Valuation of a portion of a property "as is".

[Terrel L. Shields]

First, simply delineating a property is not a sufficient identification of the relevant characteristics of a property, leaving out in particular in this case the legal characteristics of the property,

Show me in USPAP.

, I challenge you first to read FAQS 188, 189, and 190, and AI Guide Note 15.

And again, read the Q & A put out in March 2008. It's relevant too. If you use an HC it's simply not relevant.

 

[RCA]

And again, read the Q & A put out in March 2008. It's relevant too. If you use an HC it's simply not relevant.

Good grief. This nonsense never ends. Well, I suppose, it is not really nonsense - it requires some thinking and involves nuances.

1. The Q&A does not establish new standards or modify existing ones. They are just guidelines. And this one in particular is somewhat old.

2. Note that it does refer to Standard 1-2(e)(v), which says that you can appraise a physical segment of the land. Also note that the Q&A is referring to valuing the land of a single parcel that has both land and improvements. The tax assessor does this all of the time - and so do all appraisers. So, this is prima facie a customary practice.

http://www.respanews.com/Media/MediaManager/Mar%202008.pdf

3. However, the OP is detailing an assignment that is quite different: (a) It is referring to not just doing some appraisal, but deriving or estimating the Market Value of a physical segment of the parcel's land, that is not yet subdivided into a separate parcel. And NOTE: It can only be assumed to be capable of subdivision under certain assumptions that are certainly not guaranteed to be satisfied. --> So, therefore, it is quite possible there is some risk in doing the subdivision. In particular, we are not at all sure what we will wind up with in the end - or what it will cost.

Here is what ChatGPT opines;

"Appraising a specific part of a property, such as the back half of a 10-acre plot with improvements on the front half, without treating it as a separate legal parcel, can indeed be done. However, this scenario typically involves the use of a hypothetical condition because the appraisal would be based on the assumption that the back half could be separately sold or used, which may not be currently permissible under local zoning or subdivision regulations.

A hypothetical condition is used in appraisal practice when the condition is contrary to known facts about the property, such as assuming a subdivision or a separate legal status that does not exist. According to USPAP, using a hypothetical condition must be clearly disclosed in the appraisal report, and the reason for its use must be reasonable in the context of the assignment.

In the case you described, if the back half of the land cannot currently exist as a separate parcel according to legal or regulatory frameworks, then appraising it as if it were a separate parcel would necessitate a hypothetical condition. This is because you are assuming a condition (separability and independent sale or use) that does not legally exist at the time of the appraisal.

If, however, the land can legally be subdivided or already has a status that would allow separate treatment under local laws, you might not need a hypothetical condition. The key here is the legal ability to treat the back half as a distinct entity.

In practice, the appraiser would need to conduct a thorough analysis of relevant local laws, zoning regulations, and potentially consult with legal experts to determine the feasibility and implications of treating part of the property as a separate parcel without invoking a hypothetical condition. The appraisal report should clearly state all assumptions, conditions, and the basis for any conclusions drawn, especially when a hypothetical condition is used.

For more detailed information or specific guidance on such appraisals, consulting directly with a professional appraiser or a legal expert in real estate law would be advisable. They can provide insights tailored to the specifics of the property and local regulations."

I think the previous posts are far too hung up in the wordage of the poorly worded USPAP and addenda, rather than studying the logic of the whole issue. Nowadays, subdivision of a pacel can at the same time attach unexpected constraints to land usuage. We see this all of the time with regard to water, water treatment, waste, the ability to bring in landfill and so on and so forth. So, generally speaking .... think about it.

 

[andrew81]

Let's say you have been engaged to appraise the back 100 acres of a 200 acre former farm now rural residence with outbuildings. Your assignment conditions are that only the market value of the back 100 acres is to be appraised. Assume it has road frontage but is otherwise unimproved acreage, say pasture land with limited development potential. The description is not really relevant to the question here. The subject 100 acres has not been subdivided from the larger parent tract, and the permitting application process has not been started.. Subdivision is not a particularly involved process, nevertheless, a requisite wastewater permit with accompanying engineering reports, a recorded survey, a zoning board review, a simple application and small fee are required, and the process can take from a week to several months. Your engagement letter requires that the 100 acre subject value definition be market value under an "as is" valuation premise.

If as of the date of valuation the subject 100 acre tract as described is not a legally subdivided parcel, then a sales comparison approach with comparable sales which were subdivided parcels would not produce an indication of the subject market value "as is". Rather the indicated value would reflect the market value of the subject tract "as if" it were already subdivided and a legal saleable property. In fact, this methodology is employing the hypothetical condition (HC) that the subject is stand alone. Because an HC has been employed the "as is" valuation premise assignment condition would not be realized. The Appraisal Institute and USPAP agree on this principal as evidenced through guide notes, advisory opinions and within the 2024-2025 USPAP Update course materials.

So, then, what would be the proper method of developing an opinion of market value "as is" of the 100 acre subject tract? Could the above noted subdivided comparable sales be used in a sales comparison approach with a market derived adjustment for the lack of a subdivision permit? How would such an adjustment be derived from the market if this is an acceptable method to find MV "as is"? Would the contributory value of the subject property to the market value of the whole parent tract reflect the market value of the unsubdivided 100 acres? How would this be extracted from the market? A yellow book before and after analysis would possibly reflect severance damage to the remainder, which would be over and above the value of the subject. Please comment.

In my market, how I do this is:

If it has been surveyed and split at the county level, then it is as-is.

If it has been surveyed, but, not split at the county level, then it is hypothetical.

If it has not been surveyed and not split at the county level, then is an extraordinary assumption.

 

[sputnam]

I think most of us understand that appraising a physical segment is not the problem. The problem is with the as-is for this particular scenario.

Maybe most do. The OP doesn't.. or didn't when they wrote their post.

 

[Mark K]

In my market, how I do this is:

If it has been surveyed and split at the county level, then it is as-is.

If it has been surveyed, but, not split at the county level, then it is hypothetical.

If it has not been surveyed and not split at the county level, then is an extraordinary assumption.

In this area, I'd swap those two terms under those scenarios.

 

[bsilver]

Maybe most do. The OP doesn't.. or didn't when they wrote their post.

No, I am perfectly aware of the physical segment concept. Please re=read my question.

 

[bsilver]

If it has been surveyed and split at the county level, then it is as-is.

If it has been surveyed, but, not split at the county level, then it is hypothetical.

If it has not been surveyed and not split at the county level, then is an extraordinary assumption.

I'd swap those two terms under those scenarios.

I follow what these posts indicate. The existence of a survey is not really consequential as to the determination of which type of condition, EA vs HC, is employed. For clarity, note that in both EA and HC predicates, the condition presumed to be true is presumed to be so as of the effective date of the appraisal. So, whether a survey describing the subject exists or not, if, as of the date of valuation, the subject has not been split, and the appraisal has been developed as if it has been split, then there is a HC. There is an HC since the appraisal is predicated on a condition that is contrary to fact as of the valuation date.
An EA that assumes the property will be split, again whether there is a survey or not, that assumed split condition to be true is as of the effective date of appraisal. So, if the effective date of value is the date of inspection, say last week, and as of last week the subject was not split. Use of an EA that says the property will be split means that AS OF THE DATE OF VALUATION, the property is going to be split in the future. The actual un-split condition as of the date of valuation is still un-split, even with that stated EA in the report, the development of the appraisal is of a counterfactual condition and an HC is present. An EA can be used to say that it is assumed that the a property will be split as of a certain date; but if on the date of the appraisal that fact is not true, then the EA ca not be used as a valuation predicate and the split condition is hypothetical. An EA that assumes a split will be accomplished as of a certain date in the future, and the date of valuation is a prospective future date, then the appraisal may be developed as if the subject were split without a HC, and based on the EA.

From Appraisal Institute Guide Note 15:

In the case of both assumptions and hypothetical conditions, the condition presumed true is so presumed as of the effective date (or date of value, in an appraisal), not before or after.

For example, a property is zoned for residential use, but a zoning change to commercial use is likely in the future. If the property is valued as of a current effective date as though it is already re-zoned for commercial use, the value is premised on the hypothetical condition that the re-zoning has taken place as of the effective date, not on the special or extraordinary assumption that it will be re-zoned after the effective date. When market participants perceive that a property would likely be re-zoned in the near future, the current value of that property may reflect that perception; i.e., the value might be higher (or lower) because of the likelihood of the zoning change, though not as high (or low) as the value based on the hypothetical condition that the zoning change had already occurred on the date of value.

 

[sputnam]

If it has been surveyed and split at the county level, then it is as-is.

If it has been surveyed, but, not split at the county level, then it is hypothetical.

If it has not been surveyed and not split at the county level, then is an extraordinary assumption.

I follow what these posts indicate. The existence of a survey is not really consequential as to the determination of which type of condition, EA vs HC, is employed. For clarity, note that in both EA and HC predicates, the condition presumed to be true is presumed to be so as of the effective date of the appraisal. So, whether a survey describing the subject exists or not, if, as of the date of valuation, the subject has not been split, and the appraisal has been developed as if it has been split, then there is a HC. There is an HC since the appraisal is predicated on a condition that is contrary to fact as of the valuation date.
An EA that assumes the property will be split, again whether there is a survey or not, that assumed split condition to be true is as of the effective date of appraisal. So, if the effective date of value is the date of inspection, say last week, and as of last week the subject was not split. Use of an EA that says the property will be split means that AS OF THE DATE OF VALUATION, the property is going to be split in the future. The actual un-split condition as of the date of valuation is still un-split, even with that stated EA in the report, the development of the appraisal is of a counterfactual condition and an HC is present. An EA can be used to say that it is assumed that the a property will be split as of a certain date; but if on the date of the appraisal that fact is not true, then the EA ca not be used as a valuation predicate and the split condition is hypothetical. An EA that assumes a split will be accomplished as of a certain date in the future, and the date of valuation is a prospective future date, then the appraisal may be developed as if the subject were split without a HC, and based on the EA.

From Appraisal Institute Guide Note 15:

In the case of both assumptions and hypothetical conditions, the condition presumed true is so presumed as of the effective date (or date of value, in an appraisal), not before or after.

For example, a property is zoned for residential use, but a zoning change to commercial use is likely in the future. If the property is valued as of a current effective date as though it is already re-zoned for commercial use, the value is premised on the hypothetical condition that the re-zoning has taken place as of the effective date, not on the special or extraordinary assumption that it will be re-zoned after the effective date. When market participants perceive that a property would likely be re-zoned in the near future, the current value of that property may reflect that perception; i.e., the value might be higher (or lower) because of the likelihood of the zoning change, though not as high (or low) as the value based on the hypothetical condition that the zoning change had already occurred on the date of value.

Exactly

 

[RCA]

If it has been surveyed and split at the county level, then it is as-is.

If it has been surveyed, but, not split at the county level, then it is hypothetical.

If it has not been surveyed and not split at the county level, then is an extraordinary assumption.

I follow what these posts indicate. The existence of a survey is not really consequential as to the determination of which type of condition, EA vs HC, is employed. For clarity, note that in both EA and HC predicates, the condition presumed to be true is presumed to be so as of the effective date of the appraisal. So, whether a survey describing the subject exists or not, if, as of the date of valuation, the subject has not been split, and the appraisal has been developed as if it has been split, then there is a HC. There is an HC since the appraisal is predicated on a condition that is contrary to fact as of the valuation date.
An EA that assumes the property will be split, again whether there is a survey or not, that assumed split condition to be true is as of the effective date of appraisal. So, if the effective date of value is the date of inspection, say last week, and as of last week the subject was not split. Use of an EA that says the property will be split means that AS OF THE DATE OF VALUATION, the property is going to be split in the future. The actual un-split condition as of the date of valuation is still un-split, even with that stated EA in the report, the development of the appraisal is of a counterfactual condition and an HC is present. An EA can be used to say that it is assumed that the a property will be split as of a certain date; but if on the date of the appraisal that fact is not true, then the EA ca not be used as a valuation predicate and the split condition is hypothetical. An EA that assumes a split will be accomplished as of a certain date in the future, and the date of valuation is a prospective future date, then the appraisal may be developed as if the subject were split without a HC, and based on the EA.

From Appraisal Institute Guide Note 15:

In the case of both assumptions and hypothetical conditions, the condition presumed true is so presumed as of the effective date (or date of value, in an appraisal), not before or after.

For example, a property is zoned for residential use, but a zoning change to commercial use is likely in the future. If the property is valued as of a current effective date as though it is already re-zoned for commercial use, the value is premised on the hypothetical condition that the re-zoning has taken place as of the effective date, not on the special or extraordinary assumption that it will be re-zoned after the effective date. When market participants perceive that a property would likely be re-zoned in the near future, the current value of that property may reflect that perception; i.e., the value might be higher (or lower) because of the likelihood of the zoning change, though not as high (or low) as the value based on the hypothetical condition that the zoning change had already occurred on the date of value.

First, a general principle is that "Valuation is the Hand of God." Anything related to valuation is special -- and probably should only be controlled by highly competent valuation engineers. We are beginning to see some recognition of this in AI. Valuation is too important to be placed in the hands of most traditional appraisers.

I predict you will see Valuation evolve in this direction. You will be surprised what happens. ....

So:

Either you KNOW what you are appraising or you don't. If you don't know, then you really can't claim Market Value - because that presumes you KNOW what you are estimating the value of.

If you don't have at your disposal a survey of a parcel, even if you have observed markers on all corners of the property, you DO NOT KNOW what you have. Especially in an area like California that has plenty of earth movement.

So, any appraisal undertaken without a survey is at best tenuous. In fact if you have a survey, you need to run it through QGIS (or equivalent), adjusting for Geodesic Datum to get the corrected GIS coordinates and then check the GIS readings from the corners of the property. Then you will know that what your client thinks is his "real property" is or isn't what he thinks it is.

And then you could ask your client: "Do you want me to estimate the Market Value of your property according to legal title and the latest corrected survey data or do you want me to estimate the Market Value of what you think is your property?" If he tells you that he wants you to appraise the value of his 25 story office building with the property boundaries as defined by the fences and front street, then you may have significantly more work. And let me add, you need an HC that you are assuming the boundaries are something contrary to fact. However, you might argue that nobody who matters really cares about exact boundaries and they have been the way they are since construction as far as everyone who matters is concerned, so while you haven't checked the boundaries for accuracy you can make an EA rather than an HC, because the HC would cause problems with the lender. But, keep in the back of your mind, that just about anyone with the knowledge and tools can check the presumed boundareis. For example RTK drones with GNSS base stations are used virtually everywhere. $7,000 can get you a nice setup. So, the question is whether someone could cause legal problems. Well, it happens.

====== ChatGPT =====

Me: "Can someone cause a property owner legal problems if they discover that the what the property owner thinks are his properties boundares, are not correct by doing an RTK mapping?"

ChatGPT: "Yes, discovering discrepancies in property boundaries through RTK mapping or any other precise surveying method can indeed lead to legal issues for a property owner. Here’s how this situation might unfold and what it could entail:

1. Boundary Discrepancies: If RTK mapping reveals that the actual boundaries of a property differ from what is recorded or believed, this could affect the ownership claims over certain parts of the land. For example, a property owner might find out they are encroaching on a neighbor's land, or vice versa.
2. Disputes and Litigation: Such discrepancies can lead to disputes with neighboring property owners. If these disputes cannot be resolved amicably, they might result in litigation to determine the true property boundaries and the rightful ownership of the disputed land.
3. Title Issues: Inaccurate boundaries can also complicate matters related to the property's title. Potential issues might arise during the process of selling the property, refinancing a mortgage, or obtaining title insurance.
4. Regulatory Compliance: If the actual boundaries place a property owner in violation of local zoning laws, building codes, or other regulations (e.g., building too close to property lines), the property owner might face legal actions from local government agencies, including fines or orders to alter or remove structures.
5. Resolution through Re-Survey: To resolve boundary discrepancies, a comprehensive re-survey by a licensed surveyor might be required, and this survey would need to be legally recognized to adjust the official records.
6. Potential Mediation or Settlement: Before reaching litigation, parties involved might opt for mediation or a negotiated settlement to resolve boundary issues. This can be a more cost-effective and less adversarial process.
7. Adverse Possession: In some cases, if one property owner has been using part of another's property for a long enough period under certain conditions, they may claim ownership through adverse possession, although this is highly dependent on specific state laws.

For property owners involved in such a situation, consulting with a real estate attorney is crucial to understand their rights and obligations, and to determine the best course of action based on the local laws and the specifics of the case."