What are the key things an appraiser should look for in a Preliminary Title Report?

[barcelona]

In this case the subject property is an existing commercial property in an urban area.

The lender has provided a Preliminary Title Report. What are the major items I should be looking for or noting in the appraisal report? I am a 100% novice in this area.

As I understand it, I should be looking at the exceptions and exclusions to coverage: the usual items include stuff like property taxes, utility easements, etc. ??

 

[Russ Kitzberger]

You are going to need to look deeper into the assignment. What interest in the real property are you appraising? It is fee simple? or The bundle of rights that is transferable per the title work?

Basically if you are not appraising the fee simple, you are appraising some bundle of rights that is probably specified in the title work, of course that is for you and the client to discuss what bundle they need a value for. The client might not even know what bundle of rights they want valued. Maybe you both need legal advice on what right they need valued.

 

[Vernon Martin]

Commercial appraisals and title reports

In this case the subject property is an existing commercial property in an urban area.

The lender has provided a Preliminary Title Report. What are the major items I should be looking for or noting in the appraisal report? I am a 100% novice in this area.

As I understand it, I should be looking at the exceptions and exclusions to coverage: the usual items include stuff like property taxes, utility easements, etc. ??

I look for stuff that affects value or indicates financial problems of the property owner.

Items affecting value may include bonded indebtedness, partial interests or possessory interests held by other parties, restrictive CC&Rs, etc. You'll also see a lot of standard easements, most of them innocuous, but you'll have to judge whether any of them affect the utility of the property, such as being in the way of maximal development of the property.

Once you've seen enough preliminary title reports, you'll screen out most of the boilerplate and look for the unusual stuff -- odd statements that one would not ordinarily expect to see, such as a statement from the town's building department disclaiming all liability for the building being constructed on "uncertified" or unconsolidated landfill. Here in California, such buildings often last only until the next major earthquake. This may be your first clue that the building is on landfill.

Items disclosing the property owner's financial problems include notice of default from the lender, tax liens, mechanic's liens, legal judgments, bankruptcy filing, etc. These are not really property valuation issues, but are a basis for judging the owner's representations about profitibility. For instance, if he claims high NOI, why would he not be paying property taxes?

 

[barcelona]

The interest being appraised is fee simple. There is a small restaurant on the ground floor with five years left on the lease. So technically speaking, we could call it a leased fee interest. But 90% of the builiding is owned free and clear of any leases.

 

[barcelona]

I look for stuff that affects value or indicates financial problems of the property owner.

Items affecting value may include bonded indebtedness, partial interests or possessory interests held by other parties, restrictive CC&Rs, etc. You'll also see a lot of standard easements, most of them innocuous, but you'll have to judge whether any of them affect the utility of the property, such as being in the way of maximal development of the property.

Once you've seen enough preliminary title reports, you'll screen out most of the boilerplate and look for the unusual stuff -- odd statements that one would not ordinarily expect to see. For instance, a statement from the town's building department disclaiming all liability for the building being constructed on unconsolidated landfill. Here in California, such buildings often last only until the next major earthquake. This may be your first clue that the building is on landfill.

Items disclosing the property owner's financial problems include notice of default from the lender, tax liens, mechanic's liens, legal judgments, bankruptcy filing, etc. These are not really property valuation issues, but are a basis for judging the owner's representations about profitibility. For instance, if he claims high NOI, why would he not be paying property taxes?

Thank you Vernon. This is very helpful.

 

[Terrel L. Shields]

Any explicit easements or reservations of record are of interest - Any restrictions from the previous transfer like, it cannot be used for a grocery store, etc.

 

[cejack]

Read a lot of other prelims in your jurisdiction.

Ask anyone and anybody who has some preliminary title reports in your area.

Find a title officer and see if you can look at some prelims with the address ripped off. If your appraisal supervisor has a boatload of old files laying around, go through them, or go through the old storage files and read a lot of them in your market area.

Then you will start to get an idea of the normal / typical easements, encumbrances, exceptions, etc. And also be able to know those that are weird or abnormal and may need some special handling.

Major pipeline easements, sewer odor easements, special CC&R provisions, aviation clearance easements, etc., are some of the weird ones I've seen out in my market area that may clue you in to some additional research and analysis that needs to be handled.

 

[Michael S]

The things I generally look for are CC&Rs and easements. A recent survey showin all the easements is always nice to have since it can be hard to visualize some of them. If you have a vacant piece of land with an easement right through the middle it may make development either more expensive or downright impossible. The main thing is to look for stuff that's out of the ordinary and that can only come with experience reading through a lot of these. Another big thing is to make sure the legal description matches up with what you're supposed to be appraising. Maybe you've got an additional parcel noted in the title report that wasn't obviously part of your original assignment. That's a case where you would need to clarify with the client exactly what they want to be included.

 

[leasedfee]

In addition, I compare the commitment's legal description to the assessor's or contract's legal description. I prefer the title company's legal as it is (title policy) or usually will be (title commitment) what is used in the deed. It will have more details. 98% of the time its fine. Sometimes you find that a surveyor made an error, boundary lines don't close, or that the maybe you're even looking at the wrong assessor card. It helps to sort out complicated or multi-parcel properties, and you find that the banker is the person confused about the collateral to be taken and appraised.

I recently did a consulting assignment for an HOA. The assessor's records showed that a 6 car garage was still in the developer's name -- 23 years later. The developer's corporation name/address was still in tact. It wasn't a clear case of abandonment or prescriptive easement, though. Digging through title policies, deeds, and 7 plat maps I pieced together that it had been transferred by the developer correctly back in 1988. Suddenly a possibly complicated situation feel-out as just an assessor error. But the assessor wouldn't have believed it unless the proper docs were presented. This assignment was a welcomed change from writing an appraisal.

Others have noted the Exceptions. I recommend that you read the title commitment's boiler plate a couple of times as it helps you understand what it's all about.

Lastly, all of the Exceptions tie into pertinent property documents affecting the property right's economics. If you call the title company, ask for the "title plant", they will helpfully email you the document(s) you want to see. You can go to the county clerk & recorders office to do research too. Alternatively, there are online services that allow you to download copies of public real property official records. I was appraising a church owned by a 2nd or 3rd generation owner with cramped parking. The manager at the nearby property agreed to provide a gentleman's agreement on a middle tract they also owned. The church had $0 property rights and a constrained site. Digging into the title, plat map, planned development zoning, revealed a parking easement had been granted 20 years ago -- everyone had long forgotten this or were new and didn't know -- on this middle track for perpetuity so long as used as religious facility. Suddenly this affected property rights, and this information made the new owner very happy, and added a little to their value. While the perpetual easement wasn't listed on the title commitment's exceptions, as they had no reason to search off of the subject parcel, but ideally should have been, the title policy was extremely helpful to discover it.

In my opinion it is a real class act to actually understand real property rights. When I see appraisers who always blindly assume clean title with no blemishes and never have a plat map and always confuse a plat map with an assessor's parcel map, it suggests that they may be skipping through everything else.

 

[cejack]

In addition, I compare the commitment's legal description to the assessor's or contract's legal description. I prefer the title company's legal as it is (title policy) or usually will be (title commitment) what is used in the deed. Snip.

Great advice Timothy.

I would also get in the habit of making disclaimers about unknown encumbrances or easements in your appraisal for those appraisal reports where you do not have the luxury of being provided a preliminary title report.

I include language that notifies the client additional work at an additional fee may be required to analyze undisclosed encumbrances or easements that may be available from review of a preliminary title report on the property.

Charles E. Jack IV, MAI
CEJAC, Inc.