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These are the 3 different ways an appraiser arrives at a value for a
property.
Definition Of Market Value: The most probable price which a property
should bring in a competitive and open market under all conditions requisite to a fair
sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is
not affected by undue stimulus. Implicit in this definition is the consummation of a sale
as of a specified date and the passing of title from seller to buyer under conditions
whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed
or well advised, and each acting in what he considers his own best interest; (3) a
reasonable time is allowed for exposure in the open market; (4) payment is made in terms
of cash in U.S. dollars or in terms of financial arrangements comparable thereto; (5) the
price represents the normal consideration for the property sold unaffected by special or
creative financing or sales concessions granted by anyone associated with the sale. (FNMA
1004B 6-93)
The market data approach to value is generally the most reliable indicator of value for
residential properties. The sales comparison approach is based on the premise that the
market value of a property is directly related to the prices of comparable, competitive
properties. The value of a property in the market is set by the availability of substitute
properties of similar utility and desirability. (This is the principal of substitution
which is inherent to the development of the market data approach. This principal affirms
that a prudent purchaser will not pay more for one property than it would cost to purchase
another of like kind). Value is sustained when the relationships between land and the
improvements on land, and between property and its environment are in balance.
Externalities such as the neighborhood and the economy can affect property value
positively or negatively.
The cost approach is made up of two elements, the land value, and the value of the
improvements to the land minus their depreciation. The cost approach is based on a
comparison between the cost to develop a property and the value of the existing developed
property. Because the market relates value to cost, the cost approach reflects market
thinking. Buyers tend to compare the value of existing structures with the prices and
rents obtained for similar buildings and with the cost to create new buildings with
optimal physical and functional utility. Buyers adjust the prices they are willing to pay
by estimating the cost to bring an existing structure up to desired levels of physical and
functional utility (depreciation).
The building improvements are estimated based on published construction cost manuals,
and the appraisers own survey of local builders. The cost approach is most reliable in
areas that have an abundance of land sales and on houses that are relatively young in age.
The income approach to value is generally used for valuing investment properties, and
in most cases is the least reliable value indicator for single family residential housing.
From an investor's perspective, the earning power of a real estate investment is the
critical element affecting its value. The fundamental investment premise is the higher the
earnings, the higher the value. Investment in an income-producing property represents the
exchange of present dollars for the right to receive future dollars.
In the income approach, an appraiser analyzes a property's capacity to generate
benefits and converts these benefits into an indication of present value. The income
approach is an integral part of the valuation process. Income capitalization techniques
and procedures are employed to analyze and adjust sales data in the sales comparison
approach and to measure functional and external obsolescence by capitalizing an estimated
income loss in the cost approach.
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WARNING! |
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HVCC & YOU!
On May 1, 2009 the HVCC was initiated
throughout the Country on every mortgage transaction that
involves an appraisal that is sold to Fannie Mae and Freddie
Mac. This involves all conventional loans which prior to the
present meltdown was approximately 70% of all lending. With
the banking system crippled, conventional loans seized up
and nearly came to a halt. Presently, the conventional
mortgage market is still trying to get back on its feet
albeit very slowly and cautiously. Then there is the HVCC.
The HVCC came about due to pressure put on an appraisal
management company called eAppraiseIT by a large mortgage
lender Washington Mutual in the State of New York. The
Attorney General of New York created the HVCC. To stay out
of litigation (even though not directly involved), the
appellant in the case (The State of New York) arranged to
have Fannie Mae (FNMA) sign an agreement that all loans
placed through FNMA & Freddie Mac would have to adhere to
this new HVCC.
“We knew this was causing extreme hardship to the industry,
but we didn’t expect to get thousands of horror stories from
would-be homebuyers whose dreams have been dashed by this
well-intended, but misguided policy. Every day thousands of
people are getting the rug yanked out from under them in
their quest to become homeowners because of HVCC. You only
need to go to our petition website to read the stories for
yourself,” said Kearns. READ MORE... |
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