120 Week 4 F /For WIZARD KIM

Chapter 28: Agency confirmation provision 193

Agency confirmation provision

After reading this chapter, you will be able to:

• identify the arrangements in which an agency confirmation provision is mandated; and

• properly use the agency confirmation provision in transactions that require it.

Learning Objectives

Chapter

28

The agency relationship of brokers and their agents to their principals is required to be disclosed to all parties in targeted transactions. This includes the sale, exchange or long-term lease of a one-to-four unit residential property, commercial property or mobilehome.1

This relationship is disclosed in the agency confirmation provision located in all written negotiations to purchase or lease and lease agreements.2 [See Figure 1]

The agency confirmation provision states the existence or nonexistence of each broker’s fiduciary agency with the various parties to the transaction. Each broker identifies the party they are acting on behalf of as their agent in the transaction. Thus, one broker does not state the agency relationship of

1 Calif. Civil Code §2079.17(d)

2 CC §2079.17

Mandated for purchase agreements

agency confirmation provision A provision in all purchase agreements and counteroffers disclosing the agency of each broker in the transaction.

agency confirmation provision

associate licensee

double-end

dual agent Key Terms

For a further discussion of this topic, see Agency Chapter 3 of Agency, Fair Housing, Trust Funds, Ethics and Risk Management.

194 Real Estate Principles, Second Edition

any other broker involved in the transaction. For example, the buyer’s broker does not include the seller’s broker’s agency in the agency confirmation and broker identification provisions in the purchase agreement form.3 [See RPI Form 150]

Further, an Agency Law Disclosure is provided each time any broker prepares a purchase agreement or lease for more than one year. The separate disclosure confirms the broker’s specific agency in the transaction, and is attached as a referenced addendum. [See Chapter 2 and 3]

The Agency Law Disclosure is an explanation of the duties owed to each party in a sales transaction by the broker and agents involved.4

The Agency Law Disclosure is signed by the buyer then signed by the seller on an acceptance of the offer or submission of a counteroffer.

The contents of the agency confirmation provision requires the broker and their agents to first understand the statutory definitions of:

• agent;

• seller’s agent, also referred to as a listing agent;

• buyer’s agent, also referred to as a selling agent;

• subagent; and

• dual agent.

The statutory definitions of these agency terms and their meanings are oftentimes different from the jargon used among brokers and agents in the multiple listing service (MLS) environment.

For example, by statutory definition, an agent retained by a client is always a broker. This broker is usually represented through the efforts of licensed sales agents employed by the broker. In the jargon of the real estate industry, a sales agent employed by the broker is always called an “agent.” In practice, a licensed broker never refers to themselves or other brokers as an agent.

3 CC §2079.17(a)

4 CC §2079.17(d)

Statutory jargon

Figure 1

Excerpt from Form 150 Purchase Agreement

Chapter 28: Agency confirmation provision 195

By statute, the agent employed by a broker is defined as an associate licensee — an agent of the agent, not an agent of the client.5

Only the broker can be an agent of a client. Sales agents are not permitted to have clients. Sales agents are always employees of the client’s agent — the broker. However, for income tax purposes, agents may be classified in employment contracts with their broker as independent contractors.6 [See RPI Form 506]

A buyer’s agent, also referred to as a selling agent, by definition is a legal hybrid with four distinct personalities. Each of the four is a different type of agency relationship a broker can have with a buyer. The common thread among the legal types is direct contact with the buyer.7

By legal definition, a buyer’s agency includes the following four types of broker relationships with buyers:

1. The seller’s broker, also known as the listing broker, when acting as the seller’s exclusive agent, has direct contact with the buyer when no broker is acting on behalf of the buyer. [See Figures 2 and 4]

2. Another broker collaborating with the seller’s broker on behalf of the seller to locate a buyer, acting not as an employee of the seller’s broker but independently as a subagent of the seller. [See Figure 5]

3. Buyer’s brokers locating property on behalf of a buyer, often referred to as fee-splitting (cooperating) brokers. [See Figure 3]

4. Brokers locating buyers for an unlisted property, such as a For Sale by Owner (FSBO) transaction in which the seller will not employ the broker and the broker does not represent the buyer.8

For example, a broker who is employed by a buyer to locate qualifying properties is said to have listed the buyer or been retained by the buyer. By agency definition, the buyer’s broker is now also a selling agent, as well as being more generically entitled a buyer’s broker.

As a selling agent, the buyer’s broker confirms their agency in the purchase agreement as “the agent of the buyer exclusively” — even though no oral fee arrangements, much less a written exclusive right-to-buy listing, may exist with the buyer. [See Figure 1; see Chapter 27]

The buyer’s broker might find their agency confirmation complicated by also having a listing with the seller of the property their buyer is making an offer on. Thus, the broker becomes a dual agent. [See Figures 1 and 4; see RPI Form 117]

5 CC §2079.13(a), 2079.13(b)

6 Calif. Business and Professions Code §10132

7 CC §2079.13(n)

8 CC §2079.13(n)

associate licensee A sales agent employed by a broker.

Just who is the “selling agent”?

dual agent A broker who represents both parties in a real estate transaction. [See RPI Form 117]

196 Real Estate Principles, Second Edition

Both the agency confirmation provision and the separate Agency Law Disclosure are required to be part of a purchase agreement on all offers and acceptances negotiated by brokers on targeted transactions. [See Chapter 3]

In practice, the buyer’s agent is the broker who prepares and presents a purchase agreement to the buyer for their signature.

Thus, the buyer’s broker of their agent, will:

• attach the Agency Law Disclosure as an addendum to the purchase agreement;

• fill out the buyer’s agent’s agency confirmation provision in the purchase agreement; and

Use of the agency

confirmation provision

18 18

Figure 2 & 3

Listing Arrangements

Chapter 28: Agency confirmation provision 197

• obtain the buyer’s signature on the agency law disclosure and the purchase agreement.

Before submitting the buyer’s purchase agreement to the seller, the seller’s broker confirms their agency with the seller. The seller’s broker does so by filling out the seller’s broker confirmation, noting the agency relationship established by their conduct with the seller.

The seller’s broker or their agents are occasionally the only persons acting as agents in a transaction and working directly with a buyer. As the seller’s agent, they do not owe a fiduciary duty to the buyer.

Double- ending codified

19 19

Figure 4 & 5

Listing Arrangements

198 Real Estate Principles, Second Edition

If they do act to become the buyer’s agent, the listing broker becomes a dual agent. As a dual agent, the agent agrees to locate the most suitable property available for the buyer to purchase in the entire MLS inventory, not limited to the seller’s property. [See Chapter 5]

However, if the seller’s broker and their agents do not expose the buyer to properties other than their “in-house” listings, they do not become the buyer’s agent by their conduct. Thus, they are not dual agents. [See Figure 2]

Alternatively, a broker is said to have “double-ended” a deal when only one broker is involved and is paid a fee. When a transaction is double-ended, no cooperating buyer’s broker is involved with whom they split the fee.

In this instance, no dual agency is created. Thus, the seller’s broker includes the standard agency law disclosure and confirms their agency as the “exclusive agent of the seller.” [See Figure 1]

double-end When the seller’s agent receives the entire fee in the real estate transaction, there being no buyer’s agent for fee splitting.

The agency confirmation provision is contained in all purchase agreements for the sale, exchange or long-term lease of a one-to-four unit residential property, commercial property or mobilehome. The provision lays out the agency relationships of brokers and their agents to their principals and third-parties to the transaction.

By statutory definition, an agent retained by a client is always a broker. However, the broker is usually represented by licensed sales agents employed by the broker to provide services agreed to by the broker. The agent employed by a broker is acting on their broker’s behalf when providing brokerage services for the client, and is thus an agent of the broker.

A transaction is double-ended when the seller’s agent receives the entire fee as no buyer’s agent exits to split the fee with.

Chapter 28 Summary

agency confirmation provision ............................................. pg. 193 associate licensee ...................................................................... pg. 195 double-end ................................................................................... pg. 198 dual agent ................................................................................... pg. 195

Chapter 28 Key Terms

Quiz 6 Covering Chapters 24-30 is located on page 611.

Chapter 29: The appraisal report 199

After reading this chapter, you will be able to:

• understand the purpose and function of an appraisal to provide an opinion of a property’s value on a specific date;

• recognize the six steps of the appraisal process, concluding with the creation of an appraisal report;

• differentiate the three appraisal methods used to analyze the property data collected;

• advise on the elements of a completed appraisal report; • discuss appraiser licensing requirements; and • avoid activities which violate appraisal independence.

Learning Objectives

The appraisal report

Chapter

29

An appraisal is an individual’s opinion or estimate of a property’s value on a specific date, reduced to writing in an appraisal report.

The appraisal report contains data collected and analyzed by the appraiser which substantiates the appraiser’s opinion of the property’s value. The value of a parcel of real estate, given as a dollar amount, is the present worth to an owner of the future flow of net operating income (NOI) generated by the property.

Factors used in the appraisal process to determine a property’s value include:

• demand – the number of buyers for the property;

• utility – the property’s possible uses;

An opinion of value

appraisal An individual’s opinion of a property’s value on a specific date, documented in an appraisal report.

appraisal report Documentation of an appraiser’s findings, including the purpose and scope of the appraisal.

appraisal

appraisal report

comparison approach

cost approach

fair market value (FMV)

income approach

Key Terms

200 Real Estate Principles, Second Edition

• scarcity – the availability of similar properties; and

• transferability – the seller’s ability to transfer good title to a buyer clear of all encumbrances itemized in a title insurance policy.

Collectively, these are known as the elements of value and can be memorized with the acronym of DUST.

Further, there are forces that influence value, including:

• physical considerations – the property’s proximity to commercial amenities, access to transportation, the availability of freeways, beaches, lakes, hills, etc;

• economic considerations – rents in the area, vacancies and the percentage of homeownership, as well as employment opportunities lost or gained;

• government considerations – property taxes, zoning, building codes, and local services such as police and fire protection; and

• social considerations – crime rates, school ratings, shopping and recreational opportunities.

These forces that influence value can be memorized with the acronym of PEGS.

Factors not used to determine a property’s value include the present owner’s:

• acquisition cost;

• listing price;

• mortgage financing; and

• equity in the property.

There are many different types of values assigned to a property. In real estate appraisal, the most common type of value used is market value, also called fair market value (FMV).

The FMV of a property is the highest price on the date of valuation a willing seller and buyer would agree to, both having full knowledge of the property’s various uses.1

Several economic concepts are used in the appraisal of real estate. These principles are referred to as principles of appraisal and include:

1. The principle of supply and demand: For appraisal purposes, the principle of supply and demand holds that once the supply of available homes decreases, the value of homes increase since more people are demanding the decreased supply of available homes. This principle correlates to the density of the population and its level of income.

1 Calif. Code of Civil Procedures §1263.320

fair market value (FMV) The price a reasonable, unpressured buyer would pay for property on the open market.

Economic principles in

appraisal

Chapter 29: The appraisal report 201

2. The principle of change: The principle of change holds that property is constantly in a state of change. The change a property experiences is seen in its life-cycle. The life-cycle of a property has four stages: development, stability, decline and old age.

Development of the property includes the subdivision of lots, improvements constructed and the start of a neighborhood community.

The stability stage of a property, such as a home built within a community, occurs when the property reaches a level of completion where changes are only made to it to maintain an appropriate level of condition.

The decline stage starts when the oldest buildings begin to deteriorate, lower social or economic groups move into the community and larger homes are converted into multiple family use.

The revitalization or gentrification stage occurs when the neighborhood is recognized as suitable for renewal. This most often occurs in more urban areas where high-costs force younger and first-time buyers to create value through the renewal process.

3. The principle of conformity: The principle of conformity holds that when similarity of improvements is maintained in a neighborhood, the maximum value of a property can be realized on a sale. Zoning regulations and conditions, covenants and restrictions (CC&Rs) tend to protect homeowners by narrowing the uses and excluding nonconforming uses of the property.

The principle of conformity is further categorized under the principle of:

regression: The principle of regression holds that the value of the best property in a neighborhood will be adversely affected by the value of other properties in the neighborhood. For example, this principle applies to over-improved homes. When an owner makes extensive renovations, such as adding additional rooms and landscaping, and the other neighbors do not, the house is no longer as similar to the others. On the sale of the over-improved home, the owner will not receive the full value of the cost of over-improvements.

progression: The principle of progression is the opposite of the principle of regression, holding that a smaller and lesser maintained property in a well-kept neighborhood will sell for more than if the home were in an area of comparable properties.

4. The principle of highest and best use: The principle of highest and best use holds that the greatest value of the property is realized when its use is maximized. The test for highest and best use requires that the use be physically possible, legally permissible, economically feasible, and achieve the maximum productivity (memorized by the acronym PLEM).

Economic principles in appraisal, cont’d

202 Real Estate Principles, Second Edition

5. The principle of contribution: The principle of contribution holds that the value of one component (improvement) is measured in terms of its contribution to the value of the whole property rather than its cost. For example, a property’s FMV may increase if additions, such as a swimming pool, are added.

6. The principle of substitution: The principle of substitution holds that a buyer will not pay more for a property if it will cost less to buy a similar property of equal desirability. The principle of substitution is the most basic principle of appraisal as it is used in each of the three approaches to value.

The appraisal process consists of six steps:

• identifying and defining the appraisal effort to be undertaken by the appraiser;

• data collection;

• analyzing the data;

• applying the three appraisal approaches;

• reconciliation and final valuation of the property; and

• producing the complete report.

The first step in the appraisal process is the identification of the questions to be answered during the appraisal.

The questions to be answered include:

• What is the purpose of the appraisal?

• What interest in the property is being appraised?

• What is the description and location of the property to be appraised?

• Who owns or holds an interest in the property being appraised?

• What is the highest and best use of the property in light of zoning and CC&Rs?

• What encumbrances affect the condition of title to the property?

• Are there any facts that the appraiser needs to clarify?

• What is the appraiser’s fee?

The background information gathered on the property to conduct an appraisal is divided into two categories:

1. General data: Information on the region, city and neighborhood surrounding the property; and

2. Specific data: Information on the location, lot and improvements.

The general data gathered are to provide an overview of the property. Data on the local and regional economy are included since it affects property within the local real estate market.

Steps in the appraisal

process

Defining the appraisal

effort

Gathering data

Chapter 29: The appraisal report 203

Regional considerations include geography. Also, a growing city or county where jobs are available is desirable. Other features to consider include the quality of school systems and public facilities.

The collection of specific data about a property includes information on the size of the parcel, lot type, the improvements on the property and the uses permitted.

Lot types include:

1. Cul-de-sac lot: a lot facing the rounded turn-around portion of a dead-end street. A cul-de-sac property is private since it is not subject to through traffic. Unlike rectangular lots, the cul-de-sac lot has a small front yard which is offset by a larger backyard.

2. Corner lot: a lot located at the intersection of two streets. A corner lot does not have a great deal of privacy due to traffic on the streets it intersects. However, the corner lot may be more desirable since access to the sideyard and backyard for vehicles is available from the side street.

3. Key lot: a lot bordered by three or more lots on the sides and the back. The biggest disadvantage of the key lot is the lack of privacy due to numerous neighbors abutting all sides of the lot except the frontage.

4. T-intersection lot: a lot at the end of a dead-end street. The biggest disadvantage of the T-intersection lot is noise and lack of privacy.

5. Interior lot: a lot surrounded by lots on all three sides. This is the most common type of lot. An interior lot is usually rectangular in shape with a large backyard. However, privacy is limited since the lot is adjoined on all sides by neighbors.

6. Flag lot: a lot located behind other lots with a long and narrow access driveway to a public street. Flag lots generally have a reduced value due to the lack of privacy that results from being surrounded by other homes’ backyards. Flag lots also lack curb appeal.

The physical aspects of a lot include:

• size and shape;

• slope, drainage and soil;

• view, exposure to sun and weather; and

• improvements.

The third step in the appraisal process is analyzing the data collected to determine what further research will be necessary.

The fourth step in the appraisal process is to consider and perform the three appraisal approaches, which are:

1. The market comparison market approach (also known as the sales comparison approach);

Types of lots

Analyzing the data

204 Real Estate Principles, Second Edition

2. The cost approach (also known as the replacement or reproduction method); and

3. The income approach (also known as the gross rent multiplier or capitalization income method).

The market comparison approach is the most commonly used approach to establish the FMV of real estate. Applying the market comparison approach, the appraiser looks at the current selling prices of similar properties to help establish the comparable value of the property appraised. Adjustments are made for any differences in the similar properties, such as their location, obsolescence, lot size and condition.

For example, a property owner’s neighbor recently sold their residence for $345,000. The neighbor’s house is of a similar age, size and condition as the owner’s house, except it has a fireplace worth $3,000 which the owner does not have. Adjusting for the difference in the improvements (the fireplace) between the owner’s and neighbor’s house would establish the value of the owner’s house at $342,000.

To produce a more reliable appraisal, it is better to gather data on comparable sales, frequently called “comps.” The appraiser then compares each against the property being appraised for their similarities. Sales information can be obtained from the multiple listing service (MLS), tax records, electronic databases on recordings and title insurance companies.

Appraisers setting value using the cost approach calculate the current construction cost to replace the improvements. From the replacement cost, appraisers subtract their estimate of the accrued depreciation of the existing improvements due to obsolescence and deterioration to get the current replacement value of the improvements.

Added to this is the value of the land as though it was vacant. Thus, the appraised market value under the cost approach is the result of totaling the value of the lot plus the cost to replace the improvements minus obsolescence and physical deterioration (depreciation).

The cost approach is best used when valuing new buildings and special or unique structures, such as churches and factories.

Also, an appraiser places more emphasis on the cost approach when recent comparable sales are not sufficient or the property has no income.

Estimating the cost of improvements which would be incurred today to construct the improvements as they exist on the property involves the calculation of direct and indirect costs.

Direct costs include labor and materials used to construct the improvements.

Market comparison

approach

comparison approach A method for comparing a given property with similar or comparable surrounding properties; also called market comparison.

Cost approach

cost approach An appraisal method used by an appraiser to arrive at a property’s value based on the present cost of constructing the present improvements and acquisition of the land.

Chapter 29: The appraisal report 205

Indirect costs include expenditures other than labor and materials, including permits and other governmental fees, insurance, taxes, administrative costs and financing charges.

The estimated replacement cost of the existing improvements is determined using one of four methods:

• comparative-unit method: estimates the cost in terms of dollars per square foot or per cubic foot based on known costs of similar structures, adjusted for physical differences;

• unit-in-place method: estimates the unit costs for building components such as foundations, floors, walls, windows and roofs, as well as labor and overhead;

• quantity survey method: the most comprehensive and accurate method for estimating the cost of the labor and materials a general contractor would use to build an identical structure, such as lumber, cement, plumbing, electrical, roofing, stucco, glazing, drywall, insulation and labor costs; and

• index method: the method designed for use in updating historic costs or backdating current costs such as in probate valuations where it is required to establish a number at an earlier date.

After the appraiser estimates the replacement costs, the next step is to estimate and deduct depreciation.

Depreciation reflects any value-related loss in the property due to use, decay and improvements that have become outdated.

There are three types of depreciation:

1. Physical deterioration is the loss in the property’s value due to wear and tear. Physical deterioration can be curable or incurable. Examples include damage from termites or damage resulting from deferred maintenance and negligent care.

2. Functional obsolescence is any loss in the property’s value due to outdated style or non-usable space. Examples include antique fixtures, a one-car garage or an outdated kitchen.

3. Economic obsolescence is the loss in property value due to changes in the property’s neighborhood. Economic obsolescence is external to the property. For example, a property’s value may decrease due to increased noise and traffic if a freeway is built next to it.

There are two methods of calculating the property’s value under the income approach:

• the gross rent multiplier (GRM) method; and

• the capitalization method.

Estimated replacement cost under the cost approach

Estimated depreciation cost under the cost approach

The income approach

206 Real Estate Principles, Second Edition

The GRM method uses the market rent (determined by a survey of similar properties) of the subject property which is then multiplied by a factor, the GRM, to arrive at a value for the subject property. The GRM factor is determined by comparing the subject property to similar properties that have recently been sold.

The capitalization method determines the property’s value based on the property’s future income and operating expenses. Property appraised using the income approach includes:

• apartments;

• offices;

• industrial buildings;

• commercial units; and

• other income-producing property.

The first step to establish value using the capitalization approach is to determine the property’s effective gross income. A property’s effective gross income is its gross income minus vacancies and collection losses. [See RPI Form 352]

The second step is to deduct operating expenses from the effective gross income to determine the property’s net operating income (NOI). Operating expenses include such items as:

• property taxes;

• insurance;

• security;

• management fees;

• utilities; and

• maintenance.

Operating expenses that vary, such as utilities and repairs, are called variable costs. Operating costs that remain constant, such as property taxes, security services and insurance, are called fixed costs.

The third step is to mathematically divide the property’s NOI by the appropriate capitalization rate (cap rate). The cap rate is comprised of a prudent investor’s expected annual rate of return on monies invested in this type of property (adjusted for inflation and risk premiums), and a rate of recovery of their invested monies allocated to the improvements, also called depreciation.

Finally, the FMV of the property is determined by dividing the NOI by the cap rate. For example, if a property’s NOI is $100,000 annually, and a cap rate of 10% is used, the property’s value under the income approach would be $1,000,000.

Determine the net

operating income

Net operating income

divided by cap rate

income approach One of three methods of the appraisal process applied to income producing property to develop the appraiser’s opinion of value.

Chapter 29: The appraisal report 207

The rate of interest paid on mortgages and the amount or terms of mortgage debt on a property have no bearing on a property’s market value. The property is viewed as being clear of any monetary encumbrances.

The next step in the appraisal process is the correlation or reconciliation of the values arrived at under each of the three approaches described previously.

The process selects the most appropriate value from the values arrived at by using the three approaches.

The final step in the process is the creation of the complete appraisal report. It is the documentation of the appraiser’s findings. The types of appraisal reports include:

• short summary report – a filled-in form using checks and explanations;

• letter form – a brief written report; and

• self-contained or narrative – an extensive written report.

The following information is included in the appraisal report:

• the property’s description;

• the purpose and scope of the appraisal;

• description of the neighborhood;

• the date on which the value is estimated;

• qualifying conditions and assumptions;

• factual data, photos and maps with analyses;

• the estimate of value;

• the name, address, type of license and signature of the appraiser.

All appraisers are required to hold a license or certification issued by the California Bureau of Real Estate Appraisers (CalBREA).

The license/certification categories are:

• Trainee appraiser – allows the trainee to work on the appraisal of properties under the direct supervision of an appraiser licensed to appraise those properties.

• Residential appraiser – allows the appraisal of one-to-four residential units up to $1 million and nonresidential property up to $250,000.

• Certified residential appraiser – allows the appraisal of one-to-four residential units of any dollar amount and nonresidential property up to $250,000.

• Certified general appraiser – allows the appraisal of any type of real estate and transaction value or complexity.

Correlation of values

The appraisal report

Appraiser licensing

208 Real Estate Principles, Second Edition

When a buyer locates a property and contracts to pay a price to buy it, the property needs to be qualified as collateral which will provide adequate security for the repayment of the mortgage amount in the event of a default.

This task of valuation falls to third-parties in the transaction, parties that are indirectly hired by the lender. However, the buyer has an even greater interest in knowing they have paid the right price than does the lender. A buyer is unable to contact or discuss the price with the third-party appraiser. The buyer is permitted to receive a copy of the appraisal report and may appeal the results based on factual information that is found to be in error, such as amenities not considered in the report.

It is unlawful to violate appraisal independence, including:

• coercing, extorting, colluding with, instructing, bribing or intimidating any appraisal professional into appraising property at a value based on any factor other than the independent judgment of the appraiser;

• mischaracterizing the appraised value of a property to secure a mortgage;

• influencing or encouraging an appraiser to meet a targeted value for a property; and

• withholding or threatening to withhold payment for an appraisal report or service.2

This does not prohibit anyone with an interest in the transaction from asking an appraiser to:

• consider additional relevant property information, including information regarding comparable properties;

• provide further explanation for the valuation;

• correct errors in the appraisal report; or

• obtain multiple valuations in order to assure reliability in value assessment.

No appraiser or appraisal company may have an interest, financial or otherwise, in the property being appraised.

If a lender is aware of a violation of appraisal independence, they are prohibited from using that appraisal report to make a mortgage, unless the lender has confirmed that the appraisal does not misrepresent the value of the property.

Lenders and their agents need to compensate fee appraisers at a rate that is reasonable in the market area of the property being appraised. A fee appraiser may charge a fee for complex assignments that reflects the increased time, difficulty and scope of the work performed.

2 15 United States Code 1631 §129E

Justifying the buyer’s price

is another matter

Appraisals under federal

law

No interest in property appraised

Chapter 29: The appraisal report 209

An appraisal is an individual’s opinion of a property’s value on a specific date, reduced to writing in an appraisal report. The appraisal report contains data collected and analyzed by the appraiser which substantiates the appraiser’s estimate of the property’s value.

The appraisal process consists of six steps:

• identifying and defining the appraisal effort to be undertaken by the appraiser;

• data collection, including both general data on the area surrounding the property, and specific data on the improvements and property lot;

• analyzing the data;

• applying the three approaches to value;

• reconciling the approaches and determining the final value of the property; and

• creating the complete appraisal report

When applying the data collected, each of the three appraisal approaches are used:

• the comparative market approach;

• the cost approach; and

• the income approach.

Under the market comparison approach, the appraiser looks at the current selling prices of similar properties to establish the comparable value of the property appraised. Adjustments are made for any differences in the similar properties, such as their location, amenities and condition.

Under the cost approach, the appraiser sets a property’s value by calculating the construction cost to replace the improvements at today’s prices.

Under the income approach, the appraiser determines the property’s value based on future income and operating expenses of the property.

The next step in the appraisal process is the correlation/reconciliation of the values arrived at under each of the three appraisal approaches, selecting the most appropriate value from the values arrived under the three approaches.

As the final step in the process, the appraiser creates a complete appraisal report.

All appraisers are required to hold a license or certification issued by the California Bureau of Real Estate Appraisers (CalBREA).

Chapter 29 Summary

210 Real Estate Principles, Second Edition

Quiz 6 Covering Chapters 24-30 is located on page 611.

Appraisers are required to maintain independence. It is unlawful to violate appraisal independence by:

• coercing any appraisal professional into appraising property at a value based on any factor other than the independent judgment of the appraiser;

• mischaracterizing the appraised value of a property to secure a mortgage;

• influencing or encouraging an appraiser to meet a targeted value for a property; and

• withholding or threatening to withhold payment for an appraisal report or service.

appraisal ....................................................................................... pg. 199 appraisal report ........................................................................... pg. 199 comparison approach ................................................................ pg. 204 cost approach ............................................................................... pg. 204 income approach ........................................................................ pg. 206 fair market value (FMV) ............................................................ pg. 200

Chapter 29 Key Terms