Property Valuation, Appraisal, and Collateral Assessment
Valuation Methods
Know the three approaches: direct comparison (most common for residential), cost approach (useful for unique or new construction), and income approach (used for commercial and multi-unit property). Understand what an appraisal report contains: subject description, neighbourhood analysis, comparable selection and adjustments, highest and best use, and a final opinion of value. Distinguish an appraisal from an automated valuation model, a drive-by or desktop valuation, and a lender's own collateral review.
Collateral and Risk
Candidates must understand loan-to-value calculation, marketability of the property, zoning and legal non-conforming use, title issues, easements, encroachments, and environmental risk. Know that lenders assess both the borrower and the property, and that unusual properties (rural, mixed-use, leasehold, or with residual damage) may require specialist appraisal or reduced LTV. Understand appraisal independence rules and that pressure on an appraiser to hit a target value is prohibited.
Traps in Exam Questions
Watch for questions where the purchase price exceeds appraised value - lenders generally lend on the lower of the two. Another trap is confusing assessed value (property tax) with market value. Also watch for chattels versus fixtures, and for income approach applied incorrectly to a single-family home.
Rule of Thumb
When price and appraisal diverge, the lower figure drives LTV and the borrower must cover the shortfall in cash.
Worked example: Purchase price $500,000, appraised value $480,000, 80% LTV limit. The lender uses $480,000, so maximum loan is $384,000; the borrower needs $116,000 down rather than $100,000.