Incorporation by Reference: Update from Mr. Bagott

The author responds and updates information regarding The Appraisal foundation.  Incorporation by reference is the major premise of what Mr. Bagott is writing about and in this update, he is looking at the Texas Railroad Commission.  While not specific to the valuation profession it is yet another instance of the public sector grabbing private documents and placing them into regulations and codes.

 

The press release form Mr. Bagott starts below:

Jeremy Bagott, MAI, AI-GRS
Author contact: BOIpublishingco@gmail.com

 

*** FOR IMMEDIATE RELEASE ***

 

AGENCY’S TEXAS TWO-STEP PUSHES FOUNDATION CHIEF’S ‘BIFURCATED’ 2017 PAY TO BACK BURNER

LOS ANGELES (January 27, 2020) – Many real estate appraisers were distracted last week, some pondering why the 2017 annual compensation of more than $760,000 for the sitting president of the Appraisal Foundation constituted both internal retirement pay plus CEO pay, as an undated, unsigned memo posted to the blog site Valuation Nation seemed to explain. A source of confusion: David S. Bunton, president of the tiny congressionally authorized nonprofit, wasn’t retired in 2017 and isn’t retired as of this writing in 2020. Meanwhile, an ominous op-ed was quietly queuing at a newspaper chain in the Lone Star State.

The Austin American-Statesman, the Amarillo Globe-News, the Lubbock Avalanche-Journal and the other publications owned by the unflinching Lubbock-based A-J Media ran a column Sunday by Jeremy Bagott, author of “Dispatches from the Cosmic Cobra Breeding Farm,” a book that details waste and abuse in appraiser oversight.

“Once you’ve read the column,” said the author, “if you want to independently confirm that no specific version of the Uniform Standards of Professional Appraisal Practice has ever undergone a required “adoption by reference” rulemaking in the Texas Register – needed to make the standard enforceable in Texas – contact Jill Ledbetter, Team Lead in the Government Filings department in the Texas Secretary of State’s Office. Her email is jledbetter@sos.texas.gov. Be nice to her. She mans a bleak, windswept outpost on the outer frontier between order and lawlessness in Texas government. She’s keeper of the Texas Register.

“If you need your faith in state government restored,” said the author, “contact Rules Attorney Haley Cochran at the Texas Railroad Commission. She’s at Haley.Cochran@rrc.texas.gov. Ask her to email you the steps she took to legally adopt by reference the 2006 version of the copyrighted “NFPA 54” code and the 2008 version of “NFPA 58” code in accordance with Texas law,” said Bagott. “The Texas Railroad Commission is doing everything right. It’s a little sad that simply not breaking your state’s administrative procedure act and administrative code now seems worthy of commendation. A number of states simply can’t do a rulemaking given the USPAP’s two-year change cycle, so they bluff.  It normalizes scofflaw behavior.”

Mr. Bagott Replies to TAF’s “Cryptic Memo”

This was just sent over to me. Mr. Bagott, the author of the book that exposes the odd salary information for the president of The Appraisal Foundation, David Bunton. I will add to the oddity of this week by disclosing that someone from Mr. Bunton’s staff called me Tuesday and essentially gave me a dressing down for posting the information that I had at that juncture. Once again, I am not trying to denigrate Mr. Bunton, I am just asking about the transparency of the organization and the use of public monies and monies collected from the appraisers that must pay for the standards that they follow.

CRYPTIC MEMO CLAIMS FOUNDATION DEALT BUNTON INTERNAL RETIREE PAYOUT PLUS CEO PAY IN 2017

An unsigned, undated memo on Appraisal Foundation letterhead was posted to the blog site “Valuation Nation” on January 22. The memo, citing “inaccurate” reporting in an unnamed recently published book, sought to further explain the 2017 annual pay of David S. Bunton, president of the Appraisal Foundation. The $760,000 pay package for the head of the 14-employee nonprofit, categorized as “compensation” in the Foundation’s Form 990, was reported to have included both an annual CEO pay component alongside an internal retirement-related payout.

“There are many open questions about the internal retirement component of Bunton’s pay if this memo is accurate,” said Jeremy Bagott, author of Dispatches from the Cosmic Breeding Farm, a book dealing with waste and abuse in appraiser oversight. “For example, have any additional sequenced internal retirement accounts been set up by his compensation committee or anyone else? One thing is clear: Bunton was no retiree in 2017. Nor was he one in 2018 or 2019. Even a onetime internal payout could have the effect of underreporting his pay over the coming years. Part of this haul was once our money, public money,” said the author.

Bagott contacted David Greer, Director of Communications for the nonprofit, seeking further comment. As of this writing, an email to Greer was unreturned.

Clarification on TAF President Compensation

I kicked a hornet’s nest earlier in the week.  I knew that it was not only possible but very likely that someone (maybe even a few people) would have a serious issue with my posting the Appraisal Foundation (TAF) tax paperwork showing their president’s salary, David Bunton, from 2017.  I do not begrudge anyone making a salary commensurate with what they are worth in the market.  I mean no ill intent to Mr. Bunton whatsoever.  In fact, I have spoken to him several times.  We have had some great conversations and he has impeccable taste in wine. Nothing untoward was meant at all.  I am just asking why things look the way that they do.  And when one sees such a salary number, it does makes one stop and wonder about it.

To be clear, I am not saying that his compensation is commensurate with a fair market amount or not.  That is for others to determine, I am just an appraiser and I will leave the opinion of what is fair or isn’t fair to the readers out there.  The only opinion I have is the way that the standards are handled.  In the appraisal profession, that handling seems to be a bit of an unicorn.  I am not aware of any profession that requires the practitioners to purchase their standards every two years and also requires said practitioners to pay for continuing education that pays a licensing fee to the owner of the standards because these standards for public  trust are copyrighted and fiercely protected.

In the meantime, I have done some additional research and I have been able to piece together a multiple year comparison of what TAF is doing regarding the topic.  This is all easily obtainable information, but I have assembled it from the schedule Js from each year available.

TAF chart

I was also able to speak with two CPAs and one non-profit executive management professional and confirmed that the TAF press release that went out today was on point and explained the situation in a reasonable, and more importantly, legal way.  TAF is doing nothing wrong, at least from what is required of them under current IRS regulations and applicable tax law.

From the TAF press release January 22, 2020:

“More than a decade ago, the Foundation’s Executive Compensation Committee set up an executive retirement account for Mr. Bunton, a common practice in the nonprofit world.   Under the terms of this account and per IRS regulations, a lump sum disbursement was required when the account holder turned 65 years old. For Mr. Bunton, that occurred in 2017. The Foundation’s 2017 990 reflects BOTH Mr. Bunton’s annual compensation and the entire retirement savings from the account, which was a majority of the compensation.”

Reply From The Appraisal Foundation

I am currently attending the Collateral Risk Network meeting in Sarasota, Fl but I wanted to post up a reply sent out from TAF this morning.  I will have some follow up later in the day as time permits, but I wanted to get this out as it was sent to me directly.  The link is unaltered and is exactly as it was sent to me.

 

https://www.dropbox.com/s/5xvmq9oi24e0epe/012220%20TAF%20Correction%20to%20Publication.pdf?dl=0

I appreciate TAF’s intent to explain the situation and give transparency.

The Appraisal Foundations Dirty Secrets?

The Appraisal Foundation (TAF) made some waves this last few days.  A new book just came out discussing what goes on at TAF and it doesn’t sound too good.  I have yet to read it, but have ordered it.  From what a few people have described to me it doesn’t paint a pleasant picture of TAF.  The book can be found at this link:

https://www.amazon.com/Dispatches-Cosmic-Cobra-Breeding-Farm/dp/0999710745/ref=sr_1_1?keywords=cobra+appraisal&qid=1579551872&s=books&sr=1-1

In other revelations, a colleague has posted to Facebook a copy of TAF’s 2017 tax filings and it discloses what is being paid to David Bunton, Kelly Davids and John Brenan. The feed back so far in social media is very negative about how high the salary and total compensation package is for the President.

taf

More on this to come.

My 2019, A year in Review

2019 is in the books and we have already begun 2020.  From an appraisal perspective, 2019 was a year of change for me. I am in a completely different place then where I was at the beginning of the year.  I left a large valuation firm to start my own enterprise while also partnering with a large franchise operation in the process.  I have mentored one more trainee into obtaining their certified residential credential and have two more coming along nicely. I have worked on some additional professional designations and made headway into some new spaces to me regarding helping the profession as much as I can.  I also learned some things about how appraisal organizations operate that gave me pause.

The Biggest Change, Going to a New Company

I started getting a feeling that what I wanted to be doing in the appraisal profession was quite different than my employers about a year or so ago.  And honestly, the biggest reason came from the omnibus tax bill that congress put through.  Party affiliations aside, that was a terrible bill that hurts appraisers that work as employees.  It no longer allowed me to write off expenses, most important of which was my mileage, and my employer wasn’t interested in doing reimbursements.  I lost a lot of write offs that year, so it made it hard to continue to stay where I was and earn significantly less money.

I actually was not really interested in starting a new business at first and disliked the idea entirely.  But like most difficult choices in my life I started by doing some research and talking with trusted colleagues and friends.  One such friend, Creighton Cross, MAI, starting chatting with me about a company he had franchised with and he seemed to really like what they were doing as a national company. Enter Accurity Valuation.

Accurity’ s business model was exciting and from what I knew about the profession, a new thing that shows real promise of working  both as a good business model but also (most importantly to me) an ethically sound way to evolve how the profession works with collaboration. I am all for making a profit but never at the expense of doing sound work.   I had drinks with several of the office owners at Accurity in February 2019 in Chicago at Valuation Expo and knew of or had met many of them previously.  What I really liked and seemed most intrigued about was that a few fellow instructors were part of the group, as well as some well-known and well-respected appraisers.  Of course, I was not sold on starting a new company just yet.

I went through the paces of applying for jobs with various entities and had a couple of good offers.  But I had a few things that I needed to do on the fee side before I took a job where I would be doing hardly any actual valuation field work.  I had three trainees, one of which being my son.  There was no way I would take a desk job somewhere while I needed to help them finish their training. Had I left to work in a different capacity there would have been three trainees with way to finish their mentorship. Fast forward to August, I set up a company with my son and we were open as of the 15th of August. Accurity Fincham and Associates, Inc is coming along splendidly. We set up an s-corporation and had the company up and running in no time. I now own my office but have franchised with Accurity. I now have the autonomy to lead my team as I see fit.

The franchise model with Accurity allows me to collaborate with some great business leaders. Some of these folks have been doing this for a long time and have found successful ways to run a valuation firm.  A couple have been well respected instructors for a long time, and I find myself in a positive environment.  I have a couple of weekly calls with the leadership groups (I sit on the executive board, and an innovation team) and those calls are great sessions that help me focus on the larger picture, not just the minutia of my office. I really need that kind of support.

Adding to the Profession

I have finished training my first trainee in almost ten years.  Allen Nicholls passed his state board in December and after three years of hard work, we have added another certified residential appraiser to the field.  Mr. Nicholls has done a great job and has proven he is a capable beginner.  He has worked with me on some complex assignments that included large estates and litigation.  I look forward to watching him develop as a fully credentialed appraiser.  I believe his SRA designation is the next step for him.

Just behind him is my son. He is just a couple of classes from being ready to sit for his exam as well.  Right behind Woody, Jr. is our newest trainee, Trevor Dusing. Trevor is ready to get his core classes finished up and will be ready for his exam within a year.  I love to be part of a team where I am bringing along the next generation.  It makes me a better appraiser because you learn what you are teaching even better after teaching it.  The efficiencies we have developed as team allow us to handle more volume and still write a higher quality report than most of our local competition.

I also taught several classes this year traveling all over this great land of ours.  I spent some time in New York early in the year and enjoyed seeing Long Island for really the first time.  I love traveling and teaching affords me some time to do just that.  While I am never anywhere too long, it is still neat to visit.  Most of all I love the students that I meet.  Most are kind, curious and willing to share their experiences and add to the classes.

More Letters

This past year also saw me add some additional designations to my resume.  I finally got around to applying for my RAA designation with the National Association of Realtors.  I waited a while on doing this but have found it to be as beneficial as any that I have.  Why?  It is simple, Realtors care about working with other Realtors.  I have gotten lots of referral work and best of all my local board has really welcomed me into doing presentations, working on committees and just being able to rub elbows with potential clients. Not to mention, many agents are plain fun to interact with.

Late in the year saw me finally get all my requirements finished for the ASA designation with the American Society of Appraisers.  This is an important one as the ASA has multi-disciplines of valuation professionals.  Personal property, intangible assets, business valuers, fine art, farm equipment…You name it and they have a niche for it. I am looking most forward to working with John Russel, their chief governmental relations profession.  I have gotten to know John over the last couple of years from various trade shows and TAFAC meetings.  John is a great advocate for the profession.

More Letters Means More Organizations, That’s a Good Thing, Right?

Earning the designations that I have help open doors and show potential clients that I take what I do very seriously.  But with designations also come the organizations that bestow the credentials.  And if I have one major negative thing to say about valuation organizations in general it’s that the politics can be painful. And before I write anymore, I am not referring to any specific organization (I am new to the ASA and NAR so they are not part of this observation). For many years I wondered why the valuation profession struggles so mightily with residential topics and over the last 18 months or so, it has become quite evident.  The issues do not just exist with the one organization, they are a part of most organizations. Maybe it is just human nature, but I have never seen anything like this including many years or soccer (playing and coaching), being in bands and other things that I have done involving social communities. The amount of unprofessional infighting that goes on adds unneeded drama and simply creates a general community of unfriendliness and unfortunately creates various pockets of camps or clicks as we called it in High School.  It seems that as any one person succeeds to a position of leadership among the residential folks, there is some faction that is resentful (jealous) towards that person or persons, and drama ensues. Going everywhere from stalking everything that person says and participate sin on social media and complaining to the organization, to outright character assassination.

No wonder it seems residential issues do not get anywhere, the very ones that should be showing progress on residential issues and looking like professionals are too busy jockeying over position rather than using their energy to do good.  I guess folks forget that volunteering is supposed to be about helping others not about elevating oneself for personal gain.  Exactly what an appraiser gets out of climbing a ladder in an organization besides an ego boost baffles me. Life is too short to try to step on another person’s back to achieve a personal goal.

My final perspective on this looks at the dishonesty there seems to be among some people in leadership.  Leadership seems ready to lie, cheat and steal to get what they want personally out of something. I personally have had two senior leaders in an organization come to be and ask me to do a very unethical thing, and I refused. I am sure my unwillingness to help them game the system will have some form of retribution attached to it at some time. I have seen colleagues get attacked directly and indirectly by creating  complex schemes to go after someone they dislike, and worse yet, the organizations don’t just have a process for it, they seem to aid in the tearing down of a member if the situation fits. All it takes is two or more people willing to create a false narrative and there you have it.

It seems leadership only cares about being accused of not doing something rather than having a just reason to go after someone.  And I have seen it happen repeatedly to different folks.  When it is done, it is done in secrecy, so membership does not find out about it, but it seems to get out anyway.  In one case issues are handled by a committee that works separate from the main leadership, and they have the autonomy to do what they want, even having their own attorney to do it, without any oversight from the main leadership group.

I won’t mention any names, but I have had at least a dozen people mention this scenario to me over the last 10 years, and after watching these folks seemingly disappear from leadership or active roles, I certainly knew something was awry. In another case, I watched two long time members of leadership drum up an issue with a member to try and push the member out, and it was done with fabricated issues.  All because there was personal dislike between these two “leaders “and the member.   You honestly could not make some of this stuff up if you tried.  Luckily cooler heads prevailed because attorneys were circling the fracas.

The biggest take away I think is that when outside stakeholders and potential members see this kind of thing, it reinforces to them that associating in a membership organization is not worth it. That the politics are unprofessional and often, simply juvenile.  Just think of what an organization could get done if it actually used its resources to accomplish things for positive change.

One thing to counter what I am writing about here is that there are many, many good people in every organization.  The good far outweighs the bad, but like anything a few bad apples spoils the bunch. I guess it is of no surprise that those with the desire to lead attempt to get there by any means necessary. Afterall, wanting to be a leader takes a bit of gumption. Great leaders, most often, are the ones that do not selfishly seek the spotlight but show up with an attitude or service to help others.

My intention is not to go on a personal rant, but rather to shine a little light on practices that are harmful to more than just the people being attacked for the sake of others trying to advance or just get rid of people they dislike.  Boards and committees are better when there are various viewpoints, good ideas come out of disagreeing and working through a problem together.  Diversity, people and ideas, is a great thing and trying to stop that hurts the profession.  While I have thought about stepping away form trying to help the profession anymore through organizations, I decided that is not me. I am not going anywhere and will continue to advocate for residential valuation. I will just be doing it in different ways.

In Closing   

2020 is going to be a great year. My firm is off to the races, having a great third and fourth quarter, with momentum pushing us into a new year.  As the year evolves, I do challenge anyone reading this to not be an island unto themselves, get involved somehow in helping the profession. When you take your CE this year, don’t phone it in, take a class that will challenge you to learn something new.  If you have taken all the residential classes that interest you, take a general valuation class. I promise you will learn something to help you in your residential practice. Those of you that have years of experience, really consider taking on a trainee.  The growing pains of teaching another will make you better at your job.

Inclusiveness and transparency are things that we need as a professional.  Egos and attitudes get us nowhere.  Be wary of some out there that claim they want what is best for our profession but actually are seeking out shameless self-promotion.  Here is to a great 2020.

Accurity Valuation Welcomes Woody Fincham as Director of Collaborations

originally posted over at:

https://www.appraisalbuzz.com/accurity-valuation-welcomes-woody-fincham-as-director-of-collaborations/

ACCURITY VALUATION EXPANDS EXECUTIVE TEAM, WELCOMES WOODY FINCHAM AS DIRECTOR OF COLLABORATION

CHICAGO, IL –Accurity Valuation, one of the largest appraisal firms in the nation, is pleased to announce and welcome Woody Fincham as the company’s Director of Collaboration. Fincham will be responsible for leading the company’s collaboration and outreach efforts across the valuation industry.

Rick Hiton, Accurity COO, states “It’s very exciting to bring Woody in as part of the new generation of appraisers, and as an educational leader of Green Valuation.  I look forward to Woody’s insight and contribution as part of our national leadership team. He brings valuable input and perspective as we continue working on collaboration and expansion initiatives during this period of Accurity’s accelerated growth.”

Woody Fincham, SRA, AI-RRS, RAA is a well-known and well-respected real estate appraiser based out of the Charlottesville, VA area.  Prior to joining Accurity, Fincham acted as Residential Chief Appraiser at a national appraisal firm where he promoted cross department collaboration through training and business development efforts. He also assisted staff appraisers in complex problems and properties. Prior to this work, Fincham held several positions which included work for private firms, municipal level assessment offices, and the Virginia TAX department as a reviewer for conservation easement and historical façade easement properties.

“I’m very excited to have partnered up with Accurity and to be a part of the national leadership team. I am proud to be joining a group that is comprised of industry leaders and influencers. Partnering with Accurity not only provides an awesome opportunity to develop my business, but also an opportunity to help with the evolution of the valuation field,” states Fincham. “As Accurity’s Director of Collaboration, I am excited for the opportunity to work with our partners to reshape the industry to meet evolving demands and client needs with modern, collaborative solutions.”

About Accurity Valuation

Based in Chicago, IL, Accurity Valuation is a full-service national provider of real estate valuation services with offices nationwide. Accurity offers a broad spectrum of services for both residential and commercial properties including; appraisals for loan origination, forensic and valuation fraud reviews, litigation support, statistical analysis and collateral valuation reviews. Clients include government agencies, law firms, risk management firms, mortgage lenders and others who rely on the firm’s specialized services and high level of expertise. Privately held, the firm was founded in 2005 and defines the leading edge of the valuation profession. For more information visit www.AccurityValuation.com or call 847-580-1256.

Why should a seller get a home appraisal prior to settling on a listing price?

Written by

Woody Fincham, SRA, AI-RRS, RAA, RAC

This blog originally was written for and posted over at https://www.consumerhomevalue.com/ .   Gynell Vestal authors and posts lots of great items over on her site.

Many real estate appraisers provide pre-listing appraisal reports for sellers.  Having an appraisal done is an investment that can help save you from overpricing your home or even underpricing it.  Agent provided comparable market analysis (CMAs) can work well but often the CMAs that I see are haphazardly thrown together.  This is particularly true when dealing with custom homes and markets with few or no recent comparable sales.

 

home listing price

I cannot tell you how many times I am struggling with valuing a home that had a questionably supported CMA.  I have also seen questionable appraisals in similar situations as well.  I have been hired many times at the request of real estate agents due to the complexity of the home or complexity of the market a property may exist in.  So, let’s discuss what you should look for when hiring an appraiser for this purpose.

 

So, what should you try and find in an appraiser that will do a pre-listing appraisal for you?

 

1.       Market Competency

Is the appraiser familiar enough with your market to perform the work competently?  It is acceptable to request how many assignments the appraiser has performed recently in your market. 

2.       Property Competency

Has the appraiser ever appraised a home like yours before?  If you have unique features such as a green home (High performance home), custom built home, a swimming pool, an in-law suite, water or mountain view, or even features that may be seen as a negative such as close proximity to non-residential use (commercial property, industrial property, rail roads, busy highway) or maybe you have an utility easement running across the lot.  Maybe you have an excessively large lot for the neighborhood.  There are many things that can make your home unique in such a way that unless the appraiser has some background with that feature, they may not understand how to address it. 

3.       Assignment Type Familiarity

Does the appraiser have experience working on pre-listing appraisals?  If the appraiser has never done pre-listing work, you may want to be careful.   There are many appraisers out there that only have experience doing mortgage related work, and while that is valuable experience, trying to suggest a listing price is a nuanced assignment type.  Mortgage related work often can be extremely myopic on only retrospective sold comps.

 

While sold comps are extremely important, with a pre-listing appraisal report, there needs to be a well-supported market analysis that looks at sold comps, actively listed comps and the likelihood of how the subject property may or may not absorb in the market. 

 

Ultimately, each appraisal report that is written should be written for the client that will be using the report.  This means that the author of the report should be writing the report to the client’s understanding of the valuation process.  When writing a report for lender that looks at hundreds of reports a week, it is different than writing a report for someone that is relatively new to the valuation process.

Some words of caution should be exercised with non-residential appraisers as well.  If the appraiser normally does non-residential property types (gas stations, retail centers, medical office, etc.) they would possibly be unqualified to perform this type of work on a home.  Residential valuation is nuanced and a specialty practice that requires experience.  One would think that a certified general appraiser may be more qualified than a certified residential appraiser, but that is often not the case.  While there are some great certified general appraisers that are perfectly competent to value residential homes, it is still important o understand the background of the professional that you are hiring.  It is like trying to get diabetes advice from a plastic surgeon: they are both doctors, but you may want to speak with an endocrinologist because they have superior experience in that expertise.

That gives you a bit of background on what to look for in a professional appraiser.  Well let’s look at another list:

Now what are some of things that you should look for in the report itself?

 

1.       Report Type

The type of report that is written matters.  A pre-listing report should never be performed on a report used for mortgage financing.  This includes the Fannie Mae forms such as the 1004, the 1073, the 2055, the 1075 or any other form written to comply with mortgage regulations and loan types.  Every appraiser out there uses some type of software forms provider that has other types of forms besides mortgage use forms.  These are sometimes referred to as general purpose forms or non-lender forms.

2.       Completeness of the Report

While many residential appraisers use pre-formatted reports, the reports should be much more than checked boxes and short statements describing the property and its characteristics.  The standards that licensed and certified appraisers follow require that the reports contain summary explanations of how the conclusions are made and opinions are supported.  Many appraisals that I review have all the boxes checked but have very little commentary at all.  In the case of a listing use appraisal there should be summary comments explaining the following areas in more detail:

a.       There should be a thorough market analysis.  The reader of the report should understand exactly where the appraiser is coming from.  This should include a property productivity analysis: an explanation of what the subject property is and how it fits in the market.  This should include what are typical and ideal improvements for the market.  This explains how well the subject should compete in the market.

i.      What is the market area?  This is more than stating what neighborhood or subdivision the home is located in.  It should discuss the overall and direct competing market the subject exists within. 

ii.      There should be a cogent demand analysis that discuses the most probable end user (owner occupied or tenant), tastes of the consumers regarding housing features and styles, and an analysis of historical growth and absorption information.

iii.      There should be a supply analysis as well.  What is currently on the market competing directly and indirectly with the subject property? Is there a possibility of competition with new construction alternatives?

iv.      There should then be an analysis of how supply and demand are interacting.  Once supply and demand are identified for the competitive market, how are they working together?

v.      The final step in the market analysis is forecasting the subject capture.  This means that all the previous information used to develop an opinion of how well the subject may or may not perform if listed for sale.

 

b.      Highest and best use

 

An opinion of highest and best use is required by standards.  This is simply a four-step process that is carried out to develop an opinion of what the best use of the property is or is not.  The four steps include legally possible, physically possible, financially feasible and maximally productive. This is arguably the most important step of the appraisal process and one that many residential appraisers spend too little time on of at all.  In the end, it is a series of tests that will discuss if the subject property is more valuable as it is, or maybe it would be better if altered or even torn down and something else done with the land besides the current use.  For an improved property with a house on it, two sets of tests are normally done one “as is” and one is a hypothetical test discussing what could or should be done if the property were vacant.  The other thing that should appear with this step is the timing of the opinion of highest and best use.

 

c.      Approaches to value

The approaches to value will be the most read and discussed part of the report by normal consumers requesting the report.  This is where the opinion of value is discussed and supported.  There are three approaches to value:

i.     The cost approach is a series of steps that takes into account the cost to purchase the land, improvement the land and the cost to build the home. If the home is existing there is always some depreciation that then must be applied.  While this approach is not something many consumers consider when buying existing homes, it is still a required approach that must be considered by the appraiser.  The premise of the approach is why would anyone pay more for a home then they could reasonably build one just like it?

ii.      The income approach is an approach that considered the rental potential of the home in the market where it exists.  Could the home be rented if there is adequate rental demand? If the answer is yes, then the appraiser develops and opinion of market rent and uses a capitalization technique to develop and market value based on rental potential.  This is not used often in residential single- unit appraisals.  Nevertheless, it is an approach that the appraiser must at least consider and explain why it is not being used.  I do often see this approach overlooked in many markets.

iii.       The sale comparison approach is the most important approach, normally, when dealing with housing.  Most markets have adequate sales and active inventory to allow a supportable opinion of value to be developed.  This is where the appraiser compares the the subject property to other homes that have sold are on the market.  The appraiser makes adjustments to the comparable properties for inferior and superior features. Most homeowners understand this concept well enough, but where I see it fall apart is when the appraisal reports do not support what they are doing.  The adjustments made should not be manifested out of the ether.  They should each be based on a methodology or technique.  When an appraiser makes an adjustment for gross living area that adjustment should be supported by research and technique.  In other words, how did the appraiser come to the conclusion that the dollar amount used for the adjustment is the correct one?  On a typical home in my market I usually end up writing at least a page of information explaining the sales comparison adjustments, and often times it can be two or more pages if the home is complex in any way.  Appraisal standards require that at minimum, the appraisal report must have summary commentary for all opinions, conclusions and adjustments.

iv.      The last step before writing out the opinion of value is the reconciliation of the three approaches.  This does not need to be a long section, as the previous three approaches should have been discussed adequately enough that the reader of the report has a good understanding of where the appraisal report is headed.  In this section each of the approaches are discussed and weighted according to how well supported each is.

Pre-listing appraisal reports are different.  They are not the same as a report prepared for mortgage lending.  Much of what I have discussed here are really nuances that should differ from what many residential appraisers normally work with when doing lending use work.  It certainly helps to utilize an appraiser that does lending use work, because the appraiser can also consult on whether the home needs any repairs or maintenance work that would typically be required for loans underwritten by FHA, VA or USDA.  I hope this blog has offered something to take away.