cost of the land, site improvements, and the cost to build the structure on the land • Income Approach—analyzes the revenue, or income, the property currently generates or could generate Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
7
Chapter 12: Understanding Appraisals
Uniform Standards of Professional Appraisal Practice (USPAP) • Established and promoted by the Appraisal Foundation • Dictates a number of standards, rules, and guidelines that licensed appraisers must follow when completing an appraisal report • Requires appraiser to disclose any interest in the subject property or the outcome of the appraisal
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
8
Chapter 12: Understanding Appraisals
Uniform Residential Appraisal Report (URAR) • Most common appraisal report form used in residential mortgages • Referred to as Fannie Mae Form 1004 or Freddie Mac Form 70 • Used for single family homes, individual units in a planned-unit development (PUD), or other one-family properties • Specific forms used for condominiums, multifamily investment properties, and manufactured homes Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
9
Chapter 12: Understanding Appraisals
Sales Comparison Approach • Compares the subject property with other recently sold properties (comparables or comps) in the same location as the subject in order to assign value • Considers only past sales that have actually closed • Considered the most useful and accurate of the three appraisal methods for residential property • Also known as the market data approach
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
10
Chapter 12: Understanding Appraisals
Finding Comparable Sales • Typically use between 3 and 5 comparable sales • A minimum of 3 comps is required by most secondary market lenders • Should be: – Recent sales, usually within 6 months prior to the date of the appraisal – Same market area – Same transfer rights – Part of an arm’s length transaction Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
11
Chapter 12: Understanding Appraisals
Rules for Adjusting Properties • •
•
The subject property is the starting point and never changes If the comparable is missing a feature that the subject has, the appraiser adds to the comparable to make the properties equal If the comparable has a feature that the subject property does not, the appraiser subtracts from the comparable to make them equal
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
12
Chapter 12: Understanding Appraisals
Comparable Chart
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
13
Chapter 12: Understanding Appraisals
Adjustments • As of day the comps were sold • Made only for significant features – Generally physical features – Could be features of the transaction, such as when a sale occurred or financing terms – Only those features that appeared to contribute to any price differences should be noted
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
14
Chapter 12: Understanding Appraisals
Limits on Adjustments • Limited by Fannie Mae and others in the secondary market • Provides a benchmark as to how close the comparables actually are to the subject property • Properties that are too dissimilar can result in excessive adjustments
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
15
Chapter 12: Understanding Appraisals
Fannie Mae Guidelines • The total net value of all adjustments should not exceed 15% of the comparable sale price • Positive adjustments (for missing features) are added together • Negative adjustments (for additional features) are subtracted from that total
• The total gross (absolute) value of all adjustments should not exceed 25% of the comparable sale price • All adjustments are added together, regardless if adjustments are positive or negative
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
16
Chapter 12: Understanding Appraisals
Sequence of Adjustments • • • • • •
Property rights conveyed Financing terms Conditions of sale Market conditions (date of sale) Location Physical characteristics
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
17
Chapter 12: Understanding Appraisals
Sequence of Adjustments • Adjustments that are a percentage of the comparable’s sale price, rather than a set dollar amount must be made first, individually and in sequence: – Property rights – Financing – Condition of sale – Market conditions • Then all other adjustments may be combined Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
18
Chapter 12: Understanding Appraisals
Property Rights Conveyed • Usually involve fee simple, meaning that all property rights typically transferred with real property in the market are being conveyed
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
19
Chapter 12: Understanding Appraisals
Financing Concessions • • • •
Interest rate buydowns Below market rate financing Loan discount points Fees or closing costs paid by the seller (if customarily paid by the buyer) • Refunds or credits for borrower’s expenses • The inclusion of non-realty items
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
20
Chapter 12: Understanding Appraisals
Market Conditions (Date of Sale) • Comparables that sold as recently as possible • Older sale may have fluctuated due to market conditions: – Supply – Demand – Economic trends – Interest rates, etc. • Survey the market to consider whether an adjustment is warranted
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
21
Chapter 12: Understanding Appraisals
Location Considerations • Market area where the comparable is located • Exact position within a neighborhood • If required, may use comps from nearest similar market area with an appropriate explanation and any necessary value adjustments
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
22
Chapter 12: Understanding Appraisals
Physical Characteristics • List of features and amenities may or may not warrant an adjustment • Additional blank spaces where more items can be inserted if other elements of comparison are responsible for value differences between comp and subject • Describe items that are not quantifiable as excellent, good, average, fair, or poor
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
23
Chapter 12: Understanding Appraisals
Researching Property Transfer History • Ensure the integrity of the appraisal process • Applies to the subject as well as the comparables • Validates whether the transactions represent bona fide transfers at market value • If not, the comparables should not be used to support value • Analyze the purchase contract, current listing, and recent prior sales for the past three years
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
24
Chapter 12: Understanding Appraisals
Property Flipping • Fannie Mae: The process of purchasing existing properties with the intention of immediately reselling the properties for a profit • Not necessarily illegal, but has a bad reputation because of fraud potential if property values are inflated
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
25
Chapter 12: Understanding Appraisals
Reconciliation • Determination of a final opinion of market value for the subject property by analyzing all of the data collected during the appraisal process • Weight the comparables appropriately, never average • Results in an indicated value range • Against USPAP rules to steer value to a targeted price
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
26
Chapter 12: Understanding Appraisals
Market Value • The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, buyer and seller, each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
27
Chapter 12: Understanding Appraisals
“As Is” • Must indicate if appraisal was performed “as is,” or subject to other hypothetical conditions or extraordinary assumptions • Typical appraisal is done "as is," meaning that the property value was determined based upon a complete and thorough examination of the subject property as it currently sits and in its present condition
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
28
Chapter 12: Understanding Appraisals
Recertification of Value (Recert) • Used to confirm whether or not certain conditions in original appraisal have been met, as in a “subject to” condition • Does not change the effective date of the appraisal • Validates the original opinion of value
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
29
Chapter 12: Understanding Appraisals
Automated Valuation Models • Provides a probable value range for properties • Performs statistical analysis of available data such as tax records • Not true appraisals – do not give an opinion of value • Best for typical homes • Fannie Mae’s Desktop Underwriter Property Inspection Report-Form 2075
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
30
Chapter 12: Understanding Appraisals
Home Valuation Code of Conduct • Appraisal management company (AMC) accused of conspiring with S&L to inflate real estate appraisals • Agreement between NY attorney general, Fannie Mae, Freddie Mac, and Federal Housing Finance Agency (effective May 1, 2009) • Not a federal law but intended to set standards to ensure real estate appraisers are not coerced in any way – Applies to 1- to 4-family homes – Required for Fannie Mae and Freddie Mac loans – Does not apply to FHA, VA, or USDA loans as originally implemented
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
31
Chapter 12: Understanding Appraisals
Home Valuation Code of Conduct • Only lender or authorized third party may select, retain, and compensate an appraiser • Lenders may not: – Use an appraisal report prepared by an employee – Accept any appraisal report completed by appraiser selected, retained, or compensated in any manner by any other third party, including mortgage brokers and real estate agents – Use any appraisal report that came from AMC owned by lender or its affiliates unless lender owns less than 20% and has no role in day-to-day operations – Use any appraisal report from an entity owned in whole or in part by the lender – Order a second appraisal if attempting to influence outcome of first appraisal.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
32
Chapter 12: Understanding Appraisals
Home Valuation Code of Conduct • Lenders may use an in-house staff appraiser to: – Order appraisals – Conduct appraisal reviews or other quality control – Develop, deploy, or use internal automated valuation models – Prepare appraisals in connection with transactions other than mortgage origination
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
33
Chapter 12: Understanding Appraisals
Home Valuation Code of Conduct • Mortgage brokers may not: – Have any role in selecting, retaining, compensating an appraiser
• Mortgage brokers may: – Initiate appraisal process on lender’s behalf if directed to submit application to authorized AMC previously arranged by lender
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
34
Chapter 12: Understanding Appraisals
Home Valuation Code of Conduct • Lenders must provide borrower with copy of appraisal report no less than 3 business days prior to closing (borrower may waive the requirement) • Lender may charge borrower for appraisal but not for the copy of the report • Lender may accept appraisal report from appraiser for a different lender if: – Obtain written assurance that other lender has adopted the Code – Lender determines that the appraisal conforms to requirements and is otherwise acceptable
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
35
Chapter 12: Understanding Appraisals
Home Valuation Code of Conduct • Lenders required to establish: – Quality control process, random evaluation of 10% – Telephone hotline and email address for complaints about improper influence
• HVCC calls for creation of Independent Valuation Protection Institute
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
36
Chapter 12: Understanding Appraisals
Appraisals on FHA Loans • Selected only by non-commissioned employees or third parties • May use appraisal management company • Loan production staff can have no substantive communication with appraiser • Lenders/third parties may not try to influence appraiser in any way • May order second appraisal only under specific circumstances • Appraisers should only accept assignments in areas with which they’re familiar
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
37
Chapter 12: Understanding Appraisals
Summary 1. Appraisal—An opinion of value of property, as of a specified date, supportable by objective data. Follows a well-defined process to value properties using three different methods: Sales comparison approach, cost approach, and income approach. Uniform Standards of Professional Appraisal Practice (USPAP) rules and guidelines must be followed so work is seen as complete, accurate, and unbiased. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
38
Chapter 12: Understanding Appraisals
Summary 2. Uniform Residential Appraisal Report (URAR)—appraisal report. Communicates the opinion of value and the supporting data. Primary Fannie Mae form used by lenders for residential property appraisal (Form 1004).
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
39
Chapter 12: Understanding Appraisals
Summary 3. The sales comparison approach compares subject property with other recently sold comparable properties in same market area. Fannie Mae requires at least 3 comps. Only past sales may be used. Looking for market value, the most probable price a property should bring in a competitive and open market.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
40
Chapter 12: Understanding Appraisals
Summary 4. Comparables must be similar to the subject, recent sales, and in the same market area. Adjustments are made to comparables for differences; the subject never changes. Add value to comp that lacks something the subject has; subtract value if comp has something extra. Only as of the day a comparable was sold. Only for significant features. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
41
Chapter 12: Understanding Appraisals
Summary 5. Sequence of adjustments is: 1. 2. 3. 4. 5. 6.
property rights conveyed financing terms conditions of sale Market conditions (date of sale) Location Physical characteristics
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
42
Chapter 12: Understanding Appraisals
Summary 6. Total Adjustments are limited by secondary market. Total net adjustments should not exceed 15% of comp’s price. Total gross adjustments should not exceed 25% of comp’s price.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
43
Chapter 12: Understanding Appraisals
Summary 7. Transfer History required by URUR. Requires 3 years to look for inflated prices. One way to detect flipping, buying and selling quickly for a profit. Validates that recent transfer price reflects market value.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
44
Chapter 12: Understanding Appraisals
Summary 8. Reconciliation—process of analyzing values derived from different appraisal approaches to arrive at a final opinion of value. Uses an indicated value range to reach a final value. Values of the different approaches are never averaged to reach a final value.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
45
Chapter 12: Understanding Appraisals
Summary 9. Automated Underwriting—value of the property is initially determined using an automated valuation model (AVM). Provide a probable value range for properties by performing a statistical analysis of available data.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
46
Chapter 12: Understanding Appraisals
Summary 10. Recertification confirms whether or not certain conditions in the original appraisal have been met. Does not change the effective date of the valuation. If appraisal must be updated or readdressed, it must be considered a new assignment by the appraiser.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
47
Chapter 12: Understanding Appraisals
Summary 11. Home Valuation Code of Conduct (HVCC) sets standards on solicitation, selection, compensation, conflicts of interest, and appraiser independence. Applies to 1- to 4-family mortgages intended to be sold to Fannie Mae or Freddie Mac. Only a lender or any thirdparty specifically authorized by the lender may select, retain, and compensate an appraiser. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
48
Chapter 12: Understanding Appraisals
Quiz 1. Which form is used most frequently for residential appraisals? a. b. c. d.
FNMA HVCC URAR USPAP
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
49
Chapter 12: Understanding Appraisals
Quiz 2. Jack has been contracted to determine the value of a large apartment building for a potential investor. Which appraisal method is probably the most useful for this situation? a. b. c. d.
competitive market analysis cost approach income approach sales comparison approach
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
50
Chapter 12: Understanding Appraisals
Quiz 3. Which comparables are given the most consideration when determining the indicated value range with the sales comparison approach? a. any sale that occurred at least six months prior b. same sized homes from different neighborhoods c. those most similar to the subject d. all of the above Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
51
Chapter 12: Understanding Appraisals
Quiz 4. Which is NOT required for an arm’s length transaction? a. buyer and seller were not related b. buyer obtained a conventional mortgage through a lender c. each party was acting in his or her own best interests d. seller made unusual financing concessions Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
52
Chapter 12: Understanding Appraisals
Quiz 5. Which of the following is a correct adjustment? a. The comparable has an extra bedroom, so $3,000 is added to the subject price. b. The comparable has an extra bedroom, so $3,000 is subtracted from the subject price. c. The comparable has an extra bedroom, so $3,000 is added to the comparable price. d. The comparable has an extra bedroom, so $3,000 is subtracted from the comparable price. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
53
Chapter 12: Understanding Appraisals
Quiz 6. Two homes are similar in every respect except one has air conditioning and the other has a heat pump. Both sold for $125,000. What can we conclude? a. A heat pump is more desirable than air conditioning. b. Air conditioning is more desirable than a heat pump. c. Neither a heat pump nor air conditioning is a significant feature. d. There must be some information missing from the question because air conditioning is always worth more. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
54
Chapter 12: Understanding Appraisals
Quiz 7. Which is considered first in the sequence of adjustments? a. b. c. d.
date of sale location physical differences property rights conveyed
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
55
Chapter 12: Understanding Appraisals
Quiz 8. When a percentage adjustment is made for a sale concession, what is the result? a. The comparable price is now the cash equivalency. b. The comparable price is now the time adjusted normal sale price. c. The subject is adjusted to the market. d. Nothing, because sales concessions are never percentage adjustments. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
56
Chapter 12: Understanding Appraisals
Quiz 9. Why are there guidelines on adjustment limits? a. because lenders wanted to limit the number of loans being made b. so appraisers do not adjust the subject too much c. to gauge how close a comparable approximates the subject d. to test which appraisers are more adept at math skills Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
57
Chapter 12: Understanding Appraisals
Quiz 10. On the URAR form, the transfer history for the subject must be reported for a. any suspicious transfers in the public record. b. the past three years. c. the past year. d. the same length as the comparables’ transfer history.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
58
Chapter 12: Understanding Appraisals
Quiz 11. A recert does NOT a. address issues in a “subject to” appraisal. b. change the effective date of the valuation. c. confirm the validity of the original opinion of value. d. verify that conditions stated in the original appraisal have been met. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
59
Chapter 12: Understanding Appraisals
Quiz 12. Under the provisions of the Home Valuation Code of Conduct, who may select and compensate an appraiser for a mortgage? a. the borrower only b. the lender only c. the mortgage broker only d. the real estate agent only
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
60
Related Documents
Mlpp3e C12 Appraisal
June 2020 3
C12
November 2019 33
C12
November 2019 26
C12
June 2020 17
C12
November 2019 21
C12
October 2019 30More Documents from "Shady Ahmed"
Mlpp3e C12 Appraisal
June 2020 3
Mlpp3e C06 Conventional
June 2020 2
Mlpp3e C13 Ethics
June 2020 1
Federal Lending Legislation
June 2020 3
