Introduction to Residential Appraisal

© 2012 Rockwell Publishing

Real Estate Appraisal

Lesson 1: Introduction toResidential Appraisal


Introduction

Appraisal: Act or process of estimating the value of property; an opinion of value.

Appraiser services:estimating the value of propertyconsulting reviewing work of other appraisers


Appraisal Practice

Distinguish between the purpose of an appraisal and the use of an appraisal.

Purpose = information appraiser is to provide

Use = how client will use provided information

Purpose vs. use


Appraisal Practice

Lenders qualify both borrower and property when deciding whether to make a mortgage loan.

Appraisal assists lender in qualifying the property

Tells lender how much property can be sold for if foreclosure becomes necessary

Lender’s use


Appraisal Practice

Staff appraisers: Employed by organization to perform appraisal services related to organization’s business.

Fee appraisers: Employed by many different clients.

Types of employment


Real Estate Financing Industry

Industry is divided into primary market and secondary market.

Primary market: Individual borrowers and lenders.

Most residential real estate financing is provided by depository financial institutions: organizations that accept deposits from account holders.Examples: banks, credit unions, savings

institutions.

Primary market



Secondary market: Loans are treated as investments, like stocks or bonds.

Primary market lenders sell loans to secondary market agencies, who package loans into mortgage-backed securities.

Mortgage-backed securities are then sold to investors.

Secondary market



Secondary market agencies: Established by the federal government:

Federal National Mortgage Association (Fannie Mae)

Government National Mortgage Association (Ginnie Mae)

Federal Home Loan Mortgage Corporation (Freddie Mac)

Secondary market agencies


SummaryAppraisal Practice

– Purpose of an appraisal– Use of an appraisal– Real estate financing industry– Depository institution– Appraisal– Secondary market agency


Real Estate

Property: Anything that can be owned (real or personal property).

Real estate: Defined in the Uniform Standards of Professional Appraisal Practice as: “an identified parcel or tract of land, including improvements, if any.”

A parcel or tract of land is identified by a legal description.

Definitions


Real Estate

Imagine a parcel of land as an inverted pyramid.

Ownership of land includes everything above and below the surface.

Inverted pyramid


Real Estate

Improvement: Something that has been added to or become part of land in some way.

Many improvements referred to as fixtures.

Fixtures: Man-made attachments to real property.

Items that were once personal property.Now attached to or connected with real

property in such a way that they have become part of real property.

Improvements and fixtures


Real Estate

Four common tests to distinguish a fixture from personal property:

1. method of attachment2. adaptation of the item3. intention of the parties4. relationship of the parties

Fixture tests


Real Estate

Method of attachment:Is the item attached to the realty?Is the item movable?

Adaptation of the item:Is item specially adapted/designed to realty

in some way?

Fixture tests


Real Estate

Intention of the parties:Did person who installed item intend it to

become part of real estate?

Relationship of the parties:Did person who installed item own the

property, or was she just tenant?Installed by tenant: personal property.Installed by owner: real property.

Fixture tests


Real Estate

Trade fixtures: Items installed by tenant in connection with business operated on leased property.

Considered property of tenant.May be removed when lease expires.

Fixture tests


SummaryAppraisal of Real Estate

– Property– Real estate– Improvement– Fixture– Trade fixture


Real Property Interests

Real property: Defined in Uniform Standards of Professional Appraisal Practice as:

“the interests, benefits, and rights inherent in the ownership of real estate.”

Real estate refers to land itself (plus improvements).



Complete bundle of rights in real property:right to possessright to useright to enjoyright to encumberright to willright to sell or transfer

Bundle of rights



Appurtenance: Something that goes along with ownership of the land.

Examples: air and water rights, some types of easements.

Appurtenances



Two main categories of interests in land.Estate: Real property interest that

includes possession.Encumbrance: Real property interest

that doesn’t include possession.

Types of interests


Types of Estates

Two categories of estates.Freehold estates: Include title to property.Leasehold estates: Estate holder is

tenant.

Two categories of freehold estates:fee simple estateslife estates

Freehold estates


Freehold Estates

Fee simple estate is most commonly appraised interest.

Includes entire bundle of rights.May last forever.All partial/fractional interests are created

from this estate.

Fee simple


Freehold Estates

Life estate lasts only as long as a particular person is alive.

Life tenant: The holder of the life estate.Measuring life: The life upon which a life

estate depends.Future interest: The ownership interest

that will begin when the life estate ends.

Life estate


Freehold Estates

Example: James donates his farm to Children’s Aid Society, retaining life estate for himself in the farm.

Life tenant? Measuring life?Holder of future interest?

Life estate


Freehold Estates

Future interest may be classified as either:Estate in reversion: A future interest

held by grantor or her heirs.Estate in remainder: A future interest

held by someone other than grantor or her heirs.

Future interests


SummaryFreehold Estates

– Freehold estate– Fee simple– Life estate– Future interest


Types of Estates

Leasehold estate: Interest held by tenant under lease agreement.

Four types:tenancy for yearsperiodic tenancytenancy at willtenancy at sufferance

Leasehold estates


Leasehold Estates

Tenancy for years: Leasehold estate that lasts for any fixed term.

Term may be a specified number of years, months, weeks, or days.

Tenant’s interest ends at end of lease term.

Also called estate for years or term tenancy.

Tenancy for years


Leasehold Estates

Periodic tenancy: Lease automatically renews itself at end of rental period until either person gives notice to terminate.

Example: month-to-month lease.

Periodic tenancy


Leasehold Estates

Tenancy at will: Tenancy with no specified termination date and no regular rental period.

Does not have to involve rent at all.

Tenancy at will


Leasehold Estates

Tenancy at sufferance: Arises when tenant stays on property after tenancy has expired.

Not true estate; tenant has no legal right to possess property.

Tenancy at sufferance


Appraisal of Leaseholds

During lease term, property owner retains title and has right to use and possess property when lease ends.

This interest is called a leased fee.

Leased fee


SummaryLeasehold Estates

– Leasehold estate– Tenancy for years– Periodic estate– Estate at will– Tenancy at sufferance– Leased fee



Encumbrance: Nonpossessory interest in real estate.

Encumbrance holder has claim to property, but no right to use or occupy.

Two categories:financial (liens)nonfinancial (easements and private

restrictions)

Encumbrances


Lien Classifications

Voluntary lien: Granted by property owner.

Involuntary lien: Arises through operation of law.

Voluntary vs. involuntary


Lien Classifications

General lien: Attaches to all real estate owned by debtor.

Specific lien: Attaches only to specific piece of debtor’s property.

General vs. specific


Nonfinancial Encumbrances

Nonfinancial encumbrances affect both title and use:

easementsprofitsprivate restrictions



Easement: Nonexclusive right to use someone else’s land for particular purpose.

Easement holder has nonpossessory interest.

Burdens owner’s title.

Two types of easements: easement appurtenanteasement in gross

Easements


Easements

Easement appurtenant: Burdens one piece of land for benefit of another piece of land.Dominant tenement: Land benefited by easement.Servient tenement: Land burdened by easement.

Runs with the land.Cannot be severed from the land.Involves two tenements.

Easements appurtenant


Types of Easements

Easement in gross: Benefits particular individual/organization rather than parcel of land.

Personal right.Not tied to ownership of land.No dominant tenement.

Easements in gross



Profit: Property interest that allows holder to use someone else’s real estate.

Includes right to take something away from land.

Usually involves renewable resources.

Profits


SummaryLiens, Easements, and Profits

– Encumbrance– Lien– Easement– Easement appurtenant– Easement in gross– Profit



Private restrictions restrict how owner may use her own property.

May include:size/style of buildings/additionslandscapingparkingcertain activities on property

Private restrictions


Private Restrictions

Covenants, conditions, and restrictions: Restrictions created and recorded by residential subdivision developer.

All subsequent buyers/owners of subdivision lots bound by CC&Rs.

Other owners in subdivision or homeowners association can sue to enforce.

CC&Rs


Government Restrictions

Government may affect private ownership through:

eminent domaintaxationpolice power



Eminent domain: Power to take private property for public use.

Government must pay property owner just compensation.

Eminent domain



Common taxes that affect real estate are general property taxes and special assessments.

General property taxes: Apply to all real estate; based on value of real estate.

Special assessments: Apply to properties within assessment or improvement district; used to pay for public improvements.

Taxation



Police power: Government’s power to make and enforce regulations for protection of public health, safety, and welfare.

Basis for zoning and land use regulations.

Examples:building codesenvironmental protection laws

Police power


SummaryPublic and Private Restrictions

– Private restrictions– CC&Rs– Eminent domain– Taxation– Police power

Documents

Introduction to Residential Appraisal