This is Diana, with ABC-The Appraiser’s Business Companion. In the building of an appraisal one of the elements in defining the appraisal problem is the intended use of the appraisal. For example, what if the intended use was to seek a mortgage on a residential vacant piece of land? The client seeks a current market value; do you know the source of the definition of value? Is there a “lender form” available to use when completing the vacant land appraisal report? Are there any secondary market guidelines that enable us to know what’s expected?
Did you realize that only credit unions underwrite vacant land loans? Knowing this information leads you to search the credit union guidelines. What you will find is the reference to the Interagency Guidelines which draw the appraiser back to performing according to the Uniform Standards of Professional Appraisal Practice. “ Standard Rule 2-2(a) (v) “state the type and definition of value AND cite the source of the definition; Comments: Stating the definition of value ALSO requires any comments needed to clearly indicate to the intended users how the definition is being applied.”
The Interagency Guidelines where the five minimum standards are defined are the prevailing guidelines over a loan that involves a vacant land loan. One of those five standards is the required definition to use for vacant land appraisals where funding is underwritten by the National Credit Union Association (NCUA). That directive can be found in 12 CFR 722.4(a) “(iv) be based upon the definition of market value as set forth in the regulation;”
The definition of market value in the NCUA regulations is found in 12 CFR § 722.2 Definitions.
“(f)Market value means 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. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”
There is no mention of any “form” or which Standard Rule to follow. This means you the appraiser must decide along with the client which format of communication the land value should be communicated. There are a variety of forms for vacant land appraisal reporting. Some are more comprehensive than others, but all that I’ve seen have a Neighborhood Rating Grid. Now here’s the interesting history behind that grid. “Back in the Day” as Chip Gains would say, there was a time when there was no certification for appraisers and there was no USPAP that was universally adhered. The appraiser took their directives from their individual appraisal organizations and their lender/client and the secondary market. The forms that were published for residential purposes, prior to certification, were last published in 1994. All (yes I said ALL), residential forms had a Neighborhood Rating Grid, just like the current Rating Grid on the vacant land appraisal forms. Across the board the forms, albeit for 2-4 family, 1004 etc., had specific directives from the secondary markets in that grid. Its so logical its difficult to understand why the appraiser can’t see it today when using the vacant land forms. The rating is a comparison of the subject’s neighborhood to its competing neighborhood in the same location. If you “ticked” the box [x] Urban, what was the comparison of the subject’s neighborhood convenience to shopping or adequacy of utilities, to one that was competing? Was it Good, Average, Fair or Poor? If it’s a Rural Location, what is the comparison of the Neighborhood where the subject of the appraisal is located, to a competing Rural Neighborhood when it comes to “Public Transportation”? If there is none in either neighborhood how can it be “poor”? By comparison the lack of pubic transportation in both locations is average. The fact that there is no public transportation is not adverse to the marketability. What needs to happen is the appraiser needs to add a narrative comment that states, “There is no public transportation in the subject’s neighborhood, nor in the competing market which is why it’s comparison rating is concluded to be “average”. The lack of public transportation is not adverse to the marketability where the principle of conformity is not the driver of demand. The driver of demand for Rural locations in part is quiet enjoyment and lax governmental regulations. The lack of public transportation is expected and accepted in exchange for the rural living lifestyle.”
Here’s another interesting definition from the NCUA, 12 CFR Section 722; “(g)Real estate or real property means an identified parcel or tract of land, including easements, rights of way, undivided or future interests and similar rights in a parcel or tract of land, but does not include mineral rights, timber rights, and growing crops, water rights and similar interests severable from the land when the transaction does not involve the associated parcel or tract of land.” Notice there is an assumption that it’s a parcel that includes easements, rights of way, undivided…and similar rights in a parcel or tract of land, but DOES NOT INCLUDE other rights that can be severable. Do you state that in your vacant land appraisal? Do you live in an area where mineral rights, timber rights, growing crops, water rights, etc. exist? Doesn’t it just make good sense to be clear about what you are appraising to ensure no other right is expected to be valued in the vacant land appraisal?
Intended Use, Intended User drive the Scope of Work in the development. Your Appraisal Report is your opportunity to narrate what you based your analyses upon given the Intended Use and the Intended User.
This is Diana Jacob and you’ve just had a tip from ABC-The Appraiser’s Business Companion.