Scope of work

While USPAP has always required appraisers to identify the scope of work needed to produce credible results, it became clear in recent years that appraisers did not fully understand the process for developing this adequately. In formulating the scope of work for a credible appraisal, the concept of a limited versus complete appraisal and the use of the Departure Rule caused confusion to clients, appraisers, and appraisal reviewers. In order to deal with this, USPAP was updated in 2006 with what came to be known as the Scope of Work project. Following this, USPAP eliminated both the Departure Rule and the concept of a limited appraisal, and a new Scope of Work rule was created. In this, appraisers were to identify six key parts of the appraisal problem at the beginning of each assignment:

• Client and other intended users
• Intended use of the appraisal and appraisal report
• Definition of value (e.g., market, foreclosure, investment)
• Any hypothetical conditions or extraordinary assumptions
• The effective date of the appraisal analysis
• The salient features of the subject property

Based on these factors, the appraiser must identify the scope of work needed, including the methodologies to be used, the extent of investigation, and the applicable approaches to value. Currently, minimum standards for scope of work are:

• Expectations of the client and other users
• The actions of the appraiser’s peers who carry out similar assignments

The Scope of Work is the first step in any appraisal process. Without a strictly defined Scope of Work an appraisal’s conclusions may not be viable. By defining the Scope of Work, an appraiser can properly develop a value for a given property for the intended user, and for the intended use of the appraisal. The whole idea of “Scope of Work” is to provide clear expectations and guidelines for all parties as to what the appraisal report does, and doesn’t, cover; and how much work has gone into it.

Types of ownership interest

The type of real estate “interest” that is being valued, must also be known and stated in the report. Usually, for most sales, or mortgage financings, the fee simple interest is being valued. The fee simple interest is the most complete bundle of rights available. However, in many situations, and in many societies which do not follow English Common Law or the Napoleonic Code, some other interest may be more common. While there are many different possible interests in real estate, the three most common are:

• Fee simple value (known in the UK as freehold) – The most complete ownership in real estate, subject in common law countries to the powers reserved to the state (taxation, escheat, eminent domain, and police power)
• Leased fee value – This is simply the fee simple interest encumbered by a lease. If the lease is at market rent, then the leased fee value and the fee simple value are equal. However, if the tenant pays more or less than market, the residual owned by the leased fee holder, plus the market value of the tenancy, may be more or less than the fee simple value.
• Leasehold value – The interest held by a tenant. If the tenant pays market rent, then the leasehold has no market value. However, if the tenant pays less than market, the difference between the present value of what is paid and the present value of market rents would be a positive leasehold value. For example, a major chain retailer may be able to negotiate a below-market lease to serve as the anchor tenant for a shopping center. This leasehold value may be transferable to another anchor tenant, and if so the retail tenant has a positive interest in the real estate.

Home inspection

If a home inspection is performed prior to the appraisal and that report is provided to the appraiser, a more useful appraisal can result. This is because the appraiser, who is not expert home inspector, will be told if there are substantial construction defects or major repairs required. This information can cause the appraiser to arrive at a different, probably lower, opinion of value. This information may be particularly helpful if one or both of the parties requesting the appraisal may end up in possession of the property. This is sometimes the case with property in a divorce settlement or a legal judgment

Next lesson, automated valuation models, read now!