The Building of an Appraisal-SR 1-2 and SR 1-3

This is Diana, with ABC-The Appraiser’s Business Companion.  In the building of an appraisal, there must be a defined location; its part of the relevant characteristics.  Remember the development SR 1-2(e): (e) identify the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal,21 including:

  • its location and physical, legal, and economic attributes;

and, SR 1-3 (a)

When necessary for credible assignment results in developing a market value opinion, an appraiser must:

(a) identify and analyze the effect on use and value of existing land use regulations, reasonably probable modifications of such land use regulations, economic supply and demand, the physical adaptability of the real estate, and market area trends; and

Comment: An appraiser must avoid making an unsupported assumption or premise about market area trends, effective age, and remaining life.

How does one do that?

Of course, the logical answer to that question is, what do the buyers think?  But wait a minute, what if the buyers are from out of town, how do they know?  Let’s call in the licensed real estate agent on this one.  How do they handle that question?  Doesn’t it begin with the question, “do you have any thoughts on where you’d like to live?”  Then comes the second question, “How many bedrooms, baths, do you need a garage, are you looking for a house with a pool?”  Ah, now we’re off to the races of beginning the search for the perfect house in the perfect location.  Say that again; perfect location; what’s that?

The decisions that go into defining the boundaries DO NOT EXPAND as far as the comparables found to use in the appraisal.  Why not?  Because competing neighborhoods are just that, competing, they are not the same neighborhood.  Consider the guidance from the conventional market.

Fannie Mae’s appraisal report forms and guidelines do not require the appraiser to rate or judge the neighborhood. Fannie Mae requires the appraiser to perform an objective neighborhood analysis by identifying neighborhood boundaries, neighborhood characteristics, and the factors that affect the value and marketability of properties in the neighborhood.

 

  • Neighborhood boundaries. The appraiser should provide an outline of the neighborhood boundaries, which should be clearly delineated using ‘North’, ‘South’, ‘East’, and ‘West’. These boundaries may include, but are not limited to streets, legally recognized neighborhood boundaries, waterways, or other natural boundaries that define the separation

of one neighborhood from another. Appraisers should not reference a map or other addendum as the only example of the neighborhood boundaries.

  • Neighborhood characteristics. These can be addressed by the types of structures (detached, attached) and architectural styles in the neighborhood (such as row or townhouse, colonial, ranch, or Victorian); current land use (such as single-family residential, commercial, or industrial); typical site size (such as 10000 sf, or 2.00 ac); or street patterns or

design (such as one-way street, cul-de-sac, or court). DIANA’s NOTE: This is where most appraisal reports show a lack in summarized specificity.

 

  • Factors that affect the value and marketability of properties in the neighborhood. These can be addressed by such things as the proximity of the property to employment and amenities, employment stability, appeal to the market, changes in land use, access to public transportation, and adverse environmental influences.

 

The appraiser must fully consider all of the value-influencing characteristics in the neighborhood and arrive at an appropriate neighborhood description and opinion of value for the property, even if this requires more extensive research for particular property types or for properties in certain geographic locations.

An appraiser must perform a neighborhood analysis in order to identify the area that is subject to the same influences as the property being appraised, based on the actions of typical buyers. The results of a neighborhood analysis enable the appraiser not only to identify the factors that influence the value of properties in the neighborhood, but also to define the area from which to select the market data needed to perform a sales comparison analysis.”

 

Consider the reason for the boundaries; “to identify the area that is subject to the same influences as the property being appraised.”  It defines the area from which a Sales Comparison Analysis can be performed.  Okay, seems simple enough, but what if there are no sales from that area.  What defines a completive neighborhood?  One that laterally a buyer, who cannot buy from one neighborhood due to lack of availability, can see the similarities of the alternative choice.

 

I had a question from someone who believed because the fields were completed the appraisal report was sufficient in its communication.  How can that be; especially when you’re communicating the assignment results of your research? It’s true, 1 plus 1 equals 2, but if 1 isn’t available, is the answer still 2?  Where do you go to find the missing 1?  Explain that reasoning and you’ll communicate the factors that make up the neighborhood and the competing neighborhood when necessary.  When this information is missing from the report it’s expected to be found in the workfile.  Read your appraisal report, if the 1 is missing, is it in your workfile?  Are the answers to the Fannie Mae guidance easily understood in your summary of commentary about the neighborhood characteristics?  Is it a logical conclusion why the boundaries are defined as stated in your Appraisal Report?

 

This is Diana Jacob and you’ve just had a tip from ABC-The Appraiser’s Business Companion.