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William L. Ventolo, Jr. & Martha R.

Williams, JD
Eleventh Edition
Fundamentals of
Real Estate Appraisal
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Fundamentals of
Real Estate Appraisal
William L. Ventolo, Jr. & Martha R. Williams, JD
11th Edition
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This publication is designed to provide accurate and authoritative information
in regard to the subject matter covered. It is sold with the understanding that the
publisher is not engaged in rendering legal, accounting, or other professional
advice. If legal advice or other expert assistance is required, the services of a
competent professional should be sought.
President: Dr. Andrew Temte
Chief Learning Offcer: Dr. Tim Smaby
Vice President, Real Estate Education: Asha Alsobrooks
Development Editor: Adam Bissen
FUNDAMENTALS OF REAL ESTATE APPRAISAL, ELEVENTH EDITION
©2012 Kaplan, Inc.
Published by DF Institute, Inc., d/b/a Dearborn Real Estate Education
332 Front St. S., Suite 501
La Crosse, WI 54601
All rights reserved. The text of this publication, or any part thereof, may not be
reproduced in any manner whatsoever without written permission from the
publisher.
Printed in the United States of America
12 13 14 10 9 8 7 6 5 4 3 2 1
ISBN: 978-1-4277-1138-0 / 1-4277-1138-0
PPN: 1556-1011
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iii
Preface vii
About the Authors ix
Acknowledgments xi
CHAPTER 1 The Appraisal Profession 1
Key Terms 1
Learning Objectives 2
Overview 2
The Appraiser’s Work 3
Licensing and Certifcation 6
Other Federal Regulation 12
Professional Groups 18
The Modern Appraisal Offce 20
Summary 22
Review Questions 23
CHAPTER 2 Appraisal Math and Statistics 25
Key Terms 25
Learning Objectives 25
Overview 26
Calculators 27
Percentages 27
Interest 33
Area and Volume 37
Statistics 52
Summary 62
Review Questions 64
CHAPTER 3 Real Estate and Its Appraisal 69
Key Terms 69
Learning Objectives 69
Overview 70
Basic Concepts 70
Legal Descriptions of Land 76
Legal Rights and Interests 80
Forms of Property Ownership 84
Summary 91
Review Questions 93
CHAPTER 4 Real Estate Transactions 97
Key Terms 97
Learning Objectives 97
Overview 98
The Offer to Purchase 98
CONTENTS
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iv Fundamentals of Real Estate Appraisal, Eleventh Edition
Record Retention 104
Transfer of Title 105
Lease Agreements 108
Summary 111
Review Questions 113
CHAPTER 5 The Real Estate Marketplace 117
Key Terms 117
Learning Objectives 118
Overview 118
The Market for Real Estate 119
Basic Value Principles 128
Summary 136
Review Questions 138
CHAPTER 6 The Appraisal Process 141
Key Terms 141
Learning Objectives 141
Overview 142
Steps in the Appraisal Process 142
Beginning the Appraisal Process 146
Valuation Approaches 148
Relationship of Approaches 156
Summary 157
Review Questions 159
CHAPTER 7 Building Construction and the Environment 161
Key Terms 161
Learning Objectives 161
Overview 162
Part I: Building Planning and Design 163
Regulation of Residential Construction 163
Plans and Specifcations 163
House Styles 166
House Types 166
Orientation: Locating the House on the Site 171
Part II: Construction Details 173
Foundations 173
Exterior Structural Walls and Framing 176
Roof Framing 180
Roof Coverings 180
Exterior Windows and Doors 181
Interior Walls and Finishing 186
Plumbing 188
Heating and Air-Conditioning 188
Electrical System 191
Summary 195
Review Questions 197
CHAPTER 8 Data Collection 199
Key Terms 199
Learning Objectives 199
Overview 200
Step 1: Identify the Problem 200
Step 2: Determine the Scope of Work 202
Step 3: Gather, Record, and Verify the Necessary Data 203
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Contents v
The Data Bank 204
Data Forms 210
Data for Sales Comparison Approach 225
Summary 233
Review Questions 235
CHAPTER 9 Site Valuation 237
Key Terms 237
Learning Objectives 237
Overview 238
Separate Site Valuations 238
Site Data 245
Environmental Concerns 246
Methods of Site Valuation 248
Summary 255
Review Questions 257
CHAPTER 10 The Cost Approach—Part I: Reproduction/Replacement
Cost 259
Key Terms 259
Learning Objectives 259
Overview 260
Cost Approach Formula 260
Reproduction Cost versus Replacement Cost 262
Finding Reproduction/Replacement Cost 265
Summary 281
Review Questions 282
CHAPTER 11 The Cost Approach—Part II: Depreciation 285
Key Terms 285
Learning Objectives 285
Overview 286
Accrued Depreciation 286
Summary 316
Review Questions 317
CHAPTER 12 The Sales Comparison Approach 319
Key Terms 319
Learning Objectives 319
Overview 320
Step 3: Gather, Record, and Verify the Necessary Data
(Continued) 321
Step 4: Data Analysis 334
Step 5: Form Opinion of Land Value 335
Step 6: Form Opinion of Value by Sales Comparison Approach 335
Application of Sales Comparison Approach 354
Summary 355
Review Questions 356
CHAPTER 13 The Income Capitalization Approach 361
Key Terms 361
Learning Objectives 361
Overview 362
The Income-Based Approaches to Appraisal 363
Potential Gross Income 364
Effective Gross Income 369
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vi Fundamentals of Real Estate Appraisal, Eleventh Edition
Net Operating Income 371
Operating Statement Ratios 376
Summary 382
Review Questions 383
CHAPTER 14 Direct and Yield Capitalization 387
Key Terms 387
Learning Objectives 387
Overview 388
Direct Capitalization 389
Capitalization Rate 389
Capitalization Techniques Using Residual Income 397
Yield Capitalization 400
Value of One Dollar 401
Annuity Method of Capitalization 402
Recapture Rates 411
Ellwood Tables 413
Summary 413
Review Questions 415
CHAPTER 15 Reconciliation and the Appraisal Report 419
Key Terms 419
Learning Objectives 419
Overview 420
Defnition of Reconciliation 420
Reconciliation is Not . . . 425
Types of Appraisal Reports 426
Styles of Written Appraisal Reports 427
Sample Appraisal Report 433
Summary 447
Review Questions 448
CHAPTER 16 Appraising Partial Interests 451
Key Terms 451
Learning Objectives 451
Overview 452
Types of Partial Interests 452
Appraising Lease Interests 462
Leased Fee and Leasehold Valuations 466
Summary 469
Review Questions 471
Appendix A 473
Appendix B 481
Answer Key 487
Glossary 541
Index 573
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vii
This eleventh edition of Fundamentals of Real Estate Appraisal continues to cover
all of the topics included in the Basic Appraisal Principles and Basic Appraisal
Procedures course requirements established by the Appraiser Qualifcations Board
of the Appraisal Foundation.
As with other areas of real estate practice, the professional appraiser must keep
pace with the demands of the marketplace. Technological advances have affected
all facets of the real estate transaction, from frst client contact to closing. Despite
the availability of vast databases of market information, there is no substitute for
the well-reasoned opinion of a competent appraiser. Of course, the skill and judg-
ment required to make a reliable appraisal must begin with a thorough knowledge
of appraisal principles and procedures.
Fundamentals of Real Estate Appraisal is designed to help the student relate appraisal
theory and technique to practice.
Each chapter begins with a list of the key terms used in the chapter. Because ■
students may not study the chapters in chronological order, important
terms are emphasized whenever appropriate.
Learning objectives help alert the student to the goals of the course ■
material.
Information on real estate and the real estate industry is designed to give ■
the student the necessary background in how real estate is defned, mar-
keted, and valued.
Explanations of the basic approaches to appraising are thorough, yet ■
concise.
Frequent practical examples, including use of forms and data grids, help ■
bring the real world of appraising to the reader.
The many exercises and review questions used in the text increase its use- ■
fulness as a practical, hands-on tool by requiring reader participation.
The emphasis throughout this book is on the ways in which appraisal theory
and practice come together and, above all, on the importance of the appraiser’s
objectivity in forming an opinion of value. Fannie Mae’s Appraiser Independence
Requirements are included in the frst chapter, setting the tone for the rest of the
book.
PREFACE
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ix
William L. Ventolo, Jr., a former vice president of Development Systems Corpo-
ration and its subsidiary, Real Estate Education Company, received his master of
science in psychology from the University of Pittsburgh. Ventolo has developed
and authored numerous industrial training programs and manuals, including a
comprehensive dealership accounting correspondence course used by the Ford
Motor Company. In addition to Fundamentals of Real Estate Appraisal, he has
authored or coauthored many trade books and textbooks, including The Art of
Real Estate Appraisal, How to Use the Uniform Residential Appraisal Report, Master-
ing Real Estate Mathematics, Residential Construction, Your Home Inspection Guide,
and Principles of Accounting. Ventolo resides in Nokomis, Florida.
Martha R. Williams, who received her juris doctor from the University of Texas,
is an author and educator and has practiced law in Texas and California. In addi-
tion to Fundamentals of Real Estate Appraisal, she is author or coauthor of The Art
of Real Estate Appraisal, How to Use the Uniform Residential Appraisal Report, Cali-
fornia Mortgage Loan Brokerage, California Real Estate Principles, other textbooks,
and numerous electronic courses. A member and former offcer of the Real Estate
Educators Association and the Association of Illinois Real Estate Educators, she
resides in Lakewood, Illinois.
ABOUT THE AUTHORS
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xi
The authors wish to thank those who participated in the preparation of the elev-
enth edition of Fundamentals of Real Estate Appraisal.
The tenth edition was reviewed by Thurza Andrew and Jody Hooper. Building
codes offcial John E. Spurgeon, MCP, once again helped update the cost fgures.
Review of the ninth edition was provided by Sam Martin, MA, IFA, SamtheTu-
tor.com, Inc., Schaumburg, Illinois.
Consulting editors are Dennis S. Tosh, PhD, who holds the J. Ed Turner Chair of
Real Estate and is associate professor of fnance at the University of Mississippi,
and William B. Rayburn, PhD, associate professor of fnance at the University of
Mississippi.
Terry V. Grissom, MBA, PhD, MAI, CRE, served as consulting editor for the ffth
and sixth editions, offering the insight of his years of appraisal practice and skill
as an educator.
James H. Boykin, PhD, MAI, SREA, served as consulting editor on earlier edi-
tions of this book, and his assistance was always appreciated. Reviewers of earlier
editions included Richard Ransom Andrews, Carol Bohling, Robert W. Chaa-
pel, Linda W. Chandler, Jane Chiavacci, Diana M. De Fonzo, Clay Estes, Larry
E. Foote, Donald A. Gabriel, Robert C. Gorman, Ron Guiberson, George R.
Harrison, Gary Hoagland, Robert Houseman, Kennard P. Howell, Alan Hum-
mel, James E. Jacobs, David J. January, Donald B. Johnson, Paul Johnson, Lowell
Knapp, Frank W. Kovats, Timothy W. Lalli, Craig Larabee, Joseph H. Martin,
Robert S. Martin, John F. Mikusas, Michael Milgrim, Robert L. Montney, Mark
A. Munizzo, Lisa Musial, Henry E. Ormonde, Leroy Richards, Kenneth E. Ritter,
Michael L. Robinson, Lawrence Sager, Richard Sorenson, Margaret E. Sprencz,
Paul C. Sprencz, Bryan K. Swartwood, Jr., Ralph Tamper, Milton J. Tharp, Doug-
las G. Winner, and Terrence M. Zajac.
In addition to those mentioned, numerous instructors, students, and real estate
professionals have offered many useful comments and suggestions over the years.
We thank all who have contacted us and welcome additional comments on this
edition.
ACKNOWLEDGMENTS
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xii Fundamentals of Real Estate Appraisal, Eleventh Edition
Special thanks must go to Software for Real Estate Professionals, Inc., in Baton
Rouge, Louisiana, for the special software accompanying this textbook that can be
found at www.sfrep.com. Derived from the company’s “Appraise-It” forms process-
ing software, the software allows the user to practice completing URAR forms.
Finally, the authors thank the staff of Dearborn Real Estate Education for their
fne efforts in bringing the manuscript through the production process.
William L. Ventolo, Jr.
Martha R. Williams, JD
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1
1
CHAPTER ONE
THE APPRAISAL
PROFESSION
KEY TERMS ■
Appraisal Foundation
appraisal management
companies (AMCs)
Appraisal Practices
Board (APB)
appraisal report
Appraisal Standards
Board (ASB)
appraiser
Appraiser Independence
Requirements
Appraiser Qualifcations
Board (AQB)
computer-assisted mass
appraisal (CAMA)
Economic Stimulus Act
of 2008
Department of Veterans
Affairs (VA)
Dodd-Frank Wall Street
Reform and Consumer
Protection Act
(Dodd-Frank)
Fannie Mae
Federal Deposit
Insurance Corporation
(FDIC)
Federal Housing
Administration
(FHA)
Federal Housing Finance
Agency (FHFA)
Financial Institutions
Reform, Recovery, and
Enforcement Act of
1989 (FIRREA)
Freddie Mac
government-sponsored
enterprises (GSEs)
House Price Index (HPI)
Housing and Economic
Recovery Act of 2008
(HERA)
Housing Finance Board
Offce of Thrift
Supervision (OTS)
opinion of property
value
scope of work
subprime lending crisis
Truth in Lending Act
(TILA)
Uniform Standards of
Professional Appraisal
Practice (USPAP)
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2 Fundamentals of Real Estate Appraisal, Eleventh Edition
LEARNING OBJECTIVES ■
After successfully completing this chapter, you should be able to
describe the types of assignments that an appraiser can receive,
explain how the savings and loan crisis of the 1980s led to appraiser
licensing,
name the organization that assists Congress by developing appraiser and
appraisal criteria,
identify and explain the qualifcation criteria for the four categories of appraiser
licensing,
recognize other federal regulations that have an impact on appraisal practice,
and
list the major appraisal trade groups.
OVERVIEW ■
More than a half-century of prosperity following the end of World War II and
the subsequent demand for housing caused the overall value of real estate to rise
dramatically in the United States. Even though prices dipped somewhat in reces-
sionary periods in various market areas, the trend continued on an upward curve,
fnally peaking in most parts of the country in early 2007. Then, the lowered
credit requirements and a too-broad range of loan products brought a cascade of
loan and market failures. As the country entered 2012, foreclosures continued to
dominate sales statistics, despite record-low interest rates.
According to what was then the Offce of Federal Housing Enterprise Oversight
(OFHEO), and is now the Federal Housing Finance Agency (FHFA), the price
of the average U.S. residence increased almost 47 percent from 2002 to 2007. By
October 2011, however, FHFA reported that the House Prince Index (HPI),
an indicator of house price trends in various regions of the United States, had
declined to 19.2 percent below its April 2007 peak and was about the same as the
February 2004 index level. In those parts of the country with the highest rates of
foreclosures—such as Nevada, Arizona, Florida, Michigan, and California—the
decline was much greater.
When foreclosed properties dominate a market, the appraisal process is even more
important. The appraiser’s analysis always takes into account the fact that market
demand fuctuates. Not every property will increase in value, particularly over the
short term, and some may lose value.
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Chapter 1 The Appraisal Profession 3
After many years of debate, the federal government mandated state-regulated
appraiser licensing or certifcation for specifed federally related real estate trans-
actions. The major impetus for this action came with the enactment by Congress
of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA). Some states require licensing or certifcation for all transactions.
This chapter takes a look at the appraiser’s role and discusses some of the qualifca-
tions that can help ensure a reliable, credible appraisal. The chapter also covers
licensing and certifcation requirements and includes discussion of the Uniform
Standards of Professional Appraisal Practice (USPAP).
THE ■ APPRAISER’S WORK
The professional real estate appraiser provides an opinion of the value of real
property (land and/or buildings). Value may be sought for any number of reasons,
such as setting a sales price or determining insurance coverage. The appraiser’s
client can be a buyer, a seller, a lender or other company, an attorney or estate
administrator, a public agency, or a real estate broker. Although real estate brokers
make many informal estimates of value, it is common practice to rely on the prac-
ticed judgment of a professional whose sole interest is in valuing real property.
The scope of work that is required for the appraisal assignment, as established
by the client and the appraiser, will determine the extent of the research and
analysis that the appraiser will perform to complete the appraisal. An appraiser’s
opinion of property value usually is in writing and may be a letter simply stating
the appraiser’s opinion of value. Most often, however, it is a longer document
called an appraisal report. The proper steps must be taken to arrive at the value
conclusion, regardless of the method used to report it. The appraiser must conduct
a thorough study of the appraised property, its geographical area, historical values,
and economic trends. The appraiser must be able to read a legal description and
recognize the exact boundaries of the subject property. The appraiser also must
have some knowledge of building construction to recognize the quality and condi-
tion of the subject property.
The appraiser must know market conditions—why some properties are more
desirable than others—as well as how to analyze income and expense statements
in order to determine a property’s potential earnings.
In short, the appraiser needs some of the expertise of the surveyor, the builder,
the broker, the accountant, the economist, and the mortgage lender. An appraisal
takes into account the many market factors that infuence a property’s value;
therefore, an experienced appraiser can make an important contribution to any
real estate transaction.
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4 Fundamentals of Real Estate Appraisal, Eleventh Edition
Assignments Available
The service of a qualifed appraiser is a recognized essential in many situations. In
a real estate transaction involving either the sale or the lease of real property, an
appraisal may be desired to
help set the seller’s asking price; ■
help a buyer determine the fairness of the asking price; ■
set a value for real property when it is part of an estate; ■
estimate the relative values of properties being traded; ■
set value on property involved in corporate mergers, acquisitions, liquida- ■
tions, or bankruptcies;
determine the amount of a mortgage loan; or ■
set rental rates. ■
In addition, other uses of real estate requiring appraisals include
determining building insurance value; ■
determining the effect on value of construction defects as part of a legal ■
proceeding;
determining property losses due to fre, storm damage, earthquake, or ■
other disaster;
assessing property for taxes; ■
setting gift or inheritance taxes; ■
estimating remodeling costs; ■
valuing property as part of a marital dissolution; ■
valuing property in an arbitration of a dispute; ■
determining development costs; ■
discovering a vacant property’s most proftable use; ■
ascertaining whether the present use of a property is its most proftable ■
use; and
establishing a value for property in a condemnation proceeding. ■
As time goes on, more and more of these appraisal activities have come to rely on
computerized research and databases. An example is the technique called com-
puter-assisted mass appraisal (CAMA), useful when thousands of properties are
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Chapter 1 The Appraisal Profession 5
reassessed for tax purposes. The more complex the property, however, the more the
training and skill of the appraiser become a vital part of the valuation process.
Employment Opportunities
The types of appraisals noted above give some indication of employment opportu-
nities available to professional real estate appraisers.
The appraiser may be self-employed, working as a sole practitioner, or perhaps using
the services of a staff of other appraisers. Large appraisal management companies
(AMCs) have offces in major cities coast to coast, making use of the services of
hundreds of appraisers, who usually act as independent contractors.
Aside from appraisal management companies, other sources of employment are
open to appraisers and, in many cases, to appraiser trainees. Appraisers’ reports are
used as a basis for establishing a variety of tax and condemnation values. Federal
agencies, such as the Federal Housing Administration (FHA) and the Depart-
ment of Veterans Affairs (VA), appraise properties before insuring or guaranteeing
mortgage loans. All agencies involved in such matters as road construction, urban
renewal, conservation, and parkland employ appraisers.
Large industrial organizations, retail and wholesale chains, and restaurant fran-
chises hire appraisers to serve their real estate departments by inspecting and
judging the condition of land and buildings before entering into purchase or lease
agreements. Individuals considering the purchase or lease of real estate may hire
an appraiser directly. If the appraisal will be used as part of a federally related trans-
action, the services of a licensed or certifed appraiser probably will be required.
Some states require that all appraisers be licensed or certifed—even for transac-
tions that are not federally related. Some clients also impose this requirement.
The importance of objective, accurate appraisals cannot be overstated. The wide
range of activities for which the appraiser’s services are required eventually touches
the life of every citizen.
Appraiser Compensation
The majority of real estate appraisals are market valuations of single-family homes
and are performed by self-employed appraisers. A self-employed appraiser works
for a specifed fee paid by the party by whom the appraiser is hired (usually a
lender). In an increasingly common relationship, the appraiser may be hired (as
an independent contractor or employee) by an appraisal company that contracts
with a lender or other client to provide appraisal services as needed.
Appraisal fees are based on the time required to complete the appraisal process
and report (the more complex the property or appraisal report required, the higher
the fee will be), but they are also subject to negotiation between the appraiser and
the party for whom the appraisal is prepared. Fees are thus subject to a balance
between the appraiser’s overhead and expenses on one hand and market competi-
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6 Fundamentals of Real Estate Appraisal, Eleventh Edition
tion on the other hand. Under no circumstances should the appraiser’s fee depend
on the fnal opinion of value, to avoid even the appearance of a confict of inter-
est. The appraiser’s fee also cannot be based on a stipulated or subsequent event.
Exercise 1-1
Should an appraiser’s compensation be based on the value of the property being
appraised? Why or why not?
Check your answer against the one in the answer key at the back of the book.
LICENSING AND CERTIFICATION ■
Some of the greatest infuences on the status of the real estate appraiser came dur-
ing the two decades of the 20th century in which the United States experienced
its greatest economic challenges. The Great Depression of the 1930s gave birth to
both the Society of Residential Appraisers, as part of the United States Savings
and Loan League, and the American Institute of Real Estate Appraisers, under
the auspices of the National Association of Real Estate Boards (now the National
Association of Realtors
®
).
The decade of the 1980s brought many examples of economic upheaval, from
the cyclic escalation and subsequent decline of real estate prices in California to
the devastated marketplaces of the oil-belt states and the Northeast. These and
other economic factors contributed to, and in turn were affected by, the collapse
of many savings and loan institutions, which ultimately led to the licensing of real
estate appraisers.
The decade began with great promise. The Depository Institutions Deregulation
and Monetary Control Act of 1980 greatly expanded the activities of depository
institutions and raised the level of federally insured accounts to $100,000. With
deregulation, however, came many abuses by institutions that were ineptly and
sometimes fraudulently managed. It was an era of increased competition, yet many
savings and loan associations were strapped with long-term mortgage loans that
yielded considerably less income than was necessary to offer the high short-term
interest rates that would attract and keep depositors. To compensate, many insti-
tutions began to fnance projects based on limited market analysis—projects that
would have been risky ventures in the best of markets. Unfortunately, political
and economic forces did not work in favor of the risk-takers. The Tax Reform
Act of 1986 (TRA ’86) eliminated the tax incentives for many investments, and
the economies of the oil-belt states took a downturn. The resulting crash of real
estate prices in many parts of the country proved to be the mortal blow for many
overextended institutions.
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Chapter 1 The Appraisal Profession 7
Other factors contributing to the savings and loan crisis were carelessness and
sometimes outright fraud in the preparation of real estate appraisals. Before the
savings and loan crisis, no state required appraiser licensing or certifcation, and
only a few states provided for voluntary certifcation of real estate appraisers or
appraisals. At most, some states required that real estate appraisers have a real
estate agent’s license. This easygoing state of affairs was to be dramatically altered,
however, by the federal government.
FIRREA
Congress took action to rescue the failed and failing savings and loans and to
initiate procedures that would help prevent another such disaster by passing
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA). FIRREA established the Offce of Thrift Supervision (OTS) and
the Housing Finance Board to supervise the savings and loans, a responsibility
that had previously belonged to the Federal Home Loan Bank Board. The Federal
Savings and Loan Insurance Corporation (FSLIC) was disbanded, and the Federal
Deposit Insurance Corporation (FDIC) was made responsible for insuring all
deposits in participating savings and loan associations as well as deposits in the
participating banks it already insured.
Appraiser Licensing
One of the most important actions taken by Congress through FIRREA was the
requirement that as of July 1, 1991 (later extended to January 1, 1993), all “fed-
erally related real estate appraisals” be performed only by appraisers licensed or
certifed (as required) by the state in which the real estate is located.
An appraisal by a certifed appraiser is required for properties with a transaction
value of more than $1 million or complex one- to four-unit residential properties
with a transaction value greater than $250,000. A property is considered complex
if the property itself, its form of ownership, or the market conditions are atypical.
Licensed status generally is required for appraisals of one- to four-unit residential
property, unless the size or complexity of the property indicates that a certifed
appraiser is necessary. Federal agency directives have indicated that appraisals
of nonresidential property and complex residential property with a transaction
value less than $250,000 also may be handled by licensed rather than certifed
appraisers.
In October 1992, Congress passed legislation that requires that any agency seek-
ing to establish a de minimis value—a minimum valuation threshold below which
appraiser licensing or certifcation is not required—determine in writing that the
threshold set would not threaten the safety and soundness of lending institutions.
This threshold was raised from $100,000 to $250,000, effective June 7, 1994.
Currently, Fannie Mae, Freddie Mac, the Department of Housing and Urban
Development (HUD), and the VA still require the use of state-licensed or state-
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8 Fundamentals of Real Estate Appraisal, Eleventh Edition
certifed appraisers for every appraisal, as do many lenders and other appraisal
clients.
The Appraisal Foundation
FIRREA stipulates that state appraiser licensing and certifcation qualifca-
tions and appraisal standards meet or exceed those of the Appraisal Standards
Board (ASB) and the Appraiser Qualifcations Board (AQB) of the Appraisal
Foundation, a nonproft corporation established in 1987 and headquartered in
Washington, D.C. Some appraiser education and experience criteria discussed in
the next part of this chapter are recommendations, but others are required in
order to qualify the appraiser to handle a federally related transaction.
The ASB is responsible for establishing the rules for developing an appraisal and
reporting its results. It has issued the Uniform Standards of Professional Appraisal
Practice (USPAP), which has been adopted by all major appraisal groups.
The AQB is responsible for establishing the qualifcations for states to follow in
the licensing, certifcation, and recertifcation of appraisers.
In response to the mortgage lending crisis of recent years, the board of trustees of
the Appraisal Foundation formed the Appraisal Practices Board (APB) on July
1, 2010. According to an APB press release, the APB was created “to issue volun-
tary timely guidance to appraisers on emerging valuation issues that are occurring
in the marketplace.” The guidance is intended to assist appraisers, appraiser regu-
lators, and educators. The initial projects of the APB indicate its concerns. On
October 3, 2011, the APB released a frst exposure draft of Residential Appraising
in a Declining Market, and on November 3, 2011, it released a frst exposure draft
of Adjusting Comparable Sales for Seller Concessions. The frst public meeting of the
APB was held on December 12, 2011, in Atlanta, Georgia. Forthcoming topics
announced by the APB include Identifying Comparable Properties and Valuation of
Green Buildings.
Announcement of future activities, public meetings, and publications of the
Appraisal Foundation and its boards can be found at its Web site.
Appraisal organizations affliated with the Appraisal Foundation include the Amer-
ican Association of Certifed Appraisers, American Society of Farm Managers
and Rural Appraisers, Appraisal Institute, International Association of Assessing
Offcers, International Right of Way Association, National Association of Inde-
pendent Fee Appraisers, and National Association of Master Appraisers. Affliate
sponsors include the American Bankers Association, Farm Credit Council, Mort-
gage Insurance Companies of America, and National Association of Realtors
®
.
The Appraisal Institute of Canada is an international sponsor.
www.appraisalfoundation.org
Uniform Standards of
Professional Appraisal
www.uspap.org
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Chapter 1 The Appraisal Profession 9
Qualifcations of an Appraiser
The real estate appraiser’s primary qualifcations are education and experience.
Table 1.1 lists the AQB licensing and certifcation criteria for all licensing cat-
egories. The criteria set minimum standards, which may be exceeded by state
standards. Note: AQB requirements for appraiser trainees and licensed residential
real property appraisers are recommendations only. Some states have followed the
criteria for those categories, but others have not. Check with your state’s appraiser
regulatory agency for applicable rules. Appendix A has contact information for
the appraiser regulatory agency in each state.
Appraiser qualifcation requirements undergo continuous review and revision.
The next revision will take effect January 1, 2015. As of that date, applicants
will have to fulfll both education and experience requirements before taking a
qualifying examination (already required in some states, but not all). In addition,
college-level courses will be required to be a licensed real property appraiser, and
a minimum of a bachelor’s degree will be required to be a certifed residential or
certifed general real property appraiser. Background checks will also be required
as part of the application process.
Education
The coursework and experience levels established by the Appraiser Qualifcations
Board of the Appraisal Foundation for licensing and certifcation set the stan-
dard for appraiser education and training. Each state adopts its own requirements,
which may be even more demanding. Programs offered by professional associa-
tions such as the Appraisal Institute and National Association of Independent Fee
Appraisers must meet individual state requirements in order to offer courses that
can be used for credit toward licensing or continuing education in those states.
Colleges and private schools also offer courses in real estate appraising topics, but
there are many other courses at both high school and college levels that can be
useful for the prospective or practicing appraiser. Some subjects included in basic
appraisal courses could beneft from more study. Appraisers must be able to work
easily with mathematical computations, because they will be computing land and
building dimensions and construction costs and performing all the steps necessary
to determine investment income. For this last subject, a knowledge of accounting
techniques is invaluable. A course in statistics (required for a certifed appraiser)
can help any appraiser in researching trend indicators, such as those found in cen-
sus and economic reports, as well as in the overall analysis of data collected.
Geography and urban sociology also are important. Because the appraiser must be
able to recognize and draw conclusions from the driving forces behind population
movements and economic trends, economics and city planning courses are use-
ful. A knowledge of building construction or engineering will help the appraiser
recognize and value building components.
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10 Fundamentals of Real Estate Appraisal, Eleventh Edition
TABLE 1.1
AQB Real Property Appraiser Qualification Criteria (Effective January 1, 2008)
Category Scope of Practice Education Hours and Courses College-Level Courses Experience
Appraiser
trainee
Appraisal of those
properties that the
supervising certified
appraiser is permitted by
current credential and that
the supervising appraiser
is qualified to appraise
75 hours consisting of the basic core
curriculum:
Basic Appraisal Principles—30 hours
Basic Appraisal Procedures—30 hours
National USPAP course or its
equivalent—15 hours
(also satisfied by the holding of a
valid real estate appraiser license or
certification)
None None
Licensed
real property
appraiser
Appraisal of noncomplex
properties of one to four
residential units having
a transaction value
less than $1 million and
complex properties of one
to four residential units
having a transaction value
less than $250,000; does
not include appraisal of
subdivisions for which a
development analysis/
appraisal is necessary
150 hours consisting of the basic core
curriculum, plus the following:
Residential Market Analysis and
Highest and Best Use—15 hours
Residential Appraiser Site Valuation
and Cost Approach—15 hours
Residential Sales Comparison and
Income Approaches—30 hours
Residential Report Writing and Case
Studies—15 hours
(also satisfied by the holding of a valid
real estate appraiser certification)
None 2,000 hours of
experience in
no fewer than
12 months
Certified
residential
real property
appraiser
Appraisal of properties
of one to four residential
units without regard to
value or complexity, and
vacant or unimproved
land best used for one- to
four-family properties;
does not include the
appraisal of subdivisions
for which a development
analysis/appraisal is
necessary
200 hours consisting of the basic
core curriculum plus the 75 hours of
courses for the Licensed Residential
Real Property Appraiser plus
Statistics, Modeling, and Finance—15
hours
Advanced Residential Applications
and Case Studies—15 hours
Appraisal Specialty Real Estate and
Appraisal Subject Matter Electives—20
hours
Associate degree (or
higher) or 21 semester
credit hours covering
English composition;
principles of economics
(micro or macro);
finance; algebra,
geometry or higher
mathematics; statistics;
computer science; and
business or real estate
law
2,500 hours of
experience in
no fewer than
24 months
Certified
general real
property
appraiser
Appraisal of all types of
real property
300 hours consisting of the basic core
curriculum plus
General Appraiser Market Analysis
and Highest and Best Use—30 hours
Statistics, Modeling and Finance—15
hours
General Appraiser Sales Comparison
Approach—30 hours
General Appraiser Site Valuation and
Cost Approach—30 hours
General Appraiser Income
Approach—60 hours
General Appraiser Report Writing and
Case Studies—30 hours
Appraisal Subject Matter Electives—30
hours
Bachelors degree (or
higher) or
30 semester credit
hours covering
English composition;
microeconomics;
macroeconomics;
finance; algebra,
geometry or higher
mathematics; statistics;
computer science;
business or real
estate law; and two
elective courses in
accounting, geography,
ag-economics, business
management, or real
estate
3,000 hours of
experience in
no fewer than
30 months,
of which
1,500 hours
must be in
nonresidential
appraisal
work
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Chapter 1 The Appraisal Profession 11
General real estate courses of interest to appraisers, and available through colleges
and private schools, are geared primarily to prospective real estate salespeople and
brokers, who must be licensed by their state real estate offces. Many real estate
appraisers enter the feld in this way—gaining the experience of handling real
estate transactions and learning frsthand how the market operates.
Overlaying all the courses and practical experience is the necessity to become
technologically profcient. The modern appraisal offce relies heavily on electronic
data gathering, recording, analysis, and reporting. This topic will be discussed in
greater detail later in this chapter.
Experience
The novice appraiser is likely to begin as a state-licensed trainee who is permit-
ted to work only under the direct supervision of a licensed or certifed appraiser.
Prospective appraisers, who may perform only the range of duties authorized by
the supervising appraiser’s certifcation, can then develop the competence to war-
rant being hired for their appraisal skill. Government agencies and some fnancial
institutions may have their own appraiser training programs.
Objectivity
Above all, the appraiser must remain objective in considering all of the factors
relevant to the appraisal assignment. Any personal interest in the outcome of the
appraisal must be revealed to the client, as indicated in the certifcation mandated
by Standards Rule 2-3 of USPAP. As a practical matter, it is in the appraiser’s best
interest to avoid any assignment that might create an appearance of impropriety.
An appraiser’s main credential will ultimately be the expertise that comes with
performing numerous appraisals. The competent appraiser will also maintain
a high level of professional practice by keeping up to date on developments in
the feld, reading appraisal and related publications, and attending seminars and
courses.
Exercise 1-2
Which of the following courses would benefit a professional appraiser? Why or
why not?
Real estate finance
Land-use planning
Real estate law
Real estate economics
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12 Fundamentals of Real Estate Appraisal, Eleventh Edition
Statistics
Real estate principles
Urban sociology
Demographics
Information systems
Check your answers against those in the answer key at the back of the book.
OTHER FEDERAL REGULATION ■
Ownership and use of real estate are the subjects of an increasing number of fed-
eral laws and administrative regulations.
Fair Housing
The important role of all real estate professionals in providing access to housing
for every resident of the United States has been recognized by Congress. The
Fair Housing Amendments Act of 1988, effective March 12, 1989, prohibits dis-
crimination in the selling, brokering, or appraising of residential real property
because of race, color, religion, sex, handicap, familial status, or national origin.
The subject of fair housing will be covered in greater detail in Chapter 8, “Data
Collection.”
Environmental Concerns
Regulations affecting buildings that may contain lead-based paint or other con-
taminants are evidence of a heightened awareness of building construction and
land development issues that affect the health and safety of occupants and others.
Some of these topics will be covered in Chapter 7, “Building Construction and
the Environment.”
Subprime Lending Crisis
The subprime lending crisis that has been in evidence since 2007 has caused
increased scrutiny of the entire lending process, including the appraisal of mort-
gaged property. The crisis was precipitated by what turned out to be a disastrous
combination of strong market demand heightened by investors seeking an alter-
native to the stock market, low interest rates, overly generous loan-qualifying
practices that made loans available to borrowers with relatively low credit scores
(the no-doc loan didn’t even require verifcation of the borrower’s income), and
a range of loan products that offered absurdly low initial interest rates or required
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Chapter 1 The Appraisal Profession 13
payment of interest only. One of the most tempting loan products was the 2/28
adjustable-rate mortgage (ARM), which offered an initial low interest rate for the
frst two years of the loan; the option ARM even gave the borrower the choice of
not paying the interest owed, which was added to the loan balance. The assump-
tion by borrowers (incorrectly, as it turned out) was that property appreciation
would justify a refnance of the loan before the higher rate kicked in.
By the second half of 2006, many borrowers found that they could not make the
new, higher loan payments that kicked in after the initial two-year period and
started defaulting on their mortgages, with the result that a record number of
foreclosures has taken place in the United States since then. In many parts of the
country, the record number of properties on the market caused a drop in property
values. Many borrowers found that they were left with loan balances greater than
the market values of their homes—the condition known as being upside down or
under water—and simply walked away from their properties. Some mortgage fore-
closures of the last several years have been attributed to fraudulent transactions,
most of which included fraudulent appraisals that misstated property values in
order to defraud a lender. In some cases, an appraisal purported to appraise a prop-
erty that didn’t exist, providing the basis for what prosecutors call the air loan.
Legislation
Congress took action by passing several pieces of legislation designed to boost
the economy, including the Housing and Economic Recovery Act of 2008
(HERA). The law increased the levels at which the FHA or the VA could insure
or guarantee loans, and also increased the levels at which loans could be sold on
the secondary mortgage market (one of the ways in which lenders acquire more
funds for lending).
All mortgage loans now face heightened scrutiny by lenders who seek to verify that
both borrower and property qualify for the requested loan. Borrower qualifcation
can be shown by the credit report and verifcation of income. Property qualifca-
tion can be demonstrated by an objective appraisal based on market conditions
and not wishful thinking. Appraisal standards have never been so important.
HERA also created the Federal Housing Finance Agency (FHFA) by merging the
Offce of Federal Housing Enterprise Oversight (OFHEO) and the Federal Hous-
ing Finance Board (FHFB). FHFA is now the regulator and conservator of Fannie
Mae and Freddie Mac, and the regulator of the 12 Federal Home Loan Banks.
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that
form the secondary mortgage market by purchasing mortgages from banks and
packaging them for sale as securities on public exchanges. The role played by the
GSEs in the housing crisis will be discussed in more detail in Chapter 5, “The Real
Estate Marketplace.”
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14 Fundamentals of Real Estate Appraisal, Eleventh Edition
Appraiser Independence Requirements
The subprime lending crisis, and resulting investigations into mortgage lending
fraud by both federal and state offcials, has resulted in new requirements designed
to insure the objectivity of appraisals of secured property. The latest directive
from Fannie Mae includes the Appraiser Independence Requirements, which
are shown in Figure 1.1 and which took effect October 15, 2010. The 2010
enactment of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank) requires changes to the Truth in Lending Act (TILA) and
other legislation that prohibit coercion and other actions designed to infuence
appraisals. In October 2010, the Federal Reserve Board issued an interim fnal rule
incorporating those changes, which became mandatory on April 1, 2011.
Professional Standards of Practice
The major appraisal associations have been leaders in establishing standards of
appraisal practice, as well as in defning ethical conduct by members of the pro-
fession. In 1985, representatives from nine appraisal groups formed the Ad Hoc
Committee on Uniform Standards of Professional Appraisal Practice. The organi-
zations included are as follows:
American Institute of Real Estate Appraisers (since merged with the Soci- ■
ety of Real Estate Appraisers and now known as the Appraisal Institute)
American Society of Farm Managers and Rural Appraisers ■
Appraisal Institute of Canada ■
International Association of Assessing Offcers ■
International Right of Way Association ■
National Association of Independent Fee Appraisers ■
National Society of Real Estate Appraisers ■
Society of Real Estate Appraisers ■
The standards, published in 1987 and amended regularly since then, cover real
estate, personal property, and business appraisals, as well as other topics. They are
now the Uniform Standards of Professional Appraisal Practice, as interpreted and
amended by the Appraisal Standards Board of the Appraisal Foundation. USPAP
Standards 1, 2, and 3 cover real property appraisal, real property appraisal report-
ing, and review appraisal. While this book is not intended to instruct students in
USPAP, sections of USPAP will be referred to throughout this book to help stu-
dents understand how topics covered relate to current appraisal requirements.
Keep in mind that the contents of USPAP are subject to ongoing review and
modifcation by the Appraisal Standards Board of the Appraisal Foundation, cur-
rently on a two-year cycle. The complete text of the 2012-2013 Uniform Standards
Practice can be found at www.uspap.org. Any proposed changes to the standards,
www.uspap.org
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Chapter 1 The Appraisal Profession 15
FIGURE 1.1
Appraiser Independence Requirements
Appraiser Independence Requirements
Appraiser Independence Safeguards
An “appraiser” must be, at a minimum, licensed or certified by the State in which the property to be appraised is located.
No employee, director, officer, or agent of the Seller, or any other third party acting as joint venture partner, independent
contractor, appraisal company, appraisal management company, or partner on behalf of the Seller, shall influence or
attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion,
compensation, inducement, intimidation, bribery, or in any other manner including but not limited to:
(1) Withholding or threatening to withhold timely payment or partial payment for an appraisal report;
(2) Withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to
demote or terminate an appraiser;
(3) Expressly or impliedly promising future business, promotions, or increased compensation for an appraiser;
(4) Conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion,
conclusion, or valuation to be reached, or on a preliminary value estimate requested from an appraiser;
(5) Requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report prior to
the completion of the appraisal report, or requesting that an appraiser provide estimated values or comparable sales
at any time prior to the appraiser’s completion of an appraisal report;
(6) Providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a
proposed or target amount to be loaned to the Borrower, except that a copy of the sales contract for purchase trans-
actions may be provided;
(7) Providing to an appraiser, appraisal company, appraisal management company, or any entity or person related to the
appraiser, appraisal company, or appraisal management company, stock or other financial or non-financial benefits;
(8) Removing an appraiser from a list of qualified appraisers, or adding an appraiser to an exclusionary list of dis-
approved appraisers, in connection with the influencing or attempting to influence an appraisal as described in
Paragraph B above (this prohibition does not preclude the management of appraiser lists for bona fide administrative
or quality-control reasons based on written policy); and
(9) Any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, or impartiality or
violates law or regulation, including, but not limited to, the Truth in Lending Act (TILA) and Regulation Z, or the Uniform
Standards of Professional Appraisal Practice (USPAP).
Acceptability of Subsequent Appraisals
A Seller must not order, obtain, use, or pay for a second or subsequent appraisal in connection with a Mortgage financing
transaction unless: (i) there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is
clearly and appropriately noted in the Mortgage file, or (ii) such appraisal is done pursuant to written, pre-established bona
fide pre- or post-funding appraisal review or quality control processes or underwriting guidelines, and so long as the Seller
adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value, or (iii) a
second appraisal is required by law.
III. Borrower Receipt of Appraisal
The Seller shall ensure that the Borrower is provided a copy of any appraisal report concerning the Borrower’s subject
property promptly upon completion at no additional cost to the Borrower, and in any event no less than three days prior to
the closing of the Mortgage. The Borrower may waive this three-day requirement if such waiver is obtained at least three
days prior to the closing of the Mortgage. The Seller may provide the Borrower at closing, a revised copy of an appraisal
and information as to the nature of any revisions, so long as the revisions had no impact on value.
The Seller may require the Borrower to reimburse the Seller for the cost of the appraisal.
IV. Appraiser Engagement
The Seller or any third party specifically authorized by the Seller (including, but not limited to, appraisal companies,
appraisal management companies, and Correspondent lenders) shall be responsible for selecting, retaining, and providing
for payment of all compensation to the appraiser. The Seller will not accept any appraisal report completed by an appraiser
selected, retained, or compensated in any manner by any other third party (including Mortgage Brokers and real estate
agents).
Source: Fannie Mae
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16 Fundamentals of Real Estate Appraisal, Eleventh Edition
FIGURE 1.1
Appraiser Independence Requirements (Continued)
There must be separation of a Seller’s sales or Mortgage production functions and appraisal functions. An employee of the
Seller in the sales or Mortgage production function shall have no involvement in the operations of the appraisal function.
(1) Certain parties are prohibited from:
(a) Selecting, retaining, recommending, or influencing the selection of any appraiser for a particular appraisal assign-
ment or for inclusion on a list or panel of appraisers approved or forbidden to perform appraisals for the Seller;
and
(b) Having any substantive communications with an appraiser or appraisalmanagement company relating to or hav-
ing an impact on valuation, including ordering or managing an appraisal assignment.
These parties are:
(i) All members of the Seller’s Mortgage production staff;
(ii) Any person who is compensated on a commission basis upon the successful completion of a Mortgage; and
(iii) Any person whose immediate supervisor is not independent of the Mortgage production staff and process.
Seller personnel not described in Section IV.B (1)(i) through (iii) above are not subject to the restrictions described above,
and may engage in communications with an appraiser. In addition, any party, including the parties described in Section
IV.B(1)(i) through (iii) above, may request that an appraiser provide additional information or explanation about the basis for
a valuation, or correct objective factual errors in an appraisal report.
(2) If absolute lines of independence cannot be achieved as a result of the Seller’s small size and limited staff, the Seller
must be able to clearly demonstrate that it has prudent safeguards to isolate its collateral evaluation process from influence
or interference from its Mortgage production process.
Any employee of the Seller (or if the Seller retains an appraisal company or appraisalmanagement company, any employee
of that company) tasked with selecting appraisers for an approved panel or substantive appraisal review must be:
(1) Appropriately trained and qualified in the area of real estate appraisals; and
(2) In the case of an employee of the Seller, wholly independent of the Mortgage production staff and process.
Use of Appraisal Reports by In-House Appraisers or Affiliated Appraisers
In underwriting a Mortgage, the Seller may use an appraisal report:
(1) Prepared by an appraiser employed by:
(a) The Seller;
(b) An affiliate of the Seller;
(c) An entity that is owned, in whole or in part, by the Seller; or
(d) An entity that owns, in whole or in part, the Seller.
(2) Prepared by an appraiser employed, engaged as an independent contractor, or otherwise retained by an appraisal
company or any appraisal management company affiliated with, or that owns or is owned, in whole or in part, by the
Seller or an affiliate of the Seller, provided that the Seller complies with the provisions of these Appraiser Indepen-
dence Requirements.
The Seller also may use in-house staff appraisers to:
(1) Order appraisals;
(2) Conduct appraisal reviews or other quality control, whether pre-funding or post-funding;
(3) Develop, deploy, or use internal Automated Valuation Models; or
(4) Prepare appraisals in connection with transactions other than Mortgage origination transactions (e.g., Mortgage work-
outs), if the Seller complies with the provisions of these Appraiser Independence Requirements.
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Chapter 1 The Appraisal Profession 17
as well as information of value to both appraisers and consumers, can be found at
www.appraisalfoundation.org.
Exercise 1-3
The federal legislation that resulted in state licensing and certification of 1.
appraisers in federally related transactions was
a. the Internal Revenue Code.
b. FIRREA.
c. FDIC.
d. FSLIC.
In federally related appraisals, state appraiser certification qualifications must 2.
meet or exceed those of the
a. Appraisal Standards Board.
b. Appraiser Qualifications Board.
c. Appraisal Practices Board.
Guidance on emerging valuation issues in the marketplace is issued by the 3.
a. Appraisal Standards Board.
b. Appraiser Qualifications Board.
c. Appraisal Practices Board.
www.appraisalfoundation.org
FIGURE 1.1
Appraiser Independence Requirements (Continued)
Transfer of Appraisals
A Seller may deliver to Fannie Mae a conventional Mortgage with an appraisal prepared by an appraiser selected by
another lender, including where a Mortgage Broker has facilitated the Mortgage application (but not ordered the appraisal).
The Seller delivering the loan to Fannie Mae makes all representations and warranties to Fannie Mae regarding the
appraisal set forth in the Mortgage Selling and Servicing Contract, the Selling Guide and related documents, including the
representation that the appraisal is obtained in a manner consistent with these Appraiser Independence Requirements.
VII. Referrals of Appraisal Misconduct Reports
Any Seller that has a reasonable basis to believe an appraiser or appraisal management company is violating applicable
laws, or is otherwise engaging in unethical conduct, shall promptly refer the matter to the applicable State appraiser certify-
ing and licensing agency or other relevant regulatory bodies.
VIII. Compliance
Sellers must adopt written policies and procedures implementing these Appraiser Independence Requirements, including,
but not limited to, adequate training and disciplinary rules on appraiser independence, including the principles detailed in
Section I. Additionally, Sellers must ensure that any third parties, such as appraisal management companies or Correspon-
dent lenders, used in conjunction with the sale and delivery of a Mortgage to Fannie Mae are also in compliance with these
Appraiser Independence Requirements.
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18 Fundamentals of Real Estate Appraisal, Eleventh Edition
Fannie Mae requires the use of a state-licensed or state-certified appraiser 4.
only
a. for appraisals of property with a transaction value of more than
$250,000.
b. for all Fannie Mae–related transactions.
Check your answers against those in the answer key at the back of the book.
■ PROFESSIONAL GROUPS
As a way of establishing professional credentials and keeping up to date in the
appraisal feld, the appraiser may seek membership in one of the appraisal pro-
fessional groups. Such organizations usually have regular meetings, publish
professional journals, hold seminars, and conduct appraisal courses. Usually, they
have education, experience, and examination requirements for membership.
Often, news updates and legislative announcements are published on an organiza-
tion’s Web site and are available to the public.
The major appraisal and related associations follow, along with their member
designations. Requirements for membership vary widely, with some being sub-
stantially more rigorous than others. Readers are urged to carefully evaluate the
benefts of membership in any appraisal organization.
American Society of Appraisers, Herndon, Virginia
www.appraisers.org
Member designations: AM (Accredited Member) and ASA (Accredited Senior
Appraiser)
American Society of Farm Managers and Rural Appraisers, Inc.,
Denver, Colorado
www.asfmra.org
Member designations: AFM (Accredited Farm Manager), ARA (Accredited
Rural Appraiser), RPRA (Real Property Review Appraiser), AAC (Accredited
Agricultural Consultant)
Appraisal Institute, Chicago, Illinois
www.appraisalinstitute.org
Publisher of The Appraisal Journal and Valuation magazine, as well as a number of
special reports and books
Member designations: MAI (member experienced in the valuation and evaluation
of commercial, industrial, residential, and other types of property, and who advises
www.appraisers.org
www.asfmra.org
www.appraisalinstitute.org
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Chapter 1 The Appraisal Profession 19
clients on real estate investment decisions) and SRA (member experienced in the
analysis and valuation of residential real property)
Appraisal Institute of Canada, Winnipeg, Manitoba, Canada
www.aicanada.org
Publisher of Canadian Property Valuation
Member designations: CRA (Canadian Residential Appraiser) and AACI
(Accredited Appraiser Canadian Institute)
International Association of Assessing Officers, Chicago,
Illinois
www.iaao.org
Publisher of the Journal of Property Tax Assessment & Administration and Fair &
Equitable magazine, as well as many specialized booklets and manuals
Member designations: AAS (Assessment Administration Specialist), CAE (Certi-
fed Assessment Evaluator), CMS (Cadastral Mapping Specialist), PPS (Personal
Property Specialist), RES (Residential Evaluation Specialist)
International Right of Way Association, Inglewood, California
www.irwaonline.org
Publisher of Right of Way magazine
Member designations: ARWP (Associate Right of Way Professional), RWA (Right
of Way Agent), RWP (Right of Way Professional), SR/WA (Senior Right of Way
Professional)
National Association of Independent Fee Appraisers, Inc.,
Chicago, Illinois
www.naifa.com
Publisher of Appraiser’s Voice
Member designations: IFA (member), IFAA (agriculture member), IFAS (senior
member), and IFAC (appraiser counselor)
National Residential Appraisers Institute, Amherst, Ohio
www.nraiappraisers.com
Member designations: CMDA (Certifed Market Data Analyst), GSA (Graduate
Senior Appraiser), SCA (Senior Certifed Appraiser), and SLA (Senior Licensed
Appraiser)
www.aicanada.org
www.iaao.org
www.irwaonline.org
www.naifa.com
www.nraiappraisers.com
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20 Fundamentals of Real Estate Appraisal, Eleventh Edition
National Society of Real Estate Appraisers, Inc.,
Cleveland, Ohio
www.nsrea.org
Publisher of National Report
Member designations: RA (Residential Appraiser), CRA (Certifed Real Estate
Appraiser), and MREA (Master Real Estate Appraiser)
THE MODERN APPRAISAL OFFICE ■
Since the 1970s, the manner in which appraisal data are accumulated and analyzed
and the way that the appraiser’s opinion of value is transmitted to the client have
been transformed. With the increasing availability and range of use of small, easily
programmed offce computers, the appraiser must be acquainted with a variety of
appraisal-based computer applications. Even the most basic computer purchased
today will offer far more speed, capability, and storage capacity than would have
been available even a few years ago. Software is available at increasingly afford-
able prices and an Internet-capable wireless phone or tablet device can provide
immediate access to e-mail, no matter where the appraiser happens to be. A few
other important technology considerations are mentioned next.
The Backup System
As with any serious computer use, the appraiser should ensure that no data are
lost in the event of a power failure or mechanical malfunction. The backup system
properly consists of two components: (1) a battery (not just a power surge protec-
tor) to which the computer is connected to provide a secondary power supply—in
essence, a cushion of time during which the computer can be shut down in the
event of a power failure without loss of data; and (2) a backup system that can be
used to keep a copy of everything that is stored on the computer. This can be a
removable hard drive, disk, or cartridge, or (safer and more convenient) an off-site
source to which fles can be regularly downloaded or uploaded.
The Internet
The importance of having reliable, high-speed Internet access for both offce and
mobile communications cannot be overstated. Most communications will be
conducted by e-mail. Electronic data interchange (EDI) allows a computer in
the appraiser’s offce to transmit a complete appraisal report to the client almost
instantaneously. Use of the Internet for research and data collection is growing
exponentially every year, as more and more sources, including multiple listing ser-
vices, provide online access to their databases. The number of government offces
allowing access to public records is also growing. Information on national, regional,
and local economic, employment, and other trends is readily available. Services
specialize in data on various types of commercial and residential properties; some
of these sources are listed in Chapter 8, “Data Collection.” Despite numerous data
www.nsrea.org
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Chapter 1 The Appraisal Profession 21
sources, however, not all information available is up to date or accurately reported.
USPAP requires that appraisers verify all information used in the appraisal report.
Geographic Information Systems (GIS)
Satellite-based mapping systems have been used for as long as satellites have
orbited the earth. From their initial military and weather technology-based appli-
cations, mapping systems based on latitude and longitude are now entering the
commercial marketplace. The utility of the maps, once available only from the
U.S. Geological Survey (USGS), has been greatly expanded. Commercial ser-
vices now provide (via computer disk or the Internet) reference maps that provide
overlays of national, regional, and local data and are capable of incorporating the
appraiser’s own data. The cost of such maps depends on the source and method of
transmission.
The Camera
No modern appraisal offce is complete without a digital camera that can be used to
make and transmit images without the need for flm or printed copies. With a digi-
tal camera equipped with a memory card of suffcient capacity or wireless access to
a computer, the appraiser can import images directly to an appraisal report. If the
report is transmitted electronically, the photos are incorporated into the report to
be viewed on the recipient’s computer monitor. Note: Because some courts and
government agencies still require printed appraisal reports with separate, profes-
sionally reproduced photos, some appraisers choose to use a 35-millimeter flm
camera as well as a digital camera.
Use of Technology
The use of appropriate resources, including computers, can help an appraiser func-
tion more effciently and more accurately, but these tools serve only as aids to the
appraiser. There never will be a substitute for the skilled and informed judgment
of a professional appraiser.
Exercise 1-4
What are some things an appraiser can do to ensure an efficient, reliable source
of information and data storage?
Check your answer against the one in the answer key at the back of the book.
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22 Fundamentals of Real Estate Appraisal, Eleventh Edition
SUMMARY ■
The skills required of the professional appraiser touch on most areas of real estate
practice. The best-qualifed appraiser will have some of the abilities of an econo-
mist, city planner, surveyor, real estate developer, builder, and broker. Familiarity
with appraisal-based computer applications is a necessity.
Impartiality, objectivity, knowledge of appraising fundamentals, and the qual-
ity of judgment that comes only with experience are the professional appraiser’s
chief credentials. Real estate appraisers’ impartiality and objectivity are essential
to insure that their prerogatives are not abused. The appraiser’s knowledge and
experience provide the basis for an accurate appraisal. Employment opportunities
include both private and public sectors, and an appraiser may be called on for a
variety of purposes.
Only state-licensed or state-certifed appraisers are allowed to perform real prop-
erty appraisals in certain federally related transactions. By helping to better defne
the role and responsibilities of the real estate appraiser, new federal and state
regulations should help enhance the qualifcations of those who seek licensing
or certifcation, which should, in turn, improve the level of appraisal services
available.
Federal laws and regulations on such topics as fair housing and environmental
issues are of increasing concern to appraisers. The subprime lending crisis of the
last few years resulted in the passage by Congress of the Housing and Economic
Recovery Act of 2008 (HERA), which increased loan limitations for federally
insured and guaranteed loans and also increased the limits on loans that can be
purchased on the secondary mortgage market. Fannie Mae issued Appraiser Inde-
pendence Requirements that took effect in 2010. The Dodd-Frank Act resulted
in new regulations, which took effect April 1, 2011, designed to avoid coercion
of appraisers.
The professional appraisal societies provide excellent sources of appraisal infor-
mation. Today’s appraiser makes use of such resources to stay abreast of both legal
requirements and technological innovations.
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Chapter 1 The Appraisal Profession 23
REVIEW QUESTIONS ■
List at 1. LEAST fve general course areas that would beneft a real estate
appraiser, in addition to real estate courses.
The federal agency that now insures deposits in fnancial institutions is 2.
FDIC. a.
FSLIC. b.
RTC. c.
FIRREA. d.
All the following areas of federal regulation affect appraisers 3. EXCEPT
appraiser licensing. a.
fair housing. b.
Congressional Budget Offce (CBO). c.
lead-based paint. d.
Appraiser qualifcations that meet federal guidelines come from the 4.
Appraiser Qualifcations Board. a.
Appraisal Standards Board. b.
Resolution Trust Corporation. c.
Appraisal Institute. d.
Every state must enact legislation to provide for appraiser licensing and cer- 5.
tifcation that is consistent with criteria established by the
Federal National Mortgage Association. a.
Appraiser Qualifcations Board of the Appraisal Foundation. b.
Resolution Trust Corporation. c.
Appraisal Institute. d.
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24 Fundamentals of Real Estate Appraisal, Eleventh Edition
The purpose of 6. USPAP is to
delay government regulation. a.
present information that will be meaningful to the client and will not b.
be misleading in the marketplace.
guarantee professionalism in appraisers. c.
present information that will be useful to appraisers. d.
A certifed appraiser is required for federally related transactions involving 7.
property valued at more than
$250,000. a.
$500,000. b.
$750,000. c.
$1,000,000. d.
The law that Congress passed to assist borrowers affected by the subprime 8.
lending crisis is the
Financial Institutions Reform, Recovery, and Enforcement Act of a.
1989.
Housing and Economic Recovery Act of 2008. b.
Tax Reform Act of 1986. c.
Fair Housing Amendments Act of 1988. d.
The appraisal coursework required by the AQB for a certifed general real 9.
estate appraiser totals
75 hours. a.
150 hours. b.
300 hours. c.
500 hours. d.
Check your answers against those in the answer key at the back of the book.
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For comments or queries about this product,
please e-mail us at contentinquiries@dearborn.com.
332 Front Street South, Suite 501, La Crosse, WI 54601
www.dearborn.com, 800.972.2220
Fundamentals of Real Estate Appraisal provides a strong foundation
for understanding the modern real estate appraisal market.
Features:
• New Key Terms added to most chapters
• Questions and examples revised to refect current market conditions
• Web sites updated and incorporated into the text
• Contemporary discussion of Dodd-Frank Wall Street Reform Act and
Consumer Protection Act
• Defnition of an appraisal described more fully
• Updated with current Uniform Standards of Professional Appraisal Practice
(USPAP) requirements for conditions afecting market value
• Incorporates new Fannie Mae guideline on measuring square footage
• Discussion of lead-based paint updated
• Updated with new requirements for flling the Sales Comparison section of
the Uniform Residential Appraisal Report (URAR) form
• Discussion of condominiums amplifed
• Section on manufactured homes revised
• Glossary expanded to include defnitions of all Key Terms
• Over 65 in-chapter exercises test appraisal knowledge
• “In Practice” features draw connections between the principles in the book
and real-world scenarios
Contents:
The Appraisal Profession
Appraisal Math and Statistics
Real Estate and Its Appraisal
Real Estate Transactions
The Real Estate Marketplace
The Appraisal Process
Building Construction and the
Environment
Data Collection
Site Valuation
The Cost Approach—Part I:
Reproduction/Replacement Cost
The Cost Approach —Part II:
Depreciation
The Sales Comparison Approach
The Income Capitalization Approach
Direct and Yield Capitalization
Reconciliation and the Appraisal
Report
Appraising Partial Interests
William L. Ventolo, Jr. & Martha R. Williams, JD
Eleventh Edition
Fundamentals of
Real Estate Appraisal
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