California Real Estate Finance
Bond, McKenzie, Fesler & Boone
Ninth Edition
Chapter 8
Qualifying the Property
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Objectives

After completing this chapter, you should be able to:






Discuss the influence of Freddie Mac and Fannie Mae and the
new Home Valuation Code of Conduct (HVCC) on a lender’s
property qualifying standards.
Describe what an appraiser looks for when analyzing a
neighborhood.
Outline the steps used in the market data approach to
estimating loan value.
Demonstrate why sales price is not the same as fair market
value.
Differentiate the formal classifications of real estate appraisers in
California.
Suggest possible ways to communicate with an appraiser within
the rules of the new Home Valuation Code of Conduct.
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Outline







What Does Qualifying the Property Mean?
Appraising a Property
Using a Standard Appraisal Form
Underwriting the Appraisal
Planned Unit Developments and Condominiums
The Licensing of Real Estate Appraisers
Working with Appraisers: The Do’s and Don’ts
© 2011 Cengage Learning created by Dr. Richard S. Savich.
What Does Qualifying the
Property Mean? (Slide 1 of 2)

Lenders’ Property Standards





Availability of funds
Market conditions
Sell in secondary market or retain in portfolio
Influence of Freddie Mac and Fannie Mae
FHA and DVA Property Standards
© 2011 Cengage Learning created by Dr. Richard S. Savich.
What Does Qualifying the
Property Mean? (Slide 2 of 2)

Procedure for Qualifying a Property

Qualifying for FHA and DVA




Meet minimum standards
As determined by appraiser
Conditional Commitment or Certificate of Reasonable Value given
Conventional Lenders and the New Appraisal
Process





Complete loan application
Appraisal ordered via Appraisal Management Companies
Based on lesser of purchase price or appraised value
Submitted to loan committee or underwriter
Final approval
© 2011 Cengage Learning created by Dr. Richard S. Savich.
New Rules Impact Appraisal
Time Frames

Mortgage Disclosure Improvement Act



Disclosures must be delivered within three days
of application
No fee can be collected until deliver of disclosures
Lenders now require a “mini” loan package




Loan Application
Credit Report
Starts the three day notification period
Appraisal can be ordered
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Time Frame for Acquiring an
Appraisal







Day 1: Loan application and supporting information sent to selected
lender
Day 4: Time frame elapses and appraisal can be ordered
Day 6: Appraisal assigned through appraisal management company
(AMC)
Day 8: Appraiser views property, takes measurements and pictures
Day 11: Appraiser completes report, including comparable
information pictures
Day 12: Lender receives completed appraisal from AMC and it is
sent for review
Day 15: Review process completed and appraisal deemed
acceptable
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Appraising a Property

(Slide 1 of 2)
Fair Market Value

“The most probable price in terms of money that
a property should bring in a competitive and open
market under all conditions requisite to a fair
sale, the buyer and seller acting prudently,
knowledgeably and assuming the price is not
affected by undue stimulus.”
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Appraising a Property



Location, location, location
City influence
Neighborhood influence
 Approach (Curb appeal)
 Neighborhood appeal
 Neighborhood homogeneity
 Neighborhood condition
 Neighborhood trend
 Adverse influences
 Schools and shopping
 Other



Curbs & gutters
Libraries
Police and fire protection
© 2011 Cengage Learning created by Dr. Richard S. Savich.
(Slide 2 of 2)
Using a Standard Appraisal
Form (See Figure 8.1) (Slide 1 of 3)

Neighborhood



Supply and demand
Price range
Neighborhood description



Employment stability
Convenience to employment, shopping and schools
Protection from detrimental conditions
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Using a Standard Appraisal
Form (Slide 2 of 3)

Property

Site







Zoning
The lot
Flood area
Improvements
Room list
Interior finish and equipment
Property rating

Functional obsolescence


Economic obsolescence


Loss in value from forces within the property
Loss in value from forces outside the property
Photographs and Square Footage Measurement
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Using a Standard Appraisal
Form (Slide 3 of 3)

Valuation




Sales comparison (aka market data approach)
Cost approach
Income approach
Compare sales price to fair market value

May not be the same




Unknowledgeable buyer or seller
Financing concessions
Personal property included in sale
Seller under pressure to sell
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Sales Comparison Approach
(aka Market Data Approach)


Principle of substitution
What similar properties have sold recently? (comparables)





Appraiser’s own files
MLS
Other agents
Public records
Web-based sites



How do they compare with this property?
Adjust for differences



Usually <15%
Sales or financing concessions?
Arrive at an estimate



Often inaccurate and outdated
Not an average
Usually one with least adjustments
Appraisals also need


Short sales
Foreclosure transactions
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Cost approach



Estimate total cost to reproduce at current
prices
Subtract estimated depreciation
Add estimated value of land
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Income Approach
(Gross rent multipliers)


Relationship between Gross Annual Rent and Sales Price
Capitalization method





Calculate gross annual income
 Assuming 100% occupancy
Deduct reasonable vacancy to arrive at gross operating income
Deduct all expenses to arrive at net operating income
Select capitalization rate
 Rate of return an investor would seek as reasonable return
Divide market capitalization rate into net operating income to
arrive at indicated value
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Underwriting the Appraisal




Based on lower of sales price or appraised value
Property acceptable by lender standards
Market value supports loan
Loan meets lender’s policies
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Planned Unit Developments
and Condominiums

PUD




Condominium




Separate, individual fee ownership
of lot and dwelling
Proportionate undivided interest
jointly in common areas
No one living above you
Unit plus undivided interest in all
land
Fee title interest in airspace
Undivided interest in land and all
common areas
Home Owners Association (HOA)



Maintains common areas
Sets dues
Monitors CCRs
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Appraiser’s view of PUDs &
Condos




General appearance
Recreational facilities
Adequate parking
Maintenance
© 2011 Cengage Learning created by Dr. Richard S. Savich.
The Licensing of Real Estate
Appraisers

Trainee License


Residential License





Residential regardless of value
Up to $250K for nonresidential
Certified General License


One to four unit residential
Up to $1M
Up to $250K for nonresidential
Certified Residential License


Must work under Licensed Appraiser
All types of property
See www.orea.ca.gov for more info
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Working with Appraisers: The
Do’s and Don’ts




Provide access to property
Let appraiser do his/her job at property
Provide comps if available
Do not try to influence appraiser
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Questions and Comments?
© 2011 Cengage Learning created by Dr. Richard S. Savich.