Desk Review appraisal review that the lender carries out at their desk as

Principals of Real Estate II - Chapter 1: Real Estate Appraisal

Flashcards **Market Value**Market value is the most probable price a property should bring in a competitive and open market Appraisal ProcessThe value of a property may be affected by social, economic, governmental, and environmental influencesAn appraiser must always be aware of these influences and possible changes in them that could affect market value Desk Reviewappraisal review that the lender carries out at their desk (as opposed to sending someone out into the field) to make sure the original appraisal is accurate- most lenders, especially for conforming loan programs, conduct simple desk reviews, normally at their desks. These reviews simply go through a checklist of items as they analyze the appraisal report for completeness and acceptable conditions Functional ObsolescenceRefers to the loss in desirability of the style, layout, or function of an element of a property over time.Three Approaches to Value(1) The Sales Comparison Approach(2) The Cost Approach(3) The Income Approach.The appraised value of a property is:(a) The sale price(b) An opinion of value(c) A market analysis(d) The market value of a property Principal of Progressionthe value of a subject property is increased by the value of surrounding projects **Principle of Substitution**At the core of appraisal is a basic economic concept referred to as the principle of substitution. According to this principle the value of the commodity is influenced by the cost of acquiring a substitute or comparable item.An informed person, acting rationally, would pay no more for an item than he or she would to acquire an equally desirable substitute.Therefore, the prices at which similar items are sold in a market tend to be similar, and the value of one item can be inferred from the price at which a similar item is sold.Market ValueThe price a willing seller will sell for, and the price a willing buyer will pay Gross Rent Multiplier (GRM)the relationship between the amount of rent a specific property can command, and the value of the property to the owner.This number is neighborhood specificGRM = Sales Price / Monthly Rent[I.e., if the appraiser determines that the weighted average of similar home sales is $174,000 and average rent is $1,400 per month, the GRM is

calculated as follows: GRM = $174,000/$1,400=124]

Cost ApproachThe cost approach to the market value of the property considers how much a new structure of this size and type would currently cost to build.Of special interest in a residential appraisal is the age of improvements. The

appraisal is concerned with age in 2 areas:(1)

Chronological Age - the actual age of the property in years.If the house is 20 years old, it has a chronological age of 20(2) The appraisal's estimate of the age of the house based upon its ongoing maintenance and upgrades **Principal of Contribution**suggests that the value of a property is equal to the sum of the contributory value of each of it's component parts.The most important practical application of the concept of contribution is that cost does not equal value[i.e., adding a

swimming pool to a property at the cost of $50,000 might result in a contributory value of only $20,000, much to the dismay of the homeowner External ObsolescenseThe loss in value of a property caused by factors outside of the property itself