by Thomas Murry, CRA
Estate properties provide the most complex
residential review performed. An estate has a high value due to
the combination of location in an estate community, size of the
site and improvement features. Though standard practices are
employed, the review should include additional research and not
simply rely on the appraiser's presentation. In this writing,
the estate property, appraisal contents and estate review topics
are discussed.
ESTATE PROPERTY ISSUES
The site and improvements of the subject are
constantly being evaluated in comparisons. The neighborhood,
site, improvements and depreciation need consideration as
conditions dictate.
Neighborhood
The estate neighborhood is usually a unique
portion of the city or community. In most, the value range is
typically wide due to a range of site sizes, improvement sizes,
and features. Large estates are often the most valuable real
estate in the neighborhood. Due to this, the value may be
limited by the neighborhood's price range more than the
amenities or sheer size. Even the value range of adjacent estate
areas may influence the values in the subject's neighborhood.
Site
Estate valuations are affected by legal
constraints, site features and conformity. Legal constraints,
such as zoning, limit actual and potential development. Site
features such as size and topography establish utility.
Conformity of the site considers adjacent uses and neighborhood
standards. Zoning establishes use standards and minimum site
requirement. The subject will usually be zoned a single
residence, but a guest house with a kitchen may cause the estate
to be considered a duplex by the building department. However,
when the guest house is on a separate lot within the same site,
it may require treatment as a second and separate property.
For sites with excess acreage the potential for
development should he considered with caution. In some locales,
estate property has a minimum size, even if part is not
landscaped or utilized. A subdivided site may cause an imbalance
of improvement size to site size. A small lot with a large house
may no longer be an estate but simply an over-improvement. The
resulting over-improvement will lack the lot of an estate and be
too big a house to be part of the typical housing stock; nearly
unmarketable.
Improvements
The estate property is usually part of a
regional luxury housing market. This market may require
construction well above the normal standards. Consistency of
style identifies high quality, not a single feature.
Each architectural style has trademark features
and the higher quality house includes those style features
inside and out. The style may even affect the floor plan, but to
say one style is superior to another is beyond the scope of the
appraisal process. Equal quality standards tend to have equal
market appeal, regardless of style. Quality in the materials
used and features provided include the use of brand name
plumbing fixtures (Kohler or American Standard) and kitchen
appliances (Gagganau, Kitchenaid, Thermadore). Superior features
also include multiple heating and cooling systems, alarms,
central vacuum, and a second flight of stairs.
Depreciation
Causes of depreciation include three categories:
physical, functional, and external. The physical depreciation
should be based on the relationship of effective age to total
economic life (effective age plus remaining economic life). In
considering functional obsolescence in estates, conventional
standards may not always be applicable. Good architectural
design balances the custom homeowner's needs with general design
standards. The size, number and location of rooms will often be
determined by the owner's family size and entertainment needs.
The determination of what warrants an over-improvement is
complex for estates. Clearly the largest house in the
neighborhood should be subject to consideration as an
over-improvement, but determine the relevant market area before
reaching a conclusion. An over-improvement has diminishing
marginal utility verses the general housing stock and not simply
compared to recent sales. The external depreciation should be
consistent with the site description. External obsolescence can
have a large impact on estates. The buyer of estate property
usually expects a dream property, free of any adversity. As a
result, property having external obsolescence may not attract
buyers at a price as similar estates without the adversity.
ESTATE APPRAISAL ISSUES
Report Type
Though most lenders prefer estate property
appraisals to be on FNMA/FHLMC forms, some prefer narrative
reports. In either type it is the content not the format that
determines the soundness of the report. Narrative reports do
have some advantages, but many readers prefer the condensed
information of a form report.
Use of form reports does not imply that the
USPAP or other standards may be ignored due to the form's lack
of topic inclusion or space. For example, the Condominium
Appraisal Form (FNMA 1073/FHLMC 465) provides no specific line
for a legal description. The legal description must still be
provided in the report.
Report Contents
The appraisal should represent a single and
complete thought. The report should be a repeating series of
description, evaluation and conclusion. This cycle is repeated
for the area, subject, each value approach, and finally a
conclusion, with supporting addenda. Industrious appraisers are
also articulate. A presentation that uses good grammar and
spelling has more communication. Appraisals that avoid excess
abbreviations are also easier to read.
The appraisal should describe the property
sufficiently to denote the range in features and materials.
Interior photos are excellent support for descriptions. The
description should encompass all finished areas, such as a
basement, guest house, or recreation room. Each area warrants a
separate description of construction material and depreciation.
The quality range in estates ranges from average to excellent.
On form reports, quality above "good" should be noted by
comments. Besides neighborhood standards and special features,
cost services also provide quality definitions. These services
include detailed descriptions used in their estimating methods.
The quality level is important as it affects all approaches to
value,
Cost Approach
For existing estates, the cost approach is not
usually given most weight in the final reconciliation. Due to
this, appraisers often spend little time in this approach. The
reproduction cost should indicate a data source for the cost
estimate. In most cost services, the base cost per square foot
for the highest quality class does not exceed $100.00. Unique
features, such as hand painted walls or complex foundation
should be itemized. The land value is often difficult to
determine by direct sales analysis in fully developed areas. As
a result, most land value estimates are via abstraction (also
known as the residual approach) with no sale data. Despite a
lack of direct analysis, information about "tear down"
residences that sell for land value is helpful. Also, sales of
similar vacant site from adjacent market areas may add
credibility to the land value estimate.
Market Approach
This is generally the most relevant approach to
value for estates. In simple terms, what makes a residence worth
a million dollars is that a similar property sells for a million
dollars, not a particular special feature. Errors or inaccurate
data in this part of the report can destroy the credibility of
the entire report. The data should include relevant comparables,
accurate descriptions, and market sensitive adjustments.
Atypical site features require at least some comparables to have
the same features or the market analysis may be comparing apples
to oranges. For most estates relevant sales will be only within
the same neighborhood and community, however large estates may
have an extended market area. This does not mean that a big
house, far from similar properties, allows the appraiser to
ignore nearby housing prices. Remote comparables may need
additional analysis to understand the comparative demographics
and government. Additional comparables and other market data can
be as helpful as the data provided in the grid. Listing data and
dated sales of nearby homes can help to verify the value
conclusion. A special area of concern for estates is the
age/condition and site/view adjustments. Compound adjustments
often causes confusion. In many established estate communities,
the actual age of most mansions is over fifty years, with
updating used to keep the improvements useful. The effective age
of these estates is often significantly differs from the actual
age. Preferably, the condition line will denote effective age
and condition, such as "Good/Eff l0yr,"or"Avg./Eff25yr". This
method ties the related terms of effective age and condition
together. The site/view adjustments can be separated on the form
grid in two ways. In the most common method, the view adjustment
is made on a separate line and the site/view line used only for
differences in the gross lot sizes. Another method provides the
gross lot size and view rating on the site/view line, then a
separate line indicates the. useful pad area. This method uses
the site/view line for the view adjustment and the pad area line
for lot adjustments, based on the usable pad size. Either way,
when explained, reduces confusion.
Income Approach
Estate valuations seldom use the income
approach. Owners usually occupy estate properties. Use of this
approach in estate valuations should only be used when the
appraiser can prove that estates, in that area, typically
transact for income potential.
Final Reconciliation and Addenda
The final portions of the appraisal include a
reconciliation, conditions of the report, sale history, a
reconciliation and a variety of addenda. All conditions should
be reasonable and a certificate of completion included in the
report. The sale history of the subject is often invaluable
information. In addition to historical price, any recent
marketing should be analyzed. Local real estate boards should
confirm that the subject has not been listed for sale recently
when appraised for a refinance. For pending sales, the listing
information can provide an additional source to verify the
features of the subject and comparables. The purpose of the
appraisal should be identified. The date of value, date
prepared, and effective date should be similar. The appraiser
must be competent to do the appraisal. A statement describing
the scope of the appraisal process aid in determining diligence.
As FIRREA takes hold, the reviewer must increase their awareness
of requirements of these regulations. It is important that the
appraisal report was prepared to conform to the Uniform
Standards Of Professional Appraisal Practice (USPAP). Some
lenders now require a statement indicating that the departure
provision of the USPAP was not used.
ESTATE REVIEW ISSUES
An estate appraisal review will usually have
several complex aspects. Whatever the presentation, estate
appraisal should be convincing to the reader. The reviewer
should be able to identify accurately whether the estate is
within an estate community or simply one of the largest
residence in the area.
General Review Standards
The Financial Institution Reform, Recovery and
Enforcement Act of 1989 (FIRREA) became a law on August 9, 1989.
Title XI of FIRREA included provisions calling for appraisals
prepared for most depository institutions to be completed by
certified or licensed appraisers. Residential estate
transactions with a dollar amount over one million dollars
require a certified appraiser. A reviewer of high value
residences will need to recognize complex property and expand
the review as the appraisal warrants. The third standard of the
USPAP (see exhibit 1) specifically addresses review appraisals.
Information provided by the client should include the appraisal
report, title report, escrow instructions, and any other
information appropriate to the review,
Review Sequence
The review process for estates is an amplified
version of basic residential review techniques. However, a desk
review is seldom adequate and most lenders require a field
review. The sequence of the process is important for the
reviewer to avoid multiple or redundant trips to the subject's
neighborhood. Conduct initial research in the office, followed
by field inspection, and concluded in writing the review. The
report should be cohesive and logical during the first reading.
Check common source of math errors, like the living area sketch.
Additional checks for all other math areas, such as room count,
lot size, and comparable's adjustments are also part of the
first review. Next, verify the comparable's sale price, date,
and terms. Also, access data sources to verify the improvement
and site information on the subject and the report's
comparables. During this search look for additional sale data.
The field portion of the review starts after the reviewer has
analyzed an adequate amount of data. Unfortunately, many estates
are behind tall walls and gates, allowing the reviewer to
inspect only the street side appearance. Take care to be
thorough but not intrusive. Have your business card ready and be
direct with neighbors or security patrols who may question your
motives. The reviewer has a legitimate business purpose, but
conducting your review unprofessionally invites query.
Available Information
A review of public records, to verify that the
appraiser correctly identifies the improvements is a good
practice. It is not uncommon to accidentally identify a finished
basement or attic as part of the living area, grossly
over-stating the actual size of the living area. The reviewer
usually lacks the knowledge of a personal interior inspection,
but should be an expert regarding relevant public information.
Local demographic data, geological maps, flood maps, zoning
codes, and building codes are essential tools in estate reviews.
Replacement cost figures are available from several sources:
appraiser, local contractors, Marshall & Swift, R. S. Means, and
construction loan data. Sale data sources usually include public
records, Realtors, private data services and appraiser files.
Appraising is a research process that incorporates some
knowledge in many separate professions. Drafting, writing,
architecture, photography, building construction, mortgage
banking, and real estate brokerage all have information used for
appraisal. A sound appraisal library includes traditional
appraisal books, time-dated facts, and information from seminars
and conventions.
Market Analysis
In estate appraisals and reviews, errors in
value tend to be large. The appraiser may not only be incomplete
in the report presentation, but may select sale data that is not
relevant to the subject. Sale information that is recent and in
the same general area, may not be appropriate, resulting in a
grossly inaccurate value conclusion.
Comparable selection
Critical analysis of the comparable's relative
location, size and features distinguish relevancy. If all the
comparables are a mile east, then the appraisal tells you what
the subject is worth if it was a mile away, not where it is.
When the comparables are next to a beach, or other recreational
features and the subject is not, the appraisal is not comparing
like properties. The next concern is the similarity of lot size
and improvement size. A comparable that is half or double the
size of the subject is rarely germane to the subject's
valuation. A wide range of size usually causes a large range for
the indicated value. This makes it difficult to feel that any
particular value is the best. Estate communities usually have
homes designed with extra livability. Comparables which all have
an extra garage space or extra fireplace may warrant a minor
dollar adjustment, but also could indicate that the subject does
not have the features which that area's estate properties have.
An over-improvement is implied when the comparables are all
significantly smaller or the only comparables of similar size
are selected from outside the neighborhood. Comparables which
are nearby and similar in size, but have not recently sold
suggests a slow market for that size of estate instead of
functional obsolescence. After considering location, size and
features, the reviewer needs to verify the report's data. During
the verification a search for additional comparables can be
started. I recommend a three stage approach. First, locate
recent sales in the immediate area and identify several
properties that are clearly superior and others that are
inferior. These will bracket the value range of next search and
confirm the appraisals neighborhood price range. Next, conduct a
search for most similar properties with an expanded search area
and time frame. This provides additional direction toward a
specific value and suggests value trends for estates in this
area. Next, compare the data with the comparables the field
reviewer selected. Any comparables used in the appraisal but not
found in your search will require additional verification and
may be suspect.
Adjustments
The comparable's features are fact, but
adjustments based on those features are often subjective. The
size and number of adjustments often influence credibility. A
half dozen adjustments for a custom estate comparable is not
uncommon, but comparables with over a dozen adjustments are not
really alike. Adjustments for features that the data sources
identified in the appraisal do not describe and not observable
at street side, should be questioned. Atypical adjustments, such
as a separate adjustment for features typical to estates of the
same quality, should be scrutinized. Unique features are common
in custom homes, though they might be considered upgrades in
tract style homes. Items such as luxury landscaping or deluxe
kitchen appliances can seldom be verified for the comparables,
causing them to be unsupported adjustments. Another typical
estate adjustment problem is very small amounts used for
adjustments. Adjustment, but adjustments under one percent of
the value will have no noticeable affect on the indicated value
for the subject. Small adjustments may understate the market
reaction. Estate appraisals frequently require some subjective
adjustments that may lead to disagreement. A review of the
comparable's price range and dollar per square foot of gross
building area can provide a cross check on the subject's value.
The comparables may not be appropriate when the subject's
indicated value is above or below the price of the comparables.
REVIEW CONCLUSION
The NARA/MU review form or FNMA 2000/FHLMC 2032
is used for appraisal report critiques. The appraisal's
information and reasoning is a combination of quantity and
quality. The thicker appraisal does not always have better
reasoning, but more information is available for review. A
quality report will be accurate and relevant. The review
critique needs careful treatment of subjective factors. Each
report and review is just one person's opinion, and everyone's
entitled to theirs. When information on the review and appraisal
differ, the underwriter will need to decide who is more
credible. Appraisal and reviewing involve independent thinking
and conflicting views are expected occasionally. It is the
reviewer's duty to service the client and promote the review's
merits. Dialogue with the underwriter or appraiser may be more
constructive than a series of review response letters may
confuse instead of resolving the issues. If the reviewer's
opinion is better, the reviewer should be willing to face
contrasting opinion. Recently, many institutions have
standardized FIRREA statements, with the form a required item,
increasing the amount of addenda. The qualifications of the
reviewer should include experience in the valuation of this
property type. A statement describing the scope of the review
process increases the client's understanding of your review. It
also can avoid implied research.
Value Change
When the report has accurate descriptions, but
fails to arrive at a reasonable value, a difficult task faces
the reviewer. The value should be lowered without bringing the
entire report into question. The appraisal should be logical to
remote underwriters and not just to local readers, who know the
housing dynamics of that community. If the report is adequate,
but the value conclusion is not the best effort given the data
available, the reviewer's conclude value should be different. A
different concluded value should be supported by adequate
comments and data. New listing data or corrections of data
contained in the appraisal should have the source of the revised
information provided. The reviewer should feel that the
appraiser has correctly identified the subject's relationship to
the neighborhood's housing stock, based on the data and value
selected.
SUMMARY
Estate properties require review skills beyond
the conventional residential appraisal report. Additional
research and a field inspection are typical. The review
appraiser will analyze the report, then compare it to the
Uniform Standards of Professional Practice and the standards
typical for the subject's market. As most estate areas have wide
value ranges, care to analyze the subject's relationship to the
general housing stock. An investment grade appraisal review is
an accurate and complete statement.
Exhibit 1
UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL
PRACTICE
Standard 3
In reviewing an appraisal and reporting the
results of that review, an appraiser must form an opinion as to
the adequacy and appropriateness of the report being reviewed
and must clearly disclose the nature of the review process
undertaken.
Explanatory Comments Relating to Standard 3
General Comment
The function of reviewing an appraisal requires
the preparation of a separate report or a file memorandum
setting forth the results of the review process. These
appraisers are normally checking for a level of completeness and
consistency in the report and cannot be expected to have
first-hand knowledge of the subject property and other data in
the report. This is a distinctly different function from that
addressed in S.R.2-5. To avoid confusion in the marketplace
between these two functions, appraisers reviewing appraisal
reports should not sign the report being reviewed. Appraisers
who engage in the function of reviewing an appraisal report must
take appropriate steps to indicate to third parties the precise
extent of the review process. A separate report or letter is one
method. Another appropriate method is a form or check-list
prepared and signed by the appraiser conducting the review and
attached to the report being reviewed. It is also possible that
a stamped impression on the appraisal report signed by the
reviewing appraiser may be an appropriate method for separating
the review function from the actual signing of the report. To be
effective, however, the rubber stamp must briefly indicate the
extent of the review process and refer to a file memorandum that
clearly outlines the review process conducted. Thomas Murry, CRA,
is the chief appraiser for Camden Financial Services, a national
mortgage banking firm. He has been appraising multi-million
dollar residences for many years. He has personally valued over
a billion dollars in one-to-four family residential property and
reviewed estate appraisals nationwide. He received his bachelor
of science degree in business economics and finance from the
University of Southern California. He regularly presents
appraisal seminars, has a California real estate broker’s
license, and has written for regional and national publications.
Mr. Murry is a senior member of the National Association of
Review Appraisers & Mortgage Underwriters and currently holds
the "CRA" (Certified Review Appraiser) designation. He also is a
Senior Residential Appraiser in the Appraisal Institute and
participates in The Mortgage Banker’s Association.
Copyright © 2008
Coldwell Banker Tomlinson Associates