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Scope of the appraisal - a practical analysis.

In August 1985, the term "scope of the appraisal" first appeared in appraisal literature published by the former American Institute of Real Estate Appraisers (AIREA). The Code of Professional Ethics, and was subsequently incorporated into the text of AIREA's Standards of Professional Practice course in March 1986. According to the 1987 Standards of Professional Practice and Conduct, an appraisal report must "describe the scope of the appraisal." (1)

The following passage appears in the explanatory comments of this rule:

This guideline requires that a written report that sets forth the results of an appraisal contain a clear and accurate description of the scope of the appraisal. The guideline is designed to protect third parties whose reliance on an appraisal report maybe affected by this information.

The term "scope of the appraisal" means the extent of the process of collecting, confirming, and reporting data. The standards clearly impose a responsibility on the appraiser to determine the extent of the work and of the report in relation to the significance of the appraisal problem. Describing the "scope of the appraisal" is the way in which the appraiser signifies acceptance of this responsibility. (2)

From another perspective, Webster's Ninth New Collegiate Dictionary defines "scope" as follows: 1) Space or opportunity for unhampered motion, activity, or thought; 2) intention, object; 3) extent of treatment, activity, or influence; 4) range of operation. (3) The third and fourth definitions most closely relate to what the scope of the appraisal section should encompass; the second definition is likely to be addressed within the purpose of the appraisal section of the report.

The intent of identifying the scope of the appraisal is to describe to the public what an appraiser does within an appraisal assignment. The most important aspect of appraisal scope is the description of the extent of the process of collecting, confirming, and reporting data, regardless of how this process is accomplished. Such a description may be fulfilled in a number of different ways. For example, an appraiser may state the amount of time necessary to complete the appraisal, and further, may mention the geographical limits of the data used in the analysis as well as their appropriateness for cases in which data are limited or the subject is a special-use property. Particularly importnat to discuss in the scope of an appraisal is whether an appraisal assignment is limited in scope (i.e., whether certain sections of the report or any approaches to value are omitted). If such limitations exists, it is necessary to provide clients and users of the report with an extensive, detailed explanation of what typical meaures or aspects were omitted, and why.

In the scope of the appraisal section, an appraiser should be as thorough as possible without being repetitive. It is not necessary, for example, to reiterate the purpose or function of the appraisal report, the subject property type, the approaches to value (and their appropriate explanations) used in the analysis, or any conclusions addressed and expanded upon in other portions of the report.

To clarify what constitutes the scope of an appraisal, Standard Rule 2-2 (f) was changed by The Appraisal Foundation, effective April 20, 1990, to state that the appraisal report should "describe the extent of the process of collecting, confirming and reporting data." (4) As is pointed out in Standard Rule 2-2 (f), "This requirement is designed to protect third parties whose reliance on an appraisal report may be affected by the extent of the appraiser's investigation; i.e., the process or collecting, confirming and reporting data." (5) Any omission in describing the extent of the process of collecting, confirming, and reporting data (i.e., the scope of the appraisal) is a standards violation and grounds for possible investigation by the Appraisal Institute's Director of Screening.

PREVAILING PROBLEMS

Rather than describe the process of collecting, confirming, and reporting data, appraisers often cite the approaches to value or describe the six steps of the appraisal process when attempting to explain appraisal scope. While this may help the reader of an appraisal to understand the appraisal process, it does not provide enough detail to explain the extent of the appraiser's work.

Following are a few example of typical scope of the appraisal sections found within appraisal reports. The problems identified in these examples primarily stem from the appraisers' misunderstanding of the purpose of this section of the appraisal.

Example 1

The scope of this appraisal includes a full analysis of the site and proposed improvements with a physical inspection and photographs taken on November 15, 1990.

The highest and best use analysis of the subject site took into consideration the most reasonable and probable uses that were physically and legally possible.

Within the valuation section of this report, all three approaches to value were utilized. The three approaches were reconciled into a final value estimate taking into consideration the market data available within each approach.

The weakness of this particular example is that it basically represents a reiteration of the appraisal process, typically described elsewhere within the appraisal report; thus it is not necessary to incorporate it under the scope of appraisal heading. In addition, there is not enough description of the data collecting, confirming, and reporting processes.

The following two examples further illustrate cases in which data collection, confirmation, and reporting are ignored. Items such as the purpose and function of the appriasal, subject property type, value estimate(s), and appropriate approaches to value are mentioned; these items, however, were already discussed elsewhere within the respective appraisals.

Example 2

The purpose of this appraisal is to estimate the market value of the fee simple interest in the subject property as of June 1, 1990, and upon its completion and stabilization by August 1991. The estimate reflects completion by July 1991 of the plans and specifications outlined in the report. The function of this report is to estimate the market value for construction and permanent loan financing.

Example 3

The subject of this appraisal is a one-story and three-story masonry building, currently being partly utilized as retail, classrooms and a day-care facility, located in a major downtown core area know as the "Peachtree City Commons" under the community's growth management plan. This appraisal focuses on the "as is" valuation of the subject property with emphasis on the underlying land value and future development potential.

The scope of this appriasal includes only the market approach since the site is effectively vacant, with no contributory value assigned to the subject improvements.

The inclusion of the description of the appraisal process in the scope of the appraisal section should not prevent an appraiser from including a description of the extent of the process of collecting, confirming, and reporting data.

CASE STUDY--SCOPE OF

THE APPRAISAL

A good scope of the appraisal section provides a succinct explanation of the research necessary to assemble the data required to prepare a thorough appraisal.

An example of a comprehensive scope of the appraisal is provided below. The strength of this example is in the recognition of the parties responsible for providing plans and specifications of the subject property, area and neighborhood analysis, and market data. The appraiser(s) also point out that the subject plans are preliminary and that an assumption of final approval is made.

Example 4

The scope of the appraisal encompasses the necessary research and analysis to prepare a report in accordance with intended use, the Standards of Professional Practice of the Appriasal Institute, and the Uniform Standards of Professional Appriasal Practice of the Appraisal Foundation. In regard to the subject property this involved the following steps:

1. The property was inspected on July 20, 1990. The photographs included in this report were taken on July 19 and July 20, 1990. Ms. Patricia Downs and Ms. Laura Smith of Luther Corporation provided plans, specifications, and a general information packet put together by Grant Corporation. Mr. Brad Johnson of Grant Corporation was contacted to clarify various details included in this information packet as well as the plans and specifications provided.

2. Regional, city, county, and neighborhood data were based on information available in the Knight & Booth library, description of which is included in the ADDENDA of this report under the heading Data Sources. The contribution of Jackson Realty Consultants of Atlanta Real Estate is acknowledged in assistance on the subject regional area. The neighborhood section was based upon a physical inspection of the area as well as data from the City of Tucker and the Center for Public Service at the University of Georgia.

3. The subject property data was based upon plans by Thomas Stevens, Architect and Associates of Tucker, Georgia. It must be noted that these are preliminary plans that have not received final approval of the City. This appraisal is based on the assumption that the improvements will not be substantially different than that noted on these plans and described within the text of this report. Other subject property data was compiled from the public records from the City of Tucker and from a physical inspection of the site.

4. In estimating the highest and best use for the property, an analysis was made of data compiled in the three steps noted above. In addition, a study of the apartment market in the subject area has been made to help determine the economic feasibility of the proposed project.

5. In developing approaches to value, the market data used were collected from the knight & Booth, Inc., office files; other appraisers, realtors, or persons knowledgeable of the subject property marketplace; and the municipal offices in the Atlanta metropolitan area.

6. After assembling and analyzing the data defined in this scope of the appraisal, a final estimate of market value was made.

CONCLUSION

Over the past several years, the term "scope of the appraisal" has appeared within the Appraisal Institute's Standards of Professional Practice with little fanfare and less explanation. In fact, its definition rather than the term itself now appears in the Uniform Standards of Professional Appraisal Practice. Although the scope of the appraisal section may seem somewhat trivial to appraisers, it is important to clients and users who rely on the data contained within appraisal reports.

When completing this section, appraisers should be mindful not to repeat what may have already been said in another section of the appraisal. Suggested inclusions within the scope of the appraisal section are geographical characteristics, time constraints, and data sources. If the appraisal analysis is limited in scope, the scope of the appraisal section should provide a detailed description of typical procedures that were omitted and why they were not included. The intent of the scope of the appraisal section is to allow an appraiser to thoroughly describe the process of collecting, confirming, and reporting data.

(1). American Inst. of Real Estate Appraisers, S.R. 2-2 (f), Standards of Professional Practice and Conduct (Chicago: American Inst. of Real Estata Appraisers, 1987), 12.

(2). Ibid., Comment S.R. 2-2 (f).

(3). Webster's Ninth New Collegiate Dictionary (Springfield, Mass.: Merriam-Webster Inc., 1989), 1053.

(4). The Appraisal Foundation, S.R. 2-2 (f), Uniform Standards of Professional Appraisal Practice (Washington, DC: The Appraisal Foundation, 1990), B-15.

(5). Ibid.

William Ted Anglyn, MAI, is the Southeast regional appraiser with New York Life Insurance Company in Atlanta. He received a BS in finance from Auburn University. He has previously published several articles in The Appraisal Journal.

John A. Robinson, MAI, is vice president with First Union National Bank in Orlando, Florida. He received a BS in finance from Auburn University.
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Anglyn, William Ted; Robinson, John A.
Publication:Appraisal Journal
Date:Jan 1, 1992
Words:1916
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