Chapter 1: Introduction (Mobile Technology Evolution) 1 I. WHY APPRAISAL IS IMPORTANT (p. 3) II. DEFINITION OF APPRAISAL (p. 4) A. Opinion (p. 4) B. Value (p. 5) C. Appraisal Art or Science? (p. 5) D. Appraisal Practice (p. 5) E. Consulting (p. 6) F. Review (p. 6) III. HISTORY OF APPRAISAL (p. 6) A. Appraisal Foundation (p. 8) IV. PURPOSES AND USES OF APPRAISALS (p. 8) A. Standards of Appraisal (p. 8) B. Statements (p. 9) C. Advisory Opinions (p. 9) D. Intended Use, Intended Users, and Standard of Value (Purpose) (p. 9) E. Career Opportunities (p. 10) F. Real Estate (p. 11) V. DISTINGUISHING REAL ESTATE FROM PERSONAL PROPERTY (p. 13) A. Method of Attachment (p. 13) B. Adaptability (p. 13) C. Relationship of the Parties (p. 13) D. Intention of the Interested Parties (p. 14) E. Agreement of the Parties (p. 14) F. Trade Fixtures (p. 14) VI. REAL PROPERTY (p. 15) A. Bundle of Rights (p. 15) B. Estates (p. 15) C. Encumbrances (p. 18) VII. GOVERNMENT RESTRICTIONS OF PROPERTY RIGHTS (p. 20) A. Eminent Domain (p. 20) B. Taxation (p. 21) C. Police Power (p. 21) D. Escheat (p. 21) VIII. APPRAISAL IN A MOBILE WORLD (p. 21) A. The Early Days of Appraisal (The Bad Good Old Days (p. 21) B. The Garn/St. Germaine Act Changed Everything (p. 23) IX. TECHNOLOGY IMPROVES (p. 24) A. Cell Phones, Answering Machines, and Fax Machines (p. 24) B. Personal Computers (p. 24) C. Job Losses (p. 24) X. ARE THERE OPPORTUNITIES IN THE FIELD OF APPRAISAL? (p. 24) A. Education Requirements Increase (p. 25 XI. THE BAD GOOD OLD DAYS REVISITED (p. 25) A. AVMs Not Appraisals (p. 25) x
B. Bad Lending Practices (p. 25) C. Increased Regulation (p. 26) D. Management Companies Take Over (p. 26) XII. WHAT S HAPPENING NOW IN THE FIELD OF APPRAISAL (p. 26) A. Fewer Appraisers (p. 26) XIII. THE APPRAISAL TECHNOLOGICAL REVOLUTION (p. 27) A. Early Morning - Getting Started (p. 27) B. Mid Morning - Mobile Maps (p. 28) C. Afternoon - Payment Apps in Use (p. 29) D. Early Evening - Backing Up Work Information (p. 29) E. The Future (p. 30) XIV. CHAPTER SUMMARY (p. 31) XV. CHAPTER QUIZ (p. 33) Chapter 2: Understanding Value 37 I. WHAT IS VALUE? (p. 40) II. FOUR CHARACTERISTICS OF VALUE (p. 40) A. Utility (p. 41) B. Scarcity (p. 41) C. Transferability (p. 41) D. Effective Demand (p. 41) III. VALUE DISTINGUISHED FROM PRICE AND COST (p. 42) A. Direct and Indirect Costs (p. 42) B. Development Cost and Construction Cost (p. 42) C. Replacement Cost and Reproduction Cost (p. 43) IV. PRINCIPLES OF APPRAISAL (ECONOMIC VALUE) (p. 43) A. Principle of Supply and Demand (p. 44) B. Principle of Substitution (p. 45) C. Principle of Competition (p. 46) D. Principle of Change (p. 47) E. Principle of Anticipation (p. 48) F. Principle of Balance (p. 48) G. Principle of Surplus Productivity (p. 49) H. Principle of Contribution (p. 49) I. Principle of Increasing and Decreasing Returns (p. 50) V. EFFECT OF USE ON REAL ESTATE VALUE (p. 50) A. Highest and Best Use Principle (p. 50) B. Consistent Use Principle (p. 52) C. Conformity, Progression, and Regression Principles (p. 52) VI. PRODUCTION AS A MEASURE OF VALUE (p. 53) A. Agents of Production Principle (p. 53) VII. TYPES OF VALUE (p. 54) A. Market Value (p. 54) B. Price (p. 56) C. Value in Use (p. 56) D. Investment Value (p. 57) E. Liquidation Value (p. 57) F. Assessed Value (p. 58) xi
G. Insurable Value (p. 58) H. Going Concern Value (p. 58) VIII. FORCES AFFECTING VALUE (p. 58) A. Social Factors (p. 59) B. Economic Factors (p. 60) C. Political Factors (p. 61) D. Environmental (Physical) Factors (p. 62) IX. CHAPTER SUMMARY (p. 65) X. CHAPTER QUIZ (p. 68) Chapter 3: The Appraisal Process 71 I. THE EIGHT STEPS OF THE APPRAISAL PROCESS (p. 73) II. STEP 1: DEFINING APPRAISAL PROBLEM (p. 74) A. What is to Be Appraised? (p. 75) B. When is It to Be Appraised? (p. 80) C. Why is It to Be Appraised? (p. 82) D. How is It Being Valued? (p. 83) E. Defining the Appraisal Problem in the Appraisal Report (p. 92) III. STEP 2: PRELIMINARY ANALYSIS (p. 92) A. Identifying the Necessary Data (p. 93) B. Identifying the Sources of Data (p. 93) C. Preliminary Analysis (p. 93) D. Creating a Plan (p. 94) E. Fee Proposal and Contract (p. 94) IV. STEP 3: COLLECTING, VERIFYING, AND ANALYZING THE DATA (p. 94) V. STEP 4: HIGHEST AND BEST USE ANALYSIS (p. 95) VI. STEP 5: VALUING THE SITE (p. 96) A. Reasons for Separate Site Valuation (p. 96) VII. STEP 6: APPLYING THE THREE APPROACHES TO VALUE (p. 96) A. Cost Approach (p. 97) B. Sales Comparison Approach (p. 97) C. Income Approach (p. 98) VIII. STEP 7: RECONCILING THE VALUE INDICATORS (p. 98) IX. STEP 8: REPORTING THE VALUE ESTIMATE (p. 100) A. The Two Basic Appraisal Reports (p. 100) B. Essential Elements of the Appraisal Report (p. 101) X. CHAPTER SUMMARY (p. 102) XI. CHAPTER QUIZ (p. 105) Chapter 4: Property Description and Appraisal Math 109 I. PROPERTY DESCRIPTION (p. 111) II. METES AND BOUNDS SYSTEM (p. 111) A. Reference Points (p. 112) B. Courses and Distances (p. 114) III. RECTANGULAR (U.S. GOVERNMENT) SURVEY SYSTEM (p. 114) A. Base Line and Meridian (p. 114) xii
B. Townships (p. 115) C. Sections (p. 116) D. Partial Sections (p. 116) E. Adjustments and Government Lots (p. 118) F. Rectangular Survey System Descriptions (p. 118) G. Geodetic Survey System (p. 118) IV. LOT, BLOCK, AND TRACT SYSTEM (p. 119) V. APPRAISAL MATH (p. 119) A. Distance, Area, and Volume (p. 120) B. Area of a Rectangle (p. 121) C. Units of Area (p. 122) D. Converting Units (p. 122) E. Area of a Triangle (p. 123) F. Right Triangles (p. 124) G. Areas of Complex Figures (p. 125) H. Volume (p. 125) I. Reciprocals (p. 125) J. Percentages (p. 128) K. Direct Capitalization (p. 129) L. Interest (p. 131) VI. FINANCIAL CALCULATIONS (p. 131) A. Present and Future Value (p. 132) B. Interest Compounding (p. 132) C. Hoskold or Sinking Fund Method (p. 133) D. Inwood Method (p. 133) VII. MEASURES OF CENTRAL TENDENCY (p. 134) VIII. CHAPTER SUMMARY (p. 135) IX. CHAPTER QUIZ (p. 137) Chapter 5: Data Collection and Analysis 141 I. UNDERSTANDING DATA (p. 143) A. Market Trend Data (p. 144) B. Competitive Supply and Demand Data (p. 144) C. Subject Property Data (p. 145) D. Comparable Property Data (p. 145) II. REGIONAL AND COMMUNITY DATA (p. 146) A. Use of Regional and Community Data (p. 146) B. Regional and Community Value Indications (p. 147) C. Housing Supply and Demand (p. 149) III. NEIGHBORHOOD DATA (p. 151) A. Defining Neighborhood Boundaries (p. 151) B. Neighborhood Value Indicators (p. 153) C. Sources of Neighborhood Data (p. 155) D. Neighborhood Inspection (p. 156) IV. SITE DATA (p. 158) A. Site Description (p. 158) B. Physical Data (p. 159) V. BUILDING DATA (p. 161) xiii
A. Categories of Building Data (p. 162) VI. SPECIFIC MARKET DATA (p. 167) A. Prices and Terms of Sale (p. 168) B. Date of Sale (p. 168) C. Financing (p. 168) D. Sale Conditions (p. 168) E. Cost Data (p. 168) F. Income and Expense Data (p. 169) VII. TOTAL FOR MOBILE APP FOR APPRAISERS (p. 169) VIII. MOBILE APPS, FORMS, AND OTHER INFORMATION FOR APPRAISERS (p. 175) A. General and Appraisal Apps (p. 175) B. ipad Apps (p. 175) C. Appraisal Forms and Guide Information (p. 176) D. Online Appraisal Forms (p. 176) E. Appraisal Errors and Omissions (p. 177) F. Online Appraiser Publications (p. 178) G. Mobile Technology Companies for Appraisers to Watch (p. 178) IX. CHAPTER SUMMARY (p. 179) X. CHAPTER QUIZ (p. 181) Chapter 6: Site Valuation 185 I. HIGHEST AND BEST USE (p. 187) A. Highest and Best Use Defined (p. 187) B. Purpose of Highest and Best Use Analysis (p. 188) C. Characteristics of Highest and Best Use (p. 188) D. Importance of the Principle of Anticipation (p. 191) E. Interim Uses (p. 191) II. VACANT AND IMPROVED LAND (p. 191) A. Legal Nonconforming Uses (p. 193) B. True Highest and Best Use (p. 193) C. Principle of Consistent Use (p. 194) D. Excess Land or Surplus Land (p. 194) E. Plottage (p. 195) F. Highest and Best Use in Residential Appraisals (p. 195) III. METHODS OF SITE VALUATION (p. 195) A. Sales Comparison Method (First and Most Important Method) (p. 196) B. Allocation Method (Second Method) (p. 201) C. Extraction Method (Third Method) (p. 202) D. Development Method (Fourth Method) (p. 203) E. Land Residual Method (Fifth Method) (p. 203) F. Ground Rent Capitalization Method (Sixth Method) (p. 206) G. Depth Tables ( 4-3-2-1 Method ) (p. 206) IV. CHAPTER SUMMARY (p. 208) V. CHAPTER QUIZ (p. 210) Chapter 7: Residential Construction 213 I. CLASSIFICATION OF HOUSES (p. 215) A. Types of Houses (p. 215) xiv
II. ARCHITECTURAL STYLES (p. 218) A. Compatibility (p. 220) III. ELEMENTS OF HOUSE DESIGN (p. 221) A. Siting (p. 221) B. Interior Functional Zone (p. 222) C. Room Characteristics (p. 224) IV. CONSTRUCTION METHODS AND MATERIALS (p. 227) A. Foundations (p. 227) B. Framing and Sheathing (p. 229) C. Exterior Finishes (p. 235) D. Doors and Windows (p. 236) E. Insulation (p. 239) F. Ventilation (p. 239) G. Interior Finishes (p. 240) H. Plumbing (p. 241) I. Heating and Air Conditioning (p. 242) J. Electrical (p. 242) K. Quality (p. 243) V. CHAPTER SUMMARY (p. 244) VI. CHAPTER QUIZ (p. 247) Chapter 8: Cost Approach to Value 251 I. BASICS OF THE COST APPROACH (p. 253) II. APPLICATION OF THE COST APPROACH (p. 253) III. ESTIMATING COST (p. 254) A. Reproduction and Replacement Cost (p. 254) B. Types of Cost (p. 254) IV. COST ESTIMATING TECHNIQUES (p. 255) A. Comparative Unit Method (p. 255) B. Unit-in-Place Method (p. 259) C. Quantity Survey Method (p. 260) D. Cost Index Trending (p. 261) V. ESTIMATING DEPRECIATION (p. 261) A. Depreciation Terminology (p. 261) B. Age and Economic Life (p. 262) VI. TYPES OF DEPRECIATION (p. 263) A. Physical Deterioration (p. 264) B. Functional Obsolescence (p. 264) C. External (Economic) Obsolescence (p. 265) VII. METHODS OF ESTIMATING DEPRECIATION (p. 265) A. Economic Age-Life Method (p. 265) B. Sales Comparison Method (p. 267) C. Capitalization Method (p. 267) D. Cost to Cure Method (p. 268) E. Observed Condition Method (p. 268) VIII. UNIFORM RESIDENTIAL APPRAISAL REPORT (URAR) (p. 268) IX. CHAPTER SUMMARY (p. 269) X. CHAPTER QUIZ (p. 271) xv
Chapter 9: Sales Comparison Approach to Value 275 I. MARKET THEORY OF VALUE (p. 277) II. REAL ESTATE MARKETS (p. 277) A. Description of Improvements (URAR) (p. 278) III. COMPARABLE SALES (p. 283) IV. STEPS IN THE SALES COMPARISON APPROACH (p. 283) A. Data Collection (p. 284) B. Verification of Data (p. 285) C. Selecting Units of Comparison (p. 285) D. Analysis and Adjustment of Comparable Prices (p. 286) E. Reconciliation of Comparable Value Indicators (p. 286) V. THE ADJUSTMENT PROCESS (p. 287) A. Elements of Comparison (p. 287) VI. ADJUSTMENT TECHNIQUES (p. 298) A. Paired Data Analysis (p. 298) B. Relative Comparison Analysis (p. 302) C. Analysis of Price Per Square Foot (p. 302) VII. CALCULATION OF PERCENTAGE ADJUSTMENTS (p. 302) VIII. SEQUENCE OF ADJUSTMENTS (p. 304) IX. RECONCILIATION (p. 305) X. CHAPTER SUMMARY (p. 308) XI. CHAPTER QUIZ (p. 310) Chapter 10: Income Approach to Value 313 I. USE OF THE INCOME APPROACH (p. 315) II. INVESTOR S PERCEPTION OF VALUE (p. 315) A. Rate of Return (p. 316) B. Competing Investment Opportunities (p. 318) III. INCOME CAPITALIZATION (p. 318) A. Direct Capitalization (p. 318) B. Income Estimation (p. 319) C. Multipliers and Capitalization Rates (p. 326) D. Calculating Value by Direct Capitalization (p. 330) E. Yield Capitalization (p. 333) IV. DISCOUNTING (p. 333) A. Compounding (p. 334) B. Annuities (p. 336) C. Yield Rates (p. 336) V. CHAPTER SUMMARY (p. 337) VI. CHAPTER QUIZ (p. 340) Chapter 11: Reconciliation and Final Value Opinion 343 I. RECONCILIATION (p. 343) A. Definition of Reconciliation (p. 344) B. Use of Reconciliation in Appraisals (p. 345) xvi
II. THE RECONCILIATION PROCESS (p. 346) A. Reviewing the Appraisal (p. 347) B. Assessing the Reliability of Value Indicators (p. 348) C. The Reconciliation Judgment (p. 350) III. FINAL OPINION OF VALUE (p. 351) A. Uniform Residential Appraisal Report (URAR) (p. 351) B. Point Estimates and Range Values (p. 352) C. Self Review (p. 353) IV. CHAPTER SUMMARY (p. 354) V. CHAPTER QUIZ (p. 356) Chapter 12: The Appraisal Report 359 I. FUNCTION OF THE APPRAISAL REPORT (p. 359) II. REPORTING REQUIREMENTS UNDER USPAP (p. 361) A. Scope of Work Rule (p. 361) B. Oral and Written Appraisal Reports (p. 361) III. UNIFORM RESIDENTIAL APPRAISAL REPORT (URAR) (p. 362) A. Page One of the URAR (p. 362) B. Page Two of the URAR (p. 368) C. Page Three of the URAR (p. 371) D. Pages Four Through Six of the URAR (p. 373) E. Desktop Underwriter s Quantitative Analysis Report (p. 373) F. Desktop Underwriter s Property Inspection Report (p. 373) G. Computer and Vendor s Software (p. 373) H. Attachments to the Report (p. 374) IV. CHAPTER SUMMARY (p. 374) V. CHAPTER QUIZ (p. 375) Chapter 13: Appraising Special Interests 379 I. PARTIAL INTERESTS IN REAL ESTATE (p. 379) A. Ways to Divide the Fee Simple (p. 381) B. Partition Action (p. 388) II. APPRAISING PARTIAL INTERESTS (p. 388) A. Leasehold and Leased Fee Interests (p. 388) B. Easements (p. 392) C. Liens (p. 393) D. Shared Ownership Interests (p. 393) III. OTHER FORMS OF OWNERSHIP (p. 394) A. Condominiums and PUDs (p. 394) B. Cooperatives (p. 395) C. Timeshares (p. 396) D. Manufactured Homes (p. 396) E. Prefabricated/Modular Homes (p. 398) F. Ground Leases (p. 398) IV. CHAPTER SUMMARY (p. 399) V. CHAPTER QUIZ (p. 402) xvii
Chapter 14: The Appraisal Profession 405 I. STANDARDS (p. 405) II. PROFESSIONAL ASSOCIATIONS (p. 407) III. STANDARDS OF PROFESSIONAL COMPETENCE AND CONDUCT (p. 411) A. The Appraisal Foundation (p. 411) B. Certification and Licensing (p. 412) IV. THE UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE (p. 427) A. General Principles (p. 427) B. Standards and Standards Rules (p. 427) C. Statements on Appraisal Standards (p. 427) D. Advisory Opinions (p. 427) E. Modifications of USPAP (p. 427) F. Introductory Provisions of the USPAP (p. 428) V. NATIONAL ASSOCIATION OF INDEPENDENT FEE APPRAISERS CODE OF ETHICS (p. 432) VI. CHAPTER SUMMARY (p. 436) VII. CHAPTER QUIZ (p. 437) Chapter 15: Financial Institutions and Regulations 441 I. FINANCIAL INSTITUTIONS (p. 443) A. Depository Institutions (p. 443) B. Noninstitutional Lenders (p. 443) II. PRIMARY AND SECONDARY FINANCE MARKETS (p. 443) III. FIRREA (p. 445) A. Resolution: Failed Savings Institutions (p. 445) B. Reorganization of Federal Finance Regulators (p. 445) C. Federal Finance Institutions Regulatory Agencies (FFIRA) (p. 446) D. Real Estate Appraisal Reform Amendments: Title XI (p. 447) E. Appraisals Covered by FIRREA (p. 450) F. FFIRA Appraisal Standards (p. 451) IV. SECONDARY MARKET APPRAISAL REQUIREMENTS (p. 453) A. Appraiser Qualifications (p. 454) B. Unacceptable Appraisal Practices (p. 455) V. REPORTING REQUIREMENTS (p. 455) A. Report Forms (p. 455) B. Age of Appraisal Report (p. 455) C. Required Attachments (p. 456) D. Completion Certificates (p. 456) E. Selection of Comparable Properties (p. 456) VI. CHAPTER SUMMARY (p. 457) VII. CHAPTER QUIZ (p. 460) xviii
Appendix 1 463 Glossary 469 Index 475 Great Books From ETC 490 Editor s Note: As the Uniform Standards of Professional Appraisal Practice (USPAP) are revised every two years, the references to USPAP in this text may become outdated. The reader is encouraged to obtain the latest edition of USPAP from the Appraisal Foundation s subscription service. xix