Who is responsible for determining an appropriate scope of work in an appraisal assignment?

What you need to know when ordering an appraisal.

Introduction

The Scope of Work defines the parameters of the appraisal assignment.

USPAP 2012-2013 defines scope of work as:

The type and extent of research and analyses in an assignment.

Selecting the proper scope of work is a function of the property type and intended use of the appraisal assignment. A complex property or assignment would most often have a more expansive scope of work than a small, straight forward property. Conversely, an appraisal made for litigation could, in many cases, have a more expansive amount of research and more details than an appraisal made for a seller wanting to list their property for sale.

According to the Uniform Standards of Professional Appraisal Practice (USPAP), it is the appraiser’s responsibility to develop and report a scope of work that results in credible results that are appropriate for the appraisal problem and intended user(s). In identifying the proper scope of work, an appraiser must:

1.  Identify the problem to be solved;

2.  Determine the scope of work to necessary to produce credible assignment results;

3.  Disclose the scope of work in the appraisal.

Though the appraiser consults as to the proper scope for the overall situation, it is helpful for clients to understand what the scope of work means to the appraisal report. This is because the extent of research and analyses within the appraisal report will reflect the scope of work.

Appraisal Problem

Most appraisal assignments have an appraisal problem to be solved of developing and reporting an opinion of value. All appraisals are developed to solve the appraisal problem. Some appraisal assignments can have multiple appraisal problems, or values related to the assignment, such as prospective value upon stabilization of the property, insurable value, “as is” market value of the fee simple estate, or “as is” market value of the leased fee estate.

It is very helpful for clients to inform the appraiser of any alternative scenarios or special circumstances in which the appraisal needs to consider to include these in the appraisal problem and scope of work, prior to starting the appraisal.

In situations where there is a greatly expanded appraisal problem, wherein value is only one aspect of the appraisal assignment, a valuation consulting assignment may be more appropriate than a stand alone appraisal.

Determining the Scope of Work Necessary for Credible Assignment Results

The appraiser is responsible for ensuring that the contents of the appraisal are sufficient and appropriate for the use of the appraisal.

This is directly related to:

• Identifying which type of value(s) will be needed;
• The report type;
• The report style;
• Level of market analysis;
• Level of marketability analysis;
• Level of highest and best use analysis;
• How many approaches to value will be required to reach a reasonable conclusion (and the depth of research within each approach), and
• Other reporting factors.

Value Types

This is perhaps the most critical aspect of an appraisal assignment. Several types of value are possible, refer to this Value Types page for the most widely used types of value within commercial and residential appraisal.

All value types can either assume unencumbered ownership (fee simple estate) or that all actual leases are in-place (leased fee estate). For instance, many lender’s will request two “as is” market values- one assuming fee simple estate, the other assuming leased fee estate. The “as is” market value of the fee simple estate interest assumes that the property has no leases or tenants and could be leased at the prevailing market rate. The “as is” market value of the leased fee estate interest assumes the property is encumbered by the terms of the lease (including the lease rate) and is subject to the existing lease terms.

Report Types

Two Report Typesare possible. While all appraisals require a complete appraisal analysis done by the appraiser, the degree in which the details are reported to the client is dictated by the report type.

Restricted Appraisal Report

A Restricted Appraisal Report contains minimal detail and is intended to relied upon by the client only, not any other party.

This is the least common appraisal report type because it does not satisfy the needs of most lenders. However, when a client does not have time to read a lengthy, detailed analysis, this can be an excellent solution.

A common situation would be if an owner is about to list a property or enter into a contract for sale and they just want the “number”, but don’t want to see all the “other stuff”.

Appraisal Report

An Appraisal Report contains a moderate or extensive level of detail.

This is the most common appraisal report within the industry because it satisfies the needs of lenders and large institutions.

Appraisal Reports can have one, two, or three approaches, depending on the situation of the property and use of the appraisal.

Report Style

Appraisal reports can either be narrative or form formats. Read more about the two appraisal report styles here…

Market Analysis

Market analyses within appraisal reports can vary extensively. They are generally broken into inferred or fundamental analyses. The property type, use of the appraisal, and appraisal problem influence the level of market analysis required. Read more about market analysis here…

Marketability Analysis

The level of marketability analysis performed by the appraiser can be basic, extensive, or somewhere in between. Read more about marketability analysis here…

Highest and Best Use Analysis 

The level of highest and best use analysis is dictated by the property type and intended use of the appraisal. In some situations, a highest and best use analysis can be very basic, other situations call for more extensive research. Further, highest and best use analyses can contemplate the property “as improved”, or assuming it were vacant as available for whatever use brings the highest value. Read more about highest and best use analysis here…

Approaches to Value

Three approaches to value are generally used by appraisers: The Income Approach, Sales Comparison Approach, and Cost Approach. These three ‘approaches’  are the methodology in which the appraiser will gather and analyze data with. Another method is available for subdivision, the Subdivision Development Method (SDM), which is similar to a discounted cash flow analysis. Each approach has several different methods within the approach that can be used.

Sales Comparison Approach

The Sales Comparison Approach is best for owner-user properties, or properties in which the most probable purchaser is an owner user. Most appraisals include this approach at a minimum, even if it is a rental property.

The Sales Comparison Approach compares similar sold or listed properties to the subject property. Adjustments are made to the comparable sales in the comparison process that reflect the comparable properties’ elements of comparison that differ from the subject’s elements of value. Typical elements of value include transaction related attributes such as property rights conveyed, financing terms, conditions of sale, and market conditions. Additionally, the comparable sales’ physical elements are analyzed and compared to the subject, such as location, size, shape, access, and characteristics of the subject.

Income Approach

On the other hand, the Income Approach values the property based on it’s ability to produce income and is consequentially best used for leased properties which the owner(s) can reasonably expect a future income stream. The income approach can assume all current leases are in-place (leased fee estate) or that no leases are in-place (fee simple estate).

The Income Approach to value is based on the present worth of the future rights to income. This type of analysis considers the property from an investor’s point of view, the basic premise being that the amount and quality of the income stream is the basis for value of the property. There are many iterations of the Income Approach. They generally fall into two categories: Direct Capitalization and Yield Capitalization. Direct Capitalization is based on a single period (one year) of income and expenses, Net Operating Income (NOI) is then capitalized by a market derived rate (cap rate).

Yield Capitalization is based on multiple periods (years) of income and expenses projected to occur throughout the duration of the hold, and the reversionary sale of the property. The income streams and net proceeds from the sale are discounted to a present value by a market derived discount rate to estimate value. Yield Capitalization is most commonly referred to as a Discounted Cash Flow (DCF) analysis.

Cost Approach

The Cost Approach arrives at an estimate of value by adding the value of the site to the depreciated cost of the improvements.

The Cost Approach is devoted to an analysis of the physical value of the property; that is, the current fair market value of land, assuming it to be vacant, to which is added the depreciated value of the improvements present on the site. The latter is derived based upon an estimate of the cost of reproducing or replacing the improvements, from which must be deducted accrued depreciation in terms of physical deterioration, functional obsolescence and external obsolescence, if any. Physical deterioration measures the physical wearing out of the property as observed during the field inspection. Functional obsolescence reflects a lack of desirability by reason of layout, style or design; and external obsolescence denotes a loss in value from causes outside the property itself.

Most Common Commercial Scope of Work

The most common scope of work for a standard commercial appraisal is a Summary Report with a Narrative Format seeking Market Value, utilizing two approaches to value.

A Summary Report relays a large amount of information regarding the data used and contemplated by the appraiser without going overboard. When people are making a decision about their commercial asset, they usually like to understand to a moderate level what is going on, data-wise, but people don’t want to sift through pages on end of statistical data. They generally think “That’s what I pay the appraiser for.”

Market Value reflects a typical listing and buying situation, without undue pressure on either side.

Most Common Residential Scope of Work

The most common scope of work for a standard residential appraisal is a Summary Report with a Form Format seeking Market Value, utilizing one approache to value (sales comparison).

What Scope of Work is Best for Me?

The best way to understand a proper scope of work for your property and situation is to submit a pricing request on your property. We will get back to you with an appropriate property and situation-specific solution, as well as the price for the related scope of work, and turn-around time. Please be sure to include as much detail about your situation and property as possible.