eBook - Real Estate Appraisal from A to Z

4-1 MARKET VALUE ESTIMATES

In accordance with HUD/FHA requirements, an appraiser must do the following:

• Define the type of value being considered for the property appraisal
• Ascertain the definition of market value appropriate for the appraisal
• Indicate whether the estimate is the most probable price that the property will sell for on the open market
• Follow the standards of USPAP. Key sections that are most applicable are provided below.

A. DEFINITION OF MARKET VALUE

The definition of market value that applies to HUD/FHA is cited from the Uniform Standards of Professional Appraisal Practice. This is the definition of value which must be used for all appraisals performed for FHA-insured mortgages.

"The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus."

Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

1. The buyer and seller are typically motivated.
2. Both parties are well informed or well advised, and each is acting in what they consider their best interest.
3. A reasonable time is allowed for exposure in the open market.
4. Payment is made in terms of cash in United States Dollars or in terms of a financial arrangement comparable thereto.
5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions.

B. PROPERTY RIGHTS APPRAISED

Identifying property rights to be valued determines the criteria for selecting market data and for comparable transactions. The following table is an example of property rights.

The appraiser examines property rights to determine what rights, if any, the property owner has conveyed to others. The conveyance of rights to others impacts the value of the property. For example, a single-family owner-occupied property has fee simple property rights that are absolute and unencumbered - unlike a leasehold estate where property rights are specified to use and occupancy for a stated term. The appraiser must determine to what extent, if any, the transfer of property rights impacts the property's value.

Fee Simple is defined as absolute ownership unencumbered by any other interest or estate.

Lease Fee is defined as an ownership interest held by a landlord with the right of use and occupancy conveyed by lease to others; usually consists of the right to receive rent and the right to repossession at the termination of lease.

Leasehold Estate is defined as the right to use and occupy real estate for a stated term and under certain conditions that have been conveyed by a lease.

C. PURPOSE

The purpose of an appraisal is the stated reason for performing an appraisal assignment. The purpose is typically stated as the basis for an underwriting decision. For HUD, the purpose is to determine market value for mortgage insurance purposes.

D. INTENDED USE OF APPRAISAL/FUNCTION

The intended use or function for all appraisals prepared for FHA is to support the underwriting requirements for an FHA-insured mortgage.

E. USE OF THE APPRAISAL

The use of the appraisal is to support FHA's decision to provide mortgage insurance on the real property that is the subject of the appraisal. Therefore, intended users include the lender and HUD.

F. EFFECTIVE DATE OF VALUE

The effective date of value is either the date when the appraiser physically inspects the subject property or another date specifically defined by the lender.

• If another date is used as the effective date, indicate the alternative date and the date on which the subject property was physically inspected.

G. SCOPE

The appraiser must perform a complete appraisal as defined by USPAP, considering all of the applicable approaches to value and developing the appropriate approaches identified in this Handbook. Departure is not allowed.

H. SPECIAL LIMITING CONDITIONS AND ASSUMPTIONS

The appraiser must adequately identify, report and quantify any extraordinary assumptions or limiting conditions that directly impact the valuation. Examples include:

• A negative external influence (proximity to a municipal landfill, for example)
• Proposed road improvements
• A pending zone change

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