Frequently Asked Questions, Page Two

In page two of our FAQ, we examine what an appraisal is, what the meaning of "value" is, and other information that will assist you in choosing the right appraiser. Page one, Professional Standards, explains who a professional appraiser is and why you should insist on finding one committed to the high ethical and legal standards required of the professional. Page three, The Process outlines what an appraisal must go through in order to ensure it is complete and meets all the legal and ethical standards.

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What is an Appraisal?

Value:
Appraisers are required to state in the report the definition of what “value” it is they are reporting. In the vast majority of cases, the “value” indication is Market Value, which is a very narrowly defined industry term.

Rights Appraised:
Real Estate appraisers do not value real estate. They value rights to the described real estate. The rights appraised are often likened to a bundle of sticks, with each stick representing a “right”. Examples might be surface rights, mineral rights, water rights, development rights, the right to lease the property to others (with multiple leases possible). If the property is encumbered by an easement, such as conservation easement, potential uses for a property may be severely limited, which can have a drastic affect on value. For this reason, each appraisal is a value opinion of the rights appraised, and these rights must be stated in the report. The full bundle or rights is considered to be the Fee Simple Estate.

Is this really important? Consider a recent assignment to help settle an estate: The decedent owned an undivided half interest in a farm property in which the mineral rights had been leased and the owner was collecting a share of royalty payments from an operating quarry on the property. In addition, all cropland outside the mine area had been enrolled in the USDA Conservation Reserve Program. If compared to an identical property in which the full bundle rights were held by one person, (the property free and clear of all leases and restrictions), the difference in market value could be drastically different.

When property rights are dispersed, it has an affect on the steps needed to solve the problem, so the property “rights appraised” must be determined in order to complete an appraisal or to offer an estimate on what it will cost to have a “property” appraised. The more the rights are dispersed, the more difficult the assignment (in terms of time required to solve the problem).

Property Description:
Each “property” to be valued must be described such that the property boundaries and unique spatial position it occupies can be identified.

An example might be the “Northwest Quarter (NW ¼)” of a government survey section. Typically, a quarter section is 160 acres in size. The value opinion offered is unique to that property and only to that property. The property described might have frontage to roads, access to utilities, buildings, unique land features, views or any number of other features unique only to it. Even a subtle difference can have a profound affect on the outcome. In the above case, suppose that the legal referenced the “NW ¼, except 10 acres in the northeast corner”. What if a building with a value of $500,000 was located on those 10 acres? Removal of the 10 acres from the property described removes the contributory value of the building. So something as subtle as a simple line in a legal description can have a profound affect on the opinion of value!

Date of Value:
Appraisal opinions are offered as of a specified date. Market conditions change and values do not remain the same. Often times a value opinion may be required as of the date of some legal event, or may simply be the day the appraiser inspected the property. But in either case, the opinion of value applies only to that date in time.