"as-is" Value In USPAP

[Rlong]

Where is it described in USPAP requiring an AS-IS value on an appriasal "Subject to Completion". I do it, I just need to know where it states it is required. (to settle a "discussion")

Bob in CO

 

[Ghost Rider]

If I remember right, it's not a USPAP requirement....It's a Fannie requirement, therefore covered under "supplimental standards" of USPAP.....but I'm not the USPAP guru on the board

 

[Rlong]

Yea after I typed that I thought possably the same thing. But I'm still not sure. I do it in commercial reports also. (I know I feel stupid not knowing why). I think my old residential reports used to site the guideline, but I'm too lazy to dig em out, there "offsite" (meaning in the shed out back).

I know we are suppose to do it, just not by what rule anymore...

Bob in CO

 

[CANative]

Does SMT-4 apply (as clarified by AO17)

Assignment Considerations
An appraiser asked to complete an assignment involving proposed improvements to real property should consider and discuss with the client:

§      the purpose and intended use of the appraisal report;

§      the effective date of the appraisal and the date when the proposed improvements are expected to be complete;

§      the physical and economic changes to the existing property and changes in the market for the property that may result from completion of the proposed improvement; and

§      the possible change in market competition from other properties over the time frame of the improvement project.



It is important for an appraiser to ensure that the client knows that the differences in the information considered in the two types of analyses can result in significant differences between a current and a prospective value opinion concerning the same subject property.



Taken together, these factors and the client’s needs determine whether it is most appropriate to develop:

§      a current value opinion on the basis of a hypothetical condition that the proposed improvements already have been completed, or

§      a prospective value opinion on the basis of an extraordinary assumption that the property will be improved as of a future date, as proposed.



If a prospective value opinion is the most appropriate, the appraiser must ensure that the requirements set forth in Statement on Appraisal Standards No. 4 (SMT-4) are properly met in the course of completing the assignment.



As stated in "General Comments" above, an appraisal of a property subject to completion of proposed improvements with a current date of value always involves use of at least one hypothetical condition (i.e., the proposed improvements have been completed as of the date of value), and this always requires reporting that the proposed improvements are appraised as if completed as described in the report, as of the date of value.

In an appraisal with a prospective date of value, the extraordinary assumption that the proposed improvements are complete as of that future date must be disclosed each time the appraiser expresses an opinion or conclusion that is affected by the assumption. The appraiser also should report any extraordinary assumption’s impact on each affected opinion and conclusion, and each extraordinary assumption’s effect on the appraisal’s results should be disclosed.

An appraiser should carefully review Standards Rule 1-4(h) and determine whether the information available for analysis is sufficient to identify the scope and character of the proposed improvements. If sufficient information is not available, an appraiser may have to invoke the DEPARTURE RULE and, for purposes of reasonable analysis, use an extraordinary assumption about the scope and character of the proposed improvements. In an appraisal with a prospective date of value, the extraordinary assumption about the scope and character of the improvements is in addition to the extraordinary assumption about those improvements being completed on the future date of value.

A current value opinion assignment does not require an appraiser to provide a prospective value opinion. However, so as to not be misleading, the appraisal report should clearly indicate the fact that the value of the property that actually exists as of the date of the report would be different from the value concluded for the property with the proposed improvements completed as described in the hypothetical condition(s) used in the appraisal.

 

[Tawfik Ahdab]

Greg is right, but there is also SMT-10: Here's the pertinent text (and it applies only for federally-related transactions.

SMT 10

Assignments for Use by a Federally Insured Depository Institution in a Federally Related Transaction

focus on this heading.

Failing to indicate the "as is" value of the property as of the date of the report and how the "as is" value differs from the value conclusion under a hypothetical condition



When a property is appraised for market value as of a current date based on a hypothetical condition, an appraiser must ensure that the appraisal report contains appropriate disclosure of the hypothetical condition, including an indication of its impact on value [SR 2-1© and SR 2-2(a) or (B)(viii)].



SUPPLEMENTAL STANDARDS RULE: The agencies’ appraisal regulations require sufficient information and analysis to support the regulated institution’s decision to engage in the transaction. The agencies’ guidelines state that for federally related transactions, "an appraisal is to include the current market value of the property in its actual physical condition and subject to the zoning in effect as of the date of the appraisal" (current date of value). If, by failing to provide this opinion, when possible, an appraiser violates the agencies’ appraisal regulation and guidelines, the appraiser violates the SUPPLEMENTAL STANDARDS RULE.

(My bold emphasis)

If it is not possible to provide an opinion as to the current market value of the property in its actual physical condition and subject to the zoning in effect as of the date of the appraisal, the appraiser must clearly explain the circumstances and reasons why such an opinion could not be developed and reported."

Please note that the crux of the matter is to identify whether your appraisal is for a federally-related transaction. A few years ago, A Fannie Mae representative on this very forum explained that appraisals for Fannie Mae are not considered by that same entity as federally-related. However, there is widespread belief, even among every single USPAP instructor I've told this to, that Fannie/Freddie appraisals are considered federally-related. It will require a statement from the ASB of the Appraisal Foundation to clarify if SMT 10 applies to secondary market loans. Until then, play it safe, and assume the need to provide an "as is" value for the subject along with the value of the property based on the hypothetical condition invoked.

 

[George Hatch]

Statement 10 applies to federally related transactions. But there are also requirements for the use of Extraordinary Assumptions (1-2g) and Hypothetical Conditions (1-2h) along with reporting requirements (2-2*.viii) that together require the appraiser to identify (1-2) and disclose (2-2) such assumptions and conditions in the development and communication of the appraisal. Further, 2-2*.viii has a comment:

(viii) state all assumptions, hypothetical conditions, and limiting conditions that affected the analyses, opinions, and conclusions;

Comment: Typical or ordinary assumptions and limiting conditions may be grouped together in an identified section of the report. An extraordinary assumption or hypothetical condition must be disclosed in conjunction with statements of each opinion or conclusion that was affected.

It is the last line "must be disclosed in conjunction with statements of each opinion or conclusion that was affected." that brings this situation into focus for non-federally related appraisal work. At this point, the appraiser is faced with the question of how to do that so that the reader will understand the extraordinary or hypothetical involved and its effect. The most practical way to do that in a definitive manner is to present the "As Is" along with the "Subject To".

So let's say you're appraising proposed construction. You have the plans, specifications and cost breakdowns necessary to form the basis for your hypothetical condition, the hypothesis being "if the property were built out according to these plans, what would it be worth as of the effective date?"

So in using this hypothetical, the best way to demonstrate both the use of the hypothetical as well as its effect on value is to report the value both ways, with and without the condition. That way, nobody misunderstands that the appraisal is based on a hypothetical or what it's impact is. An appraiser might possibly be able to indicate its effect on value by making some vague "it would be less without this condition" type of comment, but that isn't a meaningful or particularly effective way of explaining the effect.

Now, I'm sure someone will be along presently to invoke the "condo gambit" as an reason to never have to deal with an "as is" value estimate. The "condo gambit" and it's variants are based on situations where an "as is" value cannot be developed because the subject's property interest won't exist as such until all the improvements are complete and the interest is created. Other variations of the "condo gambit" are where the subject property as proposed is a single finished lot in a developing but not yet recorded subdivision; or a proposed leasehold interest is based on a lease that hasn't been signed; or anytime where the appraiser's technical competence is insufficient to quantify and qualify exactly what the subject's "as is" condition represents in the market. Obviously where it isn't possible or feasible to develop an "as is" the appraiser would probably be just fine by disclosing that and saying so. Our ethical standards do not require us to make stuff up just to fill in the box. Instead, our job is to both develop and communicate our value opinions in a manner that won't be misleading, which is how reporting the "As Is" in conjunction with the "Subject To" came about.

 

[John SRA]

Tawfik,

The ASB addressed the matter of "as is" value and the definition of FRT in some Q&A's. You can find them at the very end of the 2004 FAQ book.

Question 184 makes it clear that things for Fannie Mae are not FRTs.

"Under the agencies’ regulations, transactions that qualify for sale to a United States government agency or United States government sponsored agency (e.g., FHA, VA, Fannie Mae, Freddie Mac, Farmer Mac, and Sallie Mae) are exempted and as such are not federally related transactions."

Have a good day

JC

 

[Tawfik Ahdab]

Dear John,

Many thanks for the update. I've been too busy to keep up.

I am pleased with the opinion, which will make things easier.

 

[Ben Vukicevich SRA]

Tawfik,

In addition to what John posted, there's also a letter from one of the big 5 floating out there that states that if the loan is portfolioed by the regulated institution it doesn't come under their guidelines/Statement 10, if the loan is underwritten to Fannie, Freddie, FHA, VA,etc guidelines.

So no "as-is" value for non-FRT's and for loans that could be considered FRT's but are underwritten for sale to the GSE's, FHA and VA but portfolioed.

Confused yet???




Ben

 

[Chris Colston]

Originally posted by John@SRA,Mar 10 2004, 07:17 PM
The ASB addressed the matter of "as is" value and the definition of FRT in some Q&A's. You can find them at the very end of the 2004 FAQ book.

Question 184 makes it clear that things for Fannie Mae are not FRTs.

"Under the agencies’ regulations, transactions that qualify for sale to a United States government agency or United States government sponsored agency (e.g., FHA, VA, Fannie Mae, Freddie Mac, Farmer Mac, and Sallie Mae) are exempted and as such are not federally related transactions."

I was recently told at a USPAP update course that only FDIC transactions can be considered FRT. Loans sold on the secondary market usually involve FRT. So since we never really know if the loan is going to be sold, it is best to perform the appraisal and report the results as if it will be sold and therefore become an FRT.

It's called CYA in case it's an FRT with the FDIC...now you should really be confused :rainfro: