Communication is key in getting the right appraisal.

The most critical step in an appraisal might take place before the appraiser even gets started. It's the initial discussion between the appraiser and the client.

These two should always have a detailed conversation before the appraiser gets to work. Only then can the appraiser define the scope of work and select the right reporting option for the assignment. The conversation should cover the appraisal's user, the intended use and the appropriate methodology.

The best appraisers know their audience and target their reports specifically for them.

That makes the appraisal more meaningful and ensures that the information is sufficient to support the conclusion and explain how it was reached.

Toward that end, clients should honestly assess the information they require about the subject property's legal, economic and physical attributes. Other questions to consider: How much do you need to know about market and what do you already know about it? If you deal in midtown all the time, and the property is in midtown, you certainly know a lot more than an out-of-town user.

The appraiser also has to know who's going to read the report. Only then can he write the appraisal in a way that's appropriate. For a knowledgeable reader, the appraiser doesn't have to reinvent the wheel and dwell on subjects the reader knows intimately. On the other hand, if an attorney is going to introduce the report in testimony, it must cover all the ground the attorney expects to go over in court.

In other words, clients should be specific about how the appraisal will be used. Two examples show why:

Let's say the appraiser is valuing an office building with tenants who have long-term leases. The area is growing rapidly and the building's rents are below market. If the buyer plans to keep the current leases in place, he wants an appraisal of the property as encumbered, or based on existing rent levels. But if he intends to buy out the tenants and lease the building at market, he wants an appraisal of the property as unencumbered--without current leases, or based on market rent.

The two appraisals will yield radically different valuations--both equally valid. So it's essential that the client and the appraiser discuss the appraisal's use.

Here's a different example. The owner of a 60-unit apartment building applies to refinance after paying down a 30-year mortgage for 10 years. With appreciation and principal payments, the owner has enough equity to place the new mortgage's loan-to-value well within the lender's underwriting guidelines. If the underwriter knows the market, he knows the property's value has risen over 10 years. Consequently, the new loan would have an extremely favorable LTV. Based on these facts, the lender should be comfortable with a less detailed appraisal than other circumstances would require. That makes the appraisal much less expensive.

In both examples, the client benefits immeasurably from discussing the issues beforehand with the appraiser.

The appraisal's user and use help determine the reporting option--complete or limited, as defined by the Uniform Standards for Professional Appraisal Practice. This is the third subject the client and the appraiser should cover.

A complete appraisal uses all applicable and necessary methodologies. To borrow the argot of statistics, it provides the highest confidence level. It should be used when the risk is commensurate with the confidence level required--for example, when litigation or a high level of fiduciary responsibility is involved or when a lender is considering a high loan-to-value ratio.

A limited report will omit some methodologies, but this may be completely appropriate, based on the requirements established in the discussion between client and appraiser (relatively low LTV, for example).

The appraiser can invoke USPAP's Departure Rule, which allows him, with client consent, to produce a report with a lower confidence level (statistically speaking) than a complete appraisal. A valuation range, for example, might suffice for the client's purpose.

JEFFREY J. BEAL

PRINCIPAL

REAL ESTATE SOLUTIONS