A mortgage broker acts as an intermediary who sources mortgages on behalf of individuals or businesses.

Traditionally, banks and other lending institutions have distributed their own products. However as markets for mortgages have become more competitive, the role of the mortgage broker has become more popular. Today in most developed mortgage markets (especially the U.S., UK, Australia, Spain and Canada) mortgage brokers are the largest distributors of mortgage products for lenders.

However, given the critical nature of the mortgage broker's role, a great number of consumers are now seeking out the services of Certified Mortgage Planners, industry experts that work in concert with Certified Financial Planners to align consumers' home finance position with their larger financial portfolio(s).

The majority of mortgage brokers are regulated to ensure a level of protection for the consumer. The extent of the regulation depends on the jurisdiction.

Why use a mortgage broker?

In competitive mortgage markets many lenders use an array of rate offers and other incentives to attract customers. To many consumers, due to their infrequent purchases of mortgage products, the mortgage market may appear confusing and somewhat daunting. A mortgage broker can guide them through the process of selecting a suitable mortgage and offer mortgage and property related financial advice.

For borrowers with poor credit records, or other unusual circumstances, finding a lender may be difficult. A mortgage broker, having specialized knowledge and multiple lending sources, will normally be a valuable resource in obtaining financing.

Tasks of mortgage broker

The nature and scope of a mortgage broker's activities varies with jurisdiction. For example in the UK anyone offering mortgage brokerage is offering a regulated financial activity; the broker is responsible for ensuring the advice is appropriate for the borrowers circumstances and is held financially liable if the advice is later shown to be defective. In other jurisdictions the transaction undertaken by the broker may be limited to pointing the borrower in the direction of an appropriate lender and no advice given.

Therefore the work undertaken by the broker will depend on the depth of their service and liabilities. Typically the following tasks are undertaken:

		Marketing to attract clients
		Assessment of the borrowers circumstances. This may include assessment of credit history (normally obtained via a credit report) and affordability (verified by income documentation).
		Assessing the market to find a mortgage product that fits the clients needs.
		Applying for a lenders agreement in principle (pre-approval)
		Gathering all needed documents (paystubs/payslips, bank statements, etc.),
		Completing a lender application form.
		Explaining the legal disclosures.
		Submitting all material to the lender.

A loan officer acts as the conduit between buyer and lender. Most states require the mortgage broker to be licensed. States regulate lending practice and licensing, but the rules vary. Most have a license for those who wish to be a "Broker Associate", a "Brokerage Business", and a "Direct Lender".

A mortgage broker is normally registered with the state, and personally liable (punishable by revocation or prison) for fraud for the life of a loan. A loan officer is typically not liable for their actions, and instead works under the umbrella license of their current institution. Typically, they have less experience in the field.

Also, loan officer usually connotes someone who works for a lender, and has involvement in the internal processes of a lender. A broker exclusively uses the money of others to fund their loans.

A large segment of the mortgage finance industry is commission based. Potential clients can compare a lender's loan terms to those of others through advertisements or internet quotes.

In the 1970s, mortgage brokers did not have access to wholesale markets, unlike traditional bankers. Today, mortgage brokers are more competitive with their access to wholesale capital markets and pricing discounts. A mortgage broker has lower overhead costs compared to large and expensive banking operations because of their small structure. [citation needed] They can lower rates instantly to compete for clients. On the other hand, larger companies are less competitive since they provide their sales representatives their fixed rate sheets. The loan officer often cannot reduce their companies profit margin and may be higher or lower than the marketplace, depending on the decision of managers. Thus, mortgage brokers have gained between 60-70% of the marketplace.

Mortgage brokers can obtain loan approvals from the largest secondary wholesale market lenders in the country. For example, Fannie Mae may issue a loan approval to a client through its mortgage broker, which can then be assigned to any of a number of mortgage bankers on the approved list. The broker will often compare rates for that day. The broker will then assign the loan to a designated licensed lender based on their pricing and closing speed. The lender may close the loan and service the loan. They may either fund it permanently or temporarily with a warehouse line of credit prior to selling it into a larger lending pool.

The difference between the "Broker" and "Banker" is the banker's ability to use a short term credit line (known as a warehouse line) to fund the loan until they can sell the loan to the secondary market. Then, they repay their warehouse lender and obtain a profit on the sale of the loan. The borrower will often get a letter notifying them their lender has sold or transferred the loan.

Brokers must also disclose Yield spread premium while Bankers do not. This has created an ambiguous and difficult identification of the true cost to obtain a mortgage. The stricter Broker disclosure requirements, especially the Good Faith Estimate, can often create the illusion that they are charging more to obtain the exact same mortgage when compared to a Banker, when in fact they may cost the same or the Brokers offer may even be less costly. This topic has been hotly debated on Capitol Hill and state level judiciary committees.

Sometimes they will sell the loan, but continue to service the loan. Other times, the lender will maintain ownership and sell the rights to service the loan to an outside mortgage service bureau.

Even large companies with a lending license sell, or broker, the mortgage loan transactions they originate and close. A smaller percentage of bankers service and keep their loans than those in past decades. Banks act as a broker due to the increasing size of the loans because few can use depositor's money on mortgage loans. A depositor may request their money back and the lender would need large reserves to refund that money on request. Mortgage bankers do not take deposits and do not find it practical to make loans without a wholesaler in place to purchase them. The required cash of a mortgage banker is only $50,000 in New York. The remainder may be in the form of property assets (an additional $200,000), an additional credit line from another source (an additional $1,000,000). That amount is sufficient to make only two median price home loans. Therefore, mortgage lending is dependent on the secondary market, which includes securitization on Wall Street and other large funds.

The top wholesale institutions are Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, commonly referred to as Fannie Mae and Freddie Mac, respectively. Loans must comply with their jointly derived standard application form guidelines so they may become eligible for sale to larger loan servicers or investors. These larger investors could then sell them to Fannie Mae or Freddie Mac to replenish warehouse funds. The goal is to package loan portfolios in conformance with the secondary market to maintain the ability to sell loans for capital. If interest rates drop and the portfolio has a higher average interest rate, the banker can sell the loans at a larger profit based on the difference in the current market rate. Some large lenders will hold their loans until such a gain is possible.

The selling of mortgage loans in the wholesale or secondary market is more common. They provide permanent capital to the borrowers. A "direct lender" may lend directly to a borrower, but can have the loan pre-sold prior to the closing.

Few lenders are comprehensive. That is, few close, keep, and service the mortgage loan. The term is known as portfolio lending, indicating that a loan has been made from funds on deposit or a trust. That type of direct lending is uncommon, and has been declining in usage.

The laws have improved considerable in favor of consumers. A mortgage broker must comply to standards set by law in order to charge a fee to a borrower. The fees must meet an additional threshold, that the combined rate and costs may not exceed a lower percentage, without being deemed a "High Cost Mortgage". An excess would trigger additional disclosures and warnings of risk to a borrower. Further, the mortgage broker would have to be more compliant with regulators. Costs are likely lower due to this regulation.

Mortgage bankers and banks are not subject to this cost reduction act. Because the selling of loans generates most lender fees, servicing the total in most cases exceeds the high cost act. Whereas mortgage brokers now must reduce their fees, a licensed lender is unaffected by the second portion of fee generation. This is due to the delay of selling the servicing until after closing. Therefore, it is considered a secondary market transaction and not subject to the same regulation.

Predatory lending runs unregulated in the mortgage services industry. Consumers are often victims of predatory lending according to CNN. The main concern is that mortgage brokers and lenders whilst operating legally, are dishonestly finding loopholes in the law to obtain additional profit. The main culprit is a little known fee called Yield spread premium, which is a cash rebate wholesale lenders pay to brokers for charging a borrower a higher interest rate than they qualify for.

Some signs of predatory lending include:

		Falsifying income/asset and other documentation.
		Not disclosing Yield spread premium or other hidden fees BEFORE the settlement/closing.
		Failing to provide all RESPA documentation, i.e. Good Faith Estimate, Special Information Booklet, Truth in Lending, etc so the borrower may clearly understand the mortgage terms and lender policies.
		Convincing borrowers to refinance a loan without any true benefit.
		Influencing a higher Loan Amount and inflated appraisals (usually in tandem with an appraiser).
		Unjustly capitalizing on a borrowers relative ignorance about mortgage acquisition.

Another unethical practice involves inserting hidden clauses in contracts in which a borrower will unknowingly promise to pay the broker or lender to find him or her a mortgage whether or not the mortgage is closed. Though regarded as unethical by the National Association of Mortgage Brokers, this practice is perfectly legal. Often a dishonest lender will convince the consumer that he or she is signing an application and nothing else. Often the consumer will not hear again from the lender until after the time expires and then they are forced to pay all costs. Potential borrowers may even be sued without having legal defense.

Real property is a legal term encompassing real estate and ownership interests in real estate (immovable property). It is a type of property differentiated from personal property. This article discusses the ownership of land using the interpretation of real property as a legal term used in Anglo-American common law jurisdictions. Other legal geopolitical systems of government have different legal interpretations concerning the ownership of land. Terminology varies in these systems, as well: for instance, heritable property in Scotland; immovable property in Canada, United States, India, Malta, Cyprus, most of Europe including Russia, also South America, Malaysia, South Africa, Pakistan, Bangladesh, and many other countries and continents; and immobilier (Real Estate) in France.

History of the word

In law, the word real means relating to a thing (from Latin res, matter or thing), as distinguished from a person. Thus the law broadly distinguishes between real property (land and anything affixed to it) and personal property (everything else, e.g., clothing, furniture, money). The conceptual difference was between immovable property, which would transfer title along with the land, and movable property, which a person would retain title to. (The word is derived from the notion of land having historically been "royal" property. The word royal — and its Spanish cognate real — come from the unrelated Latin word rex, meaning king.)

In modern legal systems derived from English common law, classification of property as real or personal may vary somewhat according to jurisdiction or, even within jurisdictions, according to purpose, as in defining whether and how the property may be taxed.

Real property is not just the ownership of property and buildings — it includes many legal relationships between owners of immovable property (real estate) that are purely conceptual such as the easement, where a neighboring property may have some right on your property, right-of-way, or the right to pass over a property, and incorporeal heridiments such as profit a prendre. Real property can also be held in various ways. In some jurisdictions real property is held absolutely, in England it may still be considered to be carved out of Crown's ownership of all property in the realm. Such distinctions are important in terms of the law of escheat or when property reverts to the state because it lacks an owner or has been abandoned.

An important area of real immovable property are the definitions of estates in land. These are various interests that may limit the ownership rights one has over the land. The most common and perhaps most absolute type of estate is the fee simple which signifies that the owner has the right to dispose of the property as she/he sees fit. Other estates include the life estate where the owner's rights to the property cease at their death and fee tail estates where the property at the time of death passes to the heirs of the body (i.e. children, grandchildren, descendants) of the owner of the estate before he died.

Estates may also be held jointly as joint tenants with rights of survivorship or as tenants in common. The difference in these two types of joint ownership of an estate in land is basically the inheritability of the estate. In joint tenancy (or in marriage this is sometimes called tenancy of the entirety) the surviving tenant (or tenants) become the sole owner (or owners) of the estate. Nothing passes to the heirs of the deceased tenant. In some jurisdictions the magic words "with right of survivorship" must be used or the tenancy will assumed to be tenants in common. Tenants in common will have a heritable portion of the estate in proportion to their ownership interest which is presumed to be equal amongst tenants unless otherwise stated in the transfer deed. There are other types of estates in land that are used to prevent the alienation of land (also used in the law of trusts). Generally these are called future interests, an example being the rule against perpetuities. See also the Rule in Shelley's Case.

Real property may not only be owned it may be leased in which the possession of the property is given to the tenant for a limited period of time. Such leases are also called estates such as an estate for years, a periodic tenancy or an estate at will.

Real property may also be owned jointly through the device of the condominium or cooperative.

Because real immovable property is essential for industry or other activity requiring a lot of fixed physical capital, economics is very concerned with real immovable property and rules regarding its valuation and disposition, and obligations accruing to its owners. In economic terms, real property consists of some natural capital (or land, one of the factors of production especially in agriculture), and infrastructural capital (the buildings, water and power lines, and other improvements necessary to make immovable property useful for some human purpose). Other fixed physical assets, indistinguishable economically from infrastructure, such as machines, may be stored on immovable property and may require natural or infrastructural attributes (such as running water for a turbine or an isolated location to allow loud noise emissions) hard to duplicate even nearby.

In the United States, each state has its own real immovable property law. All states except Louisiana rely on variations of common law for the basis of their real immovable property laws. Louisiana's laws are derived from Napoleonic Code but have adopted some of the common law terms over the years.

Types of ownership interests

Real property (immovable property) can refer to the real estate itself, or to various types of ownership interests in real estate, including:

		Fee simple or freehold: The most common interest or right in real estate and provides the owner the right to use the real estate for any lawful purpose and sell the interest when and to whom the owner wishes.
		Life estate: An interest in real estate (immovable property) which is granted to a life tenant until that person dies. During the life estate, the life tenant has the right to use the real estate for any lawful purpose. The interest terminates upon the death of the life tenant*Estate for years: Similar to a life estate but term is a specified number of years.
		Leasehold: The right to possess and use real estate (immovable property) pursuant to the terms of a lease.
		Reversion: The right to possess the fee interest in real estate (immovable property) after the expiration of a life estate, estate for years, or leasehold.
		Concurrent or co-tenancy: The ownership of an interest in real property (immovable property) by more than one party. Rights of any single party may be limited in various ways depending on the jurisdiction and type of concurrency.

Note that it is possible for a property deed (the legal document used to transfer title) to further restrict these general ownership rights.

A real estate appraisal is a service performed by a licensed or certified appraiser, who develops an opinion of value based upon the highest and best use of real property. The highest and best use is that use which produces the highest value for the land, as if vacant. This use is based on 4 parts; physically possible, appropriate, legal, and economically feasible. Also of importance is the definition of the type of value being developed and this must be included in the appraisal, i.e. market value, condemnation value, quick sale value, etc. For mortgage valuations of improved residential property, this value is most often reported on a standardized form, the Uniform Residential Appraisal Report.

An appraisal is performed for a specific client, to whom the appraiser has a fiduciary responsibility, regardless of what party ultimately pays for the appraisal, whether anyone actually pays for the appraisal, or when the appraisal is paid for. Typically residential appraisers agree to accept orders from lending institutions with the understanding that payment will be made following settlement, or closing of the loan. In most cases, the homeowner or buyer ultimately pays for a residential appraisal, either directly or rolled into settlement fees.

In the USA minimum appraisal standards and appraiser qualifications are the province of The Appraisal Foundation which is chartered by Congress. Through one of its boards, The Appraisal Standards Board (ASB), it periodically publishes the Uniform Standard of Professional Appraisal Practice (USPAP). USPAP provides the minimum development and reporting standards an appraiser/appraisal report must meet. The Appraisal Foundation is also responsible for setting the minimum qualifications for appraiser licensure/certification through its other board, The Appraisal Qualifications Board (AQB). The AQB is responsible for establishing the minimum education, examination, and experience requirements for licensed/certified appraisers. Effective January 1, 2008, the requirements to become a state licensed or certified real property appraiser will significantly increase. State licensing was established in the early 1990s in the wake of the Savings and Loan "crisis".

The implementation of licensure and enforcement are state functions. In addition, there are appraisal organizations, private not-for-profits, some of which date back to the Great Depression of the 1930s, such as the American Society of Farm Managers and Rural Appraisers, founded in 1929. Others were founded as needed and opportunity arose in specialized fields, such as the Appraisal Institute and the American Society of Appraisers (founded in the 1930s) and the International Right of Way Association and the National Association of Realtors^® (after World War II). These organizations all existed to establish and enforce standards, but their influence has waned as the government increases appraisal regulation.

There are several professional organizations of appraisers in the US. They include the American Society of Appraisers (ASA), the American Society of Farm Managers and Rural Appraisers, and the largest, the Appraisal Institute (AI). In addition to state licensing and certification, appraisers can earn professional designations from the above organizations. The most highly regarded is the MAI (Member, Appraisal Institute) which requires approximately one year of post graduate college level course work, a three year internship, and successful completion of a two day Comprehensive Examination. For further information go to: http:/www.appraisalinstitute.com.

In the UK, real estate appraisal is known as property valuation and a real estate appraiser is a land valuer or property valuer (usually a chartered surveyor who specializes in property valuation). Property valuation in the UK is regulated by the Royal Institution of Chartered Surveyors (RICS), a professional body encompassing all of the building and property-related professions. The RICS professional guidelines for valuers are published in the Red Book.

The reader should be aware that differences in nomenclature exist between the different countries. Although the overall concepts are very similar, the reader should be careful to ascertain that the proper nomenclature is being used for their particular area.

There are several types and definitions of value sought by a real estate appraisal. Some of the most common are listed:

Value-in-use – The net present value (NPV) of a cash flow that an asset generates for a specific owner under a specific use. Value-in-use is the value to one particular user, which may be above or below the market value of a property.

Investment value - is the value to one particular investor, which may be above or below the market value of a property.

Insurable value - is the value of real property covered by an insurance policy. Generally it does not include the site value.

It is important to distinguish between Market Value and price. Market value is a fluid concept, ever-changing, while price is a historical fact at the time of a transaction. A price obtained for a specific property under a specific transaction may or may not represent that property's market value: special considerations may have been present, such as a family relationship between the buyer and seller, or else the transaction may have been part of a larger set of transactions in which the parties had engaged. Another possibility is that a specific buyer would be willing to pay a price higher than the market value. Such situations often arise in corporate finance, as per example when a merger or acquisition is concluded at a price which is higher than the value represented by the price of the underlying stock. The usual rationale for these valuations is that the 'sum is greater than its parts', since full ownership of a company entails special privileges for the buyer for which he is willing to pay. Such situations arise in real estate/property markets as well (see value-in-use). It is the task of the real estate appraiser/property valuer to judge whether a certain price obtained under a certain transaction is indicative of market value.

In the US, "Fair Market Value" and "Fair Value" are commonly used as accounting terms. The equivalent appraisal term is "Market Value." (USPAP Advisory Opinion 8.) USPAP defines Market Value as "a type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal".

Forming an opinion of market value is the purpose of many real property appraisal assignments, particularly when the client’s intended use includes more than one intended user. The conditions included in market value definitions establish market perspectives for development of the opinion. These conditions may vary from definition to definition but generally fall into three categories:

(Definitions: USPAP 2005.)

In the US, a typical definition of market value can be found on the FNMA residential appraisal forms, as the FNMA 1025, which states the following:

DEFINITION OF MARKET VALUE: 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, 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) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.

Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing adjustments can be made to the comparable property by comparisons to financing terms offered by a third party institutional lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market’s reaction to the financing or concessions based on the appraiser’s judgment. (FNMA form 1025, March 2005.)

		Fee simple value - the most common type of value sought. It is the fair market value of the fee simple interest in a property unencumbered by any external factors such as existing leases.
		Leased fee value - is probably the second most common value opinion sought. It is the property owner's interest in a property that is encumbered by existing long term leases which may be at, below, or above prevailing market trends.
		Leasehold value - is the lessee's interest in a leased property.

Note that in the US, the above value nomenclature does not apply. In the US, the type of value needs to be examined separately from the ownership interest. Examples of US use would be a market value of a fee simple ownership interest, or an investment value of a leased fee interest, or a liquidation value of a leasehold interest.

The highest and best use in real estate appraisal is the use that will render the maximum fair market value of a particular property. That use must be legally allowable, physically possible, financially feasible, and result in the maximum value for the property. The test of highest and best use is given to a property both as if vacant and as improved.

For example, "House A" in a residentially zoned area may have a highest and best use as vacant and a highest and best use as improved that are both the same. A similar "House B" in a commercially zoned area may have a highest and best use as vacant as a commercial lot and ''highest and best use as improved as a residence. If the value of the commercial lot as vacant in "House B" exceeds the value of house as a residence as improved plus demolition costs, the overall highest and best use of this property would be the as vacant value of a commercial lot.

Since vacant lots are not improved, such properties are generally given only the as vacant test.

The highest and best use is critical to real property valuation since in order to value a property at its fair market value, comparable properties with similar highest and best uses must be examined. In the "House B" scenario, comparing that house to other houses that do not have a similar highest and best use would result in an inaccurate value opinion.

In the US, the legally permissible aspect of highest and best use is very important. In some locations, the governing jurisdiction can use the "police power" concept to destroy illegally built improvements. This would obviously affect the market value of a property. This overall concept is logical, ie. a governing agency would be remiss to allow a toxic chemical plant to be built in the middle of a suburban area.

There are three usual approaches to determining the fair market value of a property: cost approach, sales comparison approach, and income approach. The appraiser will determine which of the approaches is applicable and develop an appraisal based upon information from each individual market area. Costs, income, and sales vary widely from area to area and particular importance is given to the specific location of the property.

Consideration is also given to the market for the property appraised. Properties that are typically purchased by investors (ie. skyscrapers) will give greater weighting to the Income Approach, while small retail or office properties (purchased by owner-users) will give greater weighting to the Sales Comparison Approach. Single Family Residences are most commonly valued with greatest weighting to the Sales Comparison Approach.

The Cost approach was formerly called the summation approach. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. It is the land value, plus the cost to reconstruct any improvements, less the depreciation on those improvements. The value of the improvements is sometimes abbreviated to RCNLD—reproduction cost new less depreciation, or replacement cost new less deprecation. Reproduction refers to reproducing an exact replica. Replacement cost refers to the cost of building a house or other improvement which has the same utility, but using modern design, workmanship and materials.

In most instances, when the cost approach is involved, the overall methodology used is a hybrid of the cost and market data approaches. For instance, while the cost to construct a building can be determined by adding the labor and materials costs together, land values and depreciation must be derived from an analysis of the market data. This approach is typically most reliable when used on newer structures, but the method tends to become less reliable as properties grow older.

The underlying premise of the cost approach in appraising market value is that building a substitute property is an alternative to someone who wishes to own such a property. While age is a fairly obvious constraint on that premise, developed urban areas present their own challenges. For instance, if there is little or no vacant land available in a neighborhood, the premise breaks down. Appraising land value is subjective when a scarcity of relevant land sales exists. But also, estimating construction cost is problematic because of an absence of similar construction from which to derive costs. Not only are building codes frequently changing in developed urban areas, but the small number of houses built do not allow the economies of scale available in a new development. The absence of land sales presents more than a data problem for completing the cost approach. The absence of such a market indicates that buyers may not be thinking in terms of building a new home as a substitute for buying an existing home, which tends to expose the unrealistic nature of the underlying premise. Building an individual new home also can be more difficult due to the difficulty in obtaining mortgage financing.

Observe that as the Cost Approach has non-market based components (costs), the approach may not be a good indicator of market value, even when new. This is most noticeable on properties where the market demand is limited. Say for example a military base. The cost to produce the base is not indicative of its market value, even when new. In the US, the government is the only party that would be willing to "buy" this product. This immediate "loss" is a form of obsolescence.

Also observe that this includes "home improvements" that do not recover their costs in the market. A common example in California is the cost of a pool. In most houses, the cost to build a pool is far greater than the increase in market value to the house. This immediate "loss" is again, a form of obsolescence. Accurately determining obsolescence and depreciation (as the property ages) are usually the main problems within the Cost Approach to open market value.

Notwithstanding, the latter challenge must be accepted for insurance purposes. Insurers are interested in insuring structures, not the value of the whole property. After a major disaster, for instance the Oakland Hills Fire of 1991, some perspective is gained on the actual cost of urban construction. The perspective may be through a distorted lens, however. While builders uniformly maintained that costs exceeded those published in cost manuals, the replacement houses, almost as uniformly are larger than those they replaced.

One of the interesting issues in the cost approach is the influence of classical economics. In the example of the swimming pool, above, or many other "home improvements" the relevant question to the homeowner is microeconomic. It is not what the modification in question costs, but rather whether he can modify his existing home more easily and cheaply than buying another house which already has those features. Even in a static market transaction costs related to selling and buying favor home improvements. In an inflationary market, adding the cost of the "improvements" to a decade old cost basis in the property compounds the effect. In a wildly inflationary market it is even dangerous to give up your present home in the hope of replacing it. The price of the replacement home becomes a moving target. This, of course, tends to exacerbate inflation by limiting, at least in the short run, supply.

The sales comparison approach looks at the price or price per unit area of similar properties being sold in the marketplace. Simply put, the sales of properties similar to the subject are analyzed and the sale prices adjusted to account for differences in the comparables to the subject to determine the fair market value of the subject. This approach is generally considered the most reliable, IF good comparable sales exist. In any event, it is the only independent check on the reasonability of an appraisal opinion.

Because this approach applies market derived numeric factors to relate the sold properties to the one being appraised, it is related to Automated Valuation Modeling, below. An interesting perspective on the relationship between relatively subjective human estimation as compared with that obtained by purely mathematic modeling is contained in "Simple Heuristics That Make Us Smart" by Gerd Gigerenzer. Dr. Gigerenzer, a psychologist, asked people to estimate some real world facts based simply on their knowledge, experience and impressions. Common knowledge and some simple rules created models which were close to those produced by multiple regression analysis (MRA) and neural networks. The predictive value of the human models applied to a new sample was a bit better than the mathematical models, suggesting that the mathematical models may have described the data better but missed the predictive relationships. Similarly automated valuation models frequently find building size (square feet or meters) predictive of value, even when that information is not explicitly advertised. This is similar to the example in "The Wisdom of Crowds", Surowiecki, in which the scientist Francis Galton observed a crowd at a fair to, on average, accurately estimate the size of an ox.

The income capitalization approach, often simply called the income approach, is used to value commercial and investment properties. This approach capitalizes an income stream into a present value. This can be done using revenue multipliers or single-year capitalization rates of the net operating income. The Net operating income (NOI) is gross potential income (GPI), less vacancy (= Effective Gross Income) less operating expenses (but excluding debt service or depreciation charges applied by accountants).

Alternatively, multiple years of net operating income can be valued by a discounted cash flow analysis (DCF) model. The DCF model is widely used to value larger and more expensive income-producing properties, such as large office towers.

In the UK, real estate appraisal, or property valuation, is regulated by the