Physical Condition Revisted

[Stephen J. Vertin MAI]

I realize this subject has been breached on this form in the past. I am looking for information someone posted sometime back. I can not locate it via search. It has to do with physical condition. In past post there have been two lines of reasoning. The first is physical condition ratings such as poor, fair, average and good have no market boundaries. What is considered good condition in one section of town is considered the same in other sections of town. This line believes good condition is good condition no matter where a property is located. The second was physical condition is relative. What is average condition in one part of town is not average in another part of town. Therefore, physical condition is relative to the market for similar properties.

Someone posted a reference within a reliable text supporting the latter. I believe it was from one of Harrison's books but I am not sure and I can not locate it in Appraising Residences & Income Properties. I am seeking text supporting the theory condition is relative and should be judged based on like properties within the subject's market area. Help, would be greatly appreciated, the issue may be going to court.

Steve Vertin

 

[Restrain]

I would start with the AI's basic appraisal book. It's the bible of appraising. Also, you might e-mail Harrison direct and see if he can give you a cite.

Roger

 

[George Hatch]

Stephen,

The following quote from A0-16 may not be specifically directed toward general appraisal technique, and as an Advisory Opinion may not be an enforceable section of USPAP, depending on how a particular state appraisal board sees it. But here goes, anyway:

The use of terms or descriptive phrases in place of factual information in a report imposes particular obligations on an appraiser to ensure that the user properly understands the report and is not misled. An appraiser needs to have, and should report wherever possible and appropriate, factual information to support the use of terms or descriptive phrases that reflect a scale or rating of a market or property that affects value or marketability conclusions. If such factual information is absent, an appraiser should clearly disclose that the rating or descriptive phrase is the appraiser’s opinion but that no factual information was available to support that rating or descriptive phrase and ensure that the use of the term or descriptive phrase is not illegally discriminatory.

An appraiser should research the actions of participants in the subject’s market to identify factors having a direct favorable or unfavorable influence on marketability or value. Failure to extract pertinent market information (e.g., sales, rents, occupancy rates, expense ratios, capitalization or discount rates, construction costs, depreciation, or exposure times) from the subject’s market could produce conclusions that are misleading and/or illegally discriminatory.

Appraisers should exercise care that comments made in a report will not be perceived as illegally biased or discriminatory. Factual descriptions, rather than subjective phrases, allow the user of a report to draw his or her own conclusions. The use of terms that reflect a scale such as “high,” “low,” “good,” “fair,” “poor,” “strong,” “weak,” “rapid,” “slow,” “average,” or the like should also provide contextual information that properly explains the frame of reference and the relative position of the subject property on the scale. For example, if absorption is stated as “rapid,” the context of the rating should be cited as well (“rapid” relative to what?).

I generally make these ratings in comparison to other properties in the area and/or to the comparable data, in the same manner as shown above in the AO. It leaves a lot less room for confusion. Regardless of what the GSEs or anyone else says about it, I know this usage will be a defendable standard in court absent any specific instructions to the contrary prior to the engagement.


George Hatch

 

[Stephen J. Vertin MAI]

George:

Great post. I am in complete agreement. It appears most appraisers use two standards or starting points of reference for physical condition. The first is relative to new construction. Thereby, condition is similar across markets. No argument from me. It is a starting point of reference. The second is the market. Markets vary. Beverly Hills standards are something more than many other markets. Again, it is a point of reference. As far as I am concerned, comparison in both frames of context are possible and acceptable. As long as an appraiser is consistent within the report and to the adjustments, it makes little or no difference which point of reference is used to the final value.

However, when the appraiser using new construction as a reference indicates the appraiser using the market as a reference is wrong, problems occur. Therefore, I am looking for authoritative text clearly supporting area or market as a point of reference. It was posted on this site sometime back. Further there is another issue within the lease where the tenant is responsible in keeping the building in similar condition as compared to like buildings within the area. This issue is to complex to shortly explain; however, a reference to an authoritative text would help other issues.

Steve Vertin

 

[Farm Gal]

Steven:

Try this
http://appraisersforum.com/forum/index.php...f=8&t=6516&st=0
I also recall another thread in which some other sources were cited, but cannot locate it...

There were two other fairly recent threads that I can recall in which this was discussed, one other is also in the Ask an Appraiser forum and related to a property in Hawaii posted by a Katherine ?, however it contained no specific references, just the anecdotal discussion as typical to this issue as the 'rural/urban' conundrum for which there are no direct qualifed expert definitions.

I believe there IS something other than that Bruce"Blue" indicated to be found somewhere in the Fannie Mae tome.

A longer search might benefit you, and you might try the old forum... however it is my observation that nearly all threads which discuss this matter result in 'it depends'.

 

[Ben Vukicevich SRA]

Steve,

I believe what you are looking for was found in the instructions for the really old FNMA forms...the one's where the appraiser had to rate the neighborhood as to public transportation, utilities, services...etc. The ratings were to be neighborhood specific/relative. So if you were in a rural area where public transportation typically was not available, you wouldn't rate it as "poor" but would rate is as "average" because, supposedly, all of the competing neighborhoods would lack similar public transportation in rural areas. So you wouldn't compare amenities across an entire market, say in a city market to a rural market...thus rating the public transportation on the URAR as "poor." The same would apply to utilities, you wouldn't mark a rural area as "poor" because it had well and septic when a city had public water and sewer.

Now, to the physical condition rating....I haven't got a clue....My best bet is that the logic from above was carried over to homes in specific neighborhoods to basically get loans through FNMA, etc. Say you're doing an appraisal in an urban area or a heavily tenant occupied neighborhood where property maintenance is lacking. To most appraisers, the properties would be in fair or poor condition but when you relate it to the neighborhood, well, your property really is typical for the neighborhood and thus "average" as it is no better or no worse. But then you have to wonder, you must state the physical condition of many components of the property on page one of the URAR and those statements are from the overall market--a heater in fair or poor condition is not average no matter what neighborhood in which it is located. And since the condition of the components contributes to the condition rating of the subject......then the condition rating for the subject should be across markets..????

FHA had this solved long ago when they had their own forms....it was called "typical" and your comp conditions were equal, inferior and superior. And I think no matter what you call the condition of the subject or comparables, as long as your condition adjustments meet the equal, inferior, superior test/guideline, you're OK.

Ben