Editor’s Note: In Part One, Bob Bell, MAI (retired) explains how appraisers can convert residential form reporting assignments to higher-paying consulting assignments with just a little know how. “Many of our appraisals should be labeled appraisal consulting reports, since they give a market value and solve problem questions in the Highest and Best Use section or in other parts of the report,” Bell says. “This applies to commercial and residential appraisals.”
Appraising to Consulting Part 2: Getting Started
By Robert K. Bell, Jr., MAI (retired)
The primary mechanism for flexibility in USPAP is the Scope of Work (SOW) that gives appraisers the ability to tailor each assignment appropriately for the circumstances. Understanding the SOW may lead to new business opportunities such as appraising / consulting and will lead to increasing the client’s satisfaction.
As an example, the appraisal work may lead to consulting regarding a problem which, in the past, has not included any additional fee. Although this is true, flexibility comes at a price- increased responsibility. The first item regarding an appraisal assignment is problem solving for the client. Disclosure obligations: the report must contain sufficient information to allow intended users to understand the SOW performed. The list of important items involving the SOW Rule is shown in 2008-2009 USPAP, pages U-12-13.
With a pending appraisal assignment, the following questions should be explored by the appraiser prior to entering into an engagement letter and estimating the appraisal fee: a preliminary inspection of the subject property; a quick check of zoning and future land uses, and the availability of supporting documents, including financial information from the client. Some type of general understanding about a potential change in the assignment if required should be agreed upon. With the fast moving economic and governmental issues, unforeseen problems regarding concurrency may be deadly. Such things as utility moratoriums, lack of school capacity, road capacity limitations, and the possibility of condemnation proceedings are a few potential unforeseen problems.
Understanding the Problem
Knowing the client’s real problems at the beginning is critical. Other issues like foreclosure and legal disputes should be uncovered prior to entering into an agreement and doing the assignment. Gathering all this information will help the appraiser tailor the amount of research and analyses to the assignment. As a warning, don’t think that the SOW only applies to narrative reports commonly used for commercial/industrial property or residential appraisals.
The Scope of Work Rule applies to summary and restricted use appraisal reports. The Scope of Work will encompass an oral report too. Remember, the report may be converted to a self-contained appraisal report or used in some later legal dispute.
Furthermore, USPAP is very clear about the burden of proof on the appraiser to make the decision to eliminate an approach or approaches. Following a client’s direction to eliminate an approach without considering the appropriateness under a specified circumstance, does not excuse the appraiser. In summary, the Scope of Work Rule requires support by relevant evidence, and logic and the credibility of assignment results are always measured in the context of the Intended Use.
The Scope of Work Rule contains three subsections described as follows: Problem Identification, Scope of Work Acceptability, and Disclosure Obligations. There are two important items that 2008-2009 USPAP does not require; there is no requirement to have an authorization letter or to furnish General Limiting Conditions for an appraisal consultation prior to entering into an assignment. However, it is suggested these are included with the authorization letter.
Tips and Traps
Watch for misrepresentation by the developer representing the owner with respect to all utilities, usable land and approvals available within a subdivision and construction features. As an example, the remaining land in a large industrial park was being appraised as though all utilities were in and the platted land was all buildable. It was found that the utilities were not all in and a substantial portion of the remaining platted land required mitigation prior to being developed. This resulted in a $1 million overvaluation. The remedy would have been for the appraiser to have checked the roads to see that there were no manholes for the sewer and water utilities. An engineer confirmed that a substantial number of acres required filling and land mitigation.
Another example is misrepresentation by an owner and architect on a custom home consisting of about 7,500 square feet, which turned out to be only 6,500 square feet. The appraiser did not have the building plans and the upper floors were of an undetermined smaller size. It was discovered later that the appraiser added the 1,000 square feet as per the owner and architect’s written information, resulting in an overvaluation and price. The remedy would have been for the appraiser to have taken upper floor interior measurements and found the error. The buyer initiated a legal suit against the appraiser. However, the owner bought the home back due to his misrepresentation to keep his reputation. Many lawsuits are due to wrong building size estimates.
Another is land appraised as per 100 percent commercial zoning without reviewing the county future land use map, which had about 40 percent of the land zoned residential. The result was an overstated value. Keep in mind the future land use maps have precedence over the zoning on vacant land. Vacant land subject to a moratorium on utilities prevented immediate development. One appraiser used land sales with vested development rights, meaning the property could be developed immediately, versus another appraiser who used land sales without vested development rights (cannot be developed at that time). The substantial difference in value between the two appraisers resulted in a two-year legal suit.
Here is a safety clause for the engagement letter that could save you money and heartache, “Termination – You, as client, have the right to terminate the appraiser’s services at any time. The appraiser shall have the same right subject to an obligation to give you seven calendar days notice to arrange for alternative professional services. All fees and costs shall be paid through the date of termination at the billable rate of $______ per hour.”
In conclusion, adding appraisal consulting as a service can be another benefit to your business now and in the future.
There is a helpful manual, Appraisal Consulting Guide that was originated as a guide to comply with the 2008-2009 Uniform Standards of Professional Appraisal Practice (USPAP). This manual has two to three samples of appraisal consulting reports, which are samples to help residential and commercial appraisers interested in helping clients solve problems. The guide should help designated appraisers, reviewers, candidates, and associate members, as well as state-certified or licensed appraisers throughout the country but does not directly present real estate appraisal methods or techniques. For more, visit: www.appraisalguidebybells.com or call (352) 751-6413.
About the Author
The guide was developed by Robert K. Bell, Jr., MAI (retired), Author and Publisher. Bell taught continuing education appraisal courses approved by the Florida Real Estate Appraisal Board, and served as a Florida consultant to the Bureau of Education and Testing, 2002-2008. Mr. Bell was a Residential Member (RM) of the Appraisal Institute 1970-1975, and became a Member of the Appraisal Institute (MAI) in 1975 through 2006. He served on various local and national committees for nearly 20 years, including the Residential Appraisal Exam Committee, General Experience Committee as National Examiner for the Appraisal Institute, local Admissions Committee for 15 years, and member of the 1997 Publications Committee. He has published and updated the Sample Appraisal Guide by Bells for the last 15 years.