Summary:

Property Appraisals may contain enough wiggle-room disclosures, referred to as Assumptions, Limiting Conditions, and Departures from Uniform Standards of Professional Appraisal Practices (USPAP), that the resulting report is, at best, useless.

Article:

Why does a property owner order and receive an independent appraisal full of misstatements, misrepresentations, and incomplete conclusions?  Of course, there will be a certification that the appraiser is independent, licensed, and unbiased.  The customary language and safety valve disclosures contained in the appraisal are statements by the appraiser that the appraisal has been ordered by a principal for a limited purpose, as instructed by the principal.  The appraisal clearly states that no other party will rely on the conclusions found in the assessment.  It’s a typical scenario where the principal attempts to use the document as a bona fide, third-party, arms-length appraisal representing a current-value conclusion.

Appraisers cover their backsides with conditions, assumptions, and departures.  They may consider many assumptions about the entitlement process and readiness to build without verifying or considering their truth, completeness, or regulatory approvals.

This lack of verification can pose significant risks to the reliability of the appraisal.  Often, they do not attempt to authenticate the entitlements, building plans, or approvals.

They are given a job to appraise based on certain assumptions directed by the person hiring them.  Some are done with transparency, and some are not.

An example would be an enthusiastic developer who may order an appraisal for a 50-story condominium in the middle of the Mojave Desert, far from adequate population, demand, and absorption possibilities.  The instructions conveyed to the appraiser are that all entitlements are in place, this is an up-and-coming area, and there will be buyers for the condos.  The appraiser may create a pro forma and use comparables that are a long distance away and unrelated to the subject property.  This appraisal process represents an illustrated and rationalized illusion.

I’m going to use a few examples to illustrate my point. This discussion will conclude that you should never rely on someone else’s appraisal without thoroughly reading the entire document.  Doing so can uncover the assumptions, conditions, and evidence of departures from prestidigitation.  If you do not remember what this term means, it is magic tricks performed for entertainment, the performance of, or skill in performing magic or conjuring tricks with the hands: sleight of hand.  This emphasizes the importance of thorough reading and how it can empower you in the appraisal process.

Appraisal No. 1—Actual Example: Let’s examine a real-life appraisal to understand how assumptions and conditions can affect a property’s value.  In this case, we’re examining an appraisal for a potential residential development in an upscale beach neighborhood.

A residentially based upscale beach neighborhood features lots that are approximately 50, 100, or 5,000 square feet each.  If you assemble 4 of them in a row, you would have 20,000 square feet of land to build an apartment, condominium, or congregate care facility   The assumption is based upon an increased density that the lots would become far more valuable on what is referred to as a residual basis or floor area analysis, when many units are considered and, of course, approved, with building permits ready to be pulled by the city or county building department.

For example, a builder has decided to build a 12-story congregate facility.  All other structures in the neighborhood, for blocks around, are single-family residences and one- or two-story dwellings.  This new structure would require underground parking and massively increased density.  A 12-story high structure would be the first in the middle of an ordinary residential neighborhood.  If you lived nearby, there might be concerns about conformity in the neighborhood.  It is unlikely that the municipality would approve such a project.

The appraisal contains the following disclosures.

The property is assumed to conform to all applicable zoning and use regulations and restrictions; nonconformity has been identified, described, and considered in the appraisal.

It is assumed that all required licenses, certificates of occupancy, consents, and other legislative or administrative authority from any local, state, or national government or private entity or organization have been or can be obtained or renewed for any use on which the opinion of value contained in this report is based.

It is assumed that the use of the land and improvements is confined within the boundaries or property lines of the property described and considered in the appraisal.

In other words, the appraiser assumed all this excellent stuff was proper, as the principal who ordered the appraisal reported.  They make no effort to verify whether the entitlements are complete, whether plans are approved, or whether building permits are ready.  This lack of verification can have serious consequences, like those in The Wizard of Oz:

Why, anybody can have a brain.  That’s a very mediocre commodity.  Every pusillanimous creature that crawls on the earth or slinks through slimy seas has a brain.

Back where I come from, we have universities, seats of great learning, where men go to become great thinkers.  When they come out, they think deep thoughts with no more brains than you have, but they have one thing you don’t have: a diploma.

This highlights the potential consequences of a lack of verification and underscores the need for a more thorough verification process.

Does this sound like an appraisal diploma, appraisal license, or certification?  Yes, it does.

Review your appraisals and verify the facts:

Did the appraiser visit the property?

Did the appraiser conform to USPAP?

Did the appraisal appear to be transparent or full of misinformation?

Are zoning, building permits, and physical boundaries correct?

Are the comparables genuinely similar?

Are the rents, expenses, vacancies, and capitalization factors correct?

Should lenders conduct a thorough desk review of the appraisals and be willing to adjust the values and information when discrepancies are identified?