Chapter 9
Real Estate Finance and Appraisal

Loan Underwriting

Value of collateral security

Loan based upon the sales price or the appraised value, whichever is LESS.

Quality of title

Likelihood of timely repayment

Loan Underwriting
Likelihood of Timely Repayment

Quality of income

Credit report

Past payment and credit history

Quantity of income

PMI

Conventional

Expenses include obligations of > 10 mo.

Housing payment (PITI)/Income ratio = 28%

Housing and expenses/Income ratio = 36%

FHA

Expenses include obligations of > 6 mo.

Housing expense (PITI+maintenance)=29%

Total expense (housing + expenses)=41%

VA

Expenses include obligations of > 6 mo.

(PITI+maintenance + expenses)=41% and

Income available for family support= Gross income- Housing expense- SS- Federal and state withholding- Other obligations

Needed income given by local VA office but for a family of four approximates:

\$893 if the loan amount is \$70,000 or greater.

If the income available for family support exceeds the minimums by 20%, the 41% ratio may be waived.

Review of Mortgage Mathematics

Impact of interest rates and amortization term

Discount points

Balance outstanding

The Appraisal Process

Definition of the process

Preliminary analysis

Data selection and collection

Land value estimate

Application of the appropriate approaches to value

Reconciliation of value indications and final estimate

Reporting of value

Sales-Comparable Approach

Based upon the theory that a knowledgeable purchaser would pay no more for a property than the cost of acquiring an acceptable substitute.

Identifying comparables

Time of sale

Conditions of sale

Location

Physical attributes

Reconciliation

Comparable Sales Example

Subj.: 3 bdrm, 2 bath, 1-car gar., 2100 s.f.

Sale 1: Sales Price = \$98,000
3 bedroom, two bath, 1-car garage, 2000 s.f.

Sale 2: Sales Price = \$108,000
3 bedroom, two bath, 2-car garage, 2200 s.f.

Sale 3: Sales Price = \$101,000
3 bedroom, one bath, 1-car garage, 2200 s.f.

Sale 4: Sales Price = \$93,000
3 bedroom, one bath, 1-car garage, 2000 s.f.

Adjustment for Bathrooms: Compare Sale 1 and Sale 4; \$5,000 difference for bath.

Adjustment for Size: Compare Sale 1 and Sale 3; If Sale three had 2 baths, it would have sold for \$106,000, so the extra 200 s.f. cost an extra \$8,000 or \$40 per s.f.

Adjustment for extra garage stall: Compare Sale 1 and Sale 2; If sale 2 had 2000 s.f. it would have sold for \$100,000, so the extra garage cost \$2,000.

Sale1 Sale2 Sale3 Sale4

Price \$98,000 \$108,000 \$101,000 \$93,000

Garages \$0 -\$2,000 \$0 \$0

Baths \$0 \$0 +\$5,000 +\$5,000

Size +\$4,000 -\$4,000 -\$4,000 +\$4,000

\$102,000 \$102,000 \$102,000 \$102,000

Indicated Sales Price is then \$102,000

Cost-Depreciation Approach

Based upon the theory that a knowledgeable purchaser would pay no more for a property than the cost of building an acceptable substitute.

Site value

Plus Improvement value

Less Depreciation

Estimating Improvement Value

Quantity survey--quantity take-off

Materials

Labor

Unit-in-place--structural components

Quantity-in-place--Square feet or cubic feet

Depreciation

Physical

Functional

External

Economic

Locational

Curable vs incurable

Cost Depreciation Example

Given a 2,000 s.f. 5 year old home with 5 bedrooms and one bath. Lots cost \$30,000 and new construction costs \$40 / s.f. and an extra bathroom would cost \$12,000 to add. Homes are expected to last for 50 years

Land Cost = \$30,000

Building Cost = \$40 * 2,000 = \$80,000

Less Physical Depreciation = 5/50*\$80,000= \$8,000

Less Functional Obsolescence = \$12,000

Cost Depreciation Value = \$90,000

Income-Capitalization

Based upon the theory that a knowledgeable purchaser would pay no more for a property than the present value of the anticipated future benefits.

Estimation of income

Estimation of multipliers

Value = Income / Rate
\$10,500/.09 = \$116,667

Reconciliation

Cost-Depreciation Value=\$120,000
Income Approach Value=\$105,000
Sales-Comparison Value=\$98,000

Straight Average
(\$120,000+\$105,000+\$98,000)/3=\$107,667

Weighted Average
20% New, 50% Rentals, 30% Resales
.2*\$120,000+.5*\$105,000+.3*98,000
= \$105,900