APPRAISAL EXAM 1 Basic Principles Q&A Correctly Solved 100%

APPRAISAL EXAM 1 Basic Principles Q&A Correctly Solved 100% When are appraisers needed? *** to set asking/offering prices, settle estates, refinance, divorce, taxes, rental rates, valuation, condemnation & foreclosure Appraiser *** One who is expected to perform valuation services competently & in a manner that is independent, impartial & objective. Attributes of an Appraiser *** competent, independent, impartial, objective, prompt, organized, educated, honest & diligent Appraiser must be knowledgeable in... *** history, economics, construction, math, statistics, ethics, psychology, sociology, urban planning & land use What are some adversarial situations that require an appraisal? *** tax appeals, relocation, casualty loss, purchase offers, partnership breakups, division of assets, negotiation of leases, condemnation & estate settlements Appraisal Report *** The written or oral communication of an appraisal. Most residential appraisal reports for mortgage lending purposes are completed using a standardized app. report form that is approved by Fannie Mae & Freddie Mac. Narrative Report *** A written report presented in narrative style or "long hand" & are used most for commercial, industrial or income producing properties. What are the 4 components of the real property appraiser qualification criteria? *** 1) Continuing Education: 14 class hrs/year + 7hr National USPAP Update Course every 2 years 2) Experience: 3) Examination: successful completion valid for 24 months 4) Qualifying Education: changed in 2008 & 2015, increased classroom hours, college level requirements & minimum classroom hours for specific topic areas or modules. Requirements for a Trainee *** -75 classroom hours -no college degree -no prior experience -may have multiple supervisors Requirements for a Licensed Residential Appraiser *** -150 classroom hours -30 college hours or associates degree -non-complex one to four residential units with a transaction value less than $1,000,000 & complex units with a value less than $250,000 -2,000 hours experience in no less than 12 months Requirements for a Certified Residential Appraiser *** -200 classroom hours -Bachelor's Degree -All one to four residential units without regard to transaction value or complexity -2,500 hours experience in no less than 24 months Requirements for a Certified General Appraiser *** -300 classroom hours -Bachelor's Degree -All types of real estate -3,000 hours experience in no less than 30 months of which 1,500 hours must be in non-residential appraisal work Employment Opportunities for Appraisers *** -A majority work for themselves or in an office -Most specialize in residential work (mortgage appraisals) -General appraisers specialize in income-producing properties & are more likely to appraise in a widespread area -Banks, accounting firms, real estate investment companies, government agencies, real estate departments of chain stores & attorneys Housing Markets in 1950 *** relatively tranquil with steady growth in housing, a healthy economy & stable interest rates Housing Markets in 1960 *** no established appraisal standards nationwide, but there were professional appraisal organizations providing education programs & touting codes of ethics, membership was optional Housing Markets in 1970 *** turbulent decade, major swings in the economy & housing market lending made at local levels with risk & underwriting determined by local lenders/banks. Late 1970s Fannie & Freddie developed uniform underwriting rules & the first universally accepted appraisal form for home equity lending was Form 704. The end of the 1970s saw record inflation & increased interest rates. Housing Markets in 1980 *** Home sales soared & then tapered off. Appraisers were busy, no generally accepted standards of ethics & performance. Underwriting standards were lax (especially in commercial lending). The situation culminated with the "Saving and Loan Crisis" in the mid-1980s. Known as the Barnard Report for Rep. Douglas Barnard's letter o Congress in 1986. The Development of Appraisal Standards *** In light of the Barnard Report, 8 US based professional organizations plus 1 from Canada for the Ad Hoc Committee on Uniform Standards to develop appraisal standards; their initial focus was on developing a common definition of "market value". In 1987 the 8 US organizations established The Appraisal Foundation. The Appraisal Foundation *** -a not-for-profit organization established exclusively for educational & scientific purposes -not a professional appraisal organization or society -membership is reserved for organizations not individuals -is a private entity which has no enforcement authority in any jurisdiction -it has 14 sponsors (appraisal, international appraisal & affiliate sponsors) -4 Principal Boards: Board of Trustees (BOT), Appraisal Standards Board (ASB), Appraiser Qualifications Board (AQB), Appraisal Practices Board (APB) -The Appraisal Foundation & its boards promulgate standards & qualification criteria for the benefit of the public. They were created for the express purpose of promoting & maintaining a high level of public trust & confidence in professional appraisal practice. Board of Trustees (BOT) *** -acts as an executive board -composed of 26 individuals responsible for funding TAF & appointing members of the ASB, AQB & APB Appraisal Standards Board (ASB) *** responsible for creating standards of ethics & performance of appraisers, which is accomplished through the Uniform Standards of Professional Appraisal Practice (USPAP), in short ASB is responsible for USPAP Appraiser Qualifications Board (AQB) *** responsible for creating requirements for licensure, certification & re-certification of appraisers Appraisal Practices Board (APB) *** formed in 2010 it is responsible for issuing voluntary guidance on recognized valuation methods & techniques. Uniform Standards of Professional Appraisal Practice (USPAP) *** -developed by an Ad Hoc Committee in 1986/7 & was copyrighted in 1987 by The Appraisal Foundation -January 1989 ASB adopted USPAP as the governing document -USPAP may be amended, interpreted, supplemented or retired only by the ASB -Appraisal review, mass appraisal & appraisal of personal property and business all belong to the appraisal profession and therefore all of these disciplines were included in USPAP -Congress recognized USPAP in Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) *** -authorized federal financial institution regulatory agencies to reference USPAP in their regulations. Title XI also authorized USPAP to be the basis for standards for the states to use in licensing appraisers -FIRREA, aka the "Savings and Loan Bailout Bill", was passed in 1989 (became effective in 1991) as a result of the Savings and Loan Crisis -it created the Appraisal Subcommittee (ASC) which is a federal entity with oversight authority over the state licensing and certification agencies -it also resulted in state licensure and certification for real property appraisers The 2000s *** -unprecedented housing and lending boom, interest rates were low & mortgage money was easy to obtain -2007 the bubble burst, economic recession & increasing foreclosures led to a dramatic decrease in property values -Fannie Mae & Freddie Mac became insolvent & were taken into government conservatorship in 2008 -2010 Congress passed the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act; for appraisers the most significant reforms were new appraiser independence requirements, increased powers given to the Appraisal Subcommittee and a federal mandate that appraisal management companies (AMCs) be regulated Advisory Councils to The Appraisal Foundation *** 1) The Appraisal Foundation Advisory Council (TAFAC): comprised of 75 non-profit organizations and government entities; it serves to involve the public in the appraisal standards & qualifications development process; makes recommendations to the ASB, AQB & BOT regarding major issues pending before the Board 2) Industry Advisory Council (IAC): gives for-profit entities an opportunity to provide advice and counsel to The Appraisal Foundation, members include lending institutions, accounting firms, appraisal companies, etc. 3) International Valuation Council (IVC): provides global info and support to TAF The Appraisal Subcommittee *** -The ASC is a federal entity and has significant enforcement authority -created under Section 1103 of Title XI of FIRREA to: monitor state licensure & certification, maintain national registry of state certified and licensed appraisers eligible to perform appraisal in federally related transactions, transmit annual report to Congress & monitor the practices, procedures & activities of The Appraisal Foundation -funded by an annual National Registry fee charged to each certified and licensed appraiser -responsible for auditing the qualification & re-certification criteria in the states and territories -Their mission is to ensure that real estate appraisers are sufficiently trained and tested to assure competency and independent judgment according to uniform high professional standards and ethics -members of the ASC are appointed by the OCC, FRB, FDIC, NCUA, HUD, FHFA & CFPB The Fair Housing Act *** -originally passed in 1968 and amended in 1988 -prohibits discrimination in housing because of: race, origin, religion, sex, familial status (1 or more persons not yet 18 living with a guardian) & handicap (physical or mental impairment that limits a person's major life activity) Fair Lending *** -application of the fair lending laws to financial institutions -everyone should have equal access to credit, based only on their financial characteristics -violations may include denying access to credit through: intentional grounds, selective encouraging or discouraging applications, differential treatment & policies or procedures which have a differential impact -Fair lending laws and regulations cover ALL credit transactions unless specifically excepted (for example, a business loan over $1 million). It is a large umbrella. Fair Lending Federal Institutions *** 1) Department of Treasury: OCC, FDIC, FRB & NCUA 2) Department of Housing and Urban Development (HUD): has regulatory authority in most civil rights legislation such as the Fair Housing Act (FHA ) and the Equal Credit Opportunity Act (ECOA) -If a regulatory agency determines that a "pattern of practice" of discrimination is exhibited by a lending inst. it is referred to the DOJ; an isolated instance will be referred to HUD Routine Provider versus Provider on Request *** -Routine Providers give a copy of the appraisal report to the applicant in every case (regardless of loan approval); this practice may increase possibility of a fair lending complaint. -Provider on Request, lenders give the applicant notice of a right to a copy of the appraisal report, the consumer has 90 days after the institutions final decision to submit a written request for a copy of the report Equal Credit Opportunity Act (ECOA) *** -applies to all types of lending (mortgages, credit cards & business loans) -appraisers are considered creditors and ECOA applies to the appraisal of all dwellings (one to four units, condos, co-ops & manufactured homes) -ECOA applies to first mortgages and all junior liens -does not apply to vacant land HUD *** -regulates mortgage bankers & brokers dealing with fair lending -they have authority but only act on a complaint -current emphasis is one one to four family residential loans. These are covered under the Fair Housing Act, while ECOA covers all types of loans -Home Mortgage Disclosure Act requires lending institutions to report annually certain demo. info on 1-4 res. transactions (applicants race, sex, income, location of property & whether loan was approved, denied or withdrawn) -The info is gathered on all home purchase loans, refinances and home improvement loans Fair Lending and Appraisers *** -appraisers MUST be careful to avoid discriminatory practices when developing and reporting real property appraisals -Fannie Mae & Freddie Mac appraisal reports state: Race and the racial composition of the neighborhood are not appraisal factors -DO NOT use subjective language ('crime' or 'pride of ownership') -Ask standard questions in all situations, treat all applicants the same, etc. Advantages to joing a Professional Society *** -specialized education courses -networking with fellow appraisers -access to professional journals -access to seminars -benefits of national advertising Ethics *** -relating to what is good or bad; having to do with moral -duty and obligation -Dr. Albert Schweitzer says: in a general sense, ethics is the name we give to our concern for good behavior. We feel an obligation to consider not only our own personal well-being, but also that of others and of human society as a whole. Ethics is a way of being human. Moral *** relating to the principle of right and wrong Bias *** -a preference or inclination that precludes an appraiser's impartiality, independence or objectivity in an assignment -bias is not allowed when an individual is performing as an appraiser USPAP Compliance *** An appraiser must comply with USPAP when obligated by law or regulation or by agreement with the client or intended users. Basically appraisers should always comply with USPAP Is it necessary to certify that the appraiser has not been coerced in the appraisal report? *** Not in such blatant terms; however a statement such as, "my engagement in this assignment was not contingent upon developing or reporting predetermined results" should be added to each appraisal report. Should an appraiser perform an assignment where there might be a conflict of interest? *** Yes, as long as the appraiser specifies the particulars in a situation where they have any present or prospective interest with respect to the parties involved in the property that is the subject of the report. If the appraiser has an interest but could provide the service in an ethical, unbiased manner then the appraiser could accept the assignment as long as the appraiser was competent and properly disclosed the interest. Essentially the appraiser must be able to perform the assignment without bias. Does an appraiser need to disclose prior services performed on the same property? *** Yes, if the appraisal was done within 3 years of the date of the acceptance of the assignment. This is not a violation of the ethics rule on confidentiality. Is it ethical for an appraiser to pay a fee to be included on a lender's approved appraiser list provided the appraiser discloses payment of a fee in his or her appraisal report? *** Yes; an appraiser can pay a fee to be on a lender's approved appraiser list, as long as payment of this fee is appropriately disclosed in the certification section of every appraisal report prepared for that client. Is it ethical for an appraiser to offer a client a reduced fee on an appraisal if the client's loan does not close? Would the result be different if the client agreed to pay extra for other assignments? *** Neither practice would be ethical. Offering a client a reduced fee on an appraisal if the client's loan does not close is a violation of the Ethics Rule. Does an appraiser have to comply with USPAP if they are not charging a fee? *** Yes, compliance with USPAP is not contingent upon a fee. Electronic Data Interchange (EDI) *** electronic appraisal report including maps, sketches, photos and digital signatures that can be sent directly to clients What changes did Fannie/Freddie make in 2011 to the appraisal industry? *** They launched the Uniform Collateral Data Portal (UCDP) which changed the way lenders transmitted loan documentation and they adopted the Uniform Appraisal Dataset (UAD) that provides standardized formats and responses for many of the fields on the most popular residential appraisal forms (only applies to mortgage loans sold to Fannie/Freddie or insured by FHA or guaranteed by VA). List some useful information an appraiser would find on the internet? *** -demographics and trends -tax rates -maps -aerial photos -subject property information -listing information -sales and lease information -census tract numbers -zoning and other land-use ordinances -various appraiser data A list of some helpful websites include: *** - - - - - -county assessors office -county clerks office Geographic Information Systems (GIS) *** a computerized mapping system for encoding, retrieving, analyzing and presenting geographic or spatial data Appraisal *** 1) the act or process of developing an opinion of value 2) an opinion of value So an appraisal is no more or no less than an opinion developed by an appraiser. As an opinion, an appraisal is not to be construed as a guarantee or a very precise number. Assignment (as it refers to an appraisal) *** 1) An agreement between an appraiser and a client to provide a valuation service 2) The valuation service that is provided as a consequence of such an agreement Client *** 1) The party or parties who engage an appraiser (by employment or contract) in a specific assignment. *The client is the one we work for and owe our confidentiality to.* The client may remain anonymous on the report but must be included on the workfile Real Estate *** 1) An identified parcel or tract of land, including improvement, if any 2) Land and all things that are a natural part of the land as well as things that are attached to the land by people. All permanent building attachments (plumbing, heat/air untis). Real estate includes all attachments below and above the ground, it is a physical thing. Ex: Window ac unit built into the wall, built-in range, mounted microwave, built-in dishwasher & rose bushes Land *** 1) The earth's surface, both land and water, and anything that is attached to it whether by the course of nature or human hands; all natural resources in their original state (mineral deposits, wildlife, timber, soil, water) 2) In law, the solid surface on the earth, as distinguished from water 3) One of the four agents of production in economic theory 4) Valuation of land as if vacant, and of land and improvements to or on the land, is an economic concept. Whether vacant or improved, land is also referred to as real estate. The earth's surface, the space beneath which extends to the centre of the earth, and the space above which extends to the sky. The ownership of land and the rights attached to the ownership are subject to the laws of a particular State. List some important characteristics of land: *** 1) Unique Location: different topography, access, subsoil & orientation 2) Immobility: fixed in location & sensitive to its immediate surroundings 3) Durability: classified as a long-lasting asset & has a longer physical and economic life than other assets 4) Finite Supply: limited supply therefore increasing the demand Subsurface Rights *** 1) The rights to the use and profits of the underground portion of a designated property; usually refers to the right to exact coal, minerals, oil, gas or other hydrocarbon substances as designated in the grant; may include a right of way over designated portions of the surface. 2) The right to construct and maintain tunnels, subways, subcellars, pipelines, sewers, etc. *The rights can be sold or leased to another party* Air Rights *** The right to undisturbed use and control of designated air space above a specific land area within stated elevations. Such rights may be acquired to construct a building above the land or building of another or to protect the light and air of an existing proposed structure on an adjoining lot. *The exchange of air rights is more common with commercial or industrial properties.* Fixture *** An article that was once personal property but has since been installed or attached to the land or building in a rather permanent manner so that it is regarded in law as part of the real estate. *A fixture could be a shrub or tree but generally fixtures are man-made things* In order to determine whether something is a fixture ask: -How permanent is it? -Can it be removed without doing substantial permanent damage? -What was the intent? Was it meant to be permanent or temporary? Personal Property *** 1) Identifiable tangible objects that are considered by the general public as being "personal" (furnishings, machinery, artwork); all tangible property that is not classified as real estate. 2) Consists of every kind of property that is not real property; movable without damage to itself or the real estate; subdivided into tangible and intangible. Also called personalty. *Personal property is something that is portable* Ex: window ac unit,free standing range, washer/dryer, countertop microwave, portable dishwasher & chandelier Real Estate versus Personal Property *** -Typically personal property is not included in the appraisal of residential properties for mortgage loans. -Financing of personal property may be more common in commercial or income properties; where the personal property may be essential to the operation of a business (restaurant or hotel). -Appraisers may appraise personal property if they are knowledgeable and experienced in this area. Trade Fixtures *** -Articles placed in or attached to rented buildings by a tenant to help carry out the trade or business of the tenant (shelves, display cases, bars, pizza ovens, etc.) -Found only in rented space and for use in commercial property -Installed by the tenant and they may/not remain after the lease expires Real Property *** 1) The interests, benefits and rights inherent in the ownership of real estate 2) All the rights, interests and benefits related to the ownership of real estate. Real property is a legal concept distinct from real estate, which is a physical asset. There may also be potential limitations upon ownership rights to real property *Real estate is the physical being (land & improvements) *Real Property is the rights and benefits inherent in the ownership of real estate -We are real property appraisers NOT real estate appraisers Bundle of Rights Theory *** The concept that compares property ownership to a bundle of sticks with each stick representing a distinct and separate right of the property owner; the right to use, sell, lease, give away, transfer by will/trust or do nothing. 4 Public Restrictions *** 1) Taxation 2) Eminent Domain 3) Police Power 4) Escheat Taxation *** all real property is subject to taxation at the local level; this tax creates a lien against your property and failure to pay the tax could result in your property being transferred to the taxing authority to be sold. Eminent Domain *** 1) The right of government to take private property for public use upon the payment of just compensation. The Fifth Amendment, aka the 'taking clause', guarantees payment of just compensation upon appropriation of private property. -The process of taking property by eminent domain is called condemnation -Appraisers are called in to determine 'just compensation' Police Power *** 1) The right of government, through which property is regulated, to protect public safety, health, morals and general welfare Ex: zoning, building codes, subdivision regulations, electrical codes, plumbing codes & energy codes Escheat *** 1) The right of government that gives the state titular ownership of a property when its owner dies without a will or any ascertainable heirs -Considered a public restriction on real property ownership 4 Private Restrictions *** 1) Mortgages 2) Mechanic's Lien 3) Deed Restriction 4) Conditions, Covenants & Restrictions (CC&RS) Mortgage *** 1) A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions *Mortgage Note: A document or a clause in a document in which the borrower accepts responsibility for the repayment of a debt -Mortgage creates a lien against the property Mechanic's Lien *** 1) A legal claim placed on real estate by someone who is owed money for labor, services or supplies contributed to the property for the purpose of improving it. Typical lien claimants are general contractors, subcontractors and suppliers of building materials. A mechanic's lien claimant can sue to have the real estate sold at auction and recover the debt form the proceeds. Deed Restriction *** 1) A provision written into a deed that limits the use of land. Deed restrictions usually remain in effect when title passes to subsequent owners 2) Lawful limitations which run with the land and may affect the use, development and conveyance of ownership -Most restrict the use of the property. Ex: never a rental property, cannot be subdivided in less than 10 acres -May also promulgate a non-compete clause in commercial properties. Ex: dry cleaner cannot be sold and turned into anything other than a dry cleaner -Can stipulate property never be sold to person/relative -Deed restrictions can be overturned but not easily CC&Rs *** 1) A list of expresses assurances and limitations on land use; often found in contracts between a land subdivider and a lot purchaser. CC&Rs should be specified in the conveyance -Similar to deed restrictions but are applied to more than one property; typically promulgated by a developer to establish regulations for a subdivision; common in condos Ex: min. building size, min. building cost, pets, livestock, RV storage, any kind of signs, outbuildings, outdoor lighting, landscape, sheds, etc. Legal Description *** 1) A description of land that identifies the real estate according to a system established or approved by law; an exact description that enables the real estate to be located and identified. -The description must be unique enough to delineate a particular piece of real estate without question -3 most common systems of legal description: lot and block, metes and bounds and rectangular survey Lot and Block *** 1) A system for the legal description of land that refers to parcels' lot and block numbers, which appear on recorded maps and plats of subdivided land; may also be used for assessment maps -The most recent system of legal description, became common in 1950s -It tells nothing about property location, size or shape & is meaningless without a reference map that displays this info Metes and Bounds *** 1) A system for the legal description of land that refers to the parcel's boundaries, which are formed by the point of beginning (POB) and all intermediate points (bounds) and the courses or angular direction of each point (metes) -The earliest system of legal description used in the US; primarily in the 13 colonies Metes *** -refers to bearing or direction relative to North or South 1 Full circle = 360 degrees 1 degree = 60' (60 "minutes") 1' = 60" (60 "seconds") 1 degree = 3,600" (60 seconds per minute x 60 minutes per degree) Ex: A property boundary is North 33degrees10'12" East, would read North 33 degrees, 10 minutes, 12 seconds East Bounds *** -the distances that a boundary runs at that prescribed angle; distances are indicated by feet 1 Mile = 8 Furlongs 1 Furlong = 660 Feet, or 10 Chains 1 Chain = 66 Feet, or 4 Rods 1 Rod = 16.5 Feet, or 25 Links 1 Link = 7.92 Inches, or 0.67 Feet Gunter's Chain *** -many modern units of measurement based on Gunter's Chain -1607 designed a chain 4 perches in length divided in 100 links -In Gunter's combination system an acre was 10 square chains How many square feet in an acre? *** 43,560 How many feet in a mile? *** 5,280 How can a chain and link measurement be converted to feet? *** multiply the number of chains by 66 and the number of links by 8 inches or 0.67 feet. Rectangular Survey System *** 1) A land survey system used in Florida, Alabama, Mississippi and all states North of the Ohio river or West of the Mississippi river except Texas; divides land into townships and ranges approx. six miles square, each normally containing 36 one-square-mile sections of 640 acres, except when adjusted for the curvature of the earth. -aka "Government Survey System" -based on standardized measurements and consistent squares as opposed to the irregular shapes commonly found in metes and bounds descriptions 1 Township = 36 sq miles (6x6 miles) 1 Section = 1 sq mile (5,280x5,280 feet) 1 Square Mile = 640 acres 1/4 Section = 160 acres Quarter-Quarter Section = 40 acres A Farmer owns 6 full sections, 3 half sections and 5 quarter sections. How many acres is that? *** 5,600 acres A lot measures 187.64 feet by 316.35 feet. How many acres is that? *** 1.36 acres A lot measures 12 chains and 48 links by 3 chains and 24 links. How many acres is that? *** 4.05 acres A lot contains .85 acres. It sells for $72,000. How much did it sell for per square foot? *** $1.94 Estate *** 1) A right or interest in property. Defines an owner's degree, quantity, nature and extent of interest in real property. Types of estates: freehold (fee simple, determinable fee and life estate) and leasehold 2) To be an estate in land, an interest must allow possession (either now or in the future) and be differentiated primarily by its duration). Fee Simple *** 1) An absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power and escheat. 2) Absolute ownership subject only to limitations imposed by the State; also called a freehold - It is the fullest and most complete type of estate that is subject to common public limitations - Consists of the full bundle of rights -It is inheritable, transferable & perpetual - The most common form of ownership Partial Interest *** 1) Divided or undivided rights in real estate that represent less than the whole (a fractional interest) - If one or more of the bundle of rights is missing it results in partial interest or partial estate Ex: life estates, leased fee estates & leasehold estates Life Estate *** 1) Rights of use, occupancy and control, limited to the lifetime of a designated party, sometimes referred to as the life tenant. Ex: When an elderly person transfers ownership of the property to another party (relative) but retains the right to live in the property for the rest of their life. - During the life of the holder of the life estate the interest is called an Estate in Remainder - An adjustment to the value of a life estate property would involve some sort of discounting of the value based upon morality tables and the expected remaining life of the person holding the life estate. **It is a very complex undertaking for an appraiser. Leased Fee Interest *** 1) A freehold (ownership interest) where the possessory interest has been granted to another party by creation of a contractual landlord-tenant relationship (lease). Leasehold Interest *** 1) The tenant's possessory interest created by a lease - A leasehold interest may have value if the contract rent stipulated in a lease is less than the property's market rent. - It is considered a non-freehold estate Easement *** 1) The right to use another's land for a stated purpose 2) Nonpossessory interest in landed property conveying use, but not ownership, of a portion of that property - Someone else is allowed to enter a property and therefore the owner has relinquished the exclusive right to occupy and use the property creating a partial interest or diminished estate - The effect of an easement can vary from negligible to substantial (ex. power line through middle of property vs. easement along the edge of the property) Easements in Gross *** 1) An easement that benefits a legal person or entity (individual, corporation, partnership, LLC, government entity, etc.) and not a particular tract of land; an easement having a servient estate but no dominant estate) Ex: easements for railroads, pipelines and utility companies - An easement in gross burdens one's property but does not benefit another parcel of land - Usually easements in gross are common in an area and affect a number of different properties; therefore there may be no need to adjust for this factor since all properties used as comparables are affected by similar easements. Easement Appurtenant *** 1) An easement having both dominant and servient estates. The easement interest passes with title to the dominant estate and continues to burden the servient estate. An easement appurtenant contrasts with an easement in gross, which has a servient estate but no dominant estate. Ex: If I own a property in the rear of yours and access it through an access right-of-way over your property, I gain benefit and your property is encumbered; I would have the dominant tenement and you would have the servient tenement. Affirmative Easement *** 1) The right to perform a specific act on a property owned by another -This is the good kind of easement, it works in your favor - Sometimes called dominant estate Negative Easement *** 1) An easement preventing a property owner from certain, otherwise permitted, uses of his or her land (ex: agreeing not to do something such as building a wall or fence blocking an adjoining property's view. - Can be punitive in nature and create losses in value Ex: conservation easements, drainage easements, historic preservation easements, subsurface rights, air rights - No longer have fee simple ownership or full control of all aspects of the property Conservation Easement *** 1) An interest in real property restricting future land use to preservation, conservation, wildlife habitat. May permit farming, timber harvesting or other uses of rural nature to continue, subject to the easement. - These easements are generally granted by the property owner who wants tax benefits - Can only be granted to: the Army Corps of Engineers, various state park systems, the Land Trust Alliance, the Nature Conservancy & local conservation groups. Drainage Easement/Drainage Right of Way *** 1) The right to drain surface water from one owner's land over the land of one or more adjacent owners - Normally the drainage right of way can have no structures or improvements, the land must be kept free and clear for the water to flow across it Historic Preservation Easement *** - Includes various kinds of controls on historically designated properties; which are imposed by cities, towns or villages - Restrictions include: controls over exterior (doors, windows, and roof lines), choice of materials and paint colors that may not be changed Facade Easement *** 1) Traditionally considered a type of preservation easement that protected only the facade of a building, not the entire structure. It has the effect of prohibiting alteration of the exterior of an existing improvement. Must be certified as a historic structure to qualify for tax benefits. License *** 1) For real property, a personal, unassignable and typically revocable privilege or permit to perform some activity on the land of another without obtaining an interest in the property - License can be terminated at any time and is considered personal property rather than real property Ex: the purchase of hunting or fishing rights on private property Encroachment *** 1) Trespassing on the domain of another - Physical in nature, occurs when someone builds something over the property line of another property - FHA will insure a loan on a property that is subject to an encroachment if a perpetual encroachment easement is filed; this agreement recognizes the problem and absolves the mortgagee of any liability. The parties agree to just leave it alone. Tenancy in Severalty *** 1) An estate in real estate held by one owner Tenancy *** 1) The holding of property by any form of title Concurrent Ownership *** - Property that is concurrently owned by more than one individual Ex: tenancy in common, joint tenancy & tenancy by the entirety Tenancy in Common *** 1) An estate held by two or more persons, each of whom has an undivided interest - The most basic example of concurrent ownership - No limit to the number of tenants in common a property can have - Ownership does not have to be in equal amounts & each tenant may sell their interest without the approval or knowledge of the other tenants - There is no right of survivorship, if a tenant dies their interest goes to their heirs, it does not convey back to the other owners Joint Tenancy *** 1) Joint ownership by two or more persons with the right of survivorship - If one joint tenant dies, that person's interest in the property automatically passes to the other joint tenant(s) - Joint tenant must have an equal ownership interest - To create joint tenancy, all owners must go on title at the same time (unity of time) - In some states it is common for husbands and wives to take property as joint tenants Tenancy by the Entirety *** 1) An estate held by a husband and wife in which neither has a disposable interest in the property during the lifetime of the other, except through joint action - Has the same right of survivorship provisions as joint tenancy, but the survivor must be the spouse Land Trusts *** 1) A legal vehicle for partial ownership interests in real property in which independently owned properties are conveyed to a trustee; may be used to effect a profitable assemblage or in some cases to facilitate the assigning of property as collateral for a loan - A trust agreement is established to define the duties of the trustee (independent department of a bank) - Trustee has limited duties/responsibilities (manage property or collect rent) Partnership *** 1) An association of two or more persons who carry on as co-owners of a business for profit - Partnerships are commonly found in acquisitions of real estate, it affords an opportunity for pooling of funds and to share the risk - The two types of partnerships are: general and limited General Partnership *** 1) An ownership arrangement in which all partners share in investment gains and losses and each has personal and unlimited responsibility for all liabilities - This is the most common kind of partnership where each partner has an individual designated percentage of the partnership Limited Partnership *** 1) An ownership arrangement consisting of general and limited partners. General partners manage the business and assume full liability for partnership debt, while limited partners are passive and liable only to the extent of their own capital contributions - Offer opportunities for investment without the hassle of day to day operations and have limited liability. Corporation *** 1) In law, an organization that acts as a single legal entity in performing certain activities, usually business for profit; also includes charitable, educational and religious organizations - Ownership of the corporation is divided into partial interests by selling shares of stock in the corporation, but the owner of the real estate is the corporation Syndication *** 1) A private or public partnership that pools funds for the acquisition and development of real estate projects or other business ventures - Can be used to purchase, develop, manage and dispose of real estate - Created when someone purchases real property with the intent to transfer the rights to a limited partnership which will then sell interests to investors Real Estate Investment Trust (REIT) *** 1) A corporation or trust that combines the capital of many investors to acquire or provide financing for all forms of real estate. Like a mutual fund for real estate. The shares are freely traded. SEC requires REITs with over 300 investors to make their financial statements public. - The popularity of REITs waxes and wanes during economic cycles and with changing tax laws. Specialized form of ownership *** - A person may own something in fee simple along with shared rights of certain common properties Ex: condos, cooperatives, PUDs and timeshares Condominium *** 1) A for of ownership in which each owner possesses the exclusive right to use and occupy an allotted unit plus an undivided interest in common areas. - you are a fee simple owner of certain parcel plus you are an owner in common of other specified common areas Cooperative Ownership *** 1) A form of ownership in which each owner of stock in a cooperative apartment building or housing corporation receives a proprietary lease on a specific apartment and is obligated to pay a monthly maintenance charge that represents the proportionate share of operating expenses and debt service on the underlying mortgage, which is paid by the corporation. - In a co-op you do not receive a fee simple interest you merely acquire ownership of shares of a corporation that owns the real estate Planned Development Unit (PUD) *** 1) A type of residential, commercial &/or industrial development in which buildings are clustered or set on lots that are smaller than usual, and large, open, park-like areas are included within the development - individual ownership of a parcel combined with shared ownership of common areas - characteristics of a PUD include: *a homeowner association that holds title to the common area *mandatory membership of all unit owners *the right of unit owners to vote in the operation of the association *lien supported assessment of the members Timesharing *** 1) Limited ownership interests in, or the rights of use and occupancy of, residential apartments or hotel rooms. - Two types of timeshares: fee and nonfee timeshares - It is critical that the appraiser identify whether the subject and the comparables are fee or nonfee timeshares Fee Timeshares *** - Where the purchaser receives a deed that conveys title to a unit for a specific part of a year - May be based on timeshare ownership or interval ownership - Fee timeshares in which legal title and deed are conveyed are generally more valuable Nonfee Timeshares *** 1) A limited interest in real property in which the purchaser receives only those rights specifically granted by the developer, usually the right to use a timeshare unit and the related premises; does not impart legal title to the property Deed *** 1) A written. legal instrument that conveys an estate or interest in real property when it is executed and delivered -Grantor is the seller -Grantee is the buyer -Title officially passes when the deed is delivered by the grantor and accepted by the grantee -To be legally valid: deed must be in writing, description of the parties, grantor must be legally capable, property adequately described, legally acceptable grantee clause, must be an amount, signed by the grantor & deed must be delivered to the grantee Grant Deed *** 1) A deed in which the grantor warrants that he or she has not previously conveyed or encumbered the property; does not ensure that the grantor is the owner of the property or that the property is unencumbered; conveys any after-acquired title of the grantor, unless a different intent is expressed -The grantor does not expressly warrant the title as being free and clear of all encumbrances and does not even warrant that he or she is the owner of the property Quitclaim Deed *** 1) A form of conveyance in which any interest the grantor possesses in the property described in the deed is conveyed to the grantee without warranty of title -Weakest for of a deed -Makes no claims or warrants to the quality of the title, "buyer beware" Bargain and Sale Deed *** 1) A deed that conveys real property from a seller to a buyer but does not guarantee clear title; used by court officials to convey property they hold by force of law, but to which they do not hold title -Step up from quitclaim, does not guarantee a clear title but it implies that the grantor does hold title to the property Ex: a sheriff's deed, given to the purchaser of a property at a court-ordered sale -Most do not have covenants or warranties Tax Deed *** 1) A deed that conveys title to a property purchased at a tax sale; may or may not convey absolute title, free of all prior claims and liens, depending on state law -Essentially a bargain and sale deed but used specifically for tax sales where properties have been taken over for non-payment of real estate taxes Warranty Deed *** 1) A deed that conveys to the grantee title to the property free and clear of all encumbrances, except those specifically set forth in the document -Best and most powerful deed -Grantor guarantees free and clear title and if any issues or claims are made on the title the grantor must make it right Deed of Trust *** 1) A legal instrument similar to a mortgage document, except that three parties are involved in securing the debt; the borrower, a lender and a trustee who holds property title when the deed of trust is executed and delivered. The trustee transfers title to the lender if the borrower defaults and to the borrower if the note is repaid -Similar to a mortgage, title is vested in a third party, the trustee, until the mortgage lien is satisfied Reconveyance *** 1) Passing of title to real property back to the original owner. Ex: in a deed of trust arrangement, upon liquidation of the debt the property is reconveyed from a third-party trustee to the trustor (borrower) -If a deed of trust is recorded and then the loan is paid off, the reconveyance document passes title back to the borrower Do deeds need to be recorded in order to be valid? *** No, but it is in the best interest of the parties to record the deed in public records (county clerk) Contract *** 1) A legally binding agreement between two or more persons that represents their promise to do or not to do a particular thing. 2) An agreement between persons which obliges each party to do or not to do a certain thing 3) An agreement with specific terms between two or more persons or entities in which there is a promise to do something Promise *** 1) A firm agreement to perform an act, refrain from acting or make a payment or delivery -As in a promissory note, we promise to repay something -Contracts are promises that the law will enforce Oral vs Written Contracts *** -An oral contract may be just as valid as a written agreement, but proving its existence and clarifying its terms may be difficult -An oral contract is sometimes provable by action taken by one or both parties and it works as long as both parties agree -Statute of limitations for suing for breach of an oral contract is shorter than for written contracts -Most contracts that can be completed within one year can be written or oral; major exceptions are contracts involving ownership of real estate and commercial contracts for goods in excess of $500, they need to be in writing to be enforceable Mutual Assent *** -consent of both parties to a contract should be free, mutual and communicated by each to the other -established by the process of offer and acceptance Offer *** 1) A manifestation of willingness to enter to into a bargain, which creates in the offeree the power of acceptance 2) A specific proposal to enter into an agreement with another -Offers remain open until they are: accepted, rejected, retracted, countered or expired by their own terms -Offers may be revoked any time prior to the communication of acceptance of the offer -Once an offer is accepted in all terms by another party, a contract is created and can be enforced Acceptance *** 1) A manifestation of willingness to be bound by the terms of an offer made in a manner invited or required by the offer -All terms of the offer must be accepted without change or condition -May occur as express or implied Express Contract *** -the existence of the contract and its terms are stated in words or writings of the parties -may be either oral or written Ex: listing agreements, purchase offers, mortgages, leases & installment contracts Implied Contract *** -the existence of the contract and its terms are inferred or implied from the conduct of the parties -the distinction between an express and implied contract is only in the manner in which the agreement is shown Ex: if you order food at a restaurant you imply a promise to pay for the food Bilateral Contract *** -both parties have made promises to each other, one promise in exchange for another -most commercial contracts of any substance are bilateral Ex: a real estate sales contract Unilateral Contract *** -one party makes a promise in order to induce another party to do something, the second party is not legally obligated to comply Executed Contract *** -one that has been fully performed & all promises fulfilled according to the terms of the contract Executory Contract *** -one that has not been fully performed or completed Ex: a listing contract or a mortgage Valid Contract *** -one that is binding and enforceable on all parties Ex: a real estate deal that has cleared all contingencies but has not closed Void Contract *** -one that has no legal force or effect even though it contains the elements of a valid contract -"null and void" because it contains some illegal element that could not be enforced (racial discrimination) or some act in violation of legal use or an act of God (fire, flood) Voidable Contract *** -one that results from the failure of the parties to meet some legal requirement -parties are not required to void the contract Unenforceable Contract *** -one that appears to be valid but would not be enforceable in court Ex: one party tries to enforce an otherwise valid contract after the statute of limitations has expired, contracts that are vague or poorly worded, verbal contracts where written ones are required -can be considered valid if both parties agree List the 5 elements that make a valid contract binding and enforceable *** 1) Competent parties 2) Mutual agreement 3) Consideration 4) Lawful objective 5) In writing and signed Competent *** 1) in general, able to act in the circumstances, including the ability to perform a job or occupation, or to reason or make decisions *Competency: the mental ability to understand the general effect of a transaction or document -a contract is voidable if a party "by reason of mental illness or defect is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of this condition -a minor can hold an adult to a contract but an adult cannot hold a minor to a contract Duress *** 1) feebleness on one side, overpowering strength on the other 2) if a party's manifestation of assent is induced by an improper threat by the other party that leaves the victim with no reasonable alternative, the contract is voidable by the victim Consideration *** 1) payment or money. a vital element in the law of contracts, consideration is a benefit which must be bargained for between the parties and is the essential reason for a party entering into a contract. Consideration must be of value (to the parties) and is exchanged for the performance or promise of performance by the other party 2) any act of forbearance which is of benefit to the promisor or detriment to the promisee -must be something of value: money, property, promise to pay/perform, forbearance (promise to refrain from something) -courts can and will enforce promises that involve consideration Parol Evidence Rule *** -written contracts take precedence over oral agreements 1) if there is evidence in writing such as a signed contract the terms of the contract cannot be altered by evidence of oral (parol) agreements purporting to change, explain or contradict the written document Contracts can be terminated by: *** -agreement of parties -performance of the contract -impossibility of performance -operation of law Agreement of the Parties - Release *** 1) to give up a right as releasing one from his/her obligation to perform under a contract, or to relinquish a right to an interest in real property 2) to give freedom 3) the writing that grants a release Agreement of the Parties - Assignment *** 1) the act of transferring an interest in property or some right to another. Used commonly by lawyers, accountants, business people, title companies and other dealing with property Agreement of the Parties - Novation *** 1) agreement of parties to a contract to substitute a new contract for the old one.It cancels the old agreement. Often used when the parties find that payments or performance cannot be made under the terms of the original agreement or the debtor will be forced to default -the only way any funds can be paid -a new contract is created which terminates the original agreement and absolves the original party from liability Performance of Contract - Execute *** 1) to finish, complete or perform as required, as in fulfilling one's obligations under a contract or a court order; to sign otherwise complete a document Performance of Contract - Time is of the essence clause *** 1) a phrase often used in contracts which in effect says:the specified time and dates in this agreement are vital and thus mandatory and 'we mean it'. Therefore any delay-reasonable or not, slight or not, will be grounds for canceling the agreement -could have important ramifications and should be left to attorneys to interpret and apply Impossibility of Performance - Impossibility *** -if a law changed after the contract was arranged but before the full performance of the contract -if a party dies or a property is destroyed this could be considered impossibility to perform Operation of Law *** -the application of law may change the rights and liabilities of the parties without their consent -contracts can be terminated by operation of law under: bankruptcy, statute of limitations & alteration of contract Interpretation *** 1) where the parties attach the same meaning to the term used in their agreement, the interpretation of the agreement should be in accord with that meaning even if a third party might interpret the language differently -no contract arises unless both parties have the same meaning in mind Breach of Contract *** 1) failing to perform any term of a contract, written or oral, without a legitimate legal excuse -one of the most common causes of lawsuits for damages or court ordered "specific-performance" of the contract -does not relieve the obligations of the breaching party Ex. of legal remedies include: rescission, reformation, injunction, specific performance, compensatory damages, consequential damages, attorney fees and costs, liquated damages & punitive damages Rescission *** 1) the cancellation of a contract by mutual agreement of the parties -may be applied when the contract has not been performed and there is a breach by one party Reformation *** 1) the correction or change of an existing document by court order upon petition of one of the parties to the document. Reformation will be ordered if there is proof that the parties did not intend the language as written or there was an omission due to mistake or misunderstanding -may have been a clerical error Injunction *** 1) a writ issued by a court ordering someone to do something or prohibiting some act after a court hearing Ex: prohibitions against cutting trees, creating nuisances or polluting a stream -'mandatory' injunctions may include returning of property, keeping a gate unlocked or clearing off trees limbs from a right-of-way Specific Performance *** 1) the right of a party to a contract to demand that the defendant be ordered in the judgment to perform the contract Ex: when a defendant was to sell a property and did not, a judge may order the defendant to actually complete the sale -It is the opposite of recission Compensatory Damages *** 1) damages recovered in payment for actual injury or economic loss, which does not include punitive damages Consequential Damages *** 1) damages claimed and/or rewarded in a lawsuit which were caused as a direct foreseeable result of wrongdoing -foreseeable means that each side should have reasonably known at the time of the contract that there would be potential losses in the event of a breach Attorney's fees and costs *** -only recoverable if they are expressly provided for in the contract Liquidated Damages *** 1) an amount of money agreed upon by both parties to a contract which one will pay to the other upon breaching the agreement or if a lawsuit arises due to the breach Punitive Damages *** 1) damages awarded in a lawsuit as a punishment and example to others for malicious, evil or particularly fraudulent acts -these damages are reserved for the more serious acts such as fraud -they are not recoverable for breach of contract even if the breach was willlful Earnest Money *** 1)something of value given by a buyer to a seller to bind a bargain If a seller defaults, a buyer may: *** 1) Rescind the contract and recover the earnest money deposit 2) File a suit calling for specific performance, to force the seller to sell the property 3) Sue the seller for compensatory damages If a buyer defaults, a seller may: *** 1) Declare the contract forfeited 2) Rescind the contract 3) Sue for specific performance 4) Sue for compensatory damages Real Estate Contracts *** 1) When the value opinion to be developed is market value, an appraiser must, if such information is available to the appraiser in the normal course of business: analyze all agreements of sale, options and listings of the subject property current as of the effective date of the appraisal -appraisers look for the following in the real estate contracts: price, date of sale, sale concessions, owner of record, legal description, personal property Lease *** 1) a contract in which the rights to use and occupy land or structures are transferred by the owner to another for a specified period of time in return for a specified rent -must be in writing & spell out terms of rental -can be month to month, short term less than 5 years or long term Flat Rental Lease *** 1) a lease with a specific level of rent that continues throughout the lease term -easiest kind, typically for short term periods Ex: 2 year lease at $500/month or $6,000 annually Gross Lease *** 1) a lease in which the landlord receives stipulated rent and is obligated to pay all of the property's operating and fixed expenses; also called full-service lease Ex: 2 year lease at $500/month plus utilities or $6,000 annually plus utilities Net Lease *** 1) a lease in which the landlord passes on all expenses to the tenant Graduated Rental Lease *** 1) A lease that provides for specific changes in rent at one or more points during the lease term (step-up or step-down leases) Index Lease *** 1) a lease usually for a long term that provides for periodic rent adjustments based on the change in an economic index -consumer price index is most often the index to which the lease is tied Revaluation Lease *** 1) a lease that provides for periodic rent adjustments based on the market rental rate of the space -usually long term, may be cast as a series of short-term leases with renewal options Escalator Lease *** 1) a lease that requires the lessor to pay expenses for the first year and the lessee to pay any necessary increase in expenses as additional rent over the subsequent years of the lease -sweetheart deal of landlords, they are guaranteed the same return each year no matter what happens with tax rates or rising costs Percentage Lease *** 1) a lease in which the rent or some portion of the rent represents a specified percentage of the volume of business, productivity or use achieved by the tenant -typically used for retail properties -straight percentage lease may have no minimum rent but most include a guaranteed minimum rent and an overage rent Overage Rent *** 1) the percentage rent paid over and above the guaranteed minimum rent or base rent; calculated as a percentage of sales in excess of a specified breakpoint sales volume -landlord becomes the risk taker and shares in the business fortunes of the tenant Items found in a lease agreement that are important to appraisers: *** -lease term, occupancy date, rent amount, payment terms, rent concessions, landlord & tenant covenants, right to sublease, option to renew, option to purchase, escape or cancellation clauses, security deposits, casualty loss, non-competition clauses, revaluation clauses & lessee improvements Market *** 1) a set of arrangements in which buyers and sellers are brought together through the price mechanism; the aggregate of possible buyers and sellers and the transactions between them. 2) a gathering of people for the buying and selling of things; by extension, the people gathered for this purpose. -"a sphere within which price making forces operate" -may or may not be in a particular physical location, such as: a farmer's market, stock market, used car market, bond market, money market & real estate market Supply and Demand *** 1) In economic theory, the principle that states that the price of a commodity, good or service varies directly, but not necessarily proportionately, with demand and inversely, but not necessarily proportionately, with supply. In a real estate appraisal context, the principle of supply and demand states that the price of real property varies directly, but not necessarily proportionately, with demand and inversely, but not necessarily proportionately, with supply. -if there's a shortage for something, probably get a better price -if there's a surplus of something, probably have to cut the price to dump it -price and demand have a direct relationship -price and supply have an inverse relationship -with real estate supply is relatively fixed and slow to change but demand can change quickly Real Estate Market *** 1) buyers and sellers of particular real estate and the transactions that occur among them -participants in the real estate market include: buyers, sellers, landlords, tenants, agents, appraisers, mortgage officers, underwriters, title company, attorneys, surveyors, home inspectors, engineers, developers, contractors & investors -not an established market in an established place Active Market *** 1) a market characterized by numerous transactions Buyer's Market *** 1) a market in which buyers have the advantage; exists when market prices are relatively low due to an oversupply of property or reduced buyer demand Seller's Market *** 1) an active market in which the sellers of available properties can obtain higher prices than those obtainable in the immediately preceding period; a market in which a few available properties are demanded at prevailing prices by many users and potential users. Depressed Market *** 1) a market in which a drop in demand is accompanied by a relative oversupply and a decline in prices. Characteristics of a good market: Homogeneous Products *** - it is an axiom of real estate that each parcel is unique; differing in style, age, design, condition, topography, land, subsoil & property rights -real estate is anything but homogeneous, making it difficult to establish a price and say this property is worth the same as another Characteristics of a good market: Stable Prices *** -the real estate market is a dynamic market that is fluid and subject to constant & immediate change -changes can be triggered by many factors such as factory closing or natural disasters Characteristics of a good market: Low Prices *** -markets work well and effectively if product prices are relatively low -however, investment in real estate is likewise a substantial investment and a somewhat risky outlay of capital Characteristics of a good market: Transportable Products *** -real estate is unique as an economic good in that it is immovable, making it sensitive to nearby influences -you buy a piece of real estate you also inherit the neighborhood and the immediate environment surrounding it Characteristics of a good market: Organized Market Mechanism *** Ex: the New York Stock Exchange -markets should be organized and have a specifically constructed mechanism for bringing together buyers and sellers -however, real estate is a loose affiliation of disparate components, the definable market is different for virt