Slide 1 STEPS IN THE APPRAISAL PROCESS. Slide 2 WHAT IS AN APPRAISAL? AN UNBIASED ESTIMATE OF THE...

STEPS IN THE APPRAISAL PROCESS

WHAT IS AN APPRAISAL?

• AN UNBIASED ESTIMATE OF THE NATURE, QUALITY, VALUE, OR UTILITY OF AN INTEREST IN, OR ASPECT OF, IDENTIFIED REAL ESTATE AND RELATED PERSONALTY.

WHO IS AN APPRAISER?• EDUCATED• TRAINED• EXPERIENCED• TESTED• CERTIFIED GENERAL

CERTIFICATION• DESIGNATION

BEGINNING THE PROCESS• WHAT IS NEEDED

– CLEAR INSTRUCTIONS• ESTATE TO BE APPRAISED• INTENDED USE• INTENDED USER• PURPOSE OF THE APPRAISAL• DEFINITION OF VALUE• TYPE OF REPORT

CLEAR INSTRUCTIONS• DUE DATE• COMPENSATION• COPIES OF DEEDS• COPY OF SURVEYS• INSTRUCTIONS ON PERSONAL PROPERTY• SPECIAL INSTRUCTIONS ON

– TIMBER– IRRIGATION WATER– SUBSURFACE RIGHTS– IMPROVEMENTS

CLEAR INSTRUCTIONS• TITLE REPORT OR LISTING OF

ENCUMBRANCES• DATE OF VALUE• MAPS • LEGAL DESCRIPTION OF PROPERTY• COPIES OF ANY LEASES, OR CONTRACTS• ASSUMPTIONS AN LIMITING CONDITIONS• OTHER PERTINENT INFORMATION TO THE

APPRAISAL REQUEST

FIRST STEP

• APPRAISER ASSESSES OWN COMPETENCY TO COMPLETE

• REVIEWS SUBJECT MATERIAL• VERIFIES INFORMATION

– COURTHOUSE RECORDS, ZONING– FSA RECORDS-MAPS, PRODUCTION– LANDOWNER

FIRST STEP

• BEGIN COLLECTING SALES– LOCATION– SALE DATES– SIMILAR LAND MIX– SIMILAR IMPROVEMENTS– SIMILAR PROPERTY RIGHTS– ARMS LENGTH TRANSACTIONS

FIRST STEP

• SIMILAR SOILS AND TOPOGRAPHY• DETERMINE ZONING AND HIGHEST AND

BEST USE• SIMILAR WATER, TIMBER, SUBSURFACE

RIGHTS• VERIFY PRODUCTION• COLLECT MAPS, DEEDS AND BEGIN

VERIFICATION PROCESS

FIRST STEP• VERIFY SALES WITH BUYER AND SELLER• ESTABLISH ACTUAL SALE/PURCHASE

PRICE • DETERMINE MOTIVATION OF BOTH

PARTIES – ESTABLISH ARMS LENGTH• DETERMINE LAND AND IMPROVEMENT

ALLOCATIONS FROM BUYER/SELLER PERSPECTIVE

FIRST STEP• GATHER SALES OF LIKE ENCUMBERED

SALES• GET COPY OF RECORDED EASEMENT• ANALYZE RESTRICTIONS AND

LIMITATIONS OF EASEMENT• DETERMINE TERMS• CONDITION AT TIME OF SALE-

RESTORED?

FIRST STEP

• GATHER LOCAL AND REGIONAL INFORMATION– SOCIAL– ECONOMIC– GOVERNMENT– ENVIRONMENTAL

APPRAISAL CONCEPTS

AN APPRAISAL IS THE

ESTIMATE OF VALUE OF THE

RIGHTS OF OWNERSHIP OF

A THING. THE RIGHTS ARE

VALUED, NOT THE THING

ITSELF.

THING

PROPERTY

REAL ESTATE

LAND

APPRAISAL CONCEPTS

IF THE GENERAL PUBLIC SHARED ALL THE RIGHTS TO YOUR HOME WITH YOU, WHAT WOULD ITS VALUE BE?

SO, YOU SEE, ITS THE “SPECIAL RIGHTS” TO PRIVATE USE THAT ARE VALUABLE, NOT THE THING.

HIGHEST AND BEST USE

COMPONENTS OF HIGHEST AND BEST USE

• LEGALLY PERMISSIBLE

• PHYSICALLY POSSIBLE

• FINANCIALLY FEASIBLE

• MAXIMALLY PRODUCTIVE


ALL POSSIBLE USES

LEGALLY PERMISSIBLE USES

PHYSICALLY POSSIBLE USES

FINANCIALLY FEASIBLE USES

MAXIMALLY PRODUCTIVE USES

HIGHEST ANDBEST USE


• HIGHEST AND BEST USE AS IF VACANT AND AVAILABLE

FOR IMPROVEMENT TO ITS HIGHEST AND BEST USE

• HIGHEST AND BEST USE AS PRESENTLY IMPROVED

• RECONCILIATION OF HIGHEST AND BEST USE

APPRAISAL PRINCIPLES

HIGHEST AND BEST USE: EXAMPLE #1

• WHAT IS THE HIGHEST AND BEST USE AS IF VACANT?

• WHAT IS THE HIGHEST AND BEST USE AS IMPROVED?

• WHAT IS THE INDICATED VALUE OF THE BUILDING?



YOU ARE APPRAISING A 100’ X 100’ IMPROVED LOT ON COMMERCIAL STREET. IT HAS COMMERCIAL ZONING AND IS IMPROVED WITH A 1,500 SF RESIDENCE.

INFORMATION YOU HAVE GATHERED INCLUDES:



LAND VALUE (IF VACANT) $25,000

RESIDENTIAL SALE #1 $30,000





100’

100’

1,500 SF

SALE #2

$32,500

SALE #3

$32,000

SALE #1

$30,000

COMMERCIAL STREET



YOU ARE APPRAISING A 220 AC. VACANT TRACT ZONED

AGRICULTURE. IT IS WITHIN THE CITY LIMITS OF A MAJOR

CITY, POP. 100,000. IT IS SOUTH OF MAJOR STREET. CITY

OFFICIALS INDICATE NO UTILITIES SOUTH OF THE STREET

WITH NO CURRENT PLANS TO EXTEND THE UTILITIES.



SALE #1: 200 AC., $10,000/AC., ZONED AGRICULTURE,

SALE CONDITIONAL ON ZONE CHANGE, ZONE CHANGE

APPROVED

SALE #2: 240 ACRES, $10,500/AC., ZONED RESIDENTIAL

DEVELOPMENT



SALE #3: 240 AC., $1,500/AC., RURAL ROAD, ZONED

AGRICULTURE

SALE #4: 200 AC., CONTRACT AT $10,000/AC., CONTINGENT

ON ZONE CHANGE TO RESIDENTIAL, REQUEST

DENIED, PRICE REDUCED TO

$3,500/AC., SOLD



• FROM THE INFORMATION GIVEN:

• WHAT IS THE HIGHEST AND BEST USE OF THE PROPERTY?

• WHY?

• WHAT IS ITS PROBABLE VALUE?

• WHY?


HIGHEST AND BEST USE: EXAMPLE #2SALE #1

$10,000/AC

SALE #4

$3,500/AC

SUBJECT

SALE #2

$10,500/AC

SALE #3$1,500/AC

MAJOR ROAD

COUNTY ROAD

HIGHEST AND BEST USE160 ACRE FARM

10 ACRE FARMSTEAD

INSPECT SUBJECT• SET TIME WITH LANDOWNER• INSPECT ENTIRE PROPERTY

INCLUDING IMPROVEMENTS• TAKE PHOTOS• ASK MANY QUESTIONS• VERIFY ACCESS,

ENCROACHMENTS, EASEMENTS

INSPECT SUBJECT• LOOK FOR ANY ENVIRONMENTAL ISSUES• OBSERVE NEIGHBORHOOD• ASSESS CONDITION OF LAND AND

IMPROVEMENTS• COLLECT ALL NEEDED INFORMATION• VERIFY AREA OF PROPOSED EASEMENT

AND ACCESS

INSPECT SALES

• VIEW ALL AREAS OF SALES• TAKE PHOTOS• NOTE ANY CHANGES SINCE PURCHASE• NOTE CONDITION OF LAND AND

IMPROVEMENTS• NOTE ACCESS ISSUES, MINERAL

PRODUCTION, ENCROACHMENTS, ENVIRONMENTAL ISSUES

ANALYSIS• CONSIDER ALL ASPECTS OF

SUBJECT PROPERTY• COMPLETE ANALYSIS OF SALES

– LAND CLASS ALLOCATION– BUILDING ALLOCATION– INCOME APPROACH– COST APPROACH– OTHER ASSET ALLOCATIONS, TIMBER,

SUBSURFACE

ANALYSIS• COMPARE SALES TO SUBJECT

– SIZE– LOCATION– PROPERTY RIGHTS– LAND USE– NATURAL RESOURCES– IMPROVEMENTS– OTHER AMENITIES

LAND VALUE ESTIMATE

• (DIRECT) SALES COMPARISON

• ALLOCATION

• EXTRACTION

• LAND RESIDUAL

• CAPITALIZATION OF GROUND RENT

• SUBDIVISION ANALYSES (DEVELOPMENT)

ANALYSIS LAND VALUE ESTIMATE

• DEVELOP SALES GRID• DEVELOP MATCHED PAIRS TO

ESTABLISH WHAT BUYERS ARE PAYING FOR

• EXAMPLE

COST APPROACH

COMPONENTS

LAND VALUE IS DETERMINED USING ONE OF THE FOLLOWING

TECHNIQUES:

• DIRECT SALES COMPARISON

• ALLOCATION

• EXTRACTION

• LAND RESIDUAL

• GROUND RENT CAPITALIZATION

• SUBDIVISION ANALYSIS (DEVELOPMENT)

COST APPROACH

COMPONENTS

• RCN

– REPLACEMENT COST NEW

– REPRODUCTION COST NEW

• TOTAL ACCRUED DEPRECIATION

COST APPROACH

DEPRECIATION

THE LOSS IN VALUE RESULTING FROM ANY CAUSE

ACCRUED DEPRECIATION

THE DIFFERENCE BETWEEN AN IMPROVEMENT’S REPRODUCTION OR REPLACEMENT COST NEW AND ITS MARKET VALUE AS OF THE DATE OF VALUATION

COST APPROACH

TYPES OF DEPRECIATION

• PHYSICAL DETERIORATION

– CURABLE

– INCURABLE

• SHORT-LIVED

• LONG LIVED

COST APPROACH

• FUNCTIONAL OBSOLESCENCE

– CURABLE

• EXCESS

• DEFICIENCY

– INCURABLE

• EXCESS

• DEFICIENCY

• EXTERNAL OBSOLESCENCE

COST APPROACH

FUNCTIONAL OBSOLESCENCE• CURABLE

– EXCESS• A FARM NEEDS HAY STORAGE; IT HAS AN OLD

BARN WITH STALLS AND MANGERS THAT COULD BE CONVERTED TO STORAGE BY REMOVING THE ITEMS

– DEFICIENCY• AN OLDER BARN HAS A DIRT FLOOR WHILE

CURRENT CONSTRUCTION REQUIRES A CONCRETE FLOOR

COST APPROACH

FUNCTIONAL OBSOLESCENCE• INCURABLE

– AN OLDER BARN HAS A THICK, OVERSIZED, STONE FOUNDATION, BUT CURRENT DESIGN WOULD BE A BARN OF POLE CONSTRUCTION

• DEFICIENCY– A MACHINE SHED BUILT IN 1960 HAVING AN

EAVE HEIGHT OF 9 FEET WILL NOT ACCOMMODATE NEWER EQUIPMENT

COST APPROACH

EXTERNAL OBSOLESCENCE• ALMOST ALWAYS INCURABLE

– URBAN ENCROACHMENT TOWARD AN INTENSIVE LIVESTOCK OPERATION

– CHANGING CONSUMER TASTE– CHANGES IN GOVERNMENT SUPPORT

PROGRAMS

INCOME APPROACH

NET OPERATING INCOME

INVESTMENT OR SALE PRICE OF PROPERTY

OR

RO = I/V

“RO”= RATE OF CAPITALIZATION

“I”= NET OPERATING INCOME

“V” = SALE PRICE/VALUE OF PROPERTY

INCOME APPROACH

VARIATIONS OF FORMULA

INCOME = V x R

VALUE = I/R

RATE = I/V I

R V

RECONCILIATION AND FINAL VALUE CONCLUSION

• FINAL STEP IN THE VALUATION PROCESS

• APPRAISER MUST:

– EXAMINE VALUES FROM ALL APPROACHES

– CONSIDER RELATIVE RELIABILITY OF EACH APPROACH

– EXPLAIN VARIATIONS AMONG INDICATIONS

– ACCOUNT FOR ANY INCONSISTENCIES BETWEEN INDICATIONS

RECONCILIATION AND FINAL VALUE CONCLUSION

• REPORT A FINAL VALUE CONCLUSION

– REFLECTS APPRAISER’S OPINION, JUDGMENT, AND

ANALYSIS OF DATA PRESENTED IN THE REPORT

– MUST BE CONSISTENT WITH THE LOGIC DEVELOPED IN ALL

SECTIONS OF THE REPORT

CERTIFICATION

I certify to the best of my knowledge and belief:

The statements of fact contained in this report are true and correct.

The reported analyses, opinions and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, unbiased professional analyses, opinions, and conclusions.

I have no (or other specified) present or prospective interest in the property (if any) that is the subject of this report, and I have no (or the specified) personal interest or bias with respect to the parties involved.

I have no bias with respect to the property that is subject of this report or to the parties involved with this assignment.

My engagement in this assignment was not contingent upon developing or reporting predetermined results.

CERTIFICATION

My compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal.

My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice and The Uniform Appraisal Standards for Federal Land Acquisition.

I have (or have not) made a personal inspection of the property that is the subject of this report. (If more than one person signs the report, this certification must clearly specify which individuals did and which individuals did not make a personal inspection of the property.)

No one provided significant real property appraisal assistance to the person signing this certification. (If there are exceptions, the name of each individual providing significant real property appraisal assistance must be stated.)

SIGNATURE DATE

WHY DO REVIEWS?

History and Need for Reviews

•Legal Requirement for federal agencies since 1970’s

•Good Business practice•Confidence of Public

Why Have Reviews

•Quality Control•Check Technical Accuracy•Corrections of errors and omissions

•Client confidence

Why Have Reviews

•Risk management•Identify divergencies•Raise level of professionalism

•Approved appraiser

Need For Review Course•Compliance with Standard 3•Consistency among reviewers•Management confidence•Teach procedures•Rules and sideboards•Establish review standards

Review Appraiser

• Examine reports of other appraisers

• Determine validity of data and conclusions

• Determine if conclusions are consistent with the data reported

Role of Review Appraiser• No subjective judgement• No hindsight (hindsight much more

accurate than foresight, but not near as useful . . . . )

• Not patronize• Not make personal references• Not be unduly critical• Results may be used against

appraiser

Role of Review Appraiser• Markets differ, so do appraisals• No right vs. wrong

Reasonable vs. unreasonable

Role of Review AppraiserLearning experience for the

appraiser

1. Recommendations to appraiser2. Diplomatic and gramatically correct3. Meaningful comments4. Not a re-appraisal

Role of Review Appraiser

Reviewer Decisions

How much is enough?How much is too much?

Is it good enough to approve?Is it bad enough to

disapprove?

Definition of Appraisal ReviewTechnical Review

“A mental walk-through of the property through the eyes of the principle appraiser”

Not a check-list

Definition of Appraisal ReviewTechnical Review“An analysis of the completed

appraisal to determine:• If conforms to specific

requirements• Reasonably consistent and

mathematically correct”

Definition of Appraisal Review

A technical review is “an appraisal of the appraisal.”

Categories of Appraisal ReviewAdministrative Reviews1. Completed by someone not an

appraiser• Loan officers• Bankers• Attorneys• Others??

Administrative Reviews2. Individual may not have competence

to complete technical review3. Check sheet generally used4. Sometimes used to determine if

technical review required5. Used for business decisions6. May not include check of calculations

Administrative Review7. Does/does not include check for

reasonableness?8. Relies/does not rely on

judgement, experience, logic?9. Often used to authorize payment

by government10. Used by banks to determine

reasonableness

Administrative Review11. Used by attorneys to search for

weak portions of report12. Not bound by USPAP Standard 313. Administrative review is used to

determine degree of conformity with institutional or agency requirements- does the report contain all of the pieces?

Administrative Review• Not USPAP Compliance Review• Not Technical Review• Can be conducted by someone

other than an appraiser• Appraisal completed in accordance

with client’s requirements

Goal of Reviewer

OBTAIN AN ACCEPTABLE

REPORT

ISSUES FROM 06 FOR APPRAISERS/APPRAISALS• Lack experience completing Yellow Book appraisals.• Failing to follow the Yellow Book when completing appraisals. • Failure to address required items in the Yellow Book.• Lack of knowledge of Yellow Book.• Lack of understanding of required appraisal specifications• Lack of compliance with required appraisal specifications• Not providing a self contained report• Not discussing crop base/allotments as required by appraisal

specifications• Incorrect rights appraised stated.• Incorrect market value definition• Math errors• Failure to discuss and analyze larger parcel concept• After condition being used to determine larger parcel• Appraising only proposed easement area when larger parcel

exists• Acreage differences between the before and after are different

which does not provide a true market value

ISSUES FROM 06 FOR APPRAISERS/APPRAISALS• Lack of understanding of larger parcel• Lack of verification and description of comparable sales including soil types and

crop bases and adjustments• Not addressing irrigation water rights• Not addressing subsurface rights on comparables or making adjustments• Failure to adjust after sales for restoration completed• Failure to adjust for subsurface rights• Incorrect analysis of comparable sales• Lack of land mix analysis and other adjustment on comparables• Lack of support and documentation for all adjustments made, matched pairs,

head to head• Time adjustments not supported from market and not consistently used in

before and after values• Adjustments not supported from the market• Inaccurate adjustments based upon comparable sales• Inconsistencies in rental rates and expenses when analyzing income approach

on comparables and subject• Work orders issued when contractors have not met qualifications, for example

no Yellow Book course• Appraisers being instructed to only appraise easement area

ISSUES FROM 06 FOR APPRAISERS/APPRAISALS• Comparable sales are not current• Comparable sales unlike subject• After comparable sales not analyzed for type of restrictions and effect

on value• No after sales with same or similar restrictions • After sales not stating terms of easement, restrictions, and if

restoration work had been done at time of sale and basis for adjustments

• Appraisers not researching wider markets for after sales• After sales not being analyzed for comparability to subject

encumbered land • Use of unsupported loss in value due to placement of the easement• Failure to comply with USPAP in after value by not using hypothetical

condition• Cloning of reports without adequate review produces appraisals with

inaccurate information, information not applicable to specific assignment, and does not represent market values.

• Inadequately describe buildings, location map and support for valuation or exclusion

• Acreage differences between the before and after are different which does not provide a true market value were undetected during reviews

ISSUES FROM 06 REVIEWERS• Appraisal reviews not detecting problem areas and

accepting appraisals• Inconsistency among reviewers both administrative and

technical• Technical reviewers pick on non-critical issues and miss

valuation issues• Technical reviewers not addressing crop base/allotments,

irrigation water, subsurface • Technical reviewers not familiar with review specifications• Inexperienced technical reviewers• Reviewers not understanding appraisal specifications• Administrative reviewers lack real estate background and

understanding• Administrative reviewers accepting appraisals that do not

meet appraisal specifications and contain numerous fatal issues relating to values

• Lack of quality control at NHQ level

ISSUES FROM 06 NRCS• NRCS not providing required information to appraisers• Not providing information on crop base/allotments• Not providing maps of owned property• Not providing map of proposed easement and access• Not assigning technical reviewer at the time the appraisal is

assigned to the appraiser • Not ordering the first appraisal and having a technical review

completed before the appraiser completes any other appraisals• Setting due dates for all orders due at the same time. • Lack of contact with local appraisers on solicitations• Issuing state wide solicitations rather than breaking down by areas

or counties• Directing appraisers to value conclusions• Not ordering appraisals on a timely basis• Last minute appraisals ordered which drive up costs• Establish longer completion times which will lower costs• Offers being made on unsupported values opinions• Lack of sufficient qualified appraisal staff• Lack of over sight by NRCS

Fish and Wildlife Migratory Bird Hunting and Conservation Stamp Act of March 16, 1934, as amended by Public Law 85-585 on August 1, 1958.• Utilizes Secretary’s legislated authority for all matters pertaining to Small

wetlands Acquisition Program under the 1958 amendment to the Migratory Bird Hunting and Conservation Stamp Act, aka Duck Stamp Act.

• 1958 amendment allows the Secretary broad discretion how property rights are acquired.

• Amendment sets forth the requirement to acquire small prairie potholes and interest therein, but is silent on the specific land acquisition details.

• used to acquire critical migratory waterfowl breeding habitat as Waterfowl production Areas (WPA) in the Prairie Pothole Region of the northern Great Plains.

• Uses administratively determined payments, as authorized, in lieu of an appraisal.

• Rights acquired from private landowners are minimally restrictive for wetland and grassland easements.

• Does not address restrictive habitat easements or fee acquisitions.• Agency determined that minimally restrictive easements acquire few property

rights, appraisals completed under Yellow Book and USPAP typically indicate little or no impact on property values, therefore little or no value placed on minimally restrictive easements.

• Established a direct percentage of fee unit value through a mathematical formula of the property to be encumbered to determine easement payment.

• Acquisitions range between $2,500 and $20,000 and sometimes reach as high as $50,000.

• Not authorized for NRCS

IRS APPRAISAL REQUIREMENTS• APPRAISAL MUST HAVE A DATE OF VALUE WITHIN 60

DAYS OF CONTRIBUTION• APPRAISALS CAN NOT BE COMPLETED MORE THAN 60

DAYS PRIOR TO CONTRIBUTION OR NO LATER THAN FILING OF RETURN

• LARGER PARCEL INCLUDES PROPERTY OWNED BY SIBLINGS, CHILDREN, GRANDCHILDREN AND SPOUSE

• APPRAISER MUST BE A DESIGNATED MEMBER OF RECOGNIZED APPRAISAL ORGANIZATION (H.R.4)

• SPECIFIC EDUCATION AND EXPERIENCE IN VALUING SAME TYPE OF PROPERTY

• APPRAISER SELECTED BY PROPERTY OWNERS

Slide 1 STEPS IN THE APPRAISAL PROCESS. Slide 2 WHAT IS AN APPRAISAL? AN UNBIASED ESTIMATE OF THE...

Documents

Transcript of Slide 1 STEPS IN THE APPRAISAL PROCESS. Slide 2 WHAT IS AN APPRAISAL? AN UNBIASED ESTIMATE OF THE...