Opinion Of Fair Market Value

[Ariba]

I might be called to testify in a divorce case on an appraisal. One question that keeps coming to my mind, is an appraisal for a divorce any different than one done for mortgage lending purposes? Could the opinion of fair market value be influenced by the intended use?

Does someone have some definitive narrative or terminology that differentiate the differed types of appraisals? For example if the intended purpose of the appraisal is financial/mortgage, divorce, estate, assessment, insurance, etc. Do you analysis these appraisals differently? If so, how, and does your opinion of fair market value change?

Ron
http://www.AppraiserPlus.com

 

[xm72mhd]

The difference in what you list is mostly exposure time and the whether the transaction is arm's length. Also you may be asked in some of those situations to complete the report effective as of some date other than the inspection date. There are a considerable number of possibilities, but you should ask the cleint what sort of value they are looking for and be able to explain how their choice will affect what you are doing.

 

[George Hatch]

All of the definitions of value are based on certain assumptions. Those assumptions vary. So yes, using a different definition of value can absolutely affect the final number. There are several specific definitions that refer to "Market Value" alone, not to mention other types of value.

Choosing and using the "correct" definition of value is one of the elements of the scope of work decision process. By "correct" I mean using the one that will be meaningful to the intended users in accordance with the intended use(s).

In this case, you should get with the client to find out which definition to use and then develop your opinion of value based on how that definition works. It's also not a bad idea (although not a USPAP requirement) to reference the client's instructions as the rationale for using that value definition. You wouldn't want anyone to get the idea that you're just arbitrarily making that decision by yourself.

 

[Richard Carlsen]

One question that keeps coming to my mind, is an appraisal for a divorce any different than one done for mortgage lending purposes? Could the opinion of fair market value be influenced by the intended use?

Absolutely. Most appraisers will no doubt say that the two are the same and that the value for one will be the value for both. On the contrary. They are different in that the one for lending is done under the constraints of the Intended Use i.e. the Secondary Market. They can have different value conclusions though they should be very close in final opinion if properly developed. Ever hear of the 6 months/1 mile rule? That is an imposed guideline for the secondary market. How about gross adjustments? Secondary market rule. All of those things that Fannie and the rest impose on us in doing an appraisal are not in force when you do an appraisal for a divorce. You can really get creative and say things that you would not get away with in saying in a lending appraisal.

That of course does not mean that you go over board. It just means that if a house 3 doors down sold 14 months ago and you think it is relevant, you can use it. Just remember that at some point, if you agree to do so, you might have to justify everything in defense of your report.

One other thing. I hope that you did a complete appraisal with all of the approaches to value considered. If you do a 1004 with sales data and cost approach full developed and included lots of documentation, maps, 12 photos of the subject, 5 comps, etc. and the other sides appraiser comes in with a 2055 with 3 comps, 3 exterior photo, no interior photos, which report do you think the court gave most credit to? You owe it to your client to produce a report that will serve them well when it gets introduced into court. We had one recently for a Florida divorce where the other side did 2 side by side 20 acre parcels with separate tax i.d. numbers, each with house and garage and tried to value the two parcels in one appraisal report by combining the two parcels in the report and calling one house a guest cabin. We developed two separate narrative reports, one on each. Work we have is that our clients attorney tore the other sides appraiser up in court over methodology and misleading conclusions.

 

[Elliott]

Ron,
So an attorney is going to ask you "Well, Ron, is there a difference
betwen "Market Value" for mortgage purposes and a dissolution""

And so you say, "No." Next question.

If you say, "Yes"....then you'll be on the stand another 30 minutes
explaining yourself and eventually the attorney will back you
in to a corner and all you will have accomplished is diminishing
the value of your testimony to your client.

elliott

 

[Verne Hebert]

I think a little more clarification is necessary here.

Regardless of the intended user (ex: mortgage, non-mortgage) given current, good quantity and quality of data market value should not differ on a given effective date.

I think what Richard is saying is that the appraisers hands are not tied by contraints of the secondary market appraisal "requirements" when it is not a secondary market mortgage appraisal.

Now in terms of the definition of market value, I don't think most clients (mom and pop, accountants, and maybe most attorneys) are savvy enough to discuss, or do they prefer, to define a particular cited definition of market value. I will generally state what I will use, and look for objection.

After establishing a definition of market value. Market value is market value is market value.

 

[T.E. Faravelli]

There is a difference. Market value is an appraisal term (definition & type) while fair value is an accounting term and can be referenced under FASB statements No. 13, 15, 61 & 121.

In summation, market value assumes the property has already been exposed for sale and the closing takes place as of the effective date of the appraisal while fair value assumes the property has not yet been exposed to sale the sale will occur in the future. Does a present value of a future annuity ring a bell? Any ways, FWIW here is a definition of fair value:

FAIR MARKET VALUE DEFINED

Revenue Ruling 59-60 provides a working definition of fair market value: 2.2 Section 20.2031-1(B) of the Estate Tax Regulations (section 81.10 of the Estate Tax Regulations 105) and section 25.2512-1 of the Gift Tax Regulations (section 86.19 of Gift Tax Regulations 108) define fair market value, in effect, as:

[1] the price at which the property would change hands.

[2] between a willing buyer.

[3] and a willing seller.

[4] when the former is not under any compulsion to buy and the latter is not under any compulsion to sell.

[5] both parties having reasonable knowledge of the relevant facts.

[6] the hypothetical buyer and seller are assumed to be able.

[7] as well as willing, to trade.

[8] to be well-informed about the property.

 

[Pat Butler]

One of the biggest differences is the scope of work. You know in advance that your appraisal is going to get challenged, so you need to have a very thorough work file to be used as evidence. This requires a lot of phone calls to verify data as well as a lot of logging of these calls so that you have a record of who you talked to at what time. I also obtain a lot of original source documents (deeds, surveys, MLS printouts.) and this gets expensive for the client.

This can make a huge difference because so many appraisers do not provided this sort of evidence for the comp data. One appraiser might have done an excellent job but might fail his client is he is cross examined and can't provide evidence to support something in the appraisal.

Other than that, have a very tight engagement letter with your client that addresses what you are now talking about-- what definition of value is going to be used. You don't want to be sued by your own client if he feels that you did something procedurally wrong like not even knowing what value definition to use.

 

[Verne Hebert]

I think Ron is using the old appraisal term fair market value, when in fact he is talking about the currently recognized appraisal term market value, and not the accounting term "fair value".

Ron, please clarify.

 

[T.E. Faravelli]

Verne, good point. The scope of work decision is driven in part by type and definition of value. For many of the assignments in which my company is retained we use the term fair value as the intended use is for federal estate taxes, estate planning and gift disbursement purposes.