Appraisal Reports: Types and Essentials

Chapter 12: Appraisal Reports: Types and Essentials

I. Introduction: The Role of the Appraisal Report

An appraisal report is the formal communication of an appraiser’s expert opinion of value for a specific property. It is not merely a statement of value; it is a comprehensive document that presents the data, analysis, and reasoning used to arrive at that conclusion. This chapter explores the different types of appraisal reports and the essential elements that must be included to ensure clarity, accuracy, and compliance with professional standards.

II. Types of Appraisal Reports

Appraisal reports can be categorized based on their level of detail, intended use, and reporting format. The Uniform Standards of Professional Appraisal Practice (USPAP) defines specific types of reports.

• A. Self-Contained Appraisal Report:
  • This is the most comprehensive type of report. It provides a complete summary of all data, methods, and reasoning used to develop the appraiser’s opinion of value.
  • It includes detailed descriptions of the property, neighborhood, and comparable sales, as well as a thorough explanation of the appraisal techniques employed.
  • The report must be understandable without requiring the reader to consult external sources.
  • Application: Complex properties, litigation support, estate planning, or any situation requiring a high degree of transparency and justification.
• B. Summary Appraisal Report:
  • This report summarizes the data and analysis used in the appraisal process but does not provide the same level of detail as a self-contained report.
  • It references the appraiser’s work file for supporting documentation.
  • It is more concise and cost-effective than a self-contained report.
  • Application: Mortgage lending, where the lender has specific requirements for the report format and level of detail.
• C. Restricted Use Appraisal Report:
  • This report provides a minimal amount of detail and is intended for use only by the client.
  • It identifies the property, the purpose of the appraisal, and the appraiser’s opinion of value.
  • It does NOT provide a detailed explanation of the data or analysis.
  • Restriction: Can only be used by the client. Not suitable for third-party reliance.
  • Application: Internal decision-making by the client where detailed justification is not required. For example, property tax assessment reviews.
• D. Oral Report:
  • An appraiser may deliver a value opinion verbally, typically in testimony or a business consultation.
  • The appraiser must still comply with USPAP standards and maintain a workfile with supporting data, documentation and reasoning for the conclusion.

III. Essential Elements of an Appraisal Report

Regardless of the type of report, certain elements are essential for compliance with USPAP and for conveying a credible and understandable opinion of value.

• A. Identification of the Property:

  • Legal Description: A precise description that uniquely identifies the property, such as a metes and bounds description, lot and block number, or government survey system reference.
    • Example: “Lot 12, Block B, of the Meadowbrook Subdivision, according to the plat thereof recorded in Plat Book 24, Page 18, of the Public Records of Anytown County, State of Anystate.”
  • Street Address: The common address of the property.
  • Assessor’s Parcel Number (APN): The tax identification number assigned by the local assessor.

• B. Purpose and Intended Use:

  • A clear statement of the reason for the appraisal, such as mortgage lending, estate planning, or litigation support.
  • Identification of the intended users of the appraisal report (e.g., the client, lender, potential investors).

• C. Definition of Value:

  • The specific definition of value being estimated, such as market value, investment value, or liquidation value. The most common is market value, which requires specific conditions to be met.
  • Market Value Definition (Example): “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus…”

• D. Effective Date of the Appraisal:

  • The specific date on which the appraiser’s opinion of value is applicable. This date may differ from the report date.
  • The appraiser is offering an opinion of value as of a specific point in time, considering the market conditions at that time.

• E. Scope of Work:

  • A description of the extent of the research, analysis, and data verification performed by the appraiser.
  • This includes the appraisal methods used (e.g., sales comparison approach, cost approach, income approach), the data sources consulted, and any limitations or extraordinary assumptions made.
  • The appraiser must disclose any work performed by others that was relied upon.
  • Example: “The appraiser personally inspected the subject property and three comparable sales, verified sales data with the listing brokers and reviewed county assessor records. The sales comparison approach was the primary method used in developing the opinion of value.”

• F. Property Description:

  • A detailed description of the physical characteristics of the property, including:
    • Site: Size, shape, topography, zoning, utilities, easements, and any adverse conditions.
    • Improvements: Size, age, condition, construction quality, number of rooms, and any special features.
    • Personal Property: A listing of any included personal property.
  • Inclusions of personal property must include an individual valuation or their effect on market value if not included.

• G. Market Analysis:

  • An overview of the relevant market area, including:
    • Neighborhood: Boundaries, demographics, economic trends, and property values.
    • Market Conditions: Supply and demand, sales volume, vacancy rates, and price trends.
    • Absorption Rate: The rate at which properties are sold or leased in a specific market.
  • The analysis must be supported by relevant data and statistics.

• H. Valuation Approaches:

  • A discussion of the appraisal methods used to develop the opinion of value.
  • This typically includes the sales comparison approach, cost approach, and income approach, although not all approaches may be applicable in every situation.
    • Sales Comparison Approach:
      • Selection of comparable sales and adjustments for differences in property characteristics.
      • Equation: Adjusted Sale Price = Sale Price ± Adjustments
      • Example of an adjustment for a difference in square footage: If the subject property has 1,500 sq ft and a comparable sale has 1,400 sq ft and the market indicates a value of $50 per sq ft, the comparable sale would be adjusted upward by $5,000 (100 sq ft * $50/sq ft).
    • Cost Approach:
      • Estimation of the cost to reproduce or replace the improvements, depreciation, and land value.
      • Equation: Value = Cost of Improvements - Depreciation + Land Value
      • Example of physical deterioration calculation: if an item with a 20 year life is 10 years old, and the total cost of the item was $10,000, then the depreciation would be $5,000 ($10,000 / 20 years = $500/year * 10 years).
    • Income Approach:
      • Estimation of potential gross income, operating expenses, and capitalization rate.
      • Equation: Value = Net Operating Income / Capitalization Rate
      • Example of calculating a value for an income property: a property with $200,000 NOI, and a market derived capitalization rate of 10%, then the value would be $2,000,000 ($200,000 / .10).
  • Justification for the selection and weighting of each approach.

• I. Reconciliation:

  • An analysis of the value indicators derived from the different appraisal approaches.
  • A determination of the final opinion of value based on the relative strengths and weaknesses of each approach.
  • Factors to consider: Reliability of data, relevance to the appraisal problem, and market conditions.

• J. Opinion of Value:

  • The appraiser’s final conclusion as to the value of the property.
  • This may be stated as a single dollar amount (point estimate) or a range of values.

• K. Certifications and Signatures:

  • A signed certification that the appraisal was prepared in accordance with USPAP.
  • Disclosure of any prior service regarding the property, including past appraisals.
  • The appraiser’s license or certification number and state of issuance.

• L. Supporting Documentation:

  • Maps, photographs, site plans, floor plans, and other relevant exhibits that support the appraiser’s analysis and conclusions.
  • Comparable sales data sheets with detailed information on each sale.
  • Cost data sources and calculations.
  • Income and expense statements.

IV. Practical Applications and Related Experiments

The principles and concepts of appraisal reports can be reinforced through practical applications and experiments.

• A. Case Study Analysis:
  • Provide students with sample appraisal reports of different types (self-contained, summary, restricted use) and ask them to identify the essential elements and evaluate the quality of the analysis and reasoning.
• B. Report Writing Exercise:
  • Assign students a hypothetical appraisal scenario and require them to prepare a complete appraisal report, including all necessary elements and supporting documentation.
• C. Comparable Sales Analysis:
  • Provide students with data on a subject property and several comparable sales and ask them to perform a sales comparison analysis, including adjustments for differences in property characteristics.
• D. Income Approach Calculation:
  • Present students with an income-producing property scenario and ask them to estimate potential gross income, operating expenses, and capitalization rate, and then calculate the value using the income approach.

V. mathematical❓ Formulas and Equations

The following formulas and equations are commonly used in appraisal reports:

• A. Area of a Rectangle:
  • Area = Length * Width
• B. Sales Comparison Approach:
  • Adjusted Sale Price = Sale Price ± Adjustments
• C. Cost Approach:
  • Value = Cost of Improvements - Depreciation + Land Value
• D. Income Approach:
  • Value = Net Operating Income / Capitalization Rate

VI. Conclusion

Appraisal reports are essential tools for communicating an appraiser’s expert opinion of value. By understanding the different types of reports and the essential elements that must be included, real estate❓ professionals can ensure that these documents are clear, accurate, and compliant with professional standards. Adherence to USPAP is key to creating credible and supportable value conclusions.