Residential Mortgage Lending: Principles and Practices, 6e

© 2012 Cengage Learning

© 2012 Cengage Learning© 2012 Cengage Learning

Residential Mortgage Lending:Principles and Practices, 6e

Chapter 14 Residential Real Estate Appraisal


Objectives• After completing this chapter, you should be able to:

– Define residential appraisal– List six reasons for appraising real estate– Define market value– Name the three approaches to value and state how each computes

estimated value.– Distinguish between reproduction cost and replacement cost– Describe three types of depreciation– Explain how the gross rent multiplier technique is used to estimate

value in residential property– Compare and contrast the application or uses of the three approaches

to value– Understand the different appraisal types used in residential lending– Be aware of regulatory and compliance restrictions affecting all

lending and appraisal personnel


Uniform Residential Appraisal Report (URAR)

• Subject: address, ownership rights, legal description, occupancy• Contract: price, date, seller, sales concessions• Neighborhood: market conditions, price ranges, land use, boundaries• Site: dimensions, zoning, off-site improvements, utilities, flood zone• Description of improvements: exterior, foundation, room count, interior,

heating and venting and air conditioning (HVAC), kitchen, amenities• Cost approach: site value, reproduction cost, depreciation• Sales comparison analysis and value: three or more comparable sales,• detailed value adjustments, sources, prior sales data• Income approach: estimated market rent, gross rent multiplier• Reconciliation: final reconciliation, estimate of market value, appraiser• signature(s)


Uniform Standards of Professional Appraisal Practice

• sets the guidelines by which the appraiser completes this or any other appraisal form and makes an estimate of market value.


Principles of Real Estate ValueA. Market valueB. Market priceC. Factors changing valueD. Basic value determinants

1. Supply and demand2. Highest and best use3. Diminishing returns4. Substitution


Forms Required• Single family property - URAR (Fannie Mae Form 1004

/Freddie Mac Form 70)• 2-4 family property - Small Residential Income Property

Form (Fannie Mae Form 1025 / Freddie Mac Form 72)• Condominium or cooperatives - Individual Condominium

Form (Fannie Mae Form 1073 / Freddie Mac Form 465)• PUD properties - URAR Form or Individual Condominium

Form• For all appraisal forms - Market Conditions Addendum

(Fannie Mae Form 1004MC/Freddie Mac Form 71)


Required Report Attachments• Original photos of the subject property (front, rear, and

street)• Original photos of the comparable sales (front)• Location map showing the subject and the comparable

sales• Exterior sketch of the subject dwelling, with

measurements• Certification and Statement of Limiting Conditions

(Fannie Mae Form 1004B)• Addendum warranting compliance with all pertinent

FIRREA requirements


What Do You Think?• Explain the appraisal process an appraiser would

follow developing a traditional appraisal report.

• Identify the approach to value summarized in each of the following formulas.

• What factors can affect the market value of the subject property?


What Do You Think?• Why are sales comparable adjustments

necessary to estimate the value of the subject property?

• How do other appraisal forms differ from the Uniform Residential Appraisal Report (URAR)? Why are these differences significant?


Check Your Understanding1. The appraised value of a piece of real estate will be the

same regardless of the purpose of the appraisal. 2. An appraisal is an estimate of value as of a certain date. 3. Market value is the price for which a piece of real estate

actually sells. 4. The use of a property that produces the greatest net return

over a period of time is called the highest and best use. 5. Real estate is similar to all other marketable commodities

because its value is affected by supply and demand.


Check Your Understanding6. The principle of substitution says that the value of the subject

property should not exceed the value of a similar property. 7. The cost approach involves adjusting market value of

comparables for physical differences between the comparables and the subject property.

8. The market data approach is used mainly for appraising single-family residential property.

9. The depreciation in value due to a loss of economic life caused by wear and tear is known as economic obsolescence.

10.To determine the gross rent multiplier, the appraiser must know the sales price and gross monthly rental income.

Documents

Residential Mortgage Lending: Principles and Practices, 6e