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1. What Can You Afford >>
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CH8
evaluating the individual elements of the home (roof costs, drywall costs, brick costs etc) or figuring the cost as a builder would – 20 adding materials, labor, profit and fees.
Depreciation estimates the value of the existing property vs. the value of a brand new home similar to the subject property. Depreciation 22 includes the property's condition, neighborhood influences, design and construction materials. It is not based solely on age.
There are 3 types of depreciation 23 used by the appraiser - physical, functional and external.
Physical Depreciation is a loss in value caused by the deterioration in the physical condition of the property. They are classified either 24 "curable" or "incurable". Curable refers to items like painting or items to be repaired. Incurable physical deterioration refers to other items that are not practical or feasible to repair-items that have 25 reached the end of their economic life.
Functional Depreciation is a loss in value caused by defects in the design of the structure, like floor plan or sizes and types of rooms. 26 It could also be caused by changes in the market preference that result in some aspect of the improvements considered obsolete.
External Depreciation is a loss in value 27 caused by negative influences that are outside the property - shopping centers, factories or expressways that are too close.
The Income Approach. This form of 28 evaluation weighs heavily with income properties. This approach measures value based on the ability of the property to generate income.
The method of calculating income is 30 known as the Gross Monthly Rent Multiplier or GMRM. The appraiser compares the subject property to other recently sold income producing properties. This is done by dividing the sales price 31 by its GMRM. For example, a property sold for $300,000 and rents for $2500 a month. It has a GMRM of 120. ($300,000 divided by $2500). The multipliers of the comps are then compared and a 32 single multiplier is arrived at for the subject property.
The appraiser then compares income and expenses (taxes, insurance, maintenance, management, utilities, vacancy factors etc.). 33 This calculation determines the net rental income. The net rental income figure determines if the property can support itself.
Once the three different types of 34 evaluation approaches are completed, the appraiser reconciles the different values and establishes a final value determination.
There are a number of things both the real estate agent and the Connecticut Home Loan officer can do to assist the appraiser in determining the value needed on a property.
A realtor can help ensure an accurate 36 appraisal by doing the following:
Always accompany the appraiser to provide comparable home prices which can substantiate the sales price. A Connecticut mortgage lender will want to see only sold properties used as comps, homes under contract cannot be used to provide a value, and they may only be used as additional back-up support. 37
Let the appraiser know that if the property does not "appraise out" (meaning to appraise at the value expected) to contact you immediately to 38 see if there is further information you may provide to substantiate the value you are looking for.
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