hello everybody it's Zach here from real estate license wizard.com today we're doing a full real estate exam crash course on real estate appraisal and valuation real estate appraisal and valuation are huge portions of the real estate exam so it's vital you understand every aspect before exam day how much real estate appraisal and valuation concepts are actually on the exam well regardless of what state you're taking your exam in there will be appraisal and valuation Concepts it's hard to give you an exact number since every state varies however on average our data suggests that anywhere between 5 to 15 appraisal and valuation questions are on each State's real estate exam now one question I get asked all the time is do real estate agents appraise property normally no unless they are also a licensed appraiser agents will typically not be doing property appraisals however it's still essential to know what you're talking about the worst thing an agent can do is come off uneducated or underprepared real estate agents must know a lot of things like understanding the techniques involved in appraisal how depreciation value work and comparing appraised value to market value and of course luckily for you we put together everything in this video on appraisal evaluation to make your life so much easier but before we start a quick word from today's sponsor listen up guys with buyer's remorse at all-time highs the challenges for you and your clients don't end at the closing table when you enroll your homes with a 210 home buyers warranty home warranty you could help your clients address a huge source of buyer's remorse unexpected breakdowns this could mean happier clients more referrals and more success to you in this market partner with 210 home buyers warranty by clicking the link in the description down below because protecting against buyer's remorse is more important than ever now let's talk about appraisal appraising is a distinct specific area within the world real estate the fascinating part about appraisal is to different approaches people take there are various appraisal methods depending on where you live and who you talk to before we get into appraisal itself we have to determine what is value for some value is how much something is worth for others it may be how much something costs value stems from the fact that things have worth while the cost of your phone may be 500 the photos inside of it may be Priceless luckily there are ways to assess the value of property and homes so let's take a look at market value and market price what do those things mean well you hear a lot of people use the word market value or market price interchangeably but they're kind of different essentially this just means the actual selling price of the property so if your home sells for two hundred thousand dollars its market value is two hundred thousand dollars the market price is the price that it actually sells for so really they can be used interchangeably but they're technically two different things don't worry too much about it just know if you hear market value or market price or generally the same thing all right so what about appraised value and market value it's worth noting that appraised value is different from market value most properties do not sell for the appraised value often properties sell below or above the appraised value so what's the point of finding an appraised value well the appraised value is what lenders use to help minimize the risk of lending and is still a basis for finding a market value the appraiser is hired to determine the property's Baseline market value not the property's final sales price and while earlier we established those two things can be the same more often than not they aren't there are different degrees and levels of value meaning sometimes it's hard to establish fair value in a sophisticated Market the basics of value are what people use to create appraisals after all what might be worth a lot to you may be worth little to someone else ultimately no matter what situation you are in appraisals are the best way to determine fair value so how do they work well the overall appraisal process is based on several factors such as cost the income it generates appraisal principles depreciation occurred and more let's start by talking about things that increase or decrease property value directly what is appreciation well appreciation is any gain of value of a property over time for any cause now it's worth mentioning this definition is strictly for Real Estate obviously appreciation can mean several things but generally though when you hear the word appreciation you should think of gain in value and that's precisely what it is in real estate when a home or property gains value so let's do a quick appreciation example an example of appreciation is if you get your house appraised at a hundred thousand dollars and five years later it appraised at 150 000 that means your house appraised fifty thousand dollars appreciation is as simple as that now that we covered appreciation let's discuss the inverse depreciation so what is depreciation well depreciation is any loss in the value of property over time from any cause when you hear the word appreciation you should think of increase when you hear the word depreciation you should think of decrease it's that simple so let's do a quick depreciation example an example of depreciation is if you get a house appraised a hundred thousand dollars and five years later it appraised at ninety thousand dollars that means your house depreciated ten thousand dollars now depreciation is super important to understand so important there are actually three main different types the three types or forms of depreciation you need to know are functional obsolescence economic obsolescence and physical deterioration all these things result in the loss of value of a home or property so yes depreciation is a bad thing so let's start by looking at functional obsolescence so functional obsolescence refers to loss of property value due to an obsolete design feature examples of causes of functional obsolescence can include poor or outdated design too many or too few materials or features lack of utility overly costly operating expenses basically what you need to know is functional obsolescence is usually fixable for example you can update your kitchen or add another garage to the property to maintain design Trends now let's look at economic Ops lessons so economic obsolescence refers to loss of property value due to external factors meaning things off the property affecting the property's value examples of causes of economic obsolescence can include flight patterns a busy highway or a rise in local crime economic obsolescence is usually unfixable by the homeowner for example if there is a large amount of crime in your neighborhood no one is expecting homeowners to dress up like superheroes and fight the streets now for the third type of depreciation physical deterioration So Physical deterioration is a loss of property's value as it ages wears tears or decays while it is a form of depreciation like functional and economic obsolescence it is not a form of obsolescence physical deterioration is just the regular wear and tear of building experiences over time one of the best examples of physical deterioration is Roofing and shingle replacement after a while a roof usually needs a shingle replacement or needs to be replaced completely most roofs only last a certain amount of time during that time of wear and tear physical deterioration occurs now it's worth mentioning there are two categories of physical deterioration curable and incurable and those are pretty much just like how they sound one is easier to deal with than the other so curable deterioration refers to the form of deterioration that's economically possible to repair for example maybe there's some old paint That's deteriorated and dealing with that would eliminate the problem it's curable fixable and it's economically feasible then there's incurable deterioration incurable deterioration is incurable meaning the cost of repairing an item surpasses the value it adds to the structure the item is considered incurable even if you can fix it an example of that would be if a foundation of a property is faulty there is no way of handling that without completely altering the property now there is a third type of deterioration called short-lived physical deterioration but it's generally not accepted everywhere some appraisers use this phrase to describe items that wear out faster than the improvements themselves now that we covered appreciation depreciation and value we could finally discuss appraisal so real estate appraisal is an integral part of the home buying and selling process appraisers are required for any home sale that require mortgage and is more common than you may think so what is a real estate appraisal well a real estate appraisal is an estimation of a market value of a home by a licensed appraiser that is hired by the mortgage lender here's an example after after deciding they wanted a house Mr and Mrs Smith went to a bank to get a loan the bank is making an investment and therefore pays for an appraiser to ensure the value of the home the appraiser does an evaluation of the outside and inside of the home in order to fully establish the value so what is the purpose of this appraisal well there are a lot of different reasons for a real estate appraisal but they're all doing it for one reason to determine the market value of the home appraisers provide insight into the home for buyers sellers lenders lawyers accountants Etc many people rely on these reports to make good business decisions now the most conventional type of an appraisal is the one used for a mortgage it's generally used by Banks to ensure that the home they are getting or you are getting is a good deal the bank is investing in your home and therefore they want its investment to be secure if not done properly the bank could end up losing a lot of money if you were to foreclose basically they want you to be not the only person looking at the value of the house or determining if you are getting a good deal so here are some examples Mr Smith has decided that he wants to move into a specific house valued at two hundred fifty thousand dollars and makes a down payment of fifty thousand dollars he goes to a mortgage lender who sends an appraiser out of the property he values the home at 250 therefore they are willing to issue that mortgage Mr Smith stops making his payments so the mortgage lender acquires the house they sell the house for 250 dollars and then they don't lose money alternatively if they had not sent out that appraiser to the property the house could be worth anything after Mr Smith hypothetically stopped making payments the mortgage lender could acquire that house and uh oh it turns out Mr Smith overpaid on the house and now the lender can only sell the house for a hundred fifty thousand dollars and in that case they would lose money now sometimes home buyers seek an appraisal to evaluate the value of an estate for purposes of inheritance or force in order to properly split up assets the value of those assets must be valued here's an example Rachel and Ian have their father pass away recently he owned two homes one in California and one in Ohio Rachel and Ian's father stated in his will that he wanted his property split 50 50. Rachel likes the house in California and Ian likes the home in Ohio so their initial thought was to each take the respective house Ian's wife asked him to get an appraisal on both the houses and found out that the home in California was worth three times as much as the house in Ohio now that they have that appraisal they know that each of them taking a house would not be respecting their father's wishes in terms of 50 50. these types of appraisals are fairly common and are recommended by many lawyers during the process of fulfilling a will or completing a divorce now there's obviously appraisal for business purposes which is a pretty broad category but businesses rely on real estate appraisals to conduct all sorts of business activities appraisals are required when businesses are negotiating mergers leases and Acquisitions they also use appraisals to determine the value of their assets if they deal with properties as their normal mode of business appraisals are required wherever a property is sold mortgaged taxed insured or even improved upon businesses love to keep tabs on exactly where all their money is and appraisals are the way to do that if a business owner or a business owns several properties but has no idea what these properties are worth then it could be hard to judge how much the company is actually worth so who can perform real estate appraisals well real estate appraisals are performed by an appraiser that is not associated with the lender the appraiser is intended to be unbiased when it comes to the property and should not be connected financially or otherwise to any property now it's worth noting real estate appraisers are not perfect many people have this false assumption that what the real estate appraisal says is final which is not always true although they are really good at their job sometimes they miss something that could influence the market value of property many buyers and sellers choose to get a second opinion if the results of the first appraisal are undesirable now another key takeaway is that an appraisal is an opinion although backed by evidence a real estate appraisal is an opinion on what the home is worth there are many factors that go into this for example let's say that there are two houses that were sold in the area both of which had extensive improvements that resulted in a higher sale price that higher sale price could influence the appraisal because similar homes in that area were sold for much more than what your home maybe the third home is worth although this isn't going to happen every time it can influence things there are hundreds of factors that appraisers use in their analysis and they could easily miss something although paid for by the buyer generally the Appraiser's work is usually owned by the bank that called for it they choose who that appraiser is going to share that information with many people decide to contract their own appraiser because of this and they'll do that before going to a bank that way they can accurately judge the worth of their home as well as show it to possible buyers in the future if necessary so what influences a real estate attorney appraisal well there are a lot of factors that influence appraisers or appraisals and their estimation of market value so here's a quick list I'm going to throw on the screen for you so you've got location building materials age of home renovations style layout square footage bedrooms bathroom storage space market and comparable homes and more each of those attributes will influence an Appraiser's estimation some more than others so what is a real estate inspection then where does that come into play well real estate inspections are not real estate appraisals but they are interconnected a real estate inspection is performed to understand the current condition of a home the inspector looks for things such as water damage pest infestations roof conditions and more this inspection is used by the appraiser to determine the current market value of the home let's say Mr Smith was selling his home and was showing it to potential buyers the buyers decided to purchase the home but before signing the papers the real estate inspector went to inspect the home and discovered the presence of a mild termite infestation that dropped the value of the home after some renegotiation the buyers still decided to go through with buying home but for a reduced price so then what's the difference between an inspection and Appraisal well an inspection and Appraisal are very similar but both have different goals in mind a real estate Appraiser's goal is to determine the market value of a home while a real estate inspector's goal is to discover any issues or problems on the property a lot of the appraisers work can be done without looking at your home by researching other homes that have been sold in the area while an inspector must visit the property to determine anything generally the inspection will happen first so that the appraiser can look at the results if any problems are discovered during inspection the appraiser will take that into account when determining the market value of the property simply put the real estate inspector is going to look for problems in which your property has well the appraiser is going to look at the value of everything so now how do appraisals work let's get into the meat of this so it's essential to understand the steps of the appraisal process with a combination of each step appraisers derive fair market value there are different approaches and principles appraisers use and it's essential you're familiar with them come exam day now there are three types of appraisal approaches these three main types appraisers use while they make an appraisal there is the market data approach which is commonly called the sales comparison approach there's the cost approach also referred to as summation and then there's the income approach also known as capitalization I'm going to recap each one and if you get stuck or confused on any of them just know we have full videos on each approach and I'll leave a link down below and above for those so what is the market data approach well the market data approach also known as the sales comparison approach involves comparing a property to other recently sold properties in the same area of similar size and condition for residential real estate the market data approach is typically regarded as the most accurate comparison method the market data approach is also ideal for new or unused Lots it is easier to directly compare new lots of properties because there are few variables on the properties next is the cost approach so the cost approach is a real estate appraisal method that determines how much a property would cost to replace it subtracting depreciation the method is based on the concept that a property's price should be determined by the value of the land plus the cost of building on it subtracting depreciation cost it is the only form of real estate appraisal that does not use the active Market to establish a property's value rather than basing the value on other comparable properties the cost method to valuation essentially bases uh the worth on how much it would be to rebuild it if it hypothetically were destroyed so finding the replacement cost this strategy assumes that buyers will not pay more for a building than they would have if they had to cover the current price of developing a comparable structure next is the income approach the income approach is a process used to determine the market value of a property based on its income the approach is based on the finance concept of discounted cash flow analysis under the income method the property's current worth is the present value of future cash flows the owner can expect to receive this method is most prevalent for commercial properties with tenants because it relies on rental income it's calculated by dividing the rent collected net operating income or noi by the capitalization rate next we have to talk about appraisal principles another essential element included in the appraisal process like the approaches I'm going to recap each one and give you an example if you get stuck or confused on any of them just know we have full videos on each one all right let's jump into it so what are appraisal principles well appraisal principles like the different approaches are used by real estate appraisers and investors to help establish particular property values there are five that are essential to understand and of course we do have videos covering each one specifically so the five appraisal principles that you need to know are the principle of substitution principle of Conformity principle of highest and best use principle of contribution and principle of progression so let's start with the principle of substitution so the principle of substitution states that a buyer will not pay more for a property than the cost of an equally desirable property in real estate When comparing identical homes the buyer theoretically should always choose the cheaper house the principle simply means buyers usually don't pay more when they don't have to let's do a quick example if a house is selling for five hundred thousand dollars and an equally desirable substitute is selling for four hundred thousand dollars according to the principle of substitution the first house will not sell and that makes sense right I mean who wants to spend extra money when they could get something for cheaper next is the principle of Conformity the principle of Conformity states that the value of a home or property is maximized when it complies with the design and features of the surrounding area this means as long as a property is similar to other properties in the neighborhood condition age size it is most likely to appeal to potential potential buyers and thus increase its respective value now it's worth noting if a house does not adhere to the same style and design as neighboring properties it can cause depreciation or a decrease in value remember we talked about that earlier let's do a quick principle of Conformity example so an example of the principle of Conformity would be if you had a two-car garage in a neighborhood filled with properties with one-car garages an increase would incur if your property was placed in a neighborhood with other two-car garages obviously most properties you cannot pick up and move but appraiser is used as principle to determine value for properties that are not in line with each other next is the principle of highest and best use the principle of highest and best use of a property is the concept that finding the best use of real estate would create its greatest net return this appraisal principle is designed to ask a simple yet complex question what is the maximum way to achieve the most significant return on a particular parcel of real estate or what is the highest in best use the highest and best use of a property is the use of a property that would create the greatest net return over time sometimes highest and best use is referred to on the real estate exam as the greatest net return don't be concerned if you see that highest and best use and greatest return can be used interchangeably Let's do an example let's say you owned a vacant lot in a neighborhood a residential neighborhood if you constructed a parking garage in that residential neighborhood chances are you would not be getting the highest value from that property instead building a house would be a safer bet and thus would be the highest and best use next is the principle of contribution the principle of contribution states that the actual worth of an improvement is what contributes to the property's market value not the cost of the Improvement worth and cost are not always the same thing when it comes to real estate for example a pool could add five thousand dollars to the value of a home but cost ten thousand dollars to build there are also times when Improvement can add more value than cost for example adding an additional room can be an easy simple job to complete for Handy people so maybe the cost of build is a thousand dollars but the value it adds to the property is two thousand dollars let's see an example so an appraiser named jacked was hired to prepare a feasibility study for a 12 unit apartment complex in which the owner is considering putting in a swimming pool which basic principle of appraising should jack use Jack should use contribution contribution is most commonly applied to determine how renovation and property changes may affect the property's overall cost in this case since the owner wants a feasibility study contribution would need to be used swimming pools are a typical contribution example next is the principal of progression the principle of progression states that the value of property increases when more valuable properties are built in the area the idea is that if your property is worth two hundred fifty thousand dollars and is surrounded by four hundred thousand dollar properties its value will likely go up meaning in plain terms the value of a house increases when more valuable houses are built in the surrounding neighborhood let's take a look at an example let's say your grandparents put a house in the 70s and ever since slowly and subtly other houses in the neighborhood were being built new houses were built every so often for years until the community was filled with large updated homes except for your grandparents while many people see this as a problem a wise investor would look at this as an opportunity if the surrounding neighborhoods have properties worth more than you your property value will go up what's even more incredible is that with some improvements sometimes major or minor your property can reach that value that's the principle of progression so is that everything that you need to know for the real estate exam on real estate evaluation and Appraisal pretty much we covered a lot and hopefully the materials weren't too intimidating but like always we like to be thorough if you can Master these materials you'll be good to go come exam day as for other topics check out our crash course on contracts here and of course check out our website for premium real estate exam prep packages thank you so much for watching until next time make today magical see you guys