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California Real Estate Finance Bond, McKenzie, Fesler & Boone Ninth Edition

California Real Estate Finance Bond, McKenzie, Fesler & Boone Ninth Edition. Chapter 8 Qualifying the Property. Objectives. After completing this chapter, you should be able to:

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California Real Estate Finance Bond, McKenzie, Fesler & Boone Ninth Edition

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  1. California Real Estate FinanceBond, McKenzie, Fesler & BooneNinth Edition Chapter 8 Qualifying the Property

  2. 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.

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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.”

  9. Appraising a Property (Slide 2 of 2) 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

  10. 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

  11. 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 Loss in value from forces within the property Economic obsolescence Loss in value from forces outside the property Photographs and Square Footage Measurement

  12. 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

  13. 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 Often inaccurate and outdated How do they compare with this property? Adjust for differences Usually <15% Sales or financing concessions? Arrive at an estimate Not an average Usually one with least adjustments Appraisals also need Short sales Foreclosure transactions

  14. Cost approach Estimate total cost to reproduce at current prices Subtract estimated depreciation Add estimated value of land

  15. 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

  16. 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

  17. Planned Unit Developments and Condominiums PUD Separate, individual fee ownership of lot and dwelling Proportionate undivided interest jointly in common areas No one living above you Condominium 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

  18. Appraiser’s view of PUDs & Condos General appearance Recreational facilities Adequate parking Maintenance

  19. The Licensing of Real Estate Appraisers Trainee License Must work under Licensed Appraiser Residential License One to four unit residential Up to $1M Up to $250K for nonresidential Certified Residential License Residential regardless of value Up to $250K for nonresidential Certified General License All types of property See www.orea.ca.gov for more info

  20. 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

  21. Questions and Comments?

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