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Topic 6:Real Estate AppraisalI. What is appraisal?An appraisal is simply an opinion or estimate of value. A real estate appraisal is an estimate of the value of specified rights or interests in real estate. While these general definitions are simple, defining the type of value to be estimated (e.g., market, investment, or insurable value) is likely to be more complex.A real estate appraiser might be asked to estimate the value of any type of interest: fee simple, life estate, remainder, easement, leased fee, leasehold. Usually, however, the right that is to be valued is fee simple ownership.II. Who utilizes the services of real estate appraisers?A. Lenders – want an estimate of the value prior to accepting the property as collateral for a mortgage loanB. Investors – want an estimate of the value prior to buying, selling, or exchangingC. Owner/occupants – want estimate of the value prior to remodeling or sellingD. Buyers – want an estimate of the value prior to making an offerE. Subdividers – want an estimate of the value in determining the feasibility of a proposed new subdivisionF. Developers – may want an estimate of value based on various possible improvements in order to determine the property’s highest and best useG. Insurance companies – want an estimate of value prior to insuring a propertyH. Lawyers – want an estimate of value for estate planning (taxes, distributions), divorce settlements, various typesof lawsuitsI. Local (and other) governments – want to know real estate values for ad valorem taxation, eminent domain purposesAppraisers can work as independent practitioners or as employees of lending institutions, local governments, large accounting/consulting firms, or other organizations. III. Appraiser licensing, and professional appraisal organizationsPrior to 1989, real estate appraisers were unregulated in most states. Anyone could advertise his/her services as a Real Estate Appraiser – there were no education or experience requirements – on the theory that all an appraiser did was to give an opinion, and anyone can offer an opinion. (Because of their knowledge of local market conditions, real estate brokers frequently did appraisals as a sideline.) How could people select “good” appraisers? Well-qualified appraisers distinguished themselves from their less-qualified competitors by joining professional organizations that awarded designations to members who met specified education and experience requirements. Those who could place letters after their names (MAI, SRA, ARA) could expect (hope) to be perceived by the public as honest and competent, because those who violated their organizations’ rules could lose their membership. But still, anyone could work as a real estate appraiser. Then with the passage of Financial Institutions Reform, Recovery, and Enforcement Act in 1989, Congress dictatedthat each state must implement a licensing program for real estate appraisers. Congress believed that many savings & loans had lost money in the early 1980s because appraisers were dishonest or incompetent, or both. Then with the 2009 Home Valuation Code of Conduct (HVCC) and the 2010 Dodd Frank federal financial overhaul regulation, federal law further required that appraisers be selected and supervised by parties with duties and pay independent of a lender’s loan approval process, so that a loan officer can not favor agreeable appraisers who overstate values to assure that loans can be approved. To be sure they are in compliance, many lenders now outsource the arrangements for appraisals to independent appraisal management companies (AMCs). By stating that any appraiser involved in a “federally related transaction” (such as a loan from an insured bank, or involving a government agency or government-sponsored enterprise) had to be “licensed” or “certified” by the government of the state where the subject property is located, Congress hoped to:- assure that each appraiser met minimal education and experience standards, and- provide a means for preventing dishonest appraisers from continued practice (by revoking their licenses).FIL 260/Trefzger 1So now appraisers can provide evidence of competence by being a “certified general real estate appraiser” (highest category of license), “certified residential real estate appraiser,” “associate real estate appraiser,” or trainee “temporary practice real estate appraiser,” in addition to doing so through professional designations. (The licensing categories noted above are the names used in Illinois; other states may use slightly different terms for these four license categories, which reflect different levels of education and experience. Licensing is administered in Illinois under the Illinois Real Estate Appraisal Licensing Act of 2002, by the Real Estate Appraisal Administration Division within the Bureau of Real Estate Professions in the Illinois Division of Professional Regulation. Those with lower licensing rank are restricted to appraising in federally related transactions of no more than $250,000 – a dollar threshold below which no license generally was needed at all under the original legislation.) But the professional organizations have not become superfluous in light of state regulation, for several reasons. High quality professional associations:- have stricter standards than state licensing boards (a high-quality designation still means a “cut above”),- exert much influence on the regulatory process, and- provide much of the education required by the various state licensing boards.So do you need a license to be an appraiser? Yes and no. No to the extent that many transactions are not federally related (e.g., divorce, insurance, setting an asking price). But yes to the extent that FNMA and FHLMC will not buy loans that are not accompanied by licensed appraisers’ value estimates. And the biggest source of business for appraisers of residential real estate has always been home loans. [Interesting sub-point: the secondary mortgage market has questioned whether appraisals should be required at all. The appraisal process leads to much cost and paper work, just to prevent a few bad transactions. In fact, the lending marketplace seems to be moving toward a standard of saving time and money by accepting “evaluations” or “broker price opinions” that are less thorough than full-blown appraisals. Indeed, government-sponsored


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ISU FIL 260 - Real Estate Appraisal

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