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Real Estate Appraisal

Lesson 1:
Introduction to
Residential Appraisal

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Introduction
Appraisal: Act or process of estimating the
value of property; an opinion of value.
Appraiser services:
estimating the value of property
consulting
reviewing work of other appraisers

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Appraisal Practice
Purpose vs. use
Distinguish between the purpose of an
appraisal and the use of an appraisal.
Purpose = information appraiser is to
provide
Use = how client will use provided
information

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Appraisal Practice
Lenders use
Lenders qualify both borrower and property
when deciding whether to make a mortgage
loan.
Appraisal assists lender in qualifying
the property
Tells lender how much property can be
sold for if foreclosure becomes
necessary

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Appraisal Practice
Types of employment
Staff appraisers: Employed by organization
to perform appraisal services related to
organizations business.
Fee appraisers: Employed by many different
clients.

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Real Estate Financing Industry


Primary market
Industry is divided into primary market and
secondary market.
Primary market: Individual borrowers and
lenders.
Most residential real estate financing is provided
by depository financial institutions:
organizations that accept deposits from account
holders.
Examples: banks, credit unions, savings
institutions.
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Real Estate Financing Industry


Secondary market
Secondary market: Loans are treated as
investments, like stocks or bonds.
Primary market lenders sell loans to
secondary market agencies, who
package loans into mortgage-backed
securities.
Mortgage-backed securities are then sold
to investors.

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Real Estate Financing Industry


Secondary market agencies
Secondary market agencies: Established by
the federal government:
Federal National Mortgage Association
(Fannie Mae)
Government National Mortgage
Association (Ginnie Mae)
Federal Home Loan Mortgage
Corporation (Freddie Mac)

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Summary
Appraisal Practice
Purpose of an appraisal
Use of an appraisal
Real estate financing industry
Depository institution
Appraisal
Secondary market agency

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Real Estate
Definitions
Property: Anything that can be owned (real or
personal property).
Real estate: Defined in the Uniform Standards
of Professional Appraisal Practice as: an
identified parcel or tract of land, including
improvements, if any.
A parcel or tract of land is identified by a
legal description.
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Real Estate
Inverted pyramid
Imagine a parcel of
land as an inverted
pyramid.
Ownership of land
includes everything
above and below the
surface.

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Real Estate
Improvements and fixtures
Improvement: Something that has been added
to or become part of land in some way.
Many improvements referred to as fixtures.
Fixtures: Man-made attachments to real
property.
Items that were once personal property.
Now attached to or connected with real
property in such a way that they have
become part of real property.
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Real Estate
Fixture tests
Four common tests to distinguish a fixture
from personal property:
1. method of attachment
2. adaptation of the item
3. intention of the parties
4. relationship of the parties

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Real Estate
Fixture tests
Method of attachment:
Is the item attached to the realty?
Is the item movable?
Adaptation of the item:
Is item specially adapted/designed to realty
in some way?

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Real Estate
Fixture tests
Intention of the parties:
Did person who installed item intend it to
become part of real estate?
Relationship of the parties:
Did person who installed item own the property,
or was she just tenant?
Installed by tenant: personal property.
Installed by owner: real property.
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Real Estate
Fixture tests
Trade fixtures: Items installed by tenant in
connection with business operated on leased
property.
Considered property of tenant.
May be removed when lease expires.

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Summary
Appraisal of Real Estate
Property
Real estate
Improvement
Fixture
Trade fixture

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Real Property Interests


Real property: Defined in Uniform Standards
of Professional Appraisal Practice as:
the interests, benefits, and rights inherent
in the ownership of real estate.
Real estate refers to land itself (plus
improvements).

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Real Property Interests


Bundle of rights
Complete bundle of rights in real property:
right to possess
right to use
right to enjoy
right to encumber
right to will
right to sell or transfer

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Real Property Interests


Appurtenances
Appurtenance: Something that goes along
with ownership of the land.
Examples: air and water rights, some
types of easements.

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Real Property Interests


Types of interests
Two main categories of interests in land.
Estate: Real property interest that
includes possession.
Encumbrance: Real property interest
that doesnt include possession.

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Types of Estates
Freehold estates
Two categories of estates.
Freehold estates: Include title to property.
Leasehold estates: Estate holder is
tenant.
Two categories of freehold estates:
fee simple estates
life estates
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Freehold Estates
Fee simple
Fee simple estate is most commonly
appraised interest.
Includes entire bundle of rights.
May last forever.
All partial/fractional interests are created
from this estate.

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Freehold Estates
Life estate
Life estate lasts only as long as a particular
person is alive.
Life tenant: The holder of the life estate.
Measuring life: The life upon which a life
estate depends.
Future interest: The ownership interest
that will begin when the life estate ends.

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Freehold Estates
Life estate
Example: James donates his farm to
Childrens Aid Society, retaining life estate for
himself in the farm.
Life tenant?
Measuring life?
Holder of future interest?

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Freehold Estates
Future interests
Future interest may be classified as either:
Estate in reversion: A future interest
held by grantor or her heirs.
Estate in remainder: A future interest
held by someone other than grantor or
her heirs.

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Summary
Freehold Estates
Freehold estate
Fee simple
Life estate
Future interest

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Types of Estates
Leasehold estates
Leasehold estate: Interest held by tenant
under lease agreement.
Four types:
tenancy for years
periodic tenancy
tenancy at will
tenancy at sufferance
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Leasehold Estates
Tenancy for years
Tenancy for years: Leasehold estate that
lasts for any fixed term.
Term may be a specified number of
years, months, weeks, or days.
Tenants interest ends at end of lease
term.
Also called estate for years or term
tenancy.

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Leasehold Estates
Periodic tenancy
Periodic tenancy: Lease automatically
renews itself at end of rental period until
either person gives notice to terminate.
Example: month-to-month lease.

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Leasehold Estates
Tenancy at will
Tenancy at will: Tenancy with no specified
termination date and no regular rental period.
Does not have to involve rent at all.

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Leasehold Estates
Tenancy at sufferance
Tenancy at sufferance: Arises when tenant
stays on property after tenancy has expired.
Not true estate; tenant has no legal right
to possess property.

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Appraisal of Leaseholds
Leased fee
During lease term, property owner retains title
and has right to use and possess property
when lease ends.
This interest is called a leased fee.

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Summary
Leasehold Estates
Leasehold estate
Tenancy for years
Periodic estate
Estate at will
Tenancy at sufferance
Leased fee

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Real Property Interests


Encumbrances
Encumbrance: Nonpossessory interest in
real estate.
Encumbrance holder has claim to
property, but no right to use or occupy.
Two categories:
financial (liens)
nonfinancial (easements and private
restrictions)
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Lien Classifications
Voluntary vs. involuntary
Voluntary lien: Granted by property owner.
Involuntary lien: Arises through operation
of law.

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Lien Classifications
General vs. specific
General lien: Attaches to all real estate
owned by debtor.
Specific lien: Attaches only to specific
piece of debtors property.

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Nonfinancial Encumbrances
Nonfinancial encumbrances affect both title
and use:
easements
profits
private restrictions

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Nonfinancial Encumbrances
Easements
Easement: Nonexclusive right to use
someone elses land for particular purpose.
Easement holder has nonpossessory
interest.
Burdens owners title.

Two types of easements:


easement

appurtenant
easement in gross
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Easements
Easements appurtenant
Easement appurtenant: Burdens one piece of
land for benefit of another piece of land.
Dominant tenement: Land benefited by
easement.
Servient tenement: Land burdened by
easement.
Runs with the land.
Cannot be severed from the land.
Involves two tenements.
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Types of Easements
Easements in gross
Easement in gross: Benefits particular
individual/organization rather than parcel of
land.
Personal right.
Not tied to ownership of land.
No dominant tenement.

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Nonfinancial Encumbrances
Profits
Profit: Property interest that allows holder
to use someone elses real estate.
Includes right to take something away
from land.
Usually involves renewable resources.

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Summary
Liens, Easements, and Profits
Encumbrance
Lien
Easement
Easement appurtenant
Easement in gross
Profit

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Nonfinancial Encumbrances
Private restrictions
Private restrictions restrict how owner may
use her own property.
May include:
size/style of buildings/additions
landscaping
parking
certain activities on property
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Private Restrictions
CC&Rs
Covenants, conditions, and restrictions:
Restrictions created and recorded by
residential subdivision developer.
All subsequent buyers/owners of
subdivision lots bound by CC&Rs.
Other owners in subdivision or
homeowners association can sue to
enforce.

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Government Restrictions
Government may affect private ownership
through:
eminent domain
taxation
police power

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Government Restrictions
Eminent domain
Eminent domain: Power to take private
property for public use.
Government must pay property owner
just compensation.

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Government Restrictions
Taxation
Common taxes that affect real estate are
general property taxes and special
assessments.
General property taxes: Apply to all real
estate; based on value of real estate.
Special assessments: Apply to
properties within assessment or
improvement district; used to pay for
public improvements.
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Government Restrictions
Police power
Police power: Governments power to make
and enforce regulations for protection of
public health, safety, and welfare.
Basis for zoning and land use
regulations.
Examples:
building codes
environmental protection laws
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Summary
Public and Private Restrictions
Private restrictions
CC&Rs
Eminent domain
Taxation
Police power

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