United States
Hong KongProperty valuation, appraisal and title
Appraisers use the sales comparison, cost and income approaches, with sales comparison usual for residential property. Title work establishes ownership and identifies liens, whose priority is generally set by recording order.
The collateral limb of the three Cs. Two separate professionals answering two separate questions.
The three approaches to value
| Approach | Method | Used for |
|---|---|---|
| Sales comparison | Recent sales of similar properties, adjusted | Most residential appraisals |
| Cost | Land value plus construction cost less depreciation | New or unusual property |
| Income | Value from the income the property produces | Investment property |
Sales comparison is the usual one for a home, and the adjustments are where the appraiser's judgment sits.
What an appraisal is not
A condition report. An appraiser notes obvious defects affecting value, and does not crawl the roof or test the furnace.
A home inspection does that, it is for the buyer rather than the lender, and it is optional.
Title
A title search establishes who owns the property and what claims exist against it: mortgages, judgments, tax liens, easements, restrictions.
Title insurance then protects against defects the search missed. A lender's policy protects the lender; an owner's policy protects the buyer and is separate.
A borrower paying for a lender's policy is not insured by it. Questions test whether candidates know an owner's policy has to be bought separately.
Lien priority
Generally first in time, first in right - priority runs by recording order.
With exceptions. Property tax liens typically take priority regardless of when they arose, which is why unpaid taxes are a serious problem for a lender.
Subordination
A lienholder may agree to move behind another, which is how a refinance of a first mortgage proceeds when a second lien exists and is staying in place.
Without a subordination agreement the second lien would move into first position, which no lender refinancing the first would accept.
Common questions
What are the three approaches to value?
Sales comparison, cost and income. Sales comparison is usual for residential property.
Does an appraisal check condition?
Only as it affects value. A home inspection assesses condition and is separate and optional.
What does title insurance cover?
Defects in title that the search did not reveal. A lender's policy protects the lender; an owner's policy is separate.
How is lien priority determined?
Generally by recording order, first in time first in right, though property tax liens usually take priority regardless.
What is a subordination agreement?
An agreement by a lienholder to move behind another lien, commonly used when refinancing a first mortgage with a second in place.