Real Estate Analysis and Commentary in Florida

November 4th, 2013 12:31 PM

I have been asked how appraisers determine what a property is "worth" so I have decided to begin a series of posts once a week (or so) dedicated to valuation techniques. Here is part 1, I hope you all enjoy.

PART 1 - The Beginning Of The Appraisal Process

Scope Of Work

The Scope of Work is the first step in any appraisal process. Without a strictly defined Scope of Work an appraisal's conclusions may not be viable. By defining the Scope of Work, an appraiser can properly develop a value for a given property for the intended user, and for the intended use of the appraisal. The whole idea of "Scope of Work" is to provide clear expectations and guidelines for all parties as to what the appraisal report does, and doesn't, cover; and how much work has gone into it.

Appraisers are expected to identify six key parts of the appraisal problem at the beginning of each assignment:

  • Client and other intended users
  • Intended use of the appraisal and appraisal report
  • Definition of value (e.g., market, foreclosure, investment)
  • Any hypothetical conditions or extraordinary assumptions
  • The effective date of the appraisal analysis
  • The salient features of the subject property

Based on these factors, the appraiser must identify the scope of work needed, including the methodologies to be used, the extent of investigation, and the applicable approaches to value.

Once the details of the Scope Of Work are determined, the appraiser and client (and/or intended users) can decide on the reporting requirements.

Appraisal Reports

Appraisal reports fall into three basic categories: oral reports, form reports and narrative reports, all of which must comply with the USPAP requirements to:

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

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

3) clearly and accurately disclose any extraordinary assumption, hypothetical condition or limiting condition that directly affects the appraisal and indicate its impact on value. 

Oral reports are not as typical in everyday appraisal practice as are written reports. Testimony presented in a court of law or during a deposition, for instance, is an example of an oral appraisal report. What might be surprising, however, is that anytime someone who is clearly representing him/herself to be an appraiser states an opinion of value, they are required to have the data and analysis to support their verbal conclusion. 

Form reports are classified as summary appraisal reports and are typically used for residential or smaller mixed-use properties. They are simply an appraisal report presented on a form instead of written in a narrative format. They are typically the chosen deliverable for clients such as financial institutions, insurance agencies and governmental agencies who deal with the purchase and sale of mortgages in the secondary mortgage markets. The standardization of this report format allows for greater efficiencies in the review process. 

Narrative reports are the most typical deliverable requested for commercial appraisals. The narrative format falls into three categories:
  • Restricted-Use appraisal report 
  • Summary appraisal report 
  • Self-contained appraisal report
A restricted-use appraisal report is a short written document that essentially states all pertinent data as well as an opinion of value. Because of the absence of supporting data and analysis, this report is less common than the summary or self-contained report. A restricted-use appraisal report has limited reliability for other than the intended user because it cannot be understood properly without the additional information retained in the appraiser's work file.

A summary report is a written narrative which provides a moderate level of detailed information and analysis, greater detail than the restricted-use report but less than the self-contained. The summary report states all of the pertinent information but additionally summarizes details, analysis and conclusions that are not included in the restricted-use report. 

The self-contained appraisal report contains the highest level of detail of the narrative formats, going into greater descriptive detail than either the restricted-use or summary formats.
That's all for this week. Next week in part 2 we will discuss Price vs. Value and Highest And Best Use Analysis

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Posted by D. Jeff Smith on November 4th, 2013 12:31 PMPost a Comment

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