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Chapter 3

USPAP Performance Standards for a Real Property Appraisal

3 1

Chapter Objectives

•

Upon completion of this chapter, the participant will be able to:

– Recognize and describe USPAP Performance Standards for a real property appraisal.

– Explain the analysis required related to USPAP and Advisory Opinion revisions and the effective date of review assignments. – Differentiate the twp reporting options.

Chapter Objectives

continued

•

Upon completion of this chapter, the participant will be able to:

– Explain specific obligations of development and reporting, including problem identification, scope of work, intended users, intended use, property characteristics, and property interest.

– Differentiate between exposure time and marketing time.

– Discuss the difference between effective date and date of report.

Chapter Objectives

continued

•

Upon completion of this chapter, the participant will be able to:

– Explain scope of work and circumstances in which it may be required to be expanded upon.

– Discuss type of analysis required in an assignment, including applicable Standards Rules.

– Recognize the reviewer’s tasks in analyzing the sales comparison approach section of the appraisal under review.

Chapter Objectives

continued

•

Upon completion of this chapter, the participant will be able to:

– Explain the reviewer’s perspective related to highest and best use.

– Understand the reviewer’s perspective related to extraordinary assumption and hypothetical condition.

– Identify the obligations related to an appraiser’s signed certification in the work under review.

Yesterday, Today, and Tomorrow

• A review assignment may use the

effective date

found in the work being reviewed or the assignment may use

a different effective date

• Use of a

different

effective date is only possible when the scope of work includes the reviewer developing his own opinion

of value

, which may use the same or different effective date

Yesterday, Today, and Tomorrow

continued

• When the scope of work includes

only expressing an opinion of quality on another appraiser’s work

, the effective date of the review report is the same as that found in the work being reviewed – Parts of USPAP applicable in an assignment may be different than those found in the current version, which is a good reason for keeping past USPAP editions for reference

Revisions to USPAP

• Each new edition of the USPAP document contains a section located within the “Foreword” that is titled “

Revisions to USPAP and USPAP Advisory Opinions

”

3 8

Reviewer’s Perspective

• Reviewers should familiarize themselves with the

Revisions to USPAP and USPAP Advisory Opinions

section to use as a quick reference when uncertainty arises regarding USPAP obligations in a particular appraisal review assignment

USPAP Version

• This course is based upon the

2014-2015 Edition of USPAP 3 10

Overview of STANDARDS 1 and 2

•

STANDARDS 1

and

create a road map of performance standards in the appraisal process from problem identification to reporting in a real property review assignment – These standards reflect the

minimum

obligations for appraisers in the appraisal process

Overview of STANDARDS 1 and 2

continued

• •

STANDARD 1

establishes criteria for measuring ethics and competency in the

development

process – Six Standards Rules (1-1 through 1-6)

STANDARD 2

addresses real property appraisal

reporting

– Four Standards Rules (2-1 through 2-4) in a

Intro Section – STANDARD 1

• The

introduction

STANDARD 1

states the appraiser’s general obligations related to development of a real property appraisal: –

In developing a real property appraisal, an appraiser must identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete research and analyses necessary to produce a credible appraisal

Intro Section – STANDARD 2

• The

introduction

STANDARD 2

reinforces the appraiser’s obligation not to report a real property appraisal in a manner that is misleading: –

In reporting the results of a real property appraisal, an appraiser must communicate each analysis, opinion, and conclusion in a manner that is not misleading

General Obligations

• General requirements for all real property appraisal reports are in

Standards Rule 1 1

– These obligations elaborate (in part) on the general obligations found in the COMPETENCY RULE

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General Obligations 1-1

•

Standards Rule 1-1

directs an appraiser to: – Be aware of, understand, and correctly employ recognized methods and techniques necessary to produce credible results – Not commit a substantial error of omission or commission that significantly affects an appraisal – Not render appraisal services in a careless or negligent manner

General Obligations 1-1

continued

• The Comment provides the following guidelines: – Appraisers must use sufficient care to avoid errors that would significantly affect their opinions and conclusions – Diligence is required to identify and analyze the factors, conditions, data, and other information… – Perfection is impossible to attain and competence does

not

require perfection – Appraisers are warned to

not

render appraisal services in a careless or negligent manner and to use due diligence and due care

General Obligations 2-1

•

Standards Rule 2-1

contains general obligations for all written and oral real property appraisal reports

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General Obligations 2-1

continued

• Each written or oral real property appraisal report must: –

a) clearly and accurately set forth the appraisal in a manner that will not be misleading

–

(b) contain sufficient information to enable the intended users of the appraisal to understand the report properly; and

–

(c) clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment

Reporting Options

•

Standards Rule 2-2

comprises two checklists of reporting obligations for each of the permitted options: – Appraisal Report – Restricted Appraisal Report • A Report Comparison Chart is found in

USPAP Advisory Opinion 11 3 20

Reporting Options

continued

• Each reporting option may be referenced by a

Standards Rule number

and

subsection

, rather than by title: – 2-2(a) – Appraisal Report – 2-2(b) – Restricted Appraisal Report

Reporting Options

continued

•

Standards Rule 2-2

emphasizes: – The appraiser must report conclusions and opinions by

using one of the two reporting options

– The appraiser must

prominently state in the report

the reporting option being used

Reporting Options

continued

• The Comment to

Standards Rule 2-2

contains important information and clarification: – Restricted Appraisal Report option can be used

ONLY when the client is the only intended user

– Appraisal Report option must be used

when there are intended users other than the client

– The essential difference among the two reporting options is the content and level of detail of the information reported

Reporting Options

continued

• The Comment to

Standards Rule 2-2

contains important clarification: – The level of information necessary in a report and the reporting option chosen by the appraiser depends on the

intended use

and the

intended users

in an assignment

Reporting Options

continued

• The Comment to

Standards Rule 2-2

contains important clarification: – An appraiser may use any other label (i.e., narrative format, form format)

in addition to but not in place of

the label of: • Appraisal Report • Restricted Appraisal Report

Describe, Summarize and State

• Summarize and state are distinguishing terms that reflect the level of information communicated by the specific report option to intended users: – An Appraisal Report “

summarizes

” – A Restricted Appraisal Report “

states

”

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Supplementary Information

• An appraiser must supplement a report form, if necessary, with other information,

addenda, exhibits

, etc., so that: – Intended users are

not

misled and – The report complies with the content requirements of

Standards Rule 2-2 27

Reviewer’s Perspective

• The reviewer (given the

scope of work

) must develop an opinion as to the adequacy of the content and detail of reporting in context of the particular reporting option

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Specific Obligations

• The specific obligations for developing a real property appraisal are found in

Standards Rules 1-2

through

1-6

– These specific obligations align with Steps 1 through 5 in the appraisal process

Specific Reporting Obligations

continued

• Reporting obligations are found in these Standards Rules: – 2-2(a)(i-xi)

Appraisal Report

– 2-2(b)(i-xi)

Restricted Appraisal Report

• These obligations align with Step 6 in the appraisal process

Problem Identification and Scope of Work 3

• The minimum development obligations for a real property appraisal commence with problem identification and the scope of work decision –

Standards Rule 1-2 (a-h) 31

Problem Identification

• Defining the problem consists of identifying: – The client and other intended users – The intended use – The type of value – The effective date of the opinion – The relevant characteristics of the property – Assignment conditions, including extraordinary assumptions, hypothetical conditions, assumptions, and limiting conditions

Problem Identification

continued

• Special development reminders and obligations in

Standards Rule 1-2

include but are not limited to: – The client may be an individual, group, or entity – A third party acting on behalf of a client (such as an agent or an Appraisal Management Company - AMC) may engage an appraiser and,

unless specifically noted by the client at the time of the engagement

, that third party is

not

an intended user 33

Problem Identification

continued

• Special development reminders and obligations in

Standards Rule 1-2

include but are not limited to: – An appraiser must

not

allow the intended use of an assignment or a client’s objectives to cause the assignment results to be

biased 34

Problem Identification

continued

• Special development reminders and obligations in

Standards Rule 1-2

include but are not limited to: – If the value opinion to be developed is

market value

, an appraiser must determine if the value is to be the most probable price in terms of

cash

, in terms of

financial arrangements equivalent to cash,

or in

other precisely defined terms 35

Problem Identification

continued

• Special development reminders and obligations in

Standards Rule 1-2

include but are not limited to: – If the opinion of value is to be based on

non market financing

financing with conditions or incentives that are not market typical

, the appraiser must clearly identify the terms, and develop an opinion of their influence upon the transaction; either positively or negatively

Problem Identification

continued

• Special development reminders and obligations in

Standards Rule 1-2

include but are not limited to: – When

exposure time

is a component of the definition for the value opinion being developed (which includes market value), the appraiser must also develop an opinion of reasonable exposure time linked to that value opinion – The

effective date

of the appraisal establishes the context for the value opinion and can be retrospective, current, or prospective

Problem Identification

continued

• Special development reminders and obligations in

Standards Rule 1-2

include but are not limited to: – Relevant

characteristics of the property

include the location, physical, legal, and economic attributes. The information used to identify the property characteristics must be from sources reasonably believed to be reliable – Finally, the appraiser must determine the appropriate

scope of work

that is necessary in the assignment that will produce credible results

Intended User (s) and Intended Use

• The actual name of the client must be stated in the report, along with any other intended users, who must be specified by

name

type

• An AMC may be specified as the client, but an AMC is

not

typically an intended user

unless specified as such at the time of the assignment

Reviewer’s Perspective

• Reviewers must ensure that a Restricted Appraisal Report contains the required use restriction, limiting the use of the report to the client

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Intended Use

• Intended use and the intended user(s) are primary determinants of the level and content of an appraisal report • The reviewer must recognize particular requirements: – If intended use is for a mortgage finance transaction compliant with Fannie Mae – If intended use is for legal purposes

3 41

Property Characteristics

continued

•

Standards Rule 1-2(e)

addresses the identification of the relevant property characteristics that may encompass physical, legal, and/or economic characteristics

Property Characteristic Examples

• Reporting of

property characteristics

include but not be limited to: – Neighborhood and market area boundaries may – Neighborhood characteristics – Economic characteristics – Supply and demand – Zoning – Land use – Improvement characteristics and quality/condition – Site Characteristics – Private restrictions and limitations – Taxation

Reviewer’s Perspective

• For a reviewer, the property characteristics section of the appraisal report may be one of the more concentrated areas of assessment • Each of the potentially many property elements may require commentary

Neighborhood Boundaries Commentary

• The reviewer must

effectively communicate the market area or

neighborhood boundaries

in a manner that will allow the user(s) of the report to: – Clearly understand the defined boundaries and – The reasoning for why those particular boundaries were chosen by the appraiser

3 45

Locational Characteristics Commentary

continued

•

Locational characteristics

, whether favorable or adverse, are critical to the appraiser’s conclusions • Certain elements

outside the defined neighborhood boundaries

may also have an influence, either positively or negatively

Geographical Boundaries

• It is common to use natural or man made geographic boundaries to define and discuss a neighborhood

• Examples: – Streets or other thoroughfares – Corporation limits – Flowing bodies of water

3 47

Geographical Boundaries

continued

• Fannie Mae, Freddie Mac, and other lending entities, require the boundaries of the defined neighborhood or market area to be initially delineated using directional – – – – boundaries:

North East South West

Geographical Boundaries

continued

• Characteristics of the neighborhood should be detailed that: – Allow the user(s) to create a “mental image” of the neighborhood – Provide vital information that will assist in supporting other analysis such as

highest and best use

and

overall marketability

• The

reporting option

drives the level of detail that is included

. •

Summary Appraisal Report Example

The neighborhood is defined as a predominately residential area bounded by Finch Avenue to the north, Sparrow Street to the east, Bluebird Street to the south, and Blackhawk Drive to the west, approximately 5 blocks from the city center of Anywhere. The center of Anywhere is the location of most amenities necessary to neighborhood residents, including shopping, medical care, employment, and transportation. Several arterial routes link the subject neighborhood to the center of Anywhere. Composition of the neighborhood is 70% single-family residential dwellings; 15% public services such as schools and parks; 10% 2-4 family residential dwellings; and 5% vacant land; which is reserved for future residential construction

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Summary Appraisal Report Commentary

• Appropriate commentary is necessary for most every residential appraisal report whether reported in a form or narrative format • The level of detail and content of the commentary will be greater or lesser for other reporting options • The following examples present residential reporting elements within the category of

Property Characteristics 3 51

Example: Subject Site

• The subject property is located at 15 Robin Avenue, Anywhere, USA; and is legally described as Lot #47 of Phase II of the Wild Bird Subdivision. The site is located on the west side of Robin Avenue and has site dimensions of 75’ x 90’ (.1550 acre), is mostly level, and is rectangular in shape. The subject site location is considered average when compared with other properties in the neighborhood that share similar locational attributes and market appeal

3 52

Example: Zoning

• Zoning for the subject is designated as R 1, medium density residential. The zoning designation allows for one-story dwellings of at least 1,200 square feet, and one and one-half story dwellings of at least 1,800 square feet. The subject conforms to all use and area requirements and is, therefore, legal within the zoning parameters

3 53

Example: Improvement Description

• The subject dwelling conforms to the permitted mix of design styles and is a single-family, one-story ranch style dwelling built in 1982 with a gross living area of 1,475 square feet. The structure is of brick construction with a concrete block foundation, and is built on a crawl space. The dwelling has a 2-car attached garage, composition shingle roof, and double pane windows

3 54

Example: Improvement Description

continued

• Other site improvements include a concrete driveway, patio at the rear of the dwelling, and a small covered porch at the front. Overall construction quality is consistent with other single-family residential properties in the area; thus, due to this similarity, quality rating for the subject is average. Condition of the subject is slightly below average due to damage present on the effective date of the appraisal

Example: Improvement Description

continued

• A falling tree struck the roof of the structure and caused a 2’ x 2’ hole in the west side of the roof in the weeks prior to the effective date. No interior damage was evidenced, as a result of temporary repairs performed immediately after the damage occurred. A professional contractor, retained by the property owner, confirmed that damage was restricted to the roof and the exterior of the structure and that the estimated repair cost is $2,500

Example: Improvement Description

continued

• The general maintenance level and continuous updating of the subject property is consistent with other similar properties in the area, and thus, without the damage, would be considered average. However, as the purpose of this appraisal is to develop an opinion of market value of the property in it’s as-is condition, the effective age has been established at 40 years, which is greater than the actual age of the structure, due to the roof damage present on the effective date

Reviewer’s Perspective

• The reviewer must carefully consider the level and detail of reporting within the work being reviewed in order to: – Develop an opinion of the adequacy, relevance, and appropriateness of the reporting – Determine whether the commentary is in compliance with the require minimum level of reporting

Property Interest

• Reporting of the

property interest

appraised is a specific reporting being requirement, applicable to all reporting options to “state the real property interest appraised” • In most residential appraisal assignments, the interest being appraised will be the fee simple interest

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Property Interest

continued

• Comments to the requirements for an Appraisal Report (

Standards Rules 2 2(a)(iv))

elaborate on additional diligence that is required on the part of an appraiser regarding the documentation of real property rights: –

The statement of the real property rights being appraised must be substantiated, as needed, by copies or summaries of title descriptions or other documents that set forth any known encumbrances.

Reviewer’s Perspective

• A reviewer must make certain the interest being appraised within the work being reviewed is properly “stated,” and that the encumbrances are exhibited or referenced in an Appraisal Report

Exposure Time

• An appraiser’s development obligation regarding

exposure time

is embedded in

Standards Rule 1-2

and further elaborated upon in the Comment to

Standards Rule 1-2(c):

–

Comment: When exposure time is a component of the definition for the value opinion being developed, the appraiser must also develop an opinion of reasonable exposure time linked to that value opinion

3 62

Exposure Time

continued

• Exposure time is always presumed to occur

prior to the effective date

of the appraisal • The opinion of reasonable exposure time may be expressed as a range of time and can be based on one or more of the following: – –

Statistical information about days on market Information gathered through sales verification, and

–

Interviews of market participants

Exposure Time

continued

• The Comment to

Standards Rule 2-2

both reporting options requires that: for –

When an opinion of reasonable exposure time has been developed in compliance with Standards Rule 1-2(c), the opinion must be stated in the report.

(

Bold

added for emphasis.)

Exposure Time

continued

• The appraiser must be very careful

not

confuse

exposure time

with to

marketing time

–

Exposure time

occurs

before

of the appraisal the effective date –

Marketing time

occurs

after

Exposure Time vs. Marketing Time

• • Exposure time expresses: –

“For the property to have sold for market value on the effective date, the property

would have had to have been on the market for a particular period of time

”

Exposure time

looks at

historic

market conditions

preceding

the effective date

Exposure Time vs. Marketing Time

continued

• In stating

marketing time

, the appraiser looks to the

future

and

forecasts

that: – “For the property to sell for market value determined on the effective date,

the property will need to be on the market for a particular period of time

,” considering historic trends analytically forecasted into the future after the effective date

Exposure Time vs. Marketing Time

continued

• USPAP does

not

require the development or reporting of

marketing time

• Many lending participants impose market time as a requirement (

assignment condition)

– In those cases,

both

exposure and marketing time must be reported

Market Value

•

Standards Rule 2-2(a)

for Appraisal Reports, contains reporting obligations for a

market value

appraisal assignment

3 Let’s take a look… 69

Market Value

continued

• •

When reporting market value, state whether the opinion of value is:

–

in terms of cash or of financing terms equivalent to cash, or

–

based on non-market financing or financing with unusual conditions or incentives When an opinion of market value is not in terms of cash or based on financing terms equivalent to cash, summarize the terms of such financing and explain their contributions to or negative influence on value

(

Bold

added for emphasis)

Reviewer’s Perspective

• A reviewer must determine that: – The appropriate statement has been made by the original appraiser – The conclusions of the appraiser’s analysis are credible – Explanations are summarized sufficiently

3 71

Effective Date

• USPAP STATEMENT 3 and STATEMENT 4 (in part) provide further insight related to the term

effective date:

–

The effective date establishes the context for the value opinion

3 72

Effective Date

continued

•

Three categories of effective dates may be used:

– – –

Retrospective Current Prospective

Retrospective vs. Prospective Value Opinions

• •

Retrospective

value opinions occur when the value opinion is expressed as a date in the past: – What was the value of the property on the date of the owner’s death two months ago?

Prospective

value opinions occur when the value opinion is expressed as a date in the future – What will the value of the property be when it is completed in one year?

3 74

Retrospective vs. Prospective Value Opinions

continued

• The Comment to USPAP

Standards Rule 2-2(a) and (b) (vi)

states: –

The effective date of the appraisal establishes the context for the value opinion, while the

date of the report indicates whether the perspective of the appraiser on the market and property as of the effective date of the appraisal was prospective, current, or retrospective

(

Bold

added for emphasis)

Date of Report

• USPAP STATEMENT 3 and STATEMENT 4 (in part) provide explanation of the concept of

the report

date of

–

Retrospective

appraisals occur when the effective date of the appraisal is

prior to the date of the report

–

Current

appraisals occur when the effective date of the appraisal is

contemporaneous with the date of the report

–

Prospective

appraisals occur when the effective date of the appraisal is

subsequent to the date of the report

Reviewer’s Perspective

• Reviewers must confirm that the

date of report

is consistent with the USPAP meaning and that the date of the report has

not

been misreported as the date the appraisal was prepared, signed, etc.

3 77

Scope of Work

• Reviewers must be cautious that the

scope of work disclosure

is consistent in content level to the appropriate reporting option – For form reports, the scope of work may need to be expanded, resulting in additional commentary being required

Significant Appraisal Assistance

• When any portion of the work involves significant real property appraisal assistance: – The appraiser must

summarize

state

extent of that assistance the – The signing appraiser must also state the name(s) of those providing the significant real property appraisal assistance in the certification, in accordance with

Standards Rule 2-3 79

Unacceptable Statement

• The following unacceptable statement included in an Appraisal Report lacks the detail necessary to summarize the extent of the assistance: –

John Smith has provided significant professional assistance in various phases of the appraisal process

Acceptable Commentary

• For an Appraisal Report, a more acceptable commentary, summarizing the extent of the assistance is: –

John Smith has provided significant professional appraisal assistance in this appraisal assignment including gathering data for the subject property, choosing comparable properties that were used in the sales comparison analysis, and reconciliation of the conclusions

Additional Certification Statement

• This statement must be added to the certification: –

“John Smith provided significant professional assistance in this assignment”

• For pre-printed form reports, this statement should be added as an additional certification statement

3 82

Reviewer’s Perspective

• Reviewers must take care to note appropriate disclosure of significant professional appraisal assistance during the course of an appraisal review assignment

3 83

Analysis in the Assigment

• The development process associated with Information Analyzed and Methodology Used is covered in

Standards Rule 1-4

• In a market value assignment,

Standards Rules 1-3(a)

and

1-5

also apply • The topics covered include: – Market analysis (legal and economic factors) – Development of the approaches to value Analysis of listings, options – Prior sales

Standards Rule 1-3(a)

•

When necessary for credible assignment results in developing a market value opinion, an appraiser must:

–

Identify and analyze the effect on use and value of existing land use regulations, reasonably probable modifications of such land use regulations, economic supply and demand, the physical adaptability of the real estate, and market area trends…

(

Bold

added for emphasis)

Standards Rule 1-4

•

In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results

Standards Rule 1-4

continued

• Provides development requirements for Standards Rules: –

1-4 (a)

Sales comparison approach –

1-4 (b)

Cost approach –

1-4 (c)

Income approach –

1-4 (d)

Leased fee or leasehold estate –

1-4 (e)

Various estates or component parts –

1-4 (f)

On-site and off site improvements –

1-4 (g)

Personal property, trade fixtures, intangible items

Standards Rule 1-5

• •

Standards Rule 1-5

elaborates on the analysis of any current offering, contractual agreement, or prior transaction of the subject property.

When the value opinion being developed is market value, an appraiser must:

–

(a) analyze all agreements of sale, options, and listings of the subject property current as of the effective date of the appraisal; and

–

(b) analyze all sales of the subject property that occurred within the three (3) years prior to the effective date of the appraisal

Standards Rule 2-2

• The Comment to

Standards Rule 2-2(a) and (b) (vii)

states the following requirement for all reporting options : –

When reporting an opinion of market value, a summary of the results of analyzing the subject sales, options, and listings in accordance with Standards Rule 1-5 is required. If such information is unobtainable, a statement on the efforts undertaken by the appraiser to obtain the information is required. If such information is irrelevant, a statement acknowledging the existence of the information and citing its lack of relevance is required

Standards Rule 2-2

continued

• When reporting an opinion of market value, describing or summarizing market value elements should include a discussion of, but not be limited to: – Specific data used in the analysis – Appraiser’s diligence undertaken in analysis – Information and sources relied upon – Reasoning for not performing certain analysis – Relevance or irrelevance of certain analysis and valuation methodology

Standards Rule 2-2

continued

• Key reporting obligations include: – Appraisal Reports must include sufficient information to indicate that the appraiser complied with the development requirements of

STANDARD 1

– Appraisal Reports must provide sufficient information to enable the client and intended users to understand the rationale for the opinions and conclusions, including reconciliation

Standards Rule 2-2

continued

• Key reporting obligations include: – In a market value assignment,

BOTH

reporting options require a summary of the results of analyzing the subject sales, options, and listings in accordance with

Standards Rule 1-5

– If the information is unobtainable, a statement on the efforts undertaken by the appraiser to obtain the information is required – If the information is irrelevant, a statement acknowledging the existence of the information and citing its lack of relevance is required

Standards Rule 2-2

continued

• Portions of the Comment for

Standards Rule 2 2(b)(viii)

that addresses a Restricted Appraisal Report are slightly different in some aspects regarding the appraiser’s workfile requirements : –

An appraiser must maintain a specific, coherent workfile in support of a Restricted Appraisal Report. The contents of the workfile must include sufficient information to indicate that the appraiser complied with the requirements of STANDARD 1, and for the appraiser to produce an Appraisal Report

Reviewer’s Perspective

• Regardless of whether a narrative or form report format is being reviewed

, the reviewer must assure that all required reporting areas are addressed

• For Appraisal Reports, the reporting requirements are much more detailed than for a Restricted Appraisal Report

3 94

Reviewer’s Perspective

continued

• The

scope of work

in the review assignment may require an even greater diligence on the part of the reviewer to extend the review process when developing his own opinion of the opinions and conclusions found in the original appraisal, which would require additional analysis and reporting

Standards Rule Analysis

• For

Appraisal Reports

: – The discussion of private and public restrictions, and regulations and potential modifications of those land use regulations, may be grouped as one category

delineated into multiple reporting categories – The physical adaptability (potential of assemblage, division, etc.) of the real estate may be an additional reporting area

Standards Rule Analysis

continued

• The conclusions of the appraiser’s supply and demand analysis and analysis of market area trends may also be grouped together

reported as two distinct categories – In some cases, the report will refer to an additional report attachment (such as the

1004MC Market Conditions Addendum)

additional reporting for

Reviewer’s Perspective

• The reviewer should carefully observe that this reporting is: – Consistent and not contradictory to other statements or indications reported – Well supported by actual data, reasoning, and logic – Complete with sources of data and information identified – Appropriate to the reporting option

3 98

Effective Age and Remaining Economic Life

• The Comment to

Standards Rule 1-3(a)

cautions: –

To avoid unsupported assumptions

including effective age and remaining economic life

3 99

Effective Age and Remaining Economic Life

continued

• Most every appraisal report includes a statement of estimated effective age of the subject improvements • In many appraisal review assignments, an explanation for the logic and rationale of the appraiser in estimating effective age is absent or lacking

100

Reviewer’s Perspective

• The reviewer should pay particular attention to avoid deficiency or absence of an explanatory statement in this reporting area

3 101

Acceptable Commentary: Effective Age - Example

• For an Appraisal Report –

The appraiser estimates the effective age of the subject dwelling to be five years. In estimating the effective age, the appraiser has considered any physical deterioration, functional obsolescence, and/or external obsolescence present on the effective date. No functional or external obsolescence was noted to be present in the structure. Thus, the effective age only reflects physical deterioration. The property owner has recently updated most short-lived curable items, such as the roof, floor coverings, interior decorating, exterior finishes, lighting, plumbing fixtures, and the HVAC system. Therefore, the effective age is estimated to be less than the actual age of 20 years. The estimated effective age primarily represents influence of the condition of long-lived incurable items, such as the foundation, framing, etc.

102

Reviewer’s Perspective

• At a

minimum

of work

(depending upon the

scope

in the review assignment), the reviewer should observe that: – The rationale for employing the valuation methods and techniques utilized by the original appraiser is consistent with the scope of work in the original appraisal assignment – The reasoning for the exclusion of any of the approaches to value (sales comparison, cost, or income approach) has been adequately explained

103

Adjustments

• At a

minimum

, depending upon the reviewer’s

scope of work

, the primary areas of concern for the reviewer is to observe in the appraisal report being reviewed that the: – Adjustments are consistent – Discussion includes the methodology for deriving adjustments – Rationale for

not

making an adjustment, when there is a difference, is presented and logical

104

Adjustments - Example

• For an Appraisal Report –

An adjustment has been applied in the sales comparison approach to address the difference between Comparable Sale #2 and the subject. Comparable #2 has three bedrooms, while the subject has four bedrooms

3 105

Adjustments - Example

continued

• For an Appraisal Report –

Four sets of paired data were utilized to produce the contributory value of a fourth bedroom vs. three bedrooms. The indications produced ranged from $1,500 for 1,800 square foot dwellings to $2,400 for 2,400 square foot dwellings. It was also noted that the contributory value of a fourth bedroom to a 2,200 square foot dwelling was $2,100

106

Adjustments - Example

continued

• For an Appraisal Report –

Therefore, as the subject contains 2,300 square feet, the appropriate adjustment to be applied in this assignment is $2,250, which is the midpoint between the indications produced by 2,200 square feet dwellings ($2,100 contributory value) and 2,400 square feet dwellings ($2,400 contributory value)

107

Adjustments - Example

continued

• For an Appraisal Report –

Slight differences in gross living area were noted between all of the comparable sales and the subject. After analysis of market data, it was concluded that no adjustment is required for gross living area; the market typically does not recognize such small differences

108

Cost Approach

•

When the cost approach has been developed in the work being reviewed

at a minimum, depending upon the reviewer’s scope of work, the primary areas of concern for the reviewer is to observe in the appraisal report being reviewed that the report contains:

– Explanation for the data analyzed and the methodology used for estimating site value – Data sources and the methodology employed for estimating cost new of the improvements – Appropriate explanation of how depreciation was estimated

109

Cost Approach - Example

• For an Appraisal Report –

Site value for the subject property has been developed using the sales comparison approach through analysis of past sales of similar one-half acre unimproved building sites located within the subject’s subdivision. Five site sales were analyzed, ranging in sale price from $35,000 to $38,000. Three of the five sales, which were the most similar and recent, suggested $36,000 as a reasonable estimate of value for the one-half acre subject site

110

Cost Approach - Example

continued

• For an Appraisal Report –

Replacement cost new has been estimated using the comparative unit method. The Brown and Black Costing Service for the Southwest Region was employed for estimating cost new, which has been adjusted to the local market. The per-square foot cost reflects average quality construction, which is most reflective of the subject’s quality

111

Cost Approach - Example

continued

• For an Appraisal Report –

Depreciation was calculated using the age-life method. The subject’s effective age is estimated at 15 years and expected useful life is 60 years. Thus, depreciation has been estimated at 25%

112

Income Approach

•

The primary areas of concern for the reviewer is to observe in the appraisal report being reviewed that the report contains:

– Information regarding the quality and quantity of data that was analyzed to determine market level rent, and the indications produced by the data – How and why the market level rent concluded by the appraiser differs (or is similar to) the contract rent of the subject property – Methodology employed to derive a market level rate of capitalization to be used in the approach

113

Income Approach - Example

• For an Appraisal Report: –

In developing the income approach, market level data was analyzed to assist in estimating market rent applicable to the subject property, as well as an appropriate market level rate of capitalization —which, in this assignment, is a gross rent multiplier (GRM)

114

Income Approach - Example

continued

• For an Appraisal Report: –

To estimate market level rent to apply to the subject property, three comparable rental properties were analyzed. Two of the properties mirrored the subject’s gross living area, bedroom count, and other features (central air conditioning and one-car garage). garage). Each of these properties was rented for $600 per month.

A third comparable rental property was analyzed. This property also mirrored the subject with the exception of being inferior with having only two bedrooms. It was rented for $550 per month. Therefore, the market rent applicable to the subject for use in the income analysis is supported at $600 per month

115

Income Approach - Example

continued

• For an Appraisal Report: –

Transactions of four recently sold properties, which were rented at the time of the transaction, have been analyzed for the purpose of determining the appropriate gross rent multiplier to apply to the subject’s market rent. The range of gross rent multipliers revealed in that analysis was from 122.95 to 124.91. Rental rates of the properties analyzed ranged from $590 per month to $610 per month

116

Income Approach - Example

continued

• For an Appraisal Report: –

The subject’s market rent of $600 per month is bracketed at the midpoint of this range and, thus, an applicable gross rent multiplier to be applied to the subject’s market rent is 123.34, which represents the midpoint of the range produced by the market data (122.95 – 124.91)

117

Adjustments: Example

continued

• For an Appraisal Report –

118

Current Sales, Listings, and Prior Sales

• In compliance with the requirements of Standards Rule 1-5, the reviewer must observe if the current sales and options and listings of the subject property and prior sales (within three years prior to the effective date) have been adequately reported

119

Acceptable Commentary: Current/Prior Sales

• Given the scope of work, a reviewer should particularly observe that: – Current offering price is referenced and reasoning is included for any sale price greater than the listing price – Current agreement of sale is adequately discussed, along with terms of the agreement and if the sale is arms length – All prior transfers are reported, even those which are

not

arms length or were due to foreclosure, etc.

– Excessive difference between a prior sale price and a more recent sale price within the three-year period is explained

120

Highest and Best Use

• Standards Rule 1-3(b) requires, in a market value assignment, the development of an opinion of

highest and best use:

– Standards Rule 2-2 (a)(ix) places obligations on an appraiser, for

an Appraisal Report

, to summarize the support and rationale for an appraiser’s opinion of highest and best use when such an opinion has been developed by an appraiser in the assignment

121

Highest and Best Use

continued

• Standards Rule 1-3(b) requires, in a market value assignment, the development of an opinion of

highest and best use:

– Standards Rule 2-2 (b)(ix) requires that for a Restricted Appraisal Report, the appraiser’s opinion of highest and best use, when it is developed in an assignment, must be

stated 122

Example: Highest and Best Use

•

An acceptable commentary for an Appraisal Report would be:

–

The highest and best use of the subject is considered to be its present use as a single family residential dwelling. The remaining economic life of the structure coupled with the subject site’s R-1 zoning (1-family residential dwelling) result in the present use as the only logical highest and best use conclusion

123

Extraordinary Assumptions and Hypothetical Conditions

•

Standards Rule 1-3(b)

requires, in a market value assignment, the development of an opinion of

highest and best use:

–

Standards Rule 2-2 (a)(x)

places obligations on an appraiser, for

an Appraisal Report

, to summarize the support and rationale for an appraiser’s opinion of highest and best use when such an opinion has been developed by an appraiser in the assignment

124

Example 2

• Contrast these examples of a reviewer’s narrative commentary: –

“After researching market data, the reviewer found the comparable property data employed by the appraiser in the sales comparison approach represented the most relevant available data in comparison to the subject. However, the comparable sales used for analysis in the sales comparison approach closed 3 to 9 months prior to the effective date of the appraisal. Further analysis revealed that market condition adjustments are warranted for all of the comparable sales, as the market was evidenced by the reviewer to be in a state of decline for that period. Thus, the conclusions of the sales comparison approach could likely be affected, as could the final opinion of value found in the appraisal report. All other adjustments applied to the data appear to be reasonable and supported. Therefore, even though the sales comparison approach and the conclusions produced by the methodology are not acceptable in their present form, the indications could be credible once market conditions have been properly analyzed and addressed with appropriate adjustments”

125

Signed Certification

not

arms length or were due to foreclosure, etc.

– Excessive difference between a prior sale price and a more recent sale price within the three-year period is explained

126

Reviewer’s Perspective

• The reviewer should be especially vigilant that statement regarding prior services is included in the report certification • For pre-printed forms, the certification statement must be added as a supplemental certification statement

3 127

Reviewer’s Perspective

continued

• Other instances where supplemental certification statements may need to be added: – Specific name(s) of individuals not signing the certification who provided significant professional assistance in the assignment – Any fees, commissions, or things of value that were paid by the appraiser in connection with procurement of the assignment

128

Chapter 3 Quiz

3 1. Which is NOT an obligation of STANDARD 2?

a. all hypothetical conditions and extraordinary assumptions must be disclosed in the report b. appraiser must be aware of, understand, and correctly employ recognized methods and techniques c. report must be clear, accurate, and not be misleading d. signed certification must be included in all written appraisal reports

129

Chapter 3 Quiz

3 2. When developing an income approach, Standards Rule 1-4, in part, requires an appraiser to base projections of future rent or income potential and expenses on

a. actual income and expense data of the property.

b. the basis of an extraordinary assumption.

c. nationally published income and expense data.

d. reasonably clear and appropriate evidence.

130

Chapter 3 Quiz

3 3. According to Standards Rule 1-4, what quantity of data must be analyzed when a sales comparison approach is necessary for credible assignment results?

a. all that can be located within one mile from the subject property b. any sales that occurred within one year of the effective date in the assignment c. no fewer than three comparable sales d. such comparable sales as are available

131

Chapter 3 Quiz

3 4. STANDARD 1 obligates an appraiser to determine the scope of work necessary to produce ________ in accordance with the SCOPE OF WORK RULE.

a. client satisfaction b. credible assignment results c. the greatest value opinion d. public trust in appraisal practice

132

Chapter 3 Quiz

5. An appraiser must develop an opinion of reasonable exposure time linked to the value opinion, when exposure time is a component of the

a. definition of value.

b. highest and best use analysis.

c. intended use of the appraisal.

d. relevant property characteristics.

3 133

Chapter 3 Quiz

6. Standards Rule 1-2 elaborates on an appraiser’s obligations regarding

a. acceptance of an assignment.

b. problem identification and determining the scope of work.

c. protection of confidential information in an assignment.

d. the workfile for an assignment.

3 134

Chapter 3 Quiz

3 7. STANDARD 2 requires that appraisal reports contain ________ to enable intended users to understand the report properly.

a. definitions of appraisal terms b. exhibits and photographs c. simple and common language d. sufficient information

135

Chapter 3 Quiz

3 8. In an appraisal report, sufficient information regarding the scope of work includes disclosure of research and analyses performed and might also

include disclosure of

the client’s objectives for the assignment’s results.

b. confidential information used in development.

c. fees and things of value paid to the appraiser.

d. research and analyses

not

performed.

136

Chapter 3 Quiz

3 9. If an appraiser excludes an approach to value in an appraisal assignment, how must the appraiser address the exclusion in an Appraisal Report?

a. explain the exclusion in the report b. no explanation in the report is necessary, but it must be stated in the workfile c. only state the exclusion in the report if the client agrees d. state the exclusion in the certification

137

Chapter 3 Quiz

3 10. Standards Rule 1-5 states that appraisers must analyze agreements of sale, options, and listings of the subject property that are current as of the effective date of an appraisal in a market value assignment if this information is

a. available in the normal course of business.

b. a matter of public record.

c. not

deemed confidential information.

d. required by the client.

138

Chapter 3 Quiz

11. STANDARD 2 requires appraisers to present findings

a. electronically.

b. in a manner that will not be misleading.

c. in an approved written format.

d. on Foundation forms.

3 139

Chapter 3 Quiz

3 12. According to STANDARD 2, regarding the information analyzed and methodology used in an assignment, the exclusion of ________ must be explained.

a. assignment results that are credible b. determining the scope of work necessary c. the sales comparison approach, cost approach, or income approach d. significant real property appraisal assistance

140

Chapter 3 Quiz

3 13. Regarding the appraiser’s certification: Which is a circumstance that would require an additional certification statement?

a. appraiser is licensed in multiple jurisdictions b. fee has been paid for procurement of the assignment c. omission of one or more of the approaches to value d. reasoning for use of a jurisdictional exception

141

Chapter 3 Quiz

3 14. Given the scope of work, in an appraisal review assignment of an Appraisal Report, the reviewer must observe that the current use of the subject property has been stated by the appraiser in the work being

reviewed and that the

appraiser has avoided considering other alternative uses of the property.

highest and best use conclusion coincides with the stated current use. opinion of highest and best use will accommodate the client’s intended use. support and rationale for the appraiser’s opinion of highest and best use is summarized.

142

Chapter 3 Quiz

3 15. The two dates required by USPAP that the reviewer should note in the work being reviewed are the effective date of the appraiser’s conclusions and the date of the report. Which BEST describes the date of the report?

a. date the appraisal report was prepared b. engagement date of the appraiser by the client c.

perspective of the appraiser on the effective date d. transmission date of the report to the client

143