Monday, October 2, 2023 | The Latest Buzz for the Appraisal Industry

How to Handle the Weird Stuff: Appraisal Methods from an Experienced Florida Appraiser

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In the past two blog posts in this series, I discussed the pros and cons of complex appraisal assignments and why today’s residential appraiser may want to consider specializing in “odd” or “atypical” assignments. In this post, I’ll give a few more examples of complex properties, and then I’ll talk about how to tackle them using nonstandard appraisal methods and techniques.

Complex assignment examples

The examples given in the last post were about “the property to be appraised” being atypical. This time, let’s look at “the form of ownership” and “market conditions” being atypical.

Form of ownership

Example: Life estate

An attorney purchased a condo and then gave his mother a life estate with himself as the remainder, to avoid having to share the sale proceeds with his two siblings upon the mother’s death. There are HP-12C keystrokes for life estates, but in this case, the assignment ended up being a request for market value for his CPA’s needs. The moral of this story is that sometimes assignments look more complicated on first blush than they really are.

Example: Land lease

In a large development of approximately 300 houses, four of them were on a 99-year land lease with 55 years remaining. Reason was it was the last portion of the block of land, and the owner wouldn’t sell, but did agree to the land lease. Subject is one of the four, and there were no comps on land leases for miles in this urban/suburban area.

Market conditions

One of the most important factors in a real property’s value is the health of its real estate market. Here are a few examples of atypical market conditions:

  • The 2006–2008 market bust, in which U.S. housing markets suffered severe declining property values
  • Major employer shutting down, which directly impacts demand and supply and possibly creates an exodus of people moving out of the region
  • Pandemic conditions, which bring about eviction bans, increased unemployment limiting the number of buyers in some markets, people moving out of specific areas, etc.

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How might we deal with complex assignments?

For some of “the property to be appraised” being atypical assignments, there’s a simple solution—especially when comparable data is non-existent—and that is to appraise the property “subject to” curing the problem. In other words, you are telling the client, “I don’t know what it’s worth today, as is, but I can tell you what it would be worth if the problem at hand is fixed.” Unfortunately, that’s probably not what the client wants, or there is the possibility that the property’s atypical feature cannot be cured.

Another possible solution is Qualitative Analysis—doing a simple “better-equal-worse” comparison rather than trying to allocate virtually impossible to extract or support dollar adjustments for the differences between the subject and the comparables. When I’ve been successful utilizing this technique, it was for non-lender assignments. It certainly would not be Uniform Appraisal Dataset (UAD) compliant. The good old 2065 form could be a workable vehicle in many such situations.

When you can, utilize a narrative report format rather than a standard form. This will help you avoid the automated review bells and whistles when trying to explain a complex property and valuation on a limited form.

Specific appraisal methods and techniques

There are recognized appraisal methods and techniques for dealing with the unusual. Here are some specific techniques, but certainly not all that might be utilized.

Going further away or back in time

One method is to go further back in time for comparable sales.. Another method is to use sales that are more distant to find data to utilize. Both of these techniques have long been available to appraisers. When using these appraisal methods, most often a comparison is made between properties with similar characteristics to the question at hand to extract a ratio/percentage which is then brought current or to the locale and applied. This could work for the above illustration with only four houses on leased land and no similar nearby sales. Most appraisers are familiar with and have utilized these techniques, and they’ve been demonstrated in several McKissock courses over the years.

Contingent Valuation Method (CVM)

Another method is the Contingent Valuation Method (CVM). This is a polling or survey means of obtaining opinions from knowledgeable parties by asking key questions.

Example: Loss of view

A subject property is across the street from homes that back up to a quiet, scenic river. The waterfront homes, as would be expected, sell for much more than non-waterfront. The subject had an open view of the river due to two vacant lots across the street until a large house was built on those two vacant lots, blocking 90% of the river view, and what view remains is from the porch only. Let’s assume it is a small town, only 17 houses front on the river, and there have been no sales of those homes, or homes across the street from them, in the past two decades.

How do you account for the loss of view? One way to address this is to interview potential buyers and sellers, real estate professionals, other appraisers, etc. Depending on what you are trying to determine, you could ask questions such as:

  • “How much do you feel the view was worth?”
  • “How much do you feel the reduction in view impacted subject’s value?”
  • “Does the current minimal view add to value?”

Then reconcile the results, usually tossing out any extremes and analyzing the remaining answers to hopefully find a reasonably tight range that can be reconciled to a percentage that can be applied. For example, an indicated range of 25% to 35% might be reconciled to a 30% impact.

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Relative ranking

Relative ranking is another alternative method whereby a grid of properties reasonably similar to the subject is created, and the properties are entered in order of square footage, for example. The subject is then placed where it fits in the grid by its square footage, and often an indication of value range is apparent. This method can indicate a good starting point to at least establish a range. Caution needs to be used here, as sometimes too many other factors reduce the reliability of this technique.

Depreciated cost

Depreciated cost can be a valuable tool for establishing adjustments in complex assignments. Caution with this method is also advised, because it may be that the unique factor of the subject property outweighs all the “normal” considerations, such as in the case of historic houses.

Sometimes we get lucky and traditional appraisal methods and techniques work just fine. When market data exists, it may be just the extra time involved in sorting it all out, or the need for more in-depth research and procedures to put it all together. An example might be a large waterfront area where there are quite a few waterfront sales to consider for use as comparables; however, due to navigability issues, current flow, views, water quality, and riparian rights, it may turn out that a lot more research is required. At some point, such an assignment can become complex. It ends up being the appraiser’s call.

Want more tips and techniques for dealing with complex assignments? Enroll in our CE course: Complex Properties: The Odd Side of Appraisal.

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Written by Steven W. Vehmeier. Steve resides in Florida where he is a state-certified general real estate appraiser, holds a general appraiser instructor permit, and is a licensed real estate broker. He has taught appraisal qualifying and continuing education courses for multiple colleges, professional appraisal organizations, his own school, and McKissock Learning since the mid-90’s, often spending over 100 days a year traveling and teaching. He has authored dozens of appraisal courses and textbooks, including several for McKissock, and has been a member or affiliate of eight national appraisal organizations, and national director of two.

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