8. Appraisal Myths & Realities

Will the market value equal assessed value? 
While most states support the concept that assessed value approximate estimated market value, this often is not the case. Examples include when interior remodeling has occurred and the assessor is unaware of improvements, or when properties in the vicinity have not been reassessed for an extended period.

Shouldn't market value approximate replacement cost? 
Market value is based on what a willing buyer likely would pay a willing seller for a particular property, with neither being under pressure to buy or sell. Replacement cost is the dollar amount required to reconstruct a property in-kind.

My broker performed a market valuation. Why do I need an appraiser to perform one? 
There are many reasons why valuations are required to be done by appraisers. First and foremost, the appraiser is an independent, third party. Many times, the appraiser is the only one in the transaction that does not have a vested interest in the outcome. This is the reason for the creation of the appraisal industry in the 1930's.
Another important difference between a broker's valuation and that performed by an appraiser is that a licensed appraiser is bound by USPAP, whereas a broker is not.

What are the differences between an informal appraisal and a formal one? 
Those outside the appraisal profession have different interpretations of formal and informal reports. When a client simply wants "a number" and not a long document, he/she will often call it an informal appraisal. Those outside the appraisal field often refer to a "letter of opinion" report as an informal report, although terms such as "update appraisal", "re-certification of value" and "evaluation of real property collateral" have also been used. When USPAP became effective in the late 1980's, appraisers no longer used this terminology because a letter of opinion and the derivatives above became a violation of multiple USPAP regulations. Now known as the restricted report format, appraisers are required to do substantially more work to issue this type of report.  Please note that if we even give a “ball park” verbal estimate that is considered an appraisal by USPAP and not permitted.
Again, the three type of report formats: self-contained, summary and restricted are summarized below.

In this report option, the appraiser provides all of his/her data and rationale that was used in the development of the appraisal. All conclusions and data sources are fully disclosed and discussed. Two practical tests can be used to determine if a report is a self-contained document:

    1. The content of the report fully describes the data, reasoning and each conclusion to such a degree that there is no need to consult other data sources or to inquire how the appraiser reached a conclusion.
    2. Information sources cited within the report are included in the document, within reason. Citing a book does not require the inclusion of the book in the addenda, but market studies or other material articles cited in a report should be included, especially if the appraiser relied upon them for supporting important conclusions. This is the type of report most often needed for commercial property lending.

In the summary report, the appraiser summarizes his/her findings rather than fully describing them. This is a much shorter report than a self contained and many lenders accept this reporting type. Most residential appraisals are done on forms that are summary reports along with non-complex commercial assignments. The appraiser may summarize the data and his/her conclusions without explaining the full reasoning behind them.

Restricted Report: 
This is the shortest type of report. A restricted report only states the conclusions of the appraiser with no explanation on how they were derived. Restricted reports are generally used internally or when a value must be reported quickly. Many clients order restricted reports when time is of the essence and then have them upgraded to a summary or self contained in the future.
An important caveat is that USPAP does not allow a restricted report to be used by anyone other than the client or someone intimately familiar with the property, so if the appraisal will be viewed by other third parties, a summary or self-contained must be prepared. Appraisers cannot "recertify" this type of report to any other lender.

What is the difference between a valuation and an appraisal? 
The words valuation and appraisal are used interchangeably. There is no difference between them. The confusion began when lenders started using the term "evaluations" in the early 1990's, implying that they were not appraisals. Soon, the "e" in evaluations was omitted. This issue has been addressed at length by the appraisal community and the Appraisal Foundation (the creators of USPAP) and an evaluation was found to be an appraisal. As discussed earlier, there are six possible combinations of appraisal and report; evaluations are not among them.

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