Chapter 24
THE APPRAISAL REPORT
The Appraisal Report 553
n appraisal report leads the reader from the definition of the appraisal problem through analysis and relevant descriptive data to a specific conclusion. The appraiser must present all facts, reasoning, and conclusions clearly and succinctly. The length, type, and content of appraisal reports are dictated by the client, regulatory requirements, the courts, the type of property being appraised, and the nature of the problem.
Every appraisal report is prepared to answer a particular question and provide specific information needed by a client. Some common appraisal questions are: What is the market value of the property? What is the highest and best use of the land as though vacant and the property as improved? What is the value of the part taken in expropriation? What is the damage or benefit to the remainder of the property as a result of the taking?
APPRAISAL INSTITUTE OF CANADA STANDARDS FOR WRITTEN REPORTS
Each analysis, opinion, or conclusion that results from an appraisal must be communicated in a manner that is meaningful to the client and will not be misleading to concerned parties or the public. To ensure the quality of appraisal reports, professional appraisal organizations have set minimum standards for the facts, descriptions, and statements of work and purpose to be included in all types of appraisal reports.
All members of the Appraisal Institute are required to conduct their professional appraisal activities in compliance with the requirements of Institute bylaws. The Code of Ethics and Rules of Professional Conduct set out in Regulation 1 describe requirements related to general conduct. Regulation 7, Standards of Professional Practice identify minimum standards related to the appraisal process.
The preamble to this regulation states "Standards of Professional Practice are minimum standards relating to the appraisal process which have a direct bearing upon the competency by which an appraiser renders professional appraisal services, as well as containing specific reporting rules relating to the content of all reports prepared by members. The Standards of Professional Practice are also intended to make the public and users of appraisal services aware of the Institute's current standards."
The current standards, as at 1992, for appraisal reports require that:
"The following shall be considered mandatory practice in the preparation and presentation of the appraisal report resulting from the valuation process.
Members shall, upon undertaking and developing an appraisal analysis or estimate of value, employ recognised appraisal methods and techniques and, further, shall communicate each analysis and estimate of value in a manner that is not misleading. It is a contravention of the Standards of Professional Practice: to fail to include in each appraisal report, excepting letters of opinion, the following:
(a) an adequate description of the real property being appraised;
(b) the purpose of the appraisal and a definition of the rights and value
estimated;
(c) the effective date of the value estimate and date of inspection;
(d) pertinent land use regulations as of the effective date of the value estimate;
(e) a discussion and statement of the highest and best use;
554 . The Appraisal of Real Estate
(f)a documented and factually supported value conclusion based on at least one approach to value considered most applicable to the type of property being appraised;
(g)reasoning supporting the value conclusion;
(h)the final estimate of value;
(i)assumptions and limiting conditions;
the appraiser's certification and signature."
These standards do not prohibit the use of a form appraisal when it is an appropriate reporting format; however, the appraiser must have the minimum data requirements outlined above on file to properly support the final estimate of value.
TYPES OF REPORTS
An appraisal report may be oral or written. Written communications include letter of opinion, form, and narrative reports. Usually, a report is presented in the manner requested by the client. However, when a client asks for the appraiser's opinion only, without detailed documentation, the appraiser must still perform the analysis required for a complete appraisal. In this case, all material, data, and working papers used to prepare the report are kept in the appraiser's permanent file. Although the appraiser may never need to provide written substantiation for, the opinion submitted in abbreviated form, he or she may be asked to explain or defend the opinion at a later time.
Oral Reports
An appraiser may make an oral report when the circumstances or the needs of the client do not permit or warrant a written report. Expert testimony, whether presented in deposition or in court, is considered an oral report. Most oral reports are not made under oath; they are communicated to the client in person or by telephone. To the extent that it is possible and appropriate, oral reports must address the substantive matters set forth in Institute regulations. Each oral report should include a property description and the facts, assumptions, conditions, and reasoning on which the conclusion is based. After communicating an oral report, the appraiser should keep on file all notes and data relating to the assignment and a complete memorandum on the analysis, conclusion, and opinion.
Limited Reports
Sometimes, by prior agreement with the client, an appraiser submits the results of an appraisal in a limited report. Although these reports are abbreviated, they still must conform to Institute standards. Regulation 7 specifies which elements of the appraisal report may be omitted for letters of opinion or form reports under certain circumstances and which may not. Although the discussion of some topics may be less extensive in a limited report, the report must contain sufficient information to lead the reader to the appraiser's conclusions. The two types of limited reports most frequently requested are letters of opinion reports and form reports. The term letter of opinion is somewhat of a misnomer. In the past, such
The Appraisal Report 555
reports may have consisted of only a page or two of conclusions, but given current standards, letter reports today must run several pages in length to ensure compliance with the reporting requirements. Such a report usually includes references to extensive material in the appraiser's file.
Although the usefulness of a letter report is limited, a client may specifically request that the appraiser communicate his or her opinion in a letter without detailed documentation. A typical letter report sets forth only the conclusions of the appraiser's investigations and analyses. Although much of the data and reasoning is omitted, the report must include certain items to be meaningful and to comply with the requirements of the Standards of Professional Practice.
A letter report should indicate that all significant market data and other information that support the analyses, conclusions, and opinions in the report have been retained in the appraiser's files. The following must be included in a letter of opinion:
(a)identification of the property or interest;
(h)the effective date of the value estimate;
(c)a definition of the reported value;
(d)the date of inspection (if applicable);
(e)a statement regarding the inspection;
(f)an outline of the steps taken in reaching the reported opinion(s), a reference to
specific data considered and how such information is documented;
(g)a comment on the subject property's zoning or land use classification;
(h)a statement of the subject's probable highest and best use;
(i)assumptions and limiting conditions stating that the letter of opinion is not to
be regarded as a narrative (i.e., complete and comprehensive) appraisal, and
that certain specific aspects might require more thorough analysis or investi
gation;
(j)approximate value or value range;
(k)name of appraiser and signature.
One of the differences between letters of opinion and narrative and form reports is that the reports contain a single value estimate, whereas a letter of opinion states an approximate value or value range.
As in the case of an oral report, the appraiser who prepares a letter of opinion report must keep all notes and data on file with a complete summary of the analysis, conclusion, and opinion. In addition, the client should be informed of two things: that many regulatory agencies and thirdparty users of appraisal reports do not accept letter reports or short narrative reports; and that due to the limited investigation on which a letter of opinion is based, it ought not to be relied on for decisionmaking involving significant risk without further appraisal investigation.
Forni Reports
In many instances, form reports meet the needs of financial institutions, insurance companies, and government agencies. Form reports are required by lenders and mortgage insurers for mortgage financing of the purchase of most single family
556 The Appraisal of Real Estate
dwellings. Because these clients review many appraisals, using a standard report form is more efficient and convenient. When such a form is used, those responsible for reviewing the appraisal know exactly where to find each category or item of data in the report. By completing the form, the appraiser ensures that no item required by the reviewer is overlooked.
Over time, different lenders have developed forms for appraisal reporting, each somewhat different from others, but suited to mortgage lending purposes. In order to provide greater consistency in appraisal form reporting, the Appraisal Institute of Canada has developed, in consultation with the residential mortgage lending industry, a standardized form report. This form is available for use by appraisers, however, it is not mandatory. Use of a consistent form report facilitates preparation using computer technology, and provides for efficient access by lenders of required information. Figure 24.1 is a sample of this form. Figure 24.2 is a sample of a letter of opinion form report, and figure 24.3 is a sample of an income approach Schedule A form that may be appended to form reports where this approach is appropriate. These forms have all been developed by the Appraisal Institute of Canada, their use is not mandatory, and ongoing revisions are made to ensure they continue to meet the standards of professional appraisal practice and the needs of appraisal client groups.
Form reports prepared by Appraisal Institute of Canada members must meet the reporting requirements of the Institute or qualify as letters of opinion reports under the conditions set forth in the Standards of Professional Practice. Certain forms do not contain a certification statement that complies with these standards. Therefore, Appraisal Institute of Canada members must attach supplemental material when these forms are used.
The methodology employed in a valuation is determined by the nature of the specific appraisal problem. If a lender's report form seems too rigid and does not provide for the inclusion of all data that the appraiser believes to be pertinent, the relevant information and comments should be added as a supplement.
The appraiser should make sure that the completed form report is consistent in its description of the property being appraised and provides all the data indicated by the categories listed. If the highest and best use of the property does not conform to the use for which the form is appropriate, the form cannot be used. The properties and neighbourhoods compared should be as similar as possible and all appropriate adjustments should be made. Data must be presented in a clear and comprehensible manner and all form reports should include a proper certification and statement of limiting conditions.
A form appraisal report is unacceptable if the appraiser fails to 1) consider the purpose of the report, the value definition, and the assumptions and conditions inherent in the report; 2) question the client about any underwriting criteria that conflict with proper appraisal practice; and 3) review the report before signing it.
Narrative Reports
A narrative appraisal report gives an appraiser the opportunity to support and explain his or her opinions and conclusions fully and to convince the reader of the soundness of the final value estimate. Narrative reports often provide the best means for appraisers to fulfil their obligations to their clients. Because this type of report is the most common and complete, this chapter focuses primarily on the narrative report.'
The objectives of a narrative appraisal report are to answer in writing the
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LENDER/CLIENT ATTACHMENTS:
PHOTOGRAPHS SUBJECT
ADDRESS:APPRAISAL REPORT PHOTOGRAPHS NEIGHBOURHOOD
HOME OWNERSHIP UNITSBUILDING SKETCH
TEL IIADDRESS OF PROPERTY NEIGHBOURHOOD MAP
...... LIMITING CONDITIONS
APPRAISER...... CERTIFICATION
...... SCHEDULE A
ADDRESS...... OTHER
I TEL ( I...... II
EXISTINGNEW ...... BUILDER
LEGAL DESCRIPTION...... ~
MUNICIPALITY . DISTRICT.
ASSESSMENT LAND...... SLOG~TOTALTAXES $ YEAR
PURPOSE OF APPRAISAL: To estte the W .1u.0,
PF40PERTY RIGHTS APPRAISED Fee simple . or
DEFINITION OF VALUE The most probable price at which property ld sell It the date of appraisal allowing a reasonable time 1. find a purchaser
HIGHEST & BEST USE: PI or
NEIGHBOURHOOD DESCRIPTION
NATURE OF DISTRICTTREND OF DISTRICTCONFORMITY OF SUBJECTAVERAGE AGE OF PROPERTIES SUPPLYDEMAND
RESIDENTIALIMPROVINGNEWERDISTRICTGOODGOOD
RURALDEVELOPINGOLDERTOYEARSFAIRFAIR
COMMERCIALSTABLELARGERIMMEDIATE AREA.POOR''IPOOR
INDUSTRIALDETERIORATINGSMALLERToYEARS
DISTANCEELEMENTARY SCHOOLPUBLIC TRANSPORTATION PRICE RANGE OF PROPERTIES IN DISTRICT
TO:JUNIOR SECONDARYSHOPPING FACILITIESGENERAL $
HIGH SCHOOLDOWNTOWNIMMEDIATE AREA 5
SUMMARY Including ADVERSE INFLUENCES IN AREA.,f any (eg, a,imad tracks commercial/industrial properties unkempt properties major traffic arteries etc)
SITE DESCRIPTION
SITE SIZEPAVED ROADUNDERGROUND WIPINGSTORM DRAINS
GRAVEL ROADHYDROSEPTIC TANK
TOPOGRAPHY.SIDEWALKTELEPHONEMUNICIPAL WATER
CURBSCABLEVISIONCOMMUNITY WELL
ZONINGOPEN DITCHGASPRIVATE WELL
STREET LIGHTSSANITARY SEWER
DOES PRESENT USE CONFORMYESNO
LANDSCAPING:EXCELLENTFAIRDRIVEWAY.PRIVATECONCRETE PAVING STONE
GOODPOORMUTUALBLACKTOP
AVERAGENONENONEUNPAVED
EASEMENTS OF KNOWN:
COMMENT ON ANY POSITIVE/NEGATIVE FEATURES:
DESCRIPTION OF IMPROVEMENTS
ESTIMATED AGEESTIMATED REMAINING ECONOMIC LIFE
FLOOR AREATYPE OF BUILDINGCONSTRUCTIONROOFING MATERIAL
MAINDETACHEDBUNGALOWWOOD FRAMEASPHALT SHINGLE
2ndSEMIDETACHEDSPLITLEVELBRICKWOOD SHINGLE
3rdROWHOUSE1 1/2 STOREYSTONETAR & GRAVEL
APT CONDOMINIUM2STOREYCONCRETESLATE
OTHEROTHEROTHEROTHER
TOTAL EXCLUDING BASEMENT
EXTERIOR FINIS44FOUNDATIONINSULATIONHEATING SYSTEMFUEL
BRICK VENEER, WOOD SIDINGPOURED CONCRETECEILINGFORCEDAIR.GAS
SOLID BRICKALUMINUMCONCRETE BLOCKWALLSGRAVITYOIL
STONE VENEERVINYLCONCRETE SILASBASEMENTHOT WATERELECTRICITY
SOLID STONEPLYWOODPOSTS ON PADSCRAWLRADIANTWOOD
STUCCOOTHER ()OTHER (h.)OTHER (had)OTHER ()OTHER (attached)
APPROXIMATE AGE OF HEATING SYSTEM ...... APPROXIMATE AGE OF ROOF ELECTRICAL ....amps
PLUMBING LINES: ...... WINDOW SASH & GLAZING:
HOT WATER TANK SIZE:FUEL:U.FFI. YESNO
ROOM ALLOCATION
ENTRANCELIVINGDININGKITCHENBATHS WASHROOMS BEDROOMSFAMILYLAUNDRYOTHER
13ASEMENT
MAIN
SECOND
558 The Appraisal of Real Estate
Figure 24.1 Appraisal Report Home Ownership Units (continued)
FLOORINGWALLSCEILINGSFINISHBUILTIN APPLIANCES
...... I WW CARPETSHEETVINYLCOMPOSITION BOARDSTOVE , ~ . INTERCOM
...... SOFTWOODVINYL TILEPLYWOODOVEN.....GARBAGE
DISPOSAL
...... HARDWOODCERAMICPLASTERDISHWASHER TRASH COMPACTOR
LINOLEUMGYPSUM BOARDVACUUM
......
OVERALL BLDG.
FLOOR PLANKITCHENBEDROOMS 0BATHROOMS #CLOSETSCONDITION
...... GOODGOOD. OVERSIZE2PCGOODGOOD, GOOD
...... AVERAGEAVERAGE..LARGE3ftAVERAGE AVERAGE..AVERAGE
~ FAIRFAIRAVERAGE4pcFAIRFAIRFAIR
...POORPOORSMALL5pcPOORPOORPOOR
FIREPLACE DESCRIPTION LOCATION
COMMENTS RE: INTERIOR FINISH. CONDITION, LAYOUT, ETC
BASEMENT FINISHES, CEILING HEIGHT:
GARAGBS/CARPORTS:
DECKS, PATIOS, OTHER IMPROVEMENTS:
COMMENTS: Building, appearance quality. condition. services including extras
DIRECT COMPARISON APPROACH$ADJUSTMENTSOPTIONALMANDATORY
SUBJECT / SALE NO. I-- / SALE NO. 2 / SALE NO. 3
PROPERTY / DESCRIPTION $ ADJUST / -i~Ti6N
DESCRIPTION $ ADJUST. / DESCRIPTION $ ADJUST
ADDRESS / LOCATION
DATE OF SALE
SALE PRICE
AGE / CONDITION
SIZE L.F.A
ROOMS I BE NIS
031OMPARABILI
BASEMENT
PARKING FACILITIES
SITE SIZE
EXTERIOR FINISH
DEGREE OF
ADJUSTED VALUES
CONCLUSIONS
-
VALUE BY THE DIRECT COMPARISON APPROACH (ROUNDED) $
COST APPROACHOPTIONALMANDATORYSKETCHES
LAND VALUE:$
......
BUILDING
COST ...... o$ $
......
GARAGE:
......
BASEMENT FINISH: ......
......
......
......
......
OTHER EXTRAS: ......
......
......
......
TOTAL REPLACEMENT COST$
LESS: DEPRECIATION ...... %$ $
INDICATED VALUE:
......
VALUE BY THE COST APPROACH (lounded)$
......
AS A RESULT OF MY APPRAISAL AND ANALYSIS IT 15 MY OPINION THAT THE MARKET VALUE OF THE SUBJECT PRO~ AS AT... 19
lee ...... 1 HERESY CERTIFY THAT 1 HAVE NO INTEREST, ~NT OR CONTEMPLATED, IN THE SUBJECT PROPERTY.
ASSUMPTIONS AND LIMITING CONDITIONS: . . . . . ATTACHED ... ON FILE AT YOUR OFFICE.
CERTIFICATION:...... ATTACHED . ~ ON FILE AT YOUR OFFICE.
APPRAISER(S) SIGNATURE ...... REVIEW APPRAISER SIGNATUREDID
INSPECT PROPERTY
...... (,I applicable
NAIVENAMEDID NOT INSPECT PROPERTY
1DESIGNATIONDATEDESIGNATIONDATE
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OPINION OF VALUE
LENDER/CLIENT SINGLE FAMILY DWELLING ONLYAPPRAISER:
ADDRESS:ADDRESS OF PROPERTYADDRESS.
TEL (ITEL II
PROVIDED INFORMATION
SALE PRICE$LIST ,,I CE:
(ATTACH COPY OF OFFER TO PURCHASE)REFINANCING
SITE SIZEBASIC CONSTRUCTION
HOUSE STYLE
DETACHEDLINKSEMIDETACHEDTOWNHOUSEAPARTMENT
FREEHOLDLEASEHOLDCONDOMINIUM
NUMBER OF ROOMS/BEDROOMSNUMBER OF BATHS.
PARKINGIDRIVEWAY:GARAGE:
SPECIAL FEATURES OR DETAILS:
NEIGHBOURHOOD DESCRIPTION
NATURE OF DISTRICTTREND OF DISTRICTCONFORMITY OF SUBJECTAVERAGE AGE OF PROPERTIES SUPPLYDEMAND
RESIDENTIALIMPROVINGNEWERDISTRICTGOODGOOD
RURALDEVELOPINGOLDERTOYEARSFAIRFAIR
COMMERCIALSTABLELARGERIMMEDIATE AREAPOORPOOR
INDUSTRIALDETERIORATINGSMALLERTO YEARS
DISTANCE ELEMENTARY SCHOOLPUBLIC TRANSPORTATIONPRICE RANGE OF PROPERTIES IN DISTRICT
TO:JUNIOR SECONDARYSHOPPING FACILITIESGENERAL $
HIGH SCHOOLDOWNTOWNIMMEDIATE AREA $
SUMMARY: uq ADVERSE INFLUENCES IN AREA, t y (e.g. railroad tracks commercial/industrial properties unkept properties ajor traffic arteries
iS NEIGHBOURHOOD CONSIDERED TO HAVE GOOD GENERAL MARKET APPEAL'YESNO
COMMENTS
WOULD PROPERTY VALUES BE CONSIDERED STABLE'YESNO
COMMENTS
COMPARABLE SALES ARE PROVIDED SEE ATTACHED PHOTOCOPIES
IF A SALE, DOES PURCHASE PRICE APPEAR CONSISTENT WITH NEIGHBOURHOOD MARKET?YESNO
COMMENTS
IS THERE CURRENT MARKET ACTIVITY IN THE IMMEDIATE AREA FOR COMPARISON PURPOSES,YESNO
COMMENTS
SUBJECT PROPERTY (BASED ON EXTERIOR VIEWING)
ESTIMATED AGE. YEARS
CURB APPEALGOODAVERAGEPOOR
EXTERIOR CONDITIONGOODAVERAGEPOOR
DOES THE PROPERTY APPEAR TO BE FREE OF SERIOUS DEFERRED MAINTENANCE OR POSSIBLE STRUCTURAL PROBLEMS?YESNO
ZONING
DOES PRESENT USE CONFORM'YESNO
HIGHEST AND BEST USE Present.1
COMMENTS:
IS THE BUILDING STYLE AND SIZE COMPARABLE WITH THE AREA?YESNO
COMM NTS
LIST ANY FEATURES THAT COULD ADVERSELY AFFECT THE LONG TERM MARKETABILITY OF THE PROPERTY:
PHOTOGRAPH OF SUBJECT PROPERTYOPINION OF VALUE
I HAVE CARRIED OUT ANINSPECTION OF THE SUBJECT
PROPERTY ANALYZED THE APPLICABLE DATA AND CONSIDERED ALL RELE
VANT FACTORS. BASED ON THESE FACTS AND MY FAMILIARITY WITH THE
MARKET GENERALLY, IN MY OPINION, THE PROPERTY IS ESTIMATED TO HAVE
AN APPROXIMATE VALUE AS ATOF
$FOR
MORTGAGE FINANCING PURPOSES ONLY
THERE IS NO EXTERNAL EVIDENCE OF UFF]
I HEREBY CERTIFY I HAVE NO INTEREST PRESENT OR CONTEMPLATED. IN THE SUBJECT PROPERTY
APPRAISER SIGNATUREREVIEW APPRAISER SIGNATUREDID INSPECT PROPERTY
if
NAMENAMEDID NOT INSPECT PROPERTY
DESIGNATIONDATEDESIGNATIONDATE
560 The Appraisal of Real Estate