The requirement of this assignment is to determine an Estimated Home Value and write a short paper on the topic of Estimated Home Value. Use the data below to determine the correct estimate for the su

The Art of Appraisal Review, 2nd ed. (Chicago: Appraisal Institute, 2010).

W hen undertaking any review assignment, the reviewer must at the outset discuss with the client exactly what should be reviewed. Although many review assignments entail reviewing an entire appraisal report, the subject of a review assignment can consist of any work done by another appraiser. Keep in mind that what the reviewer must do in one review assignment need not be done in every other review assignment. The scope of work decision provides the reviewer with a road map to the assignment ahead. Depending on the scope of work, the reviewer may do all or just some of the work described below. After accepting a review assignment, the reviewer must carefully review the appraisal, making certain that the data presented, the underlying assumptions, the analytical techniques applied, and the appraiser’s logic have led to consistent judgments. The data presented in the report must be reviewed to ensure that it is authentic, pertinent, and sufficient. The value definition, the identified property rights, and the qualifying conditions imposed should be carefully considered by the reviewer to ascertain whether the appraiser’s analysis specifically addresses each of these items. The reviewer should examine the differences in the conclu- sions derived from the various approaches, apply tests of reasonableness to these primary conclusions, and determine if the appraiser has satisfactorily resolved the differences among the various value indications. All mathematical calculations should be checked; significant errors can lead to incorrect value indications, and even minor errors can diminish a user’s con- fidence in the appraisal. The logic employed throughout the valuation process should be scrutinized.

Do the approaches and methods applied consider all the available data and sys- tematically lead to a meaningful conclusion that relates directly to the intended use or uses of the appraisal? Does the appraisal provide the information required to help resolve the client’s problem? For example, if the client wants to establish a basis for depreciation to compute federal income tax, does the appraisal allocate Developing the Appraisal Review Opinion by Richard C. Sorenson, MA I The Appraisal Journal, Summer 2010 Developing the Appraisal Review Opinion244 AbSTrAcT reviewing appraisal reports is an essential quality-control func- tion in the real estate appraisal business.

Whether a review is conducted within an appraiser’s own firm or by a business client, professional asso- ciation, or government entity, the goal is to ensure that credible, sound appraisals are communicated in logical, concise reports.

This article offers a review assignment framework for the reviewer in developing his or her appraisal review opinion. separate values to the improvements and the land?

A client who contemplates remodeling will want information on the costs and value benefits of this plan. The client seeking insurance coverage needs a well-supported value opinion that is consistent with the carrier’s definition of insurable value. If the client is considering whether to accept an of fer to purchase, the appraiser must adequately analyze the terms of the proposed sales cont ract.An appraisal client seeking a professional opin - ion will want to know the basis for that opinion.

The final value opinion represents the applica - tion of the appraiser’s judgment to mathematical results. The appraiser should employ the t ype and quantit y of data that market participants would consider appropriate to solve the appraisal problem at hand. This data should be applied consistently in the specific approach or approaches applicable to the appraisal problem. The valuation process is a collect ion of available analyt ical tools from which an appraiser selects those appropriate to the assignment. If the assignment is to develop a market value opinion, ever ything used in the approaches to value must be consistent with market perceptions.

T he appraisal conclusion should reflect ma rket value and t he dat a analyzed should suppor t t he appra iser ’s f i na l va lue opi n ion , but dat a a lone does not produce a value opinion. Through t he intellectual process of combining data analysis with professional judgment , a sound value opinion is formed. Sometimes an appraiser may of fer substan - t ive, a lbeit subject ive, judg ment s when precise market information is not available. This most fre - quently occurs in the appraisal of special-purpose properties for which t ransactional data is scarce, in the appraisal of properties in fully developed areas (e.g., older, urban core areas) where land sales may not have occurred for several years, or during recessionar y economic times when trans - actional data is hard to come by. The credit crisis and economic downturn of 2007, 2008, and 2009 caused many real estate markets to stall, leaving appraisers with a dearth of sales data to analyze.

All too of ten, a lack of sales activit y coupled with scarce net income information makes the deriva - tion of overall capitalization rates by direct sales comparison dif ficult , if not impossible. In t hese situations, substantive judgments by the appraiser are required. Getting Started In even the simplest assignments, reviewers need to digest a considerable amount of information. An appraisal report might be 200 pages long or more and contain thousands of individual pieces of data.

To complicate matters, all appraisers do not include the same information in their reports or use the same format. Although guidelines for appraisal reports are presented in US PAP, information can be pre- sented in a variety of ways. It can be difficult to find information or to notice that essential information is missing. For example, the subject property’s his- torical operating expenses might be listed under the heading “History of the Subject Property,” included in the income capitalization approach section, or simply mentioned in the reconciliation. A reviewer has to make sense out of all this.

The following 12 steps can be used by a reviewer as a starting point for a typical review assignment:

1. Check out the location maps and photos in order to envision where the property is located and what it looks like.

2. Read the letter of transmittal. Are the facts right (e.g., property address, ownership interest, square foot area)? Was the assignment completed as agreed? Are any mysterious “subject to” condi- tions mentioned? Are there any hedge words or warning signals in the appraiser’s verbiage?

3. Review the summary of important conclusions (executive summary). Convert taxes, gross and net income amounts, appraised value indications, and the final value conclusion into convenient units of comparison. Make quick mental checks for reasonableness. Make a copy of this section and use it to check for consistency as you review the remainder of the report.

4. Go to the end of the report and read the reconcili - ation section. Which value approach was given the greatest emphasis and weight? Are the con- clusions consistent with those in the executive summary? Is the appraised property likely to be owner-occupied or income-generating?

5. Scan the report for any special or extraordinary property or market risks. Risk may be addressed in several sections of the report. In the property Developing the Appraisal Review Opinion The Appraisal Journal, Summer 2010 245 description, check for zoning compliance, build- ing code violations, features of extraordinary obsolescence, and lease aberrations. In the environmental section, look for potential prob- lems with hazardous waste or materials and the presence of wetlands.

6. Look at the property sales history section. Is a sale in escrow or pending? Has there been any activity during the past 36 months? How do past or current sales or listing prices compare with the current value? If a wide discrepancy is evident, does the appraiser offer analysis and an explanation?

7. Read the assumptions and limiting conditions carefully. Look for unusual assumptions and unreasonable limiting conditions that could limit the effectiveness and credibility of the value conclusion and the usefulness of the report (such as a case in which the appraisal is subject to specific management or ownership).

8. Study the value approaches performed. For the income capitalization approach (income- producing properties), consider the following:

• The rent estimate. Are there any gaps between actual and forecast amounts?

• The leases. Did the appraiser have access to the leases or merely a broad-brush rent roll?

• Operating statement. Compare it with an actual statement and analyze it using ratios and units of comparison.

• N e t o p e r a t i n g i n c o m e . A p p l y u n i t s o f comparison.

• Capitalization rate. Check for reasonableness. If mortgage and equity capitalization rates are derived, check the financing assumptions against market reality. Many appraisers who use the mortgage-equity technique to develop an overall capitalization rate confuse equity dividend (or equity cash flow) with equity yield, and deriving an equity dividend rate from market data is one of the appraisal techniques most often mishandled.

Check the comparable sales for reasonable- ness if the sales comparison approach was the primary approach used. Are the sales recent and truly similar? Does analysis using units of comparison bracket the concluded value (i.e., some superior, some inferior)?

9. Review the reconciliation again. Does it flow logically to a reasonable value conclusion? Does it ramble or consist largely of boilerplate? Do the cost, sales, and income value indications fall within a reasonable range? If not, does the appraiser explain any apparent discrepancies?

10. Do a reality check. If the property is new or nearly new, check the appraised value against the owner’s land and building construction costs.

Do they reconcile? There are few “bargains” in real estate except for sales transacted under duress, foreclosures, and short sales. Generally, a seller is not going to give a property away for anything less than its market value.

11. Test for reasonableness. Cross-check value con - clusions with conclusions derived in previous assignments and recognized sources of market information.

12. Fo l l o w u p w i t h t h e A p p r a i s a l S t a n d a r d s Requirements and Regulatory Compliance Checklist (Figure 1). 1 Appropriateness, Accuracy, and Quantity of Evidence Reviewing an appraisal helps establish its accuracy and consistency as well as the logic leading to the value conclusion. Appropriateness, accuracy, and quantity of evidence are the criteria an appraiser uses to form a meaningful, defensible, and cred- ible final value opinion. These criteria are used to analyze multiple value indications within each approach and reconcile the indications produced by the different approaches into a final opinion of defined value.

The criterion of appropriateness refers to how pertinent each approach is to the intended use of the appraisal. The appropriateness of an approach is usually directly related to property type and market viability. For example, an appraisal of a 30-year-old community shopping center will ordinarily employ procedures associated with the income capitalization approach —i.e., the derivation of a gross rent multi- plier, net income capitalization, or the discounting 1. A comprehensive sample checklist for reviewing narrative appraisal reports is provided in Appendix C of Appraising the Appraisal: The Art of Appraisal Review. Appendix C also contains two Fannie Mae/Freddie Mac residential appraisal review forms, a sample commercial appraisal review form, and a sample appraiser performance rating form.

The Appraisal Journal, Summer 2010 Developing the Appraisal Review Opinion246 of cash flows. The cost approach might not be useful in valuing older or obsolete improvements, but it may be applied to calculate land value and determine, through an analysis of highest and best use, whether demolition of all or part of an improvement is appro- priate. The sales comparison approach can be used to derive value indications through the analysis of appropriate physical units of comparison.Although the final value opinion is based on the approach or approaches that are most applicable, it need not be identical to the value produced by the most applicable approach. If two approaches are applicable, the final opinion of value may be closer to the value indication produced by one approach.

For example, the value indicated by application of the income capitalization approach may be lower than the value indicated by sales comparison. If market participants are primarily interested in income- earning potential, the final opinion may be closer to the conclusion produced from income capitalization than sales comparison. If the property is an owner- occupied dwelling, however, the sales comparison approach would likely be most relevant.

Figure 1 Appraisal Standards requirements and regulatory compliance checklist 1.The appraiser is engaged directly by _____ (the client) and does not have any direct or indirect interest, financial or otherwise, in the transaction or the property. Y ¨ N ¨ N/A ¨ 2.The appraiser has disclosed the steps taken to comply with the Competency Rule of USPAP, if applicable. Y ¨ N ¨ N/A ¨ 3.

The appraisal was performed by a state licensed appraiser. Y ¨ N ¨ N/A ¨ 4.The appraisal report type is stated. Self-contained ¨ Summary ¨ Restricted use ¨ 5. The appraisal contains adequate, relevant, and meaningful discussion, analysis, and rationale so that it can be readily understood and leads to a credible value conclusion. Y ¨ N ¨ N/A ¨ 6.Market value is based on the definition set forth in appraisal regulations pursuant to FIRREA. Y ¨ N ¨ N/A ¨ 7.The appraisal reports on and analyzes any current agreement of sale, option, or listing of the property being appraised. Y ¨ N ¨ N/A ¨ 8.The appraisal reports on and analyzes, with reasonable detail, sales of the property occurring during the previous three years. Y ¨ N ¨ N/A ¨ 9.If an income-producing property is involved, the appraisal reports on and analyzes data on current revenues, expenses, and vacancies. Y ¨ N ¨ N/A ¨ 10.

The appraisal reports on and analyzes current market conditions. Y ¨ N ¨ N/A ¨ 11.The appraisal reports on and analyzes appropriate deductions and discounts for proposed construction or renovation, partially leased buildings, nonmarket lease terms, and tract developments with unsold units. Y ¨ N ¨ N/A ¨ 12.The appraisal contains sufficient supporting documentation to indicate the reasonableness of the conclusions. Y ¨ N ¨ N/A ¨ 13.

The appraisal includes a legal description. Y ¨ N ¨ N/A ¨ 14.The appraisal separately values personal property, equipment, or fixtures. Y ¨ N ¨ N/A ¨ 15.The appraisal uses applicable value approaches, explains any approaches omitted, uses appropriate techniques, and shows a reasonable rationale for the reconciliation of the approaches. Y ¨ N ¨ N/A ¨ Comments: ________________________________________________________________________\ ____________________ ________________________________________________________________________\ ____________________ ________________________________________________________________________\ ____________________ Developing the Appraisal Review Opinion The Appraisal Journal, Summer 2010 247 The criterion of appropriateness is also applied to judge the relevance of each comparable prop - er t y and each significant adjust ment made. The number of comparable properties, the number of adjustments, and the gross and net dollar amounts of adjustments may suggest the relative accuracy of a particular approach. Even when adjust ment s are suppor ted wit h comparable dat a, t hey reflect human judg ment .

Small inaccuracies can be compounded when sev - eral adjustments are added or multiplied. For this reason, the precise arithmetic conclusion derived from adjusted data should support , but not control, the appraiser’s judgment. Appropriateness and accuracy af fect the qual - it y and relevance of the value indication derived from a comparable propert y or from an approach.

Although these criteria are considered separately in the review process, both must be studied in relation to the quantit y of evidence provided by a particular comparable or approach. Even data that meets the criteria of appropriateness and accuracy can be weakened by a scarcit y of evidence. The Appraisal Report An appraisal report should convey the appraiser’s c on fidenc e i n t he solut ion bei ng of fered to t he appraisal problem. A poorly written report will not be convincing to a client or reviewer. All the ef fort put into an appraisal assignment can be lost if the report lacks organization and is carelessly written.

A c l e a r a n d c o n c i s e l y w r i t t e n r e p o r t n o t o n l y f a c i l i - t ates comprehension, it also creates a favorable impression of the appraiser. If boilerplate state - ments are used in the report , they must be current and relevant to the specific valuation problem. It is in the interest of all parties to get to the point early in t he report. A 150 -page report t hat does not describe the propert y until page 85 or does not address the derivation of market value until page 148 will only frustrate the reader. Critical issues and key assumpt ions should be highlighted, not buried, in the report. Similarly, a reviewer is likely to be confused by a report that contains tantalizing hints about potential investment risk but never addresses the problem head-on. A reviewer who is forced to read bet ween t he l i nes event ua l ly loses c on f idenc e in t he value conclusion. The reviewer would be tempted to order another appraisal to confirm or refute suspicions about the original report. Because appraising is concerned with problem solving, the reviewer has a reasonable expectation for a clear- cut solution.

Reviewers should be alert for incongruities in a report. Is a claim made too of ten, too emphati - cally, or too flippantly? Is an issue being avoided?

Are there implicit rather than explicit references to a potential problem? Inconsistencies within an appraisal —e.g., d iscrepa ncies bet ween t he dat a u s e d i n d i f f e r e n t s e c t i o n s o f t h e r e p o r t —detract from a report and erode confidence in its conclusions. Some appraisers cloud other wise st raight- for ward appraisal issues w it h technical jargon.

An appraiser may resort to jargon in an ef fort to disguise his or her shortcomings, over whelming t he reader w it h u n fa m i l ia r verbiage to def lect attention away from an issue the appraiser does not understand. Excessive reliance on jargon can also create the false impression that the value indica - tion derived in the appraisal process is both precise and scientific. Ultimately, jargon may prevent the client from understanding the appraiser’s analysis and rationale. The use of pretentious jargon has increased since the advent of the computer. Computer out- put appears aut horit at ive, and many people are impressed by the att ractiveness of desktop publish - ing page layouts or slick graphics. The reviewer, however, must not be taken in by these. To p r o v i d e a m e a n i n g f u l s e r v i c e t o t h e intended user of t he report , t he appraiser must of fer guidance in t he user’s decision-making process.

Obvious problems with the subject propert y or the market should never be ignored. Too of ten, a critical section of a report lacks essential analysis.

For example, in valuing a propert y under an older, uneconomic use that is located in a growth area, the appraiser may fail to consider that the land might be worth more if developed to an alterna - tive use. In this case, the analysis of the highest and best use of the land as though vacant did not receive suf ficient emphasis. Real estate, particu - larly investment-grade property, involves potential risks, and appraisers must address all risk factors directly in the report for the benefit of the client.

The risk components in a real estate investment must be analyzed and weighed against the risks found in alternative investments. The Appraisal Journal, Summer 2010 Developing the Appraisal Review Opinion248 Appraisal reports on existing, income-produc- ing properties should clearly reconcile dif ferences bet ween the revenue and expense histor y of the subject proper t y a nd t he revenue a nd ex pense projections used in the appraisal analysis. The cli - ent should not have to surmise how the appraiser arrived at the revenue and expense projection for the subject or how it correlates with the past per - formance of the property. The report should present this information clearly, explaining where and why the projection dif fers from the propert y’s recorded histor y. A n appraiser may choose to sy nt hesi ze much of the propert y’s financial histor y in the text of the report , but it is good practice to include a complete copy of the historical data provided by the client in the report addenda. The Review Report I n t he deter m i nat ion of t he scope of work , t he reviewer and client will agree on the manner in which the reviewer will communicate the conclu - sions of the review to the client. Form reports for reviews are t ypical for the more common review assignments because a standardized form of fers the same benefits as a form report for an appraisal:

(1) t he reader k nows where to look for speci fic information, and (2) the reader can easily see if i n f o r m a t i o n i s m i s s i n g . M a n y r e v i e w s a r e r e p o r t e d on forms because they allow the reviewer to get st raight to t he point , which most clients great ly appreciate. Table 1 provides information on some commonly used review forms. Alt hough t here is no standard format for review reports, each review report will contain certain items, including • The reviewer’s client and intended users • The intended use of the appraisal review • The purpose of the appraisal review • The subject of the appraisal review assignment • The ownership interest in the propert y that is the subject of the work under review • The date of the work under review • The ef fective date of the opinions and conclu - sions in the work under review • The appraiser (or appraisers) who completed the work under review • The ef fective date of the appraisal review • Ext raordinar y assumpt ions and hy pot het ical conditions used by the reviewer and a statement that their use might have affected the assignment results • The reviewer’s scope of work • The reviewer’s opinions and conclusions about the work under review, including reasons for any disagreement • I n c a se s i n wh ich t he sc ope of work of t he review includes developing an opinion of value, a st at ement of wh ich i n for mat ion , a na lyses, opinions, and conclusions in the work under review the reviewer accepted as credible and used in developing the reviewer’s own opinion, and a summar y of any other information relied on and the reasoning of the reviewer’s opinion of value • T he appropr iate sig ned cer t i fic at ion (e.g., i n accordance with USPAP Standards Rule 3-6) A review report should be tailored to fit the client’s informational needs. Only information that supports the reviewer’s opinion of the appraisal report needs to be included in the review report. Repeating infor- mation in the review report that is readily available in the appraisal report does not help the client, and repetition may cause confusion, particularly when similar terms are used without making clear whether the context is the appraisal or the review —e.g., the Table 1 review Forms Two residential review forms are available from Freddie Mac and Fannie Mae: 1. Fannie Mae Form 2000 (Freddie Mac Form 1032): One-Unit Residential Appraisal Field Review Report 2. Fannie Mae Form 2000A (Freddie Mac Form 1072): Two- to Four-Unit Residential Appraisal Field Review Report The forms can be used for reviews of one - unit and small residential (t wo - to four- unit) income proper ties, an individual unit in a condominium or planned unit development (PUD) project, or a cooperative unit. (The forms are available at w w w.efanniemae.com and w w w.freddiemac.com, as well as from various providers of computerized forms.) Formats of commercial review forms are both more numerous and less standardized. Lending institutions may use specific review forms for commercial proper ties or reviewers may develop their own forms that emphasize the income capitalization approach more than Fannie Mae and Freddie Mac’s residential review forms do.

Developing the Appraisal Review Opinion The Appraisal Journal, Summer 2010 249 “scope of work” of the appraisal and the “scope of work” of the review. Similarly, the word “subject” can cause confusion if used indiscriminately in the review report to refer to the “subject” property of the appraisal and the “subject” of the review.Finally, the reviewer’s f ile on a completed assignment should contain the following:

• A copy of the appraisal report • A copy of the review document • The reviewer’s field notes and working papers • The names and phone numbers of all persons interviewed during the course of the review pro- cess, such as appraisers, brokers, and investors r ichard c . Sorenson, MAI, reviews more than 300 commercial appraisals annually and provides appraisal consulting services for national, regional, and community banks as well as attorneys and gov- ernment agencies. He has an extensive background as chief appraiser for a regional bank and is a past president of the Appraisal Institute. Sorenson has been published in several appraisal and banking journals and holds a bachelor of science degree from the University of Wisconsin. More than five decades of reviewing experiences have contributed to the writing of Appraising the Appraisal: The Art of Appraisal Review. contact: www.richardsorenson.com Web Connections Internet resources suggested by the Y. T. and Louise Lee Lum Library American Bankers Association http://www.aba.com Appraisal Subcommittee, Federal Financial Institutions Examination Council https://www.asc.gov/ Home.aspx The Appraisal Foundation https://netforum.avectra.com/eWeb/StartPage.aspx?Site=TA F Federal Deposit Insurance Corporation—FI RREA http://www.fdic.gov/regulations/laws/rules/8000-3100.html The Appraisal Journal, Summer 2010 Developing the Appraisal Review Opinion250 Copyright of Appraisal Journal is the property of Appraisal Institute and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission.

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