The Eminent Domain Appraisal

The Eminent Domain Appraisal
The Review Appraiser’s perspective Statewide Real Estate Conference 2013

Hopefully you will… Come to understand the combination of qualitative and quantitative techniques in the appraisal process. Find an interest in pursuing alternate methods or techniques available to the appraisal professional. Improve the communication between the appraiser and review appraiser. Statewide Real Estate Conference - Appraisal Issues

Monday is an awful way to spend 1/7th of your life!Since it’s not Monday, we’re doing OK! Did you ever think? Statewide Real Estate Conference - Appraisal Issues

USPAP Standard 1 and the collectionof data: In developing a realproperty appraisal, anappraiser must identify theproblem to be solved,determine the scope ofwork necessary to solve theproblem, and correctlycomplete research and analysis necessary to produce a credible appraisal. Statewide Real Estate Conference - Appraisal Issues

USPAP Standard Rule 2: In reporting the results of a real property appraisal, an appraiser must communicate each analysis, opinion, and conclusion in a manner that is not misleading. You gather data and you write the report. In both cases, in a manner that allows you to solve the problem and not mislead. Statewide Real Estate Conference - Appraisal Issues

Statewide Real Estate Conference - Appraisal Issues

Let’s look at this funnel First: let’s look at some of the subjective/qualitative aspects of the appraisal. Then, let’s discuss appraisal terminology with regard to qualitative and quantitative approaches to value. Statewide Real Estate Conference - Appraisal Issues

Concepts for a Fruitful Discussion Hard work pays off in the future. Laziness pays off now! Everyone has a photographic memory. Some just don’t have film. Shin: A device for finding furniture in the dark. What are some qualitative aspects of the appraisal? Can you tell me some today? Statewide Real Estate Conference - Appraisal Issues

Qualitative Aspects of an Appraisal Choosing the most comparable sales. Making judgments with regard to quality, appeal, and other non-mathematical factors. When we determine highest and best use, interim use, as vacant/improved. When we reconcile approaches. When we determine the value from the range in values established….etc. I’m sure you have others. Statewide Real Estate Conference - Appraisal Issues

Qualitative Continued… How many of you have seen an adjustment made to a grid for say location and the explanation is “the sale is in a better location so it is adjusted downward by 10%.” Or the sale is smaller in size so it is adjusted downward to reflect the larger subject by 20%. Now have you seen these types of explanations and no reference to paired data? Where did the numbers come from? Subjective determination? Statewide Real Estate Conference - Appraisal Issues

Quantitative/Objective How many of you have seen an adjustment for size of say 10% and in the explanation a statement pairing sales… say sale # 22 is 43,560 square feet of commercial land and it sold for $1.00 per square foot and sale #33 is located across the street from sale #22 and it is 87,120 square feet and it sold for $0.90 per square foot. Therefore… rationale for the adjustment. Statewide Real Estate Conference - Appraisal Issues

Continued… Zoning: Is it always an objective consideration or can it be subjective? Larger Parcel: Is it always an objective consideration…? Separate Entity: Objective or subjective? Landscaping: Is there any objectivity in the consideration of value contribution? Proximity: I’ve been appraising for 30 years and experience tells me that there is a 40% loss in value due to proximity. Right? Statewide Real Estate Conference - Appraisal Issues

Eagles may soar, but weasels don’t get sucked into jet engines. 24 hours in a day… 24 beers in a case… coincidence? So in some cases we quantify based on subjective and objective rationale. Statewide Real Estate Conference - Appraisal Issues

Quantifying Appraisers and review appraisers must work together, through the issues of a reluctant market where quantifying is difficult. As Grail O. Fernwood, MAI wrote in the Appraisal Journal, April 2000: “I believe that appraisers can never ‘know value.’ …The range of prices or pattern serves as a consumer demand curve which reflects consumer utility or scale of preference…(appraisers) should realize that there are powerful tools and methods of analysis that should be used judiciously.” Statewide Real Estate Conference - Appraisal Issues

Quantitative Techniques Data analysis techniques such as paired data analysis, grouped data analysis, and secondary data analysis. Statistical analysis, including graphic analysis and scenario analysis, etc. Cost-related adjustments (depreciated cost) Capitalization of income differences. Statewide Real Estate Conference - Appraisal Issues

Qualitative Analysis Ranking Analysis Relative Comparison Analysis Trend Analysis Statewide Real Estate Conference - Appraisal Issues

Comparative Analysis The process by which a value indication is derived in the sales comparison approach. Comparative analysis may employ quantitative or qualitative techniques, either separately or in combination. Statewide Real Estate Conference - Appraisal Issues

Some Definitions Relative Comparison: A qualitative technique for analyzing comparable sales; used to determine whether the characteristics of comparable property are inferior, similar, or superior to those of the subject property. Relative comparison analysis is similar to paired data analysis, but quantitative adjustments are not derived. Statewide Real Estate Conference - Appraisal Issues

Bracketing Bracketing is a process in which an appraiser determines a probable range of values for a property by applying qualitative techniques of comparative analysis to a group of comparable sales. The array is divided into 3 groups: Superior Similar Inferior Statewide Real Estate Conference - Appraisal Issues

Continuation of Bracketing The adjusted sales prices reflected by the sales requiring downward adjustments and those requiring upward adjustments refine the probable range of value for the subject and identify a value bracket which the final opinion of value falls. Statewide Real Estate Conference - Appraisal Issues

Paired Sales Data A quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties is analyzed to isolate a single characteristic’s effect on value or rent. Let’s look at some quantitative procedures… Statewide Real Estate Conference - Appraisal Issues

Typical Quantitative Analysis Conditions of sale related to cash equivalency example: House sells for $220,000 with $50,000 down and a seller-financed mortgage of $170,000 for a 20 year term at 7.0% interest. Homes in market area are typically held for the full, 20 year term and the market-derived rate is 9%. Statewide Real Estate Conference - Appraisal Issues

Solution 170,000 PV (HP calculator solution) 20 g n 7 g n PMT 9 g n PV = $146,500 + $50,000 Adjusted for financing $196,500 Statewide Real Estate Conference - Appraisal Issues

MORE… Any other examples of quantitative analysis? What about expenditure immediately after the acquisition? Market adjustment? Why qualitative analysis? Because we recognize the inefficiencies in the market and the difficulty in expressing adjustments with mathematical precision. So, let’s look at an example analysis using qualitative reasoning. Statewide Real Estate Conference - Appraisal Issues

Sales Study What does the sales study provide for the review appraiser to help put some perspective to the issues just pointed out in the project review? From each sales study, the review appraiser can use statistical tools in an attempt to explain what is happening in that market. Statewide Real Estate Conference - Appraisal Issues

Statistical Tools The Mean: 1/n (X1 + X2 +…+ Xn) Or 1/n times the sum of Xi to Xn (where i equals 1). The Variance or S squared: 1/(n-1) times the sum of i=1 (Xi – the mean)squared. Standard Deviation: Square root of the Variance. Knowing the 68%; 95%; 99.7% rule. Statewide Real Estate Conference - Appraisal Issues

For this project… Commercial Land: Mean = 10.31; Std = 7.74 Manufacturing Land: Mean = 1.73; Std = 0.58 With this information and the observed value we can determine the Z score and using the table note the % of sales that lie below or above that observed value. (Demand) Think of this in terms of the nominal process…. Statewide Real Estate Conference - Appraisal Issues

Let’s look closer Before any adjustments are made we have: Sale #2 is superior at $13.43/square foot Sale #1 is similar at $8.33/square foot Sale #3 is inferior at $4.24/square foot (time adjusted) Statewide Real Estate Conference - Appraisal Issues

Where is he actually at? $8.00 is actually between 38% and 39% in the Z tables; therefore, in relation to the sales study, about 40% of all properties will sell for less than the subject. Does this make sense from the reviewer’s perspective? Think again about the observed market resistance along this stretch of roadway… Statewide Real Estate Conference - Appraisal Issues

Application Mean from Sales Study is $10.31 Sample Mean is $7.58 Standard Deviation for the Sales Study is $7.74 This puts $8.00 between - 0.29 on the Z table. Or, we are saying that @40% of the properties out here will sell for less as per study? Statewide Real Estate Conference - Appraisal Issues

Manufacturing The observed value or appraised value for one specific property is $2.51/square. The mean is $1.73 with a standard deviation of $0.58. So the $2.51 falls in a Z score of 91% will sell for less. But the appraiser’s sales study had the highest $ sale at $2.30 with a + adjustment for razing bringing it to $2.51/square. The appraiser used a $3.03/square commercial property as a comp. Statewide Real Estate Conference - Appraisal Issues

How to Start a Fight One year, I decided to buy my mother-in-law a cemetery plot as a Christmas gift. The next year, I didn’t buy a gift. When she asked me why, I replied, “Well, you still haven’t used the gift I bought you last year!” And that’s how the fight started. Statewide Real Estate Conference - Appraisal Issues

Or…, My wife and I were sitting at a table at her high school reunion, and she kept staring at a drunken man swigging his drink as he sat alone at a nearby table. I asked her, “Do you know him?” Yes, she sighed, “He’s my old boyfriend. I understand he took to drinking right after we split up those many years ago, and I hear he hasn’t been sober since.” My God! I said, “Who would think a person could go on celebrating that long?” And, then the fight started  Statewide Real Estate Conference - Appraisal Issues

My wife was standing nude, looking in the bedroom mirror. She was not happy with what she saw and said to me, “I feel horrible; I look old, fat and ugly. I really need you to pay me a compliment.” I replied, “Your eyesight’s damn near perfect.” And that’s when the fight started. Some things are just betterleft unsaid… Statewide Real Estate Conference - Appraisal Issues

My Advice to Appraisers? I couldn’t fix your brakes, so I made your horn louder. If at first you don’t succeed, destroy all evidence that you tried  Experience is something you don’t get until just after you need it. Statewide Real Estate Conference - Appraisal Issues

What Review Appraiser’s Need to Know Avoid those last lines…, you must work with the appraiser to understand what his/her mind is thinking out there in the real world. Sometimes you shouldn’t say the things you might be thinking. Statewide Real Estate Conference - Appraisal Issues

The Appraisal The purpose of the appraisal is to provide the reader with enough information to make a decision. USPAP: A credible report and not misleading. The appraiser provided: reasonable support; defensible analysis; a Sales Study from which I could make a decision. Statewide Real Estate Conference - Appraisal Issues

As Fernwood put it: “…who wants a truly just and fair appraised value of their property anyway?” Statewide Real Estate Conference - Appraisal Issues

Let’s look at some other Reviewer tricks Provide quality feedback to the appraisers. Remember the appraiser is much more familiar with the property than the reviewer. Since there are many different ways to analyze real estate, it is critical for the review appraiser to understand the method used. Exposure to many different report styles and techniques is a great learning opportunity for the reviewers. They should regard it as such and keep an open mind. Statewide Real Estate Conference - Appraisal Issues

Continued… Don’t over step the line of professionalism. Don’t impose your own bias and opinions of the work of others. The freedom that reviewers have to raise any and all issues can inadvertently lead to attempts to manipulate appraisers. Problems are caused when reviewers do not have sufficient experience and knowledge of appraisal theory to understand fully the appraisals they review Statewide Real Estate Conference - Appraisal Issues

Continued… Reviewers with limited experience tend to rely on strict, narrow interpretations of textbook ideas, falling back on dogma when presenting their critiques. The review process should be a positive experience for all participants. Statewide Real Estate Conference - Appraisal Issues

Things for an Appraiser to Remember They should realize that there are powerful tools and method of analysis that should be used judiciously. Be aware of strengths and weaknesses of their resulting opinions. Understand that an appraisal opinion is an educated guess. Understand that an appraisal opinion is a privilege sanctioned by license and institutional custom. Statewide Real Estate Conference - Appraisal Issues

What we may or may not have learned… The qualitative analysis approach to value is and has been pervasive throughout the eminent domain appraisal process. Most grids using % or $ adjustments are not really quantified but rather the quantification of the qualitative analysis. Qualitative and quantitative analysis has been and will continue to be interrelated in the appraisal process. They go hand in hand. Statewide Real Estate Conference - Appraisal Issues

What we learned, cont’d. We saw how they are interrelated through example. Statistics shows the central tendency of value in our case and this demonstrated the demand impact as illustrated by the relationship of the mean and the standard deviation to the observed value. This we called the Z factor. We must understand the many powerful tools and methods of analysis used by appraisers to reach an opinion of value. Statewide Real Estate Conference - Appraisal Issues

What we learned…, conclusion We are only beginning to recognize the role that qualitative analysis has always played in the appraisal process. However, the appraisal reader’s need for numbers grows from a culturally established quantification of value which has been all along a disguised qualitative analysis. We looked at some review techniques. Statewide Real Estate Conference - Appraisal Issues

Finally, How Will Old Beliefs Die? Max Planck, the physicist said, “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it.” Thank you! Statewide Real Estate Conference - Appraisal Issues

The Eminent Domain Appraisal