Should an appraiser be told how the appraisal will be used?

[GoBears]

I'm under the belief that an appraiser should be informed how his or her appraisal will be used.

During the process of settling an estate, appraisals were needed on two properties in the trust. Each of these properties is designated to go to one of the two beneficiaries. As per the trust, these must be equalized such that the beneficiary receiving the more valuable property must compensate the other the difference.

The trustee/beneficiary had two appraisals done for each of the properties as of date-of-death. Averages were done for each, and with that, a figure was agreed upon to equalize them.

It now seems that the trustee wants to get another appraisal as apparently this is allowed up to 6 months after death in case the values have changed, as with an investment. The reason provided for the appraisal is for estate taxation reasons (to lower the taxes), yet it was made clear that it would also get used as part of the equalization between the two properties because early indications are that one property (the trustee's) dropped a fair amount. The other seemingly did also, but the trustee stated that the value probably did not change...

The appraiser, one used previously, and who has a relationship with the trustee's husband, just thinks that this is for tax purposes. Should he know how these are being used, or is this not a reason for concern? I was sort of under the impression that appraisals for estate taxation reasons tend have less attention to detail, and are even low-balled...

 

[Bill_FL]

Tony,

The the client, whomever hired the appraiser, should have specified what value is being sought (market value, etc.) as of what date, and for what the appraisal is going to be used. This information should have been reported in the appraisal, in the scope of work.

IF the appraiser was asked to find market value, then the value should not be different, regardless of the use of the appraisal. It should not matter if it was for a mortgage, for estate taxes, or any other reason. The opinion of value should be the same if the value definition are the same. Now, there may be cases where the client puts certain restrictions or constraints on that definition. Such as, market value with a 5 day marketing time. In other words, a quick sale. OR, market value with a typical marketing time. These could produce very different values.

If you have a copy of the appraisals, the scope of work should state for what the appraisal may be used, and for what the appraiser was told it would be used.

 

[Lee Lansford]

Yes, the appraiser identifying the Intended Use(s), the Intended User(s), and the Scope of Work is basic to any appraisal assignment.

 

[hastalavista]

The appraiser, one used previously, and who has a relationship with the trustee's husband, just thinks that this is for tax purposes. Should he know how these are being used, or is this not a reason for concern? I was sort of under the impression that appraisals for estate taxation reasons tend have less attention to detail, and are even low-balled...

(my bold)

Your comment here is troubling to me.
If the implication is that the appraiser is just assuming that the purpose and intended use is for a tax valuation without asking specifically, I'd say that appraiser is using poor judgment in meeting his due diligence requirements for properly identifying the appraisal problem to be solved so that the appropriate Scope of Work can be developed and followed.
If the implication is that the trustee is misleading the appraiser into thinking that the purpose of the appraisal is only for tax purposes when the trustee has another intent, then that goes to the trustee's motives and ability to fulfill his/her legal responsibilities.

The bottom line is this: The appraiser should know the purpose and intended use of the report so that it can be developed and reported in a way that is meaningful to the client/intended user.

The development of the valuation may be as Bill suggests: For tax purposes or for valuation trust, the value may very will be the same, using the same definition of value and all the same processes required to arrive at a credible value.
However, the reporting (communicating the results) of the assignment could be drastically different. If I, as an appraiser, know that my results are going to be used by non-specialists, then I am going to be careful how I communicate the results. Please understand what I am saying: I am not going to be any more or less careful how I arrive at my opinion, but I am going to present the results differently for a non-specialist than I would for a specialist (an accountant for example). For the non-specialist, I will take more time to explain the appraisal process; the specialist doesn't need this level of explanation- the non-specialist does! And, this is not just because I say it is, but because the Uniform Standards of Professional Appraisal Practice require that the results be communicated so that it

contain sufficient information to enable the intended users of the appraisal to understand the report properly;

(my bold)

The appraiser should take the appropriate steps to identify with the client the purpose and intended use of the appraisal results. This way, the appropriate Scope of Work (development) can be used and the report (communication) is written in a manner that is commensurate with the intended user's knowledge so the results are meaningful and useful, and not presented in techno-speak or appraiser shorthand.

That's my 2-cents; others may differ.

 

[Steve Owen]

Tony, I take it that you are not an appraiser, but somehow are related to the transaction at hand. First I'll give you the regulatory answer. the Uniform Standards of Professional Appraisal Practice, which is Federal regulation and law in many states, says in Standards Rule 1-2:

"In developing a real property appraisal, an appraiser must:

(a) identify the client and other intended users;

(b) identify the intended use of the appraiser's opinions and conclusions;"

So, it is actually the appraiser's responsibility to identify the intended use. That being said, appraisers do not have any control over what their opinion is used for after it is delivered.

The reason for the regulation, is that the Scope of Work might be different if the intended use is different. For example, most appraisers would compare the subject property to similar properties that have sold, or historical data, if the intended use is for a mortgage refinance. However, if the intended use is to determine an asking or listing price, then the scope of work should also include comparing the subject property to other similar properties that are currently listed. This can help determine the top of the market or highest likely value.

That being said, the response from Bill Potts, that said the opinion of value should be the same if the definition, such as market value, is the same was correct. However, that leads to another issue that may be pertinent in your case. Appraisals for estate tax purposes should be done to the Financial Accounting Standards Board (regulatory agency for accountants) definition of "Fair Value," which is slightly different from the definition of "Market Value" that appraisers normally use when working for the lending industry.

The short answer to your question is "yes." The appraiser should be told what the purpose or what we call "intended use" of the appraisal is. I usually operate under the credo that the more information you give an appraiser, the better. It might not make a difference, but you will usually have a better work product if the appraiser knows all the details.

 

[GoBears]

Thank you for the thoughtful replies!

In this appraiser's first appraisal, the first sentence reads:

"As requested, the real properties listed below have been inspected for the purpose of determining present market value as of July 1, 2006."

Then there is a reference to Code section 1263.320 (a) defining FVM. After that, it reads "Based upon my inspection of the subject properties and their environs, investigation of similar property sales in the area and my judgment, I estimate the fair market value as of July 1, 2006 of the subject properties to be as follows:" The first page ends with the values, and a statement that the a "Attached is the report upon which these conclusions are based."

The 2nd page is a "Summary of Pertinent Information and Conclusion," which includes the aforementioned valuation date, value appraised (fee simple), address, APN, lot size, location, zoning (R2), improvements, highest & best use (present use, primarily land value) and final estitmate of value (land + improvements, which equal zero, so land only).

The next two pages present 4 comps of the sales of land only for development purposes with lot sizes up to 250,000 SF with various zonings (R315, P35, P18 and R32). The subject property in question has a 94 year old habitated home on it for which another appraisser found comps that also entail improvements.

The report then provides several pages of maps, a statement of limiting conditions, and the last page is his bio...

This is what the report includes, and I would venture to guess the next report will follow the same format. There is no Scope of Work or additional details provided. Does this merit the appraiser being contacted by the other beneficiary?

The person requesting this report is the trustee's husband, a CPA, who as I alluded to earlier, has a history with this appraisser. While this is felt to be a bit odd, nothing has been made of it. The lot size in first report was indicated to be nearly 11,000 SF. The beneficiary of this property quickly noticed this to be not correct, and informed the appraiser, and he promptly adjusted it downward (well over 1,000 SF). Given that this was a land only appraisal, this mistake impacted value quite a bit, but was corrected...

Thank you very much!

 

[hastalavista]

Tony-

It sounds like at least one of the interested parties is questioning the reliability of the appraisal and its valuation. That is not a good thing.

I think the obvious course would be to get another appraiser; someone selected by the "group" (or, perhaps two appraisers). Eliminate the real or perceived conflicts and get two qualified appraisers who aren't related, hang-out, or throw darts with any of the parties. Make sure you interview the appraisers and check their references. Decide (among the parties) what do you want? Do you want a down & dirty and trust the CPA to be able to evaluate it, or do you want the full-boat, written in a way that if you never owned real estate before in your life, you'd be able to understand how the report concluded what it concluded.

Why screw around? Get satisfaction now, before one of the parties thinks they are injured and things escalate to litigation?

 

[GoBears]

There has been 4 appraisals already completed, 2 on each propertery. In a letter just received by the trustee's husband, he makes it very clear that they want to use this guy, and that there will be no addtional appraisals (paid from the trust).

I would like to believe that this appraiser is just ignorant, and that he is not fudging numbers... If this appraiser were to be called today, what questions or statements would be most approrpriate, in your opinion?

 

[hastalavista]

I would like to believe that this appraiser is just ignorant, and that he is not fudging numbers... If this appraiser were to be called today, what questions or statements would be most approrpriate, in your opinion?

Tony-

Unfortunately, I cannot offer you any specifics, because I cannot determine what exactly is being valued and why, for example, if the subject lot is something less than 11,000sf (since this is what was reported originally, and had to be corrected downward by over 1,000sf), the report is using comps that are 250,000sf in size?

And, even knowing the specifics, I may not be able to help you.
But, in general, if the lot has an improvement on it and from your posts, only land value is being valued, then some potential questions may be:
A. Does the report conclude that the improvements have no value? In other words, the land is more valuable, vacant and ready for development vs. being sold in its "as is" condition? And if so, what is the subject's Highest and Best Use (another SFR, for example)? What is wrong with the subject that it adds no value to the property? There may be plenty of good reasons, but you should be able to read the report and see why it is. Is the existing improvement in poor condition? Is it no longer compatible with the area? Are buyers not purchasing properties that have improvements like the subject in the area? If they are buying properties that have similar improvements, are they paying less than what the land is valued at in your appraisal (if not, then it would sound like the improvement does add value)?
B. Why are differently zoned properties being compared to the subject; this may be appropriate but has it been discussed? Is the value of a similar sized lot of a different zoning similar?
C. If the subject is 10,000+/- Sf, where how does that correlate to a lot that is 250,000sf? Would somebody use the 10k lot for the same purpose as they would the 250k lot?
D. Read the appraisers "bio". Does it give any prior tax or probate experience? Any time in the courtroom (hopefully, as an expert :new_smile-l: ). Does he provide any references?


There may be more questions than this. You know, you may want to consider hiring another appraiser as a consultant (hire one in your area that is experienced. There are some organizations that will recommend qualified appraisers. NAIFA or Appraisal Institute might be two places to start). Consider paying the appraiser to act as your consultant. This doesn't mean the appraiser is going to "review" the report, but maybe she/he can point out some significant inconsistencies, or, perhaps solve a riddle for you?

Others may have different advice; that's the best I can offer! Good luck!

 

[GoBears]

Thank you Denis. Those all seem to be appropriate questions to ask here. I'm under the impresstion that the trustee, or her husband wanted the appraiser to use land only as they had expressed the land is the real value...

I feel the most important question to ask him is what he was tasked to do, and the purpose. And if he only mentions that it is for the estate taxes, I feel that he should know the entirety of this, and how this, and his previous appraisals are being used. Being that this beneficiary is not the client, is it alright for this beneficiary, an interested party, to share this information with the appraiser?