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CHAPTER 14
RESIDENTIAL REAL ESTATE
APPRAISAL
OBJECTIVES OF CHAPTER
Upon successful completion of this chapter student should be able to:
Define residential appraisal
List six reasons for appraising real estate
Define market value
Name the three approaches to value and state how each computes
estimated value.
Distinguish between reproduction cost and replacement cost
Describe three types of depreciation
Explain how the gross rent multiplier technique is used to estimate
value in residential property
Compare and contrast the application or uses of the three approaches
to value
Understand the different appraisal types used in residential lending
Be aware of regulatory and compliance restrictions affecting all
lending and appraisal personnel.
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I. Introduction
A. Definition of appraisal
B. Purposes of appraisal
C. Value
D. Uniform Residential Appraisal Report
E. Uniform Standards of Professional Appraisal
Practice
F. Principles of Real Estate Value
G. Market Value
H. Market Price
I. Factors Affecting Market Value
II. The Appraisal Process
A. Alternative Approaches to Value
B. Direct Sales Comparison Approach
C. Financing Concessions
D. Cost Approach
E. Income Approach
F. Reconciliation and Final Value Estimate
G. Required Forms
III. Streamlined Appraisals and Automated Valuation Models
A. Streamlined Appraisals
B. Uniform Appraisal Dataset and Uniform Collateral
Data Portal
C. Automated Valuation Models (AVMs)
D. Use of Streamlined Appraisals and AVMs
E. Age of Appraisal Report
F. Hiring the Appraiser
G. HVCC and Federal Reserve Final Rule—TILA
Section 129E
H. Regulatory Changes Affecting Appraisals
Teaching Tips
How do you describe an appraisal to a client so they
do not confuse it with a tax assessment?
Your client asks the question:, “what happens if the
appraisal comes in lower than the contract price?”
what do you advise them to do?
Why should we always get an income analysis for a
2-4 family house even when the owner does not to
use to rental income to qualify for the mortgage
payments?
When is a cost approach typically used?
What are the differences between an appraisal, a
streamlined appraisal, an automated valuation, a
market valuation, and a tax assessment?
What are the drawbacks of using an automated
appraisal and do you discuss the use of these in the
future? Will it have negative effects on the
mortgage industry?
Discuss the qualification of an appraiser and how
should the management company choose the right
appraiser for the job?
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SUGGESTED TRUE/FALSE QUIZ
1. The appraised value of a piece of real estate will be the same
regardless of the purpose of the appraisal
2. According to the Federal Reserve, lenders must report appraisal
violations to appropriate state licensing agencies.
3. Market value is the price for which a piece of real estate
actually sells.
4. The use of a property that produces the greatest net return over
a period of time is called the highest and best use.
5. Real estate is similar to all other marketable commodities
because its value is affected by supply and demand.
6. The principle of substitution says that the value of the subject
property should not exceed the value of a similar property.
7. The cost approach involves adjusting market value of
comparables for physical differences between the
comparables and the subject property.
8. The market data approach is used mainly for appraising single-
family residential property.
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9. The depreciation in value due to a loss of economic life caused
by wear and tear is known as economic obsolescence.
10. To determine the gross rent multiplier, the appraiser must know
the net operating income and operating expenses of the
property.
MULTIPLE CHOICE QUESTIONS More than one answer may
be correct – select all correct answers. (Correct answers are
italicized.)
1. What part of the appraisal process does recent compliance and
regulatory changes NOT effect?
a. Who could order appraisals
2. What factors does a typical Automated Valuation Model use to
produce an estimate of property value?
a. repeat sales in areas
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3. Which item is typically not attached to the appraisal report?
a. Location map
4. What is the number of comparable needed for a typical appraisal?
a. 2
5. What are three types of adjustments the appraiser makes in
calculating value based on sales comparables?
d. If there is a pool or a pond in the neighbor’s house
SUGGESTED SHORT ESSAY QUESTIONS
1. List six reasons for appraising real estate and identify the one
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of greatest concern to mortgage lenders.
ANSWER: An appraisal may estimate:
1) Assessed value for taxation purposes
2) Insurance value
The market value for mortgage loan purposes (item #4 above)
is most important to mortgage lenders. In recent years
2. What three approaches to value are used in developing an appraisal?
When is each approach most appropriate?
ANSWER: Appraisers use three very specific appraisal techniques
when developing a real estate appraisal: the direct sales comparison
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3. Explain why adjustments to the comparables are necessary for
an estimate of the value of a subject property.
ANSWER: A number of comparables should be used to
accurately reflect the market, and it is likely that some
physical differences will exist between the comparables and
4. Explain how the income approach is used for appraising
single-family residential property.
ANSWER: In areas having a rental market in single-family
homes, the gross rent multiplier method may be used. The sale
5. What two main areas of consideration does an appraisal report help a
lender evaluate? How does the appraisal report do this?
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ANSWER: The primary purpose of obtaining an appraisal report is to
help the lender determine if the collateral is sufficient security for the
loan. The secondary purpose of obtaining an appraisal report is to
6. Discuss the benefits and drawbacks to a lender using streamlined
appraisals and automated valuation models (compared to traditional
appraisals).
ANSWER: The main benefit is cost and speed in obtaining the AVM
– the main drawback is the condition of the property is unknown, as
7. Explain the impact of recent regulatory and compliance changes
related to appraisals on the mortgage origination process
ANSWER: The GSE’s HVCC guidelines in March 2008 started the
recent changes in the appraisal process. The Dodd-Frank Act
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As a result, the process is now slightly longer and more expensive by
prohibiting the originating personnel from interacting with the
ANSWERS TO ORAL DISCUSSION POINTS
The discussion points at the end of each chapter are intended for
oral discussion in class. Suggested answers/points to emphasize to
the questions are found below.
1. Explain the appraisal process an appraiser would follow developing a
traditional appraisal report.
ANSWER: The first step in the appraisal process is to plan the
appraisal. Since the appraisal is intended to solve a problem – to
estimate value of a particular property – it must be clearly stated as to
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2. Identify the approach to value summarized in each of the
following formulas.
a) Cost of reproduction or replacement – depreciation + land
value of subject property
b) Value of comparable property ± adjustments value of
subject property
c) Sale price
Gross income = GRM
ANSWER
a) Cost approach
3. What factors can affect the market value of the subject property?
ANSWER: Population growth or decline; economic developments;
financial factors, such as, the rate of inflation, cost of financing, type
4. Why are sales comparable adjustments necessary to estimate the value of
the subject property?
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ANSWER: The market prices of the comparables will be adjusted for
the physical differences between the comparable and the subject
property. Appraisers “adjust” the features of the sales comp to the
5. How do other appraisal forms differ from the Uniform Residential
Appraisal Report (URAR)? Why are these differences significant?
ANSWER: The first page of the URAR contains extensive
descriptive information about the property, its condition, and the
neighborhood in which it is located, and the market conditions at the
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