Listen to the appraiser? It could happen......

[George Hatch]

I appraised a used car sales lot in a suburban municipality. The lot fronts a major commercial thoroughfare and is zoned for general commercial uses. The only stuctural improvement is a 360 SqFt office with a 760 SqFt apartment over it, situated almost in the middle of the lot. I figure the existing use is actually the highest and best use because this thing has a rent, backed up by a rent survey with other used car sales lots, that exceeds what the lot would otherwise get in any other use with the current improvements or as vacant. So far, no problemo.

After I turn in the appraisal report to my client, a bank, I get a call from the local VP. Says, their institution doesn't like car sales lots, won't loan on vacant land value, and wants me to put a market value on the property based on any other kind of use. He suggests a photo developing kiosk or insurance office. Since there is no other use (especially not those) as profitable as the existing use, I tell him 'no can do'. My reasoning being that is the definition of Market Value is based on the assumption of knowledgeable buyers and sellers acting in their own best interests. Since they would know what the most profitable use is, they would assume the appraiser's 'market value opinion' applied to that use. Further, FIRREA requires federally related transactions use appraisals based on 'Market Value'. I offered to re-write the report, adding an additional value based on 'Use Value', but that the original valuation based on 'Market Value' would remain in the report, so as not to confuse anyone who might read it later. I further offer that their situation is an underwriting problem rather than an appraisal problem. I got away with that because of our long term (10 years+) business relationship.

The VP writes it up the way I explained it. When the President of the bank reads the VP's write-up, he tells the VP to go with the appraisal as originally submitted. Actually, he was quoted as saying the appraiser is absolutely right. Case closed.

I prefer to handle situations like this proactively rather than reactively. I reminded them that if their requirements morphed in the future to inform me in advance, before I get into the appraisal, so we can resolve questions like this before they become a problem.

I submit that if the bank had been aware of their own requirements in this case, they would never have asked me to 'dork' the report in the first place. Obviously, it doesn't always go this way, but it should.


Sorry for the long post.

George Hatch

 

[Tom Hildebrandt]

George

What a radical concept...believe the appraiser!

Glad to hear that your lenders head guy supports this novel notion!

Regards

Tom Hildebrandt GAA

 

[airphoto]

George,

Good post, good thinking .. good results!

BUT!

Presume that the bank hadn't awoken. What's wrong with the hypothetical .. valuation as a photo kiosk? You've still got your prior valuation of 'highest and best use.' The valuation as a photo kiosk (or 'whatever') would come in at something less .. with all caveats in place. You're not misrepresenting anything, merely providing the lender with the hypothetical value that they'd ax'd for ..

Sorta like valuing five undivided acres of a larger parcel ..

What say ye?

 

[George Hatch]

Bill,

I considered the possibility of using a hypothetical condition in this appraisal. Let's take a look at the book:

"SR 1-2 (h) Identify any hypothetical conditions necessary in the assignment.

Comment: A hypothetical condition may be used in the assignment only if:
* use of the hypothetical condition is clearly required for legal purposes, for purposes of reasonable analysis, or for purposes of comparison;

* use of the hypothetical condition results in credible analysis;

* the appraiser complies with the disclosure requirements set for in USPAP for hypothetical conditions."



OK, I'll address the last one first because that's the easiest. Adequate disclosure is obviously no problem in this case, as that requirement can be easily met.

It's the other two requirements, that such a condition is clearly required and that the results be credible that complicate things. I can see no basis from an appraisal standpoint why the use of a hypothetical would be legally required, nor is there to be any comparison, so those two are out. The only question is if the purpose is a reasonable analysis. I contend that it would not be a reasonable analysis to assume that a legally conforming use that also represents the highest and best use for the site is no longer feasible, particularly when there are no plans, intentions, aspirations or reasons for the property's use to be changed at this time. And I don't see how we could dork the analysis to get around that, not that we would want to.

Secondly, I fail to see how an appraised value that uses a clearly erroneous, improbable, and market-defying condition can be considered credible.

Usually when we use a hypothetical condition for an appraisal, there's a legitimate reason behind it that relates to the appraisal problem to be addressed. Trying to fabricate an opinion of value tailored not to address an appraisal problem but an underwriting quirk just doesn't seem (to me) to fall in line with professional appraisal practice. Or if it does, then I don't see how it does. And please, don't anyone tell me I gotta do it because of the 'golden rule', as in, the client should always get what they order. Truth is, if a lender doesn't want to make a loan they should use their discretion to decline it. If they want to cut back the LTV, they should simply do so. They shouldn't try to dork the appraisal to get the results they want.

I honestly don't see the difference between arbritrarily using an improbable and unnecessary assumption to get a desired result and using an improper appraisal methodology to get the desired value. Predetermined at that!

As for the '5 acre rule' in residential appraising, I can see an argument there, too. Ignoring the contributory value of the other 15 acres simply for underwriting purposes does not rise to the level of 'clearly required' the way it's explained in USPAP, so the resulting value indication they are looking may not be based on the definition of 'Market Value'. I maintain that what the client is asking for is a value based on something other than Market Value as is defined in USPAP and FIRREA. I think the appropriate way to handle that one is to define and include both values so that the reader doesn't get confused. Talk about throwing bombs....

I would imagine this approach to these problems will generate some controversy on this forum. I anticipate some discussion.

George Hatch

 

[Tom Hildebrandt]

George

I am in agreement with you in your analysis. If the client dictates the property use in a real property appraisal, the value sought is "use value" or "investment value" or something other than market value.

This is perfectly legitimate under USPAP, but probably would not meet the banks requirements under Title XI.

I would say that if your client wanted you to include an analysis of some use other than the highest and best use you have independently determined, you could do so using a hypothetical (perhaps as part of your highest and best use analysis to show that the proposed use was not the highest and best use). But why take the long walk when the short one is all you need?

Regards,

Tom Hildebrandt GAA

 

[airphoto]

George and Tom,

I've highlighted part of George's response here:

Comment: A hypothetical condition may be used in the assignment only if:
* use of the hypothetical condition is clearly required for legal purposes, for purposes of
reasonable analysis, or for purposes of comparison;

Now .. not splitting hairs, but a request by the lender for whatever their purpose may be seems to me to fall within these considerations. If I may put words in the lender's mouth: Perhaps they'd loan 'so much' on the alternative use (a reasonable use, even though perhaps not the 'highest and best' use but within their lending guidelines) and would therefore be able to make that loan whereas the existing use would not qualify within their guidelines.

Please correct me, but I see nothing recited thus far that prohibits such a consideration. Presuming an appropriate fee, why not give them what they've requested?

 

[Tom Hildebrandt]

Bill

Absolutely nothing wrong with it, so long as you do not call it "market value" and describe the hypothetical conditions imposed by the client for the specific use.

George and my point (if I may speak for George) is that the client did not present those conditions upfront, and then wanted the appraisal changed to reflect a use that was not the highest and best use.

In my opinion, George appropriately addressed the issue. He felt that developing an opinion for another use was unecessary, and was not needed for comparative purposes in the highest and best use analysis. If the client had wanted that detail in his highest and best use up front, or if George had felt it was necessary prior to completing the development of his work product, I am sure George would have provided the analysis with appropriate explanation.

One of the few absolutes in appraising is that the appraiser alone has the responsibility for making a determination as to his opinion of highest and best use when doing an appraisal for the purpose of "market value". The client can and often determines almost all other parameters of the process, such as determining the property description ("appraise five acres out of 100 hundred") property interests, and to some extent even the scope of work.

We should zealously guard against having lenders who try to get into the use issues in market value assignments. The classic example is on the house which sits on a site large enough to be subdivided. Depending on the type of loan package that is desired, the lender may say give me the value of the property as a house on one large oversized lot and ignore that it can be subdivided lot even though I need know the value will be lower). I say you are not giving the lender market value, but a use value.

I strongly disagree with appraisers who say providing the lower value as "market value" is ok. What is the diffence between that and a client who says, I know my 10 acres is worth more to a developer, but just appraise it as farm land so I can sell it to my family without paying huge gains? Same concept, just bigger $.

Having seen your posts, I feel certain you understand the issues, but this is one of my hot spots!

Regards

Tom Hildebrandt GAA

 

[jtrotta]

To all;
with regards to the excess acerage issue and the lender not wanting any value; there is always value to the excess, sub-dividable is always attainable and only restricted to the length of time it will take to sub-divide.
it has been my thought that perhaps the Lender is thinking in another direction in the aftermath of the late 80's & early 90's - when take backs were predominate. If I were the Lender, and had an opportunity to direct what I wanted, my thoughts would always be, what advantage can I take on this particular property if I were to have to take it back; therefore I can control minimal outlay of money (restricted value on excess) take the property back, sub-divide and have other valueable property, partake in excess profit, become a hero to my bank, get a raise; bonus money on the excess sale; increase my profit share; and accumulate numerous stock options; with an increase in my continual sign on bonus. Therefore, the argument exists that htere is value in the excess acereage, just how are you being restricted via the lender?? Money & Deception are practiced together thru the same vehicle, the Rules & Requirements are, in part, created for the benefit of the ability to create the Deception aspect of the equation.
Just a thought 8)

 

[airphoto]

jtrotta,

believe this ground has been plowed before, but:

Have always provided the value requested by the lender as 'five undivided acre site' but ALWAYS include some valuation for the excess acreage, usually in the addendum, but by reference to the addendum in the body of the report (so as to preclude the addendum being 'lost.')

 

[George Hatch]

Bill,

Try this one on for size, see if it fits.


"SR 2-1...


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

Comment: Examples of extraordinary assumptions or hypothetical conditions might include items such as the execution of a pending lease agreement, atypical financing, a known but not yet quantified environmental issue, or completion of onsite or offsite improvements. In a written report the disclosure is required in conjunction with statements of each opinion or conclusion that is affected."


I bolded (?) the last line because that's the point I wanted to address. The way I read this is that if we are using a hypothetical in an appraisal, the report must "clearly and accurately" disclose its impact on value. While I'm sure there isn't anything wrong with doing this in an addendum, I prefer to do it in the main body of the report; usually at every point where the final value conclusion is presented. The reason I add the last in this discussion is because there are some report formats where the final conclusion of value is addressed in several places. Sure, people are supposed to read the entire report, but I think we can all agree that the fine print sometimes gets ignored or 'lost'. Truth to tell, I do this for my benefit even more than for anyone else.


Jtrotta,

You made mention of the concept that excess land always has value and can always be subdivided. I would disagree with that. Not necessarily the value part, but the dividable part. Subdivision or other forms of dividing the lot is certainly possible in many instances, but there are also circumstances that would prevent such a split. For example, parcels can get downzoned or otherwise protected from development as open space, national or state forest lands, agricultural preserves, or the like. In terms of downzoning, we have areas here in San Diego County that have 10 acre minimums, 20 acre minimums, and 40 acre minimums. I know of other areas that have similar restrictions. Making the assumption that any of these parcels have subdivision or lot split potential would fly in the face of these legal restrictions.

Same for frontage requirements, access requirements, topography requirements, utility availability (big one), neighborhood acceptance, environmental (save the kangaroo rat), and all manner of ancillary obstacles to development of any kind. People, especially the anti-growth folks, have figured out that if they want to prevent sprawl, it must be combatted at every step.


So I don''t believe it is a stretch to assert that at least some of these hypothetical "5 acres only" appraisal conditions are not only non-existant and not likely, but are also not possible. It seems to me that as appraisers we need to draw the line somewhere when it comes to the use of hypothetical conditions or extraordinary assumptions. "Reasonably possible" seems like a good place to do it.

Let's take the hypothetical to the extreme. Here's an example I used when I was doing classes. Let's say you have a client that wants you to appraise a piece of land in the Nevada desert based on the hypothetical condition that it was beachfront to the Pacific Ocean because California had melted down and fallen into the sea. Sure, from a technical standpoint, I'm sure there are appraisers who could pull something like that off. My question is, is that the type of assignment condition that leads to a credible result? Are we furthering our professional standing in the community by participating and enabling the manipulation of the appraisal process? Stacking the deck in our clients' favor so that their hands look clean when they make an unpopular decision?

As you can see, the "5 acre only" thing really bugs me. The real problem lies in the underwriting of the loan, where an LO is trying to stuff the property into a program it obviously does not fit. And then using the appraiser as the heavy. I say, if the lender wants to cut the loan because of the nature of the property, they should do it themself. We don't do loan underwriting and they shouldn't do appraisals.

Thus concludes my morning rant.

George Hatch