ACI’s 2016 Compliance Series
As we develop new products for appraisers, compliance with industry standards is always front and center. Our objective is to help improve appraisal quality and provide efficiencies to the process. Everybody wins by connecting industry needs with appraisal reporting techniques through technology, industry guidance, and practical advice. This is ACI’s contribution to the industry – and we hope you find it informative and helpful. Enjoy.
A question generated as a result of an earlier blog on this issue was "Okay, I understand I need to analyze the contract because it’s a USPAP requirement. But why is it a USPAP requirement?" One short answer is that contract analysis is part of property identification, which is necessary to establish an acceptable scope of work.
Contract analysis is where you begin to identify the property and get your first look at a property’s relevant characteristics. Remember, relevant characteristics are not limited to physical characteristics. Legal and economic attributes are included as well. According to AO-23, relevant characteristics "define the subject property and, together with the type and definition of value and intended use of the assignment results, provide the basis for deciding what data and analysis should be included in the scope of work."
USPAP Standards Rule 1-2 (3) speaks to an appraiser’s obligations related to property identification:
(e) identify the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal, including:
(i) its location and physical, legal, and economic attributes;
(ii) the real property interest to be valued;
(iii) any personal property, trade fixtures, or intangible items that are not real property but are included in the appraisal;
(iv) any known easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, or other items of a similar nature; and
(v) whether the subject property is a fractional interest, physical segment, or partial holding;
Contract analysis may uncover some relevant characteristics that might otherwise go undiscovered, including but not limited to:
- Multiple (or partial) lots being conveyed
- Buyer accepting the property "as-is" with otherwise unapparent defect(s)
- Seller agreeing to make improvements or correct otherwise unapparent defect(s)
- Significant personal property being conveyed
- Buyer agreeing to allow seller to occupy dwelling for a considerable amount of time
- Substantial seller concessions
Your awareness of some of the issues above may or may not impact your opinion of market value, but items that don’t affect your opinion of value may still be important in identifying and understanding the transaction. Ultimately, you may need to reconcile your opinion of value to the sale price (more on that topic in a future blog) and to do so you need to understand how the transaction at hand relates to the type and definition of value applicable to the assignment.
Consistency with the Value Definition – Identifying the Transaction
Proper contract analysis requires considering the transaction within the context of the type and definition of value. It’s akin to understanding the terms and conditions of the sale of a comparable property. Most appraisers have encountered "the comp that doesn’t work." The physical and locational attributes of a sold property may make it seem like the perfect comp, but when it’s put on the Sales Comparison Grid and adjustments applied, the indicated value is significantly different than that of the other comps. Why is that?
Further investigation of "the comp that doesn’t work" usually reveals that something about the transaction is inconsistent with the definition of market value. It might be an atypically motivated or poorly informed buyer or seller, or involve related parties who are not necessarily acting with their individual best interests in mind. The point is there are transactions that fall outside of the parameters established by the value definition, and it’s important to report if this is the case.
If the transaction is inconsistent with the assignment’s value definition, it may not change your opinion of market value, but as today’s sale is tomorrow’s comp, knowledge of contract specifics can affect how you treat the transaction in the future if used as a comparable sale.
In addition to future comparable usage, identifying the transaction for consistency with market value is especially important in those cases where the appraised value is significantly different than the sale price. In such cases, a client generally wants to know why your opinion of value is $290,000 if the agreed-upon sales price is $320,000. After all if a buyer and seller agreed to a price, is that not evidence of market value? From the client’s perspective, it’s not an unreasonable expectation that the appraiser comments on the difference and provides, if available, the likely reason(s) for the variation. It’s not that you are expected to justify your value (although at times it may seem that way).It’s simply that if a buyer and seller have negotiated and agreed to a price that is substantially different than the market value of the real estate, there’s probably a reason behind it and that reason may be attributable to inconsistencies between the circumstances of the transaction and the definition of market value. Proactively addressing differences between value and price is really nothing more than answering questions that a client may have about the appraisal report. Think about it. Setting aside obtuse and insatiable clients, if a client has to contact the appraiser with questions about the report, has the appraiser really fulfilled his or her USPAP obligation with regard to communicating assignment results in a manner that is meaningful?
We have two more blogs planned in this series on Sales Contract Analysis. The next blog will focus on components of the contract and the final blog on summarizing the analysis and reconciling the sales price with the opinion of value.