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

*   Buydowns

*   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                                               

*   Adjustments

*   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.

Sales Comparison Adjustments

*   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.

Sales Comparison Adjustment Grid

*    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

*   Adjusted Price
$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