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Qualifying the Borrower

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Title: Qualifying the Borrower


1
Chapter 13
REAL ESTATE FINANCE PRESENTATION 8
  • Qualifying the Borrower

2
Qualifying the Borrower
  • Before agreeing to make a real estate loan, a
    lender will evaluate both the borrowers ability
    and willingness to repay the loan, and whether or
    not the property is of sufficient value to serve
    as collateral for the loan.
  • This evaluation process is called LOAN
    UNDERWRITING. TQ
  • The individual who conducts this process is
    called an UNDERWRITER. TQ
  • The primary concern of the underwriter is to
    minimize the amount of the lenders risk.

3
  • I. FHLMC/FNMA Underwriting Standards

4
Freddie Mac/Fannie Mae Underwriting Standards
  • According to the Freddie Mac
  • underwriting mortgage loans is an art, not a
    science. It cannot be reduced to mathematical
    formulas, but requires sensitive weighing of the
    many aspects of the loan. TQ
  • There are many factors related to the borrowers
    loan application that an underwriter will
    consider they will all relate to income, net
    worth, and credit history.

5
A. INCOME
  • Conventional lenders consider a borrowers income
    adequate for a loan if the proposed payment of
    principal, interest, taxes, and insurance does
    not exceed 28 of his or her stable monthly
    income.
  • STABLE MONTHLY INCOME TQ
  • DEBT SERVICE DEBT TO INCOME TQ

6
DEBT RATIOS MADE TO EXCEED?
  • 28/31 means i.e., min down max LTV
  • 20 Down Payment
  • 80 Loan To Value
  • What about more down???
  • 40 Down Payment
  • 60 LTV
  • 50 Down / 50 LTV
  • DTI RATIO CAN BE EXCEEDED UP TO 55 TQ

7
WHAT???
  • YOU heard right
  • Why can rules be broken?
  • Risk Factor is decreased
  • Really? You gonna put 50 down
  • You probably have even more reserves
  • You probably have super FICO score
  • You DEFININTELY dont want to lose investment!!

8
What about higher FICO?
  • Better credit scores mean higher DTI probably
  • A little better probably a little higher
  • A lot better, a bit more higher probably
  • Still more is a better risk factor
  • Credit scores can go up and down
  • Talks
  • NOTE THIS IS LIKELY, NOT GUARANTEED!!!

9
1. Stable Monthly Income
  • As mentioned earlier, stable monthly income is
    the base income of the borrower, plus earnings
    from acceptable secondary sources.
  • Before concluding there is a sufficient quantity
    of income, the underwriter must decide what
    portion of the total verified earnings are
    acceptable as a part of his or her stable monthly
    income.
  • ITS ALL FULL DOC!!!!! TQ
  • Quality
  • Durability
  • Bonuses, Commissions, and Part-Time Earnings
  • Overtime
  • Unemployment (if regular) and AFDC
  • Alimony, Child Support, or Maintenance
  • Income from Other Family Members
  • Self-Employment Income
  • Co-mortgagor
  • Rental Income
  • Verifying Income

10
FULL DOC WAS DAT?
  • It means all income and assets and everything
    else will be backed up with TQ
  • Bank statements
  • Paystubs, W-2s, 1099s, 1040s, etc.
  • Audited P L Bal. Sheet (Year To Date)
  • Divorce settlements (for )
  • Appraisals
  • Rent Surveys
  • You name it!

11
2. Computing Monthly Earnings
  • When converting hourly wages to monthly earnings,
    multiply the hourly wage by 40 (hours in a work
    week), then multiply by 52 (weeks in a year) and
    divide by 12 (months in a year)
  • MonthlyHOURLY X 40 X 4.333 or YEARLY / 12
  • Example
  • Hourly Wage 20.00 x 40 x 4.333 3466.67
  • Weekly Income 20.00 x 40 800
  • Annual Income 800 x 52 41,600
  • Monthly Income 41,600 12 3,466.67

12
3. Employment History
  • When evaluating the elements of a borrowers
    income (quantity, quality, and durability), the
    underwriter will analyze the individuals
    employment stability using the Request for
    Verification of Employment, and/or Paystubs for
    30 days TQ
  • Annual income for 2 years, i.e., 2 years 1040s
  • A borrower with a history of steady, full
    employment will be given more favorable
    consideration than one who has changed employers
    frequently, unless the changes are properly
    explained.
  • As a general rule, a borrower should have
    continuous employment for at least two years in
    the same field.

13
4. Advancement
  • If the borrower has changed employers for the
    sake of advancement within the same line of work,
    the underwriter will likely view the change
    favorably. TQ
  • On the other hand, persistent job hopping without
    advancement usually signifies a problem of some
    kind and an underwriter will tend to regard the
    individuals earnings as unstable. TQ

14
5. Education and Training
  • Special education or training that prepares an
    individual for a specific kind of work can
    strengthen a loan application.
  • Such education or training can offset minor
    weaknesses with respect to earnings or job tenure
    if the underwriter is convinced there is a
    continuing demand for individuals in this line of
    work.

15
B. NET WORTH
  • According to Fannie Mae, accumulation of net
    worth is a strong indication of credit
    worthiness. TQ
  • A borrower who has built up a significant net
    worth from earnings, savings, and other
    investment activities clearly has the ability to
    manage financial affairs and accumulate wealth.
  • An individuals NET WORTH is determined by
    subtracting personal liabilities from total
    assets.

16
1. Required Reserves After Closing
  • As a safeguard against unexpected bills or
    temporary loss of income, and as a general
    indicator of financial ability, Fannie Mae
    requires the borrower to have sufficient cash on
    deposit, or in the form of highly liquid assets,
    to cover two months payments (PITIM) after
    making the down payment and paying all closing
    costs.
  • AUTOMATED U/W (DU-Desktop Underwriter) findings
    will be the guideline ultimately. TQ
  • FHLMC guidelines require a minimum of two months
    payments for all owner-occupant loans, without
    regard to loan-to-value ratio, and three to six
    months for non-owner-occupant loans.

17
INVESTMENT PROPERTYRESERVES
  • Investment Property Non Owner Occ.
  • 6 months reserves for rental TQ
  • And for each rental with a loan on it
  • Yep 3 rentals 18 months reserves
  • 2 months reserves for residence any 2nd home
    (owner occupied vacation home)

18
2. Verification of Assets
  • Included in every loan application is a section
    devoted to assets. TQ
  • The underwriter will take whatever steps are
    necessary to verify the nature and value of
    assets held by the borrower.
  • LIQUID ASSETS
  • NON-LIQUID ASSETS

19
3. Verification of Deposit
  • The underwriter will use the Request for
    Verification of Deposit form to prove the
    borrower has the necessary funds in his or her
    bank account(s).
  • This form is sent directly to the bank and
    returned to the underwriter without passing
    through the borrowers hands.
  • Used less often now, than bank statements TQ

20
4. (Previously) Alternative, now the Usual
Verification Method TQ
  • Lenders may use an alternative method of
    verifying deposits the borrower may submit the
    original bank statements for the previous two
    months to verify sufficient cash for closing.
  • 2 months per account being verified

21
5. Financial StatementSelf Employed or Multiple
Incomes
  • If a borrowers assets are substantial and
    diverse, an audited financial statement may be
    the best way to explain the borrowers
    creditworthiness to the underwriter.
  • A FINANCIAL STATEMENT is a summary of facts
    showing the individuals financial condition it
    contains an itemized list of assets and
    liabilities which serves to disclose net worth.

22
6. Real Estate for Sale
  • If a borrower is selling a property to raise cash
    to buy the subject property, the equity may be
    counted as a legitimate asset, SUBJECT TO closing
    that sale!
  • EQUITY is the difference between the market value
    of the property and the sum of the selling
    expenses, mortgages and other liens against the
    property. TQ
  • Equity is what the buyer should receive from the
    sale of the property.

23
7. Other Assets
  • Any assets held by the borrower will help the
    loan application.
  • Assets, other than cash and real estate,
    typically listed in a loan application include
    automobiles, furniture, jewelry, stocks and
    bonds, and cash value in a life insurance policy
    OR retirement fund.

24
8. Gift Letter
  • If an applicant lacks the necessary funds to
    close a transaction, a gift of the required
    amount from relatives is usually acceptable to
    the underwriter.
  • The gift WILL be confirmed by means of a (gift)
    letter signed by the donor.
  • The letter should clearly state that the money
    represents a gift and does not have to be repaid.
  • There is a form for this!!
  • Also, evidence of donors ability to give will be
    required!! TQ

25
C. CREDIT HISTORY
  • As a part of the loan evaluation, the underwriter
    will analyze the credit history of the borrower
    this is accomplished by obtaining a credit report
    from a responsible credit rating bureau.
  • A high FICO credit score is the standard by which
    a borrowers creditworthiness is determined. TQ
  • Here are some helpful hints to increase your
    credit score
  • 1. Pay bills on time.
  • 2. Limit outstanding debt.
  • 3. Have a long credit history.
  • 4. Restrict your credit.
  • 5. Too much credit.

26
Figure 13-7

27
1. Explaining Derogatory Credit
  • LESS IMPORTANT NOW THAN EVER DUE TO FICOs TQ
  • Most people try to meet their credit obligations
    on time when they do not, there is usually a
    reason.
  • A loss of job, hospitalization, illness, death in
    the family or even divorce can create
    extraordinary financial pressures and adversely
    affect a credit report.
  • It may be possible to successfully explain the
    ratings if the borrower can show that the
    problems occurred during a specific period of
    time for an understandable reason, and that prior
    and subsequent credit ratings have been good.

28
2. Bill Consolidation, Refinancing
  • Even in the absence of derogatory ratings, there
    are matters that can be revealed by a credit
    report which might indicate the borrower is a
    marginal credit risk.
  • If an individuals credit pattern is one of
    continually increasing liabilities and
    periodically bailing out through refinancing
    and debt consolidation, he or she may be
    classified as a marginal risk.
  • The pattern suggests a tendency to live beyond a
    prudent level.

29
3. Illegal Discrimination
  • A borrower must be of legal age (18) before he or
    she can qualify for a loan after that, an
    applicants age is not a valid reason for
    rejecting a loan.
  • NO MATTER HOW OLD WE ARE!!! TQ
  • Your life expectancy is NOT a factor!!!!!
  • In addition to age, a lender cannot use as a
    basis for denying a loan the race, color, creed,
    national origin, religion, handicap, familial
    status, marital status, or sex of the borrower.
    TQ TQ TQ

30
Figure 13-8

31
Qualifying a borrower Summary
  • The loan underwriting process evaluates both the
    property and the borrowers willingness and
    ability to pay off the loan.
  • An underwriter will make a determination of these
    factors by analyzing the borrowers current
    income, debt levels, overall net worth, and
    credit history.
  • For conventional loans, these will be the
    guidelines of FNMA (FANNIE MAE) and FHLMC
    (FREDDIE MAC).

32
Chapter 14
  • Qualifying the Property
  • Valuation
  • Broker Price Opinion
  • Appraisal

33
  • I. The Lenders Perception of Value

APPRAISAL
34
Lenders Perception of Value
  • Lenders utilize Licensed and Certified Appraisers
    to provide a professional opinion of market value
    for each residence they loan upon.
  • By both state and federal law appraisers are
    required to provide an unbiased and independent
    analysis of the property. TQ
  • MARKET VALUE is the price paid by a typical
    buyer it is based on the analysis of a group of
    actual sales that occurred in the marketplace.
  • It is this true market value that a lender seeks,
    because if a foreclosure is ever necessary, the
    lender has some assurance that the property can
    be sold for an amount that can enable them to
    recover most, if not all, of their investment.

35
A. LTV AND MAXIMUM LOAN AMOUNT
  • Loans are generally made at a loan-to-value ratio
    of from 80 to 90 of the value of the property.
    Example
  • 180,000.00 Sales Price
  • 150,000.00 Appraised Value
  • 150,000.00 Appraised Value
  • x .80 Loan to Value Ratio
  • 120,000.00 Maximum Loan
  • In the example, the maximum loan is predicated on
    the lower appraised value, not the higher sales
    price.
  • If the lender were to base the loan on the higher
    of the two figures, it would be loaning an amount
    that would be 96 of the appraised market value.

36
B. ESTIMATING MARKET VALUE
  • It is not necessary for agents and loan officers
    to be able to appraise properties, BUT it is
    NECESSARY TO DO A VALUATION!! TQ
  • However, it is helpful to understand the
    mechanics of the appraisal process and to know
    something about the reasoning and logic that
    underlies many of the appraisers conclusions.
  • For real estate agents, an understanding of how
    lenders and their appraisers perceive value will
    enable them to write and arrange financing for
    sales that will hold together.

37
  • II. Market Approach

This is the only way value is determined. Yes,
appraisals have replacement value or cost of
construction BUT the value that is used is
MARKET VALUE! TQ
38
Market Approach
  • The market approach to value is the most easily
    understood by the layman.
  • The MARKET APPROACH involves a comparison of the
    property being appraised against other similar
    properties in the same neighborhood that have
    recently sold or are currently being offered for
    sale AKA COMPS. TQ
  • Appraisers know that no informed buyer who is
    acting free of pressure will pay more for a
    particular property than he or she would have to
    pay for an equally desirable substitute property.
  • An informed seller is not likely to sell for less
    than is necessary, and if he or she is objective,
    the selling price will be based on the results of
    recent sales in the neighborhood.
  • The property sales that appraisers actually use
    are those that have closed escrow.

39
A. IDENTIFYING LEGITIMATE COMPARABLES
  • When utilizing the market approach, the appraiser
    must be certain that the sales used as a basis
    for comparison are, in fact, relevant in terms of
    the factors that have the most impact on value

40
1. Metropolitan Statistical Areas
  • A METROPOLITAN STATISTICAL AREA is an area with a
    core city population of 50,000 people and the
    area surrounding it.
  • The information obtained from these areas is
    considered to be significant to business,
    industry and consumer groups.
  • Bar graphs may be combined with a frequency curve
    to provide what is known as a HISTOGRAM.
  • FREQUENCY CURVES
  • BELL CURVE

41

42
2. Multiple Regression Analysis
  • Another tool consists of the use of MULTIPLE
    REGRESSION ANALYSIS, which is a statistical
    procedure that attempts to assess the
    relationship between a dependent variable and two
    or more independent variables.
  • THIS IS ALSO KNOW AS FANCY B.S.

43
3. Automated Valuation Models
  • Currently, NOT a popular tool for the selection
    of comparable sales, the AUTOMATED VALUATION
    MODEL (AVM), which is a computer generated
    valuation report, THAT WAS the darling of the
    lending industry FOR 5 MINUTES! TQ
  • Many residential lenders accept AVM reports in
    lieu of traditional appraisals for both first and
    second mortgages.
  • An AVM can review and select from hundreds of
    properties within seconds.
  • If the AVM is combined with a regression analysis
    program it can provide a bottom line value in
    seconds.

44
AVMs (cont.)
  • Well, it turns out that most AVMs are only
    accurate about 65 of the time.
  • All economic and appraisal modeling programs
    require proper calibration by the user.
  • In addition, the raw data put into many models is
    often unverified and incorrect. For example, most
    county data is anywhere from 10-15 years old and
    may not include homeowner upgrade information.
  • The AVM program assumes that every residence in
    your area is of the same quality and condition.
  • The question might be asked Why do we need an
    appraiser?

45
4. Appraiser Assisted AVMs
  • To try to answer these problems the industry has
    developed the APPRAISER ASSISTED AUTOMATED
    VALUATION MODEL (AAAVM).
  • These programs are modified to allow an appraiser
    to manually input information, make some
    adjustments, and do minimal calibration.
  • Also, the appraiser signs off on the result which
    takes care of who is liable for the accuracy of
    the AVM.
  • NOT A TQ ISSUE!!!! NOT TQ.

46
5. Sale Date of the Comparable Sale
  • The sale should be recentwithin the past six
    months, if possible.
  • Recent sales are used because they most
    accurately reflect what is occurring in the
    current market and do not require adjustments for
    time.

47
BROKER PRICE OPINIONS
  • Cheap appraisals that lenders order from us
    brokers who want to make 20 an hour (or less) on
    average. TQ
  • Use comps 3 mos or less old, within 1 to 3 miles
    (depending on rural, urban, or suburbanwhich is
    flexible), within 20 to 25 of the GLA (gross
    living space) and a reasonable variation of lot
    size, and age construction (year built) TQ

48
BROKER VALUATION
  • Generally do your own BPO (you just dont get
    paid for it until the listing sells
  • Used to estimate value of a listing
  • Follow same guidelines
  • Aka Comparative Market Analysis
  • All of the above are TQ issues.

49
6. Location of the Comparable Sale
  • Comparables should be selected from the
    neighborhood of the subject property.
  • In the absence of any legitimate comparable sales
    in the neighborhood, the appraiser can select
    comparables from nearby similar neighborhoods. TQ
  • Care must be taken that the properties and the
    neighborhoods have similar physical and
    demographic characteristics.

50
7. Physical Characteristics
  • To qualify as a comparable, a property should
    have physical characteristics that are
    essentially similar to the subject property. TQ
  • That is, for example, compare two story homes to
    two story homesdome homes t dome homes (oops,
    this is known as a non-conforming
    construction)seen many of them around? TQ

51
8. Terms of Sale
  • With the increase of seller participation in
    financing today, the terms of sale have become
    much more of a factor when estimating value.
  • Buyers have demonstrated a readiness that often
    borders on foolishness to pay inflated prices for
    housing.
  • Often, eager sellers offer to pay a of the
    sales price in closing costs or pre-paid
    expenses while adjusting the price of the house
    upwards to recover the difference in interest.
    TOTALLY LEGAL, but has limits. TQ
  • The appraiser is required to research the terms
    of sale of comparables to determine what
    influence they had on the sale price.
  • The above referenced closing costs assistance is
    the most common seller participation in our area.

52
9. Arms Length Transaction
  • Before a sale can be relied upon as an indication
    of what the subject property is worth, it must be
    an ARMS LENGTH TRANSACTION.
  • This means that buyer and seller are both well
    informed, under no pressure to either buy or
    sell, and that the property is offered for a
    reasonable time on the open market.
  • AND probably are not related to each other!!! TQ

53
  • III. Cost Approach

REQUIRED TO BE ON THE APPRAISAL FORMS USED FOR
FNMA, FHLMC, FHA, VA OR ANY OTHER CURRENT TYPE OF
LOAN..NOT USED BY THE UNDERWRITER TO DETERMINE
VALUE OR RISK IN 99 OF SITUATIONS!! TQ
54
Cost Approach
  • The cost approach is based on the presumption
    that buyers will not pay more for an older
    property than the cost of purchasing a newly
    constructed residence at the site.
  • Residential appraisers keep abreast of current
    construction costs in their areas and refer to
    them when using the cost approach.
  • There are three steps in the cost approach
  • 1. Estimate the cost of replacing the house with
    a new home that is similar to the existing one
    utilizing the information from the cost handbook.
  • 2. Estimate and deduct accrued depreciation from
    all sources.
  • 3. Add the value of the lot to the depreciated
    value of the house.

55
(cont.)
  • The appraiser will then deduct all sources of
    accrued depreciation from the cost new.
  • Appraisers also make adjustment on the
    presumption that a used home is not as valuable
    as a new home and that it may have suffered a
    loss in value for one of the following reasons
  • PHYSICAL OBSOLESCENCE
  • FUNCTIONAL OBSOLESCENCE
  • ECONOMIC OBSOLESCENCE
  • CURABLE/ NOT CURABLE
  • TRULY IS PART OF PROCESS TQ

56
  • IV. Income Approach

THIS IS AN IMPORTANT PART (ONLY) OF A NON-OWNER
OCCUPIED OR INVESTMENT PROPERTY! TQ
57
Income Approach
  • The majority of single-family residences are not
    income producing properties (rentals), so
    traditional income analysis and appraisal
    techniques do not apply.
  • However, some single-family residences are
    rented, for which lenders will request an income
    approach.
  • Generally, this is provided by using a GROSS RENT
    MULTIPLIER (GRM) which is determined by dividing
    the sales price of a series of at least three
    recent sales of similar single family rental
    properties by their monthly rental income.
  • Example Sales price 100,000 900 monthly rent
    111 gross rent multiplier.
  • The appraiser will then select a multiplier from
    the range that has been developed.
  • He or she will then multiply that multiplier by
    the subjects rent to determine the value by the
    income approach.

58
RENTAL SURVEY/INCOME ANALYSIS
  • THIS IS AN ADDENDUM WHICH MUST BE ORDERED AND
    PAID EXTRA (ABOUT 100-150) ON ANY INVESTMENT
    PROPERTY APPRAISAL TQ

59
  • V. Understanding the Appraisal Process
  • NEW LAWS APPLY TO THE APPRAISAL PROCESS
  • ONE IS THE HVCC LAW
  • This law requires lenders to order appraisals
    thru a 3rd party TQ
  • The purpose is to avoid any pressure (which was
    already illegal) by a loan officer or lender on
    the appraiser to reach a value that the lender
    wanted or else. TQ
  • The net result, more expensive appraisals slower
    appraisals more re-inspections by
    appraisers..all adding extra expense and delay
    to the process. TQ

60
Real Estate Settlement Procedures Act TQ
  • This is the law that the HVCC was added to
  • It already was illegal to pressure appraisers,
    but now its more expensive too!
  • A great example of the government helping us!

61
Understanding the Appraisal Process
  • Real estate agents and loan brokers need to
    understand the basic steps in the appraisal
    process because it will help them eliminate, or
    at least minimize, a prevalent problem that has
    plagued the industryboth agents and loan brokers
    tend to overvalue properties.
  • SEE PREVIOUS SLIDES

62
A. HOW TO SOLVE PROBLEMS CAUSED BY LOW APPRAISALS
  • Of course the best way to eliminate the problems
    created by low appraisals is to avoid them in the
    first place by pricing properties realistically.
  • A seller should not be given an unrealistic
    estimate of his propertys worth. TQ
  • Regardless of how objective an appraiser may be,
    there are some subjective considerations and
    conclusions in every report. TQ
  • An appraisal is an opinion of value. TQ
  • If you are affected by a low appraisal and
    sincerely believe that the appraiser has made a
    mistake, you can appeal his or her decision and,
    with the proper documentation sent to your
    lender, get the appraisal increased, possibly to
    the figure originally requested. TQ

63
  • VI. Key Considerations to a Residential Appraiser

64
  • There are many things to consider during the
    residential appraisal process.
  • Some of them are very important, others are not.
  • The following is a summary of property features
    that are considered important by appraisers.
  • Location
  • Owner-Occupied
  • Vacancies
  • Rental Levels
  • Construction Activity
  • Conformity
  • Changing Land Use
  • Size and Shape of Lots
  • Contour of the Land
  • Street Patterns
  • Utilities
  • Nuisances
  • Proximity to Services
  • Zoning
  • Site/View
  • Design and Appeal
  • Construction Quality
  • Age/Condition
  • Functional Utility

65
  • VII. Rural and Suburban Homes

PART OF APPLE VALLEY AND HESPERIA AND
VICTORVILLE PHELAN PINON HILLS.ALL ARE
PARTIALLY AT LEAST THE ABOVE.THE OTHER SELECTION
WOULD BE URBAN . IT APPEARS THAT PART OF
VICTORVILLE COULD BE CALLED URBAN, BUT ITS A
JUDGEMENT CALL REALLY. FYI NOT TQ
66
Rural and Suburban Homes
  • Properties in outlying areas are eligible for
    maximum financing by both the primary and
    secondary market subject to the following
    conditions.
  • 1. The value of the land is not more than 49 of
    the overall value of the property.
  • 2. There are adequate public or private utilities
    in service on the property.
  • 3. The property is accessible by a federal,
    state, or county highway or an all-weather
    secondary road.
  • 4. The present or anticipated use of adjacent
    real estate does not unfavorably affect the value
    of the property as a residence.

67
  • VIII. Atypical Property and Loan Types

68
Atypical (NON CONFORMING) Property and Loan Types
  • ATYPICAL PROPERTIES, which are also called
    non-conforming properties, include, but are not
    limited to, manufactured homes, dome homes, and
    log cabins.
  • These must be appraised by a Certified Level
    Appraiser only.
  • Licensed Level Appraisers are only permitted to
    appraise conforming properties and loans.

69
Alert
70
IX. CHAPTER SUMMARY
  • Lenders demand professional appraisals because
    they want an entirely objective opinion of the
    true market values of the properties they loan
    upon.
  • Loan-to-value ratios are based on the sales price
    or the appraised value, whichever is lower.
  • All appraisers, and those who use their
    appraisals for federal loan transactions, must
    adhere to the Uniform Standards of Professional
    Appraisal Practice (USPAP) as well as state and
    federal lending and appraisal regulations. The
    appraiser is required to follow the appraisal
    process.
  • For loans, the appraiser is asked to determine
    the Market Value of the property. This is a
    specifically defined value that may be either
    higher or lower than the actual selling price of
    a property.
  • HONEST AND ETHICAL PRACTICES CAN ELIMINATE THE
    NEED FOR OVERREGULATION BY GOVERNMENT IN MY
    OPINION..THINK ABOUT IT!

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Chapter Summary (cont.)
  • Appraisers use the market approach, the cost
    approach, and the income approach when valuing
    properties.
  • The market approach is the most useful for
    residential properties, as it reflects what
    actually is occurring in the marketplace.
    Comparables used in this approach should be
    recent sales in the same general neighborhood or
    area as the subject and as similar to the subject
    as possible. They must be real closed sales at
    arms length.
  • The cost approach is carried out with the use of
    cost handbooks. Appraisers estimate the overall
    accrued depreciation of a property by taking into
    account any physical, functional, or economic
    obsolescence that it may have incurred.
  • The income approach is seldom used unless the
    property is a rental. Then a Gross Rent
    Multiplier is used to determine value.
  • It is useful for agents, brokers, and others to
    understand the appraisal process in order to keep
    from overvaluing properties and losing sales as a
    result. TQ
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