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Appraisal Purpose Affect On Fmv?

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C. Gailor

Freshman Member
Joined
Jun 13, 2003
Just so you know..... I am a lawyer......(please don't leave!). I have to deal with an appraiser (No. 1) next week in court who did an appraisal arriving at $464,000. Subsequent appraisal for litigation purposes of the same property by the owner (who is the defendant) put the value at $300,000 (No. 2). They are calling appraiser No. 1 to say that the $464,000 value was for "refinancing" purposes and therefore was inherently (validly) inflated and No. 2 is a better indicator of value. (There is no mention of refinancing in No. 1's appraisal report). The appraisal dates are 9 months apart. Suffice it to say that the owner wants a lower value. Are there any standards which state that FMV may differ depending on the purpose of the appraisal? Is this proposed testimony valid? Thanks in advance to anyone who can provide some insight since this is not intuitively obvious to an "ousider."
 

larryhaskell

Senior Member
Joined
Apr 23, 2002
Professional Status
Certified General Appraiser
State
Nevada
Who are "they" that are calling appraiser No. 1 to say that the value was inflated and appraisal No. 2 is a better indicator of value? Secondly, we do not use the term Fair Market Value. We estimate market value. If you have a copy of the report, you might want to read the definition of market value. To address your question, the estimate of value may differ on the type of value requested and the purpose of the appraisal. For example, if an appraisal is completed for estate purposes due to a death, the value would likely be based on a date months before the inspection date. If the purpose is to estimate market value for a relocation company, the value is projected into the future. I'm sure other appraisers will add examples but suffice it to say that the purpose of the appraisal may effect the estimate of value. Without knowing why the owner wants a lower value, I'm speculating that the first appraisal is considered to be inflated because the homeowner wants a lower value. Giving us more specific information would help. Give us some idea of what the litigation is about.
 

Francois K. Gregoire

Senior Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Florida
Originally posted by C. Gailor@Jun 13 2003, 11:10 AM
Just so you know..... I am a lawyer......(please don't leave!). I have to deal with an appraiser (No. 1) next week in court who did an appraisal arriving at $464,000. Subsequent appraisal for litigation purposes of the same property by the owner (who is the defendant) put the value at $300,000 (No. 2). They are calling appraiser No. 1 to say that the $464,000 value was for "refinancing" purposes and therefore was inherently (validly) inflated and No. 2 is a better indicator of value. (There is no mention of refinancing in No. 1's appraisal report). The appraisal dates are 9 months apart. Suffice it to say that the owner wants a lower value. Are there any standards which state that FMV may differ depending on the purpose of the appraisal? Is this proposed testimony valid? Thanks in advance to anyone who can provide some insight since this is not intuitively obvious to an "ousider."
C. Gailor,

Each of the appraisal reports should state the purpose of the appraisal, including the type and definition of value and its source. Most likely the purpose is to estimate (or provide and opinion of) market value. The full definition should be in the appraisal report. Compare the definitions provided in the two appraisal reports.

Each of the apraisal reports must state the intended use of the appraisal. See 2003 Uniform Standards of Professional Appraisal Practice, Standards Rule 2-2 (a)(ii) or 2-2 (b)(ii) or 2-2 (©) (ii). These are binding rules from which departure is not permitted. In other words, there is no valid reason to exclude the statement of intended use.

In my opinion, the intended use, in itself, should not influence the opinion of value, if the purpose of each was to develop an opinion of market value of specified real property interest as of a specific date. If Appraiser #1 indicates his opinion was influenced by the intended use (refinancing), his credibility, and that of his appraisal and appraisal report is subject to question.

Feel free to call or email for other questions or clarification.

[email protected]

Office 727-344-3393
Mobile 727-420-3804


Frank
 

George Hatch

Elite Member
Gold Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
California
To expand on the above comments a bit, what you really want to do is to examine the definitions of value upon which these different appraisals are based. Unless I am misreading your original question, I would bet that both of these appraisals are based on "Market Value", the definition of which will most likely be included in both appraisal reports. As a bit of trivia, we no longer use the definition of "Fair Market Value" as such any more, although there is a definition for "Fair Value" that differs slightly from "Market Value". Even if the definitions are not included, if the appraisals are stated to have been performed on the same basis (Market Value), they should reflect similar value opinions if done at the same time. That said, I would clarify that I wouldn't necessarily expect to see similar value opinions for 2 appraisals performed 9 months apart simply because the market conditions in many areas is constantly in flux and subject to change.

Assuming two appraisals were done (ethically and competently) on the same home with the same effective date and using the same definition of value, their opinions of value should be relatively similar and within a reasonable margin of error normally associated with rofessional opinions. As a power-user of professional opinions, I'm sure you understand that depending on the quality and quantity of data available for such an assignment, that difference is going to be higher under some circumstances than others.

The intended use and intended users of the appraisals should not be a consideration when it comes to the final conclusion of value; although there might be significant differences is different definitions of value are used. Market Value is Market Value, regardless if that Market Value is being developed for loan purposes, tax purposes, litigation purposes or whatever. However, value conclusions for separate appraisals done under Market Value and Use Value may indeed be different because of the different assumptions inherent in these different definitions.

In other words, for an appraiser to tell you that there is a legitimate reason for their Market Value-based appraisal to be higher because the intended use was for loan purposes, whereas the Market Value-based appraisal performed for litigation purposes will normally be lower is complete hogwash.

Matter of fact, our professional code of conduct expressly forbids such considerations:

Uniform Standards of Professional Practice (USPAP),

Ethics Rule, Conduct Section:

....An appraiser must perform assignments with impartiality, objectivity, and independence, and without accomodation of personal interests.

In appraisal practice, an appraiser must not perform as an advocate for any party or any issue. ......

Then there is the section in Standard Rule 1-2(b):
In developing a real property appraisal, an appraiser must:
(a) identify the client and other intended users;
(b) identify the intended use of the appraisers's opinions and conclusions;

Comment: Identification of the intended use is necessary for the appraiser and the client to decide:
- the appropriate scope of work to be completed, and
- the level of information to be provided in communicating the appraisal.

An appraiser must not allow a client's objectives or intended use to cause an analysis to be biased.

To reiterate; regardless of the use, the appraised value opinions should be reasonably similar if developed under the same definition of value. Appraisers routinely get asked to 'appraise high' or 'appraise low' based of these different uses. Unfortunately, some of our 'peers' accomodate these requests, and in so doing, perpetuate the myth that appraisers do their job based on personal whim rather than their professional ethics. From your description, it appears that one or possibly both of the appraisals you have in hand may have some problems in this regard. If that turns out to be the case, you would be doing us all a favor by sending them both into your state's appraisal board and ask them to sort it out.

I hope this helps.


George Hatch
 

Austin

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Virginia
George:
Remember that debate we had yesterday and I asked you to explain to me the nuances and fine distinctions between market value and fair value? I think this lawyer's question just answered that question for us both. For the benefit of our lawyer asking the question, yes some appraisers, most generally mortgage loan appraisers, do have two standards of market value. Having said that, don't get the wrong idea about appraisers, the problem is with the system. If you do mortgage appraisals you either come up with the number needed to make the deal work a high percentage of the time or you don't get any more work.
I do a lot of estate work and my sole objective is to find the correct answer because I know the property I am appraising is going to be sold and if I am wrong my client will find out in short order. I admit, and I work for a lender that gives me far more freedom than the vast majority of appraisers, that there is implied pressure to hit the highest number possible for whatever reason, refinancing, equity, and mortgage lending. That is a sad story but that is the way it is. This year has been the worse in my career with lenders asking if I can't go another $10,000 on that one. It is like walking a tight rope every day of the week.
I went to HS with a very smart dude that later graduated from Duke U. medical school and he told me that medical science could do a lot of good things but that the state of the art was at a very crude state of development. That was in the 1970's. I will say the same thing to you about appraising as of this date, but like the MD's, some of us are working on that problem. Don't throw the baby out with the bath water and don't let any morgtage appraisers work on your brain unless you pay up front.
 

Carnivore

Elite Member
Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
North Carolina
I must first say I could care less which appraisal is correct because they have no relevance to each other anyway. To try and impeach a report with another report with an effective date 9 months later is not reasonable. Not only is definition of market value important, but scope of work and intended user is going to play a major role.

Certainly, this requires a Standard three review as a bare minimum and Ideally a retrospective appraisal based upon the same effective date with the same purpose, intended use, intended user and SAME statement of limitation and certifications page.

This reminds me of a report I did about fivel years ago for a purchase. Two years later they divorced and the hubby had to pay cash to the wifey in the settlement. Needless to say his new appraisal came in barely above the original sale price and hubby after cost to sell did not owe the wifey anything. All hell broke loose over that one. You see it turned out that these two fought and had really tore up the house. Physical condition was deplorable.

Get a restrospective appraisal or a review and compare apples to apples.
 

C. Gailor

Freshman Member
Joined
Jun 13, 2003
Thanks to all of you who replied on my question. You make it sound like the reference to "fair market value" which is the standard used in our statute regarding valuation and distribution of property may be outdated although business appraisers still use FMV. Your suggestions are very helpful and I will follow through. This is a great forum by the way with an amazing degree of participation. :yellowblack:
 
Joined
Jan 13, 2002
Professional Status
Retired Appraiser
State
Florida
Thank you! Please do ask more questions here as more come up. You have a very interesting case that many of us here would like to know more about as it happens.
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
G Gailor
The chances are close to 100% that the differences in value in the two reports is caused by differences in appraisal 'logic,' not caused because the two appraisers sought to estimate two distinct economic quantities (ie, different "purpose"). FMV and Market Value are pretty much synonomous terms along with many other variations. Check your Black's Law Dictionary and you find Actual Value and many others. Many state jurisidictions (and the feds) use the the term FMV, which is the older synonym and remains on the books. Also, the nine-month date difference is unlikely to account for the difference.

There is some confusion in the thread and elsewhere about the 'subtle' differences between "purpose" and "intended use" (formerly called "function"). Purpose is now construed as the definition of value, but in my view does not make sense if it is not also used to indetify subject property and the date - as in, 'the pupose of this appraisal is to find the FMV of Property X as of Date Y.' The "intended use" is the reason the client and others need the appraisal. So 'mortgage finnance' decisions would be a reason why someone would want an appraisal, an intended use, even though many erroneously say 'mortgate purposes.'

The appraisal process is just another application of common sense. The decision tree starts with finding out why the client needs the appraisal (intended use) and that leads the appraiser to ask/know what property, date and definition of value (purpose) and that leads the appraiser to know how much and what kind of research and analysis to do (scope of work performed). As long as two appraisers are appraising the same subject, as of the same date, by the same/similar definition of value (same purpose), they should reach the same/similar results - regardless of the intended use. The exception to that is when the intended use would reasonably justify a limited/quickie scope of work. In that case, the differences in research and analysis performed could cause a significant, but legitimate. difference in results.

FWIW, Counselor, you do not sound very prepared to fight the battle of the expert witnesses. I never send my lawyer-client-gladiators into the arena without an adequate arsenal.
 
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