Terry Kestner, ARA, RPRARabo AgriFinance, Inc.Cedar Falls, IA

ECON 364X

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Writing an Appraisal Report

Professional appraiser: Developing, writing & reading an appraisal report

• Uniform Standards of Professional Appraisal Practices (USPAP)

• Writing the appraisal report

• Reading an appraisal report

• Reviewing an appraisal report

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USPAP

• Oral Reports – must have work file and adequate notes to support value presented.

• Written Reports – Self-Contained, Summary & Restricted Use.

• Self-contained Report – written with the level of documentation that all of the client’s questions will be answered in the report.

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USPAP (continued)

• Summary Report – written with less detail than a Self-Contained report but more than a Restricted Use report. It is still anticipated that the user will have some questions that are not fully answered in the report.

• Restricted Use Report – intended for specific use by the client only. Limited documentation in report.

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USPAP (continued)

• Each written or oral real property appraisal report must:

• (a) clearly and accurately set forth the appraisal in a manner that will not be misleading;

• (b) contain sufficient information to enable the intended users of the appraisal to understand the report properly; and

• (c) clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment.

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USPAP (continued)

• When the intended users include parties other than the client, either a Self-Contained Appraisal Report or a Summary Appraisal Report must be provided. When the intended users do not include parties other than the client, a Restricted Use Appraisal Report may be provided.

• The essential difference among these three options is in the content and level of information provided. The appropriate reporting option and the level of information necessary in the report are dependent on the intended use and the intended users.

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USPAP (continued)

• An appraiser must use care when characterizing the type of report and level of information communicated upon completion of an assignment. An appraiser may use any other label in addition to, but not in place of, the label set forth in this Standard for the type of report provided.

• The report content and level of information requirements set forth in this Standard are minimums for each type of report. An appraiser must supplement a report form, when necessary, to ensure that any intended user of the appraisal is not misled and that the report complies with the applicable content requirements set forth in this Standards Rule.

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USPAP (continued)

• A party receiving a copy of a Self-Contained Appraisal Report, Summary Appraisal Report, or Restricted Use Appraisal Report in order to satisfy disclosure requirements does not become an intended user of the appraisal unless the appraiser identifies such party as an intended user as part of the assignment.

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Writing the appraisal report

• Introduction

– Cover page

– Letter of Transmittal

– Summary of Salient Facts

– Assumptions and Limiting Conditions

– Table of Contents

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Writing the appraisal report

Factual DataI. Property Identification – clearly present location along with

distances to population centers, size and overall type of property.II. Legal Description – provide the estate appraised. If longer than 2

paragraphs, then add to the addendum.III. Appraisal Objective – determined in conjunction with client

A) Purpose – answer the value question – market, insurance, otherB) Function – what is the client going to use the appraisal for – loan,

estate settlement, bankruptcy, other.

IV. Definition of ValueV. Scope of Work – tells the extent to which the appraiser went in

preparing the report.VI. Property Rights Appraised – Fee Simple, Surface Rights,

Mineral Rights, Leased Fee, etc. Other encumbrances such as easements, mortgages, special occupancy or use requirements.

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Writing the appraisal report

VII. Effective Date of the Appraisal along with the date of the reportVIII. Ownership History of the Property – summarize any listings, sale

agreements, options, etc.IX. Complete description of area and neighborhood.

- Lead readers to accept conclusion of properties HBU.- Discuss positives and negatives of area. Don’t be misleading.- Use tables or brief summaries to incorporate statistics. Put lengthy material in the addendum or keep in work file.- Appraisal problem and subject property dictate info to include.

A) Physical considerationsB) Social considerationsC) Economic considerationsD) Governmental considerations

X. Property Description – size, location, use, terrain, drainage, soils, water rights, utilities, taxes, zoning, easements, deed restrictions, bldgs, disadvantages/advantages in relation to market area.

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Writing the appraisal report

• Data Analysis and Conclusions – lead the readers through the logical steps to determine value.

I. Highest and Best Use – most important part of the report.A. Physically Possible – consider size, shape, soil, terrain, etc.B. Legally Permissible – use must be legal considering public &

private restrictions. Also discuss any possibility of change in legally permissible uses.

C. Financially Feasible – uses that produce returns greater than operating expenses. Provide list of alternatives.

D. Maximally Productive – use that provides the highest value as warranted by the market.

Must report HBU for all properties “As if Vacant” and “As Improved”.

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Writing the appraisal report

II. Appraisal Process – present the mechanics and theory of the appraisal process including the rationale of the 3

approaches. Discuss reasoning for excluding any approachesIII. Cost Approach -

A. Land value – analysis & reasoning leading to conclusionB. Cost of Improvements – Estimate either replacement

or reproduction costs but not both.C. Depreciation – estimate all sources. 1) Physical – Curable and Incurable 2) Functional – Curable and Incurable 3) ExternalD. Conclusion – add up the contributory value from each component and summarize the applicability of the approach and strengths/weaknesses of the approach.

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Writing the appraisal report

IV. Income Capitalization Approach – income and expenses must be consistent with HBU.

A. Subject property operating statement – cash rent, share rent or owner/operator. Explain the basis for estimates.B. Income adjustments and expenses – livestock mortality

losses, vacancies, other typical losses. Explain sources for estimating expenses.

C. Capitalization Methodology – explain methodology used as it is typically confusing to readers.

D. Capitalization Rate (Cap rate) – show calculations. Rates are determined as of date of sale. Direct cap rate,

discounted cash flow.E. Value calculationF. Conclusion – discuss applicability of approach and limitations.

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Writing the appraisal report

V. Sales Comparison Approach – summarize how this approach is tied to the conclusions from area-regional-neighborhood analysis, property description and HBU sections. (unless done previously)A. Units of Comparison – Consistency!!B. Selection of comparable sales – must have similar HBU.C. Comparable sales description and analysis – goal is to

present readable, clear and accurate information.- support adjustments using pair sales analysis by isolating variables.- support that data is inconsistent or conflicting.- Subject and Comparable Sales Location Map

D. Sales Comparison GridE. Conclusion

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Writing the appraisal report

VI. Reconciliation and Final Value Estimate- Use the reconciliation to lead your readers to your final value opinion.- Discuss the interdependence of the approaches- Discuss the limitations of each approach for the problem- Restate the value conclusions from the 3 approaches and provide reasoning for selecting your final opinion of value. Essentially is an appraisal of the appraisal.- Discuss the quantity, reliability and sensitivity of the data

in each approach.- What makes one approach better than the others.- State the final opinion of value as a single number, range

or a number within a range. The choice depends upon the nature and complexity of the appraisal problem.

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Writing the appraisal report

VII. Certification- Certify that the appraisal is completed in a professional, objective and ethical manner.- Indicate if you are abiding by a code of ethics of an organization and meet that organizations education requirements.- Sign the page showing the effective date of the report.

Addenda- Include necessary exhibits including leases, lengthy legal descriptions, lengthy soil descriptions, additional photos of subject and sales, government restrictions and Qualifications of the Appraiser(s).

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Writing the appraisal report

General Suggestions- Proofread the report carefully – best by someone else.- Edit report so it is in a clear & concise manner.- Consistency- Explain departure from appraisal practices and explain effect.- Place North arrows on maps, plats, aerial photos, etc.- Always use original copies in the report.- Avoid hand lettering.- Type the report.- Provide sources of definitions in footnote format.- Separate sections of the report to enhance appearance.- NEVER conclude HBU is present use because of area or zoning.- Include Table of Contents and number all pages.

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Writing the appraisal report

- Define technical terms before using them.- Double check all calculations.- Use attractive business-like covers.- Date & describe photos- Use originals or high-quality copies.- Use maps and drawing to scale.- BE CAREFUL OF COPYRIGHT LAWS.- Title all exhibits in the addenda.- Use graphics to assist the understanding of the reader(s).

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Role of a Review Appraiser

Definitions• A review appraiser examines the reports of other appraisers to

determine whether their conclusions are consistent with the data reported and other generally known information. (The Appraisal of Rural Property ASFMRA)

• An appraiser who analyzes the written reports of other appraisers to determine validity of the data and conclusions. Often the review appraiser works for a bank, insurance company or the government. (The Language of Real Estate 5th Edition)

• An appraiser who examines the reports of other appraisers to determine whether their conclusions are consistent with the data reported and other generally known information. (Appraisal Institute)

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Role of a Review Appraiser

A.A competent reviewer should:• Not use subjective judgment• Not use hindsight – The reviewer must evaluate the appraisal report

in the context of the data and market conditions in effect at the time the appraisal was conducted.

• Not patronize or be condescending to the appraiser.• Not make personal references. These are irrelevant to the report

and the process.• Not be unduly critical of the appraiser. The tone of the reviewer’s

presentation is critical.• Distinguish between significant deficiencies and those that may be

perceived as significant, but are actually interpretive.• Remember that the review results may be used against the original

appraiser, therefore, the review must be fully defensible.

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Role of a Review Appraiser

B.Reviewer should demonstrate reasonable judgment• Reasonable limits should be considered for each appraisal, based on

the data available. Markets differ, thus, so do appraisals.• Reviewer should not evaluate the appraisal in the context of right

versus wrong, but rather in terms of what is reasonable versus what is unreasonable.

C.Review can be a learning experience for the appraiser of record

• Each review should be constructive, critiques should be documented, and recommendations should be offered to the appraiser.

• All review comments should be diplomatic and grammatically correct. The reviewer should avoid writing tactless or grammatically incorrect review summaries.

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Role of a Review Appraiser

• All review comments should be meaningful.• A review is NOT a re-appraisal of the subject property.

D. Reviewer Decisions• How much is enough?• How much is too much?• Is it good enough to approve?• Is it bad enough to disapprove?

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Role of a Review Appraiser

• Review Appraiser Limitations (CANNOT do)1)Change an appraisal report (except minor typo or math errors)2)Direct an appraiser to a value.3)Try to influence an appraiser’s judgment4)Substitute his/her judgment for the appraiser’s.5)Dismiss careful appraisal judgment, solely because it cannot be

conclusively supported by sales data or analysis.6)Direct an appraiser to rely upon a particular approach or method.7)Impose his/her personal theories, rules, procedures, etc., on the

appraiser (only those recognized by appraisal profession, federal/state law, regulations)

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Role of a Review Appraiser

• USPAP Standard 3.• Verify appraisal meets USPAP requirements.• Verify that acceptable appraisal methodology is used in the

appraisal.• Must do an appraisal if he/she states a value conclusion.• Work with the appraiser to obtain an acceptable report.

- Major flaws- Minor flaws- Multiple minor flaws can make the appraisal unreliable.

• Write review report based upon Scope of Work and agreement with client.

• Information may not be in the location that a reviewer would prefer or would put it themselves, but as long as the information is in the report then it is acceptable.

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•QUESTIONS?

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