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User-friendly appraisal reports.

This article aims to assist appraisers in preparing user-friendly appraisal reports for financial institutions. The focus is appraisal reports that involve income-producing properties affected by the minimum appraisal standards of the implementing regulations of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). Several general components of user-friendly appraisal reports, including some common deficiencies, are also summarized.


Uniform Standards of Professional Appraisal Practice (USPAP)

Title XI requires all appraisals for federally related transactions to "conform to the Uniform Standards of Professional Appraisal Practice (USPAP) adopted by the Appraisal Standards Board of the Appraisal Foundation, except that the Departure Provision of the USPAP shall not apply, to federally related transactions."(1)

With the exception of the Departure Provision, the entire contents of the USPAP have been incorporated into the implementing regulations of Title XI. Appraisers must satisfy all specific and binding requirements of the USPAP according to the implementing regulations, while the Departure Provision allows appraisers to depart from the specific requirements. A user-friendly appraisal report contains a clear and concise statement in the Letter of Transmittal and Certification that acknowledges conformity with the USPAP. The fact that the Departure Provision is not applicable should not be misconstrued to mean that a particular valuation approach cannot be excluded if not appropriate for the property being appraised.

Competency provision

The implementing regulations of Title XI require an appraiser to "disclose any steps taken that were necessary or appropriate to comply with the Competency Provision of the USPAP."(2) A user-friendly appraisal report discusses the Competency Provision and its relationship to the appraiser and subject property in a separate, titled section. The Competency Provision of the USPAP states that "Prior to accepting an assignment or entering into an agreement to perform any assignment, an appraiser must properly identify the problem to be addressed and have the knowledge and experience to complete the assignment competently; or alternatively: 1) disclose the lack of knowledge and/or experience to the client before accepting the assignment; and 2) take all steps necessary or appropriate to complete the assignment competently; and 3) describe the lack of knowledge and/or experience and the steps taken to complete the assignment in the report."(3)

Obviously, an appraiser should not take an appraisal assignment that cannot be performed competently. If an appraiser has competently and consistently appraised similar types of properties, a summary of the pertinent details of these prior appraisal assignments is a good opportunity to gain the confidence of a user.

Prior sales

An appraiser is required to "analyze and report in reasonable detail any prior sales of the property being appraised that occurred within the following time periods: (i) For 1-to-4-family residential property; one year preceding the date when the appraisal was prepared; and (ii) For all other property, three years preceding the date when the appraisal was prepared."(4)

Analysis of the prior sales of a subject property appears in a separate, titled section of a user-friendly appraisal report. Although not required by implementing regulations and the USPAP, the analysis of more years than required is recommended.

It is not sufficient to merely state a transaction sale price with no analysis. User-friendly appraisal reports include an analysis of the prior sale(s) of the subject property in a manner similar to the analysis of a comparable sale in the sales comparison approach. A copy of the historical deed within the Addenda is helpful as well.

Inclusion of such items as the date of sale, the grantor, the grantee, the transaction sale price, the cash equivalent sale price, the terms of sale, the conditions of sale, the units of comparison, the occupancy at sale, and the confirmation are critical parts of this analysis. The relationship between the historical sale price(s) and the appraised value is also important. An appraiser should analyze and discuss the primary reason for any value difference between the prior sale(s) and the appraised value.

User-friendly appraisal reports have separate sections for prior sales, history of the property, and owner of record. The History of the Property section should analyze and consider the history of the property relative to occupancy levels, rent levels, pending/historical litigation, renovation, and any tangible or intangible changes involving the subject property. The Owner of Record section should include the formal name and mailing address of the legal title owner. If legal title is held by a corporation or partnership, the disclosure of the names of the principals is beneficial to a user.

Current revenues, expenses, and vacancies

An appraiser is also required to "analyze and report current revenues, expenses, and vacancies for the property if it is and will continue to be income-producing."(5)

While this stipulation may appear rather simplistic, real estate appraisers sometimes do not even analyze or consider the contract rent and its relationship to the estimated market rent.

A user-friendly appraisal report includes a professionally prepared rent roll summary in chart format as well as a separate, titled section for the analysis of the rent roll. The characteristics of the rent roll should be analyzed and discussed in a manner similar to the analysis of the physical features of the building improvements within the Description of Improvements section. Appraisers sometimes present three to five pages of analysis for the description of improvements; however, the analysis of the existing rent roll is often excluded or summarized in one paragraph.

Some relevant questions for the analysis of the rent roll are: What is the average rent per square foot? What is the typical lease term? What are the divisions of expenses? What rental rate per square foot is indicated by the most recently executed leases? Is there any rental discount for large-space users? What is the valuation effect of lease rollovers? How does the subject rent roll relate to the rental characteristics of the competitive properties? Are rental concessions granted? What is the business nature of the tenant? What is the tenant profile of the subject property? Most importantly, what are the quantity, quality, and durability of the income stream and how do these characteristics relate to the selected capitalization rate?

Expense and vacancy analysis should provide a detailed and thorough analysis similar to the rent roll analysis. A chart summary is extremely useful for summarizing current expenses and vacancies.

Reasonable marketing period

Title XI also requires that an appraiser "analyze and report a reasonable (e.g., normal) marketing period for the subject property."(6) The analysis and estimation of a reasonable marketing period is as important as the estimation of market value. The estimation of a reasonable marketing period and related matters have historically been a source of misunderstanding between appraisers and users. A generally accepted definition of a normal or reasonable marketing period is as follows.

Normal Marketing Period is the amount of time necessary to expose a property to the open market in order to achieve a sale. Implicit in this definition are the following characteristics:

* The property will be actively exposed and aggressively marketed to potential purchasers through marketing channels commonly used by buyers and sellers of similar type properties.

* The property will be offered at a price reflecting the most probable markup over market value used by sellers of similar type properties.

* A sale will consummate under terms and conditions of the definition of market value required by the regulation.(7)

In user-friendly appraisal reports separate, titled sections contain analyses, discussions, and estimates of reasonable marketing periods. A reasonable marketing period is generally considered the time (e.g., number of months) from the date the property is listed to the date a contract for purchase and sale is executed, and should be defined in an appraisal report.

Users of appraisal reports within financial institutions need to know reasonable marketing periods for various purposes. It is imperative that appraisers understand that the estimated market value and the estimated reasonable marketing period are interrelated and are a combined function of value and time. It is not possible to present a market value estimate without a reasonable marketing period estimate.

A reasonable marketing period estimate should appear wherever the market value appears within an appraisal report. For example, a presentation similar to the following example is recommended based on the assumption that the market value of the property is $1,000,000 and the reasonable marketing period is 24 months.

* $1,000,000

* One million dollars

* (The reasonable marketing period is estimated at 24 months)

An estimate of the reasonable marketing period is a USPAP requirement as well as being a minimum standard of Title XI regulations. According to Standards Rule l-2(b), "If the concept of reasonable exposure in the open market is involved, the appraiser should be specific as to the estimate of marketing time linked to the value estimate."(8)


Title XI also requires appraisers to include a statement similar to "The appraisal assignment was not based on a minimum valuation, a specific valuation, or the approval of a loan."(9)

In addition to this statement and the traditional statements within the certification, the final estimate of value(s) should be presented within this section. An appraiser thus would be properly certifying (i.e., endorsing, attesting to truth and accuracy) the value estimate(s) to the financial institution when a certification is executed. Further, to control authenticity it is advisable to add a caveat to the effect that "This appraisal report is invalid unless all signature pages have a blue-ink signature and embossed seal of XYZ Appraiser."

Legal description

An appraiser must "include a legal description of the real estate being appraised, in addition to the description required by USPAP."(10) A user-friendly appraisal report presents the legal description within the Addenda as an exhibit. The legal description should be taken from a copy of a historical deed, mortgage, or promissory note to prevent error.

Some appraisers insert the entire legal description within the narrative text. If it is a lengthy metes and bounds description, the probability of a typographical error is enhanced if this method of presentation is used. Further, it is inefficient to type lengthy metes and bounds legal descriptions.

Engagement letter/employment contract

Title XI requires an appraiser to be "engaged directly by the regulated institution."(11) A user-friendly appraisal report contains a copy of the executed (both parties) engagement letter within the Addenda as an exhibit. The Office of the Comptroller of the Currency (OCC) requires that "All instructions from the bank to the appraiser must be in writing. Further, the appraisal must contain all of the bank's instructions to the appraiser."(12)

A common deficiency is the omission of a copy of the engagement letter and appraisal instructions or the inclusion of the engagement letter executed only by the financial institution. This is important because financial institutions must prove to the government regulators that an appraiser was hired directly.



A lack of analysis of off-street parking can be a problem. The required and existing off-street parking ratio should be summarized. The primary analysis, however, should concern the quality and functional utility of the off-street parking and its relationship to the market value of a property. The quality of off-street parking directly affects the quantity, quality, and durability of an existing and potential income stream and thus a quality analysis of off-street parking is essential. Some appraisers address this topic within the Description of the Improvements or Site Data sections; however, many appraisers fail to mention the valuation effects of the quality of the off-street parking.

While the subject property as improved may satisfy the off-street parking requirements of the zoning code, the quality of parking could be poor. Examples of poor quality parking are 1) a poorly designed parking garage; 2) a large percentage of compact or nonstandard parking spaces; 3) a noncontiguous parking lot; 4) a poorly designed covered parking area; and 5) parking space location that is not optimum in relation to the location of the building improvements. Examples of poorly located parking spaces are roof-top spaces, parking spaces along the rear of a retail building, or parking spaces that require a more than typical walking distance to the main entrance.

In Dade County (Miami), Florida, the quality of parking was such a significant issue that the zoning ordinance was changed, effective March 1, 1991, to prohibit the use of compact parking spaces (i.e., 7'6" x 15'). Prior to this zoning change, compact parking spaces were allowed to account for up to 45% of the total spaces. The Dade County Zoning Department also increased the minimum off-street parking ratio from 3.33 spaces per 1,000 square feet to 4.00 spaces per 1,000 square feet for retail uses. This zoning change has created many legally nonconforming retail properties.

A user-friendly appraisal report analyzes and discusses the quality and functional utility of off-street parking and its effect on selected capitalization rates and market value. The mere statement that the property conforms with off-street parking requirements does not suffice.

Real property assessment and tax data

Which of the following scenarios is more user-friendly for the presentation of real property assessment and tax data?


Scenario 1 is clearly more user-friendly. The use of a topic/comment format rather than the traditional narrative paragraph should occur as often as possible within appraisal reports (e.g., in such sections as the Summary of Salient Facts, Site Data, Description of the Improvements, Zoning). The term "narrative" appraisal report should not be construed to mean that the document must read like a novel. The topic/comment format is extremely useful to users because of its quick reference characteristic. This format is often in conflict, however, with transcriptions of appraisal reports.

Users of appraisal reports within financial institutions often need to know of delinquent real property taxes that may encumber a subject property. A clear and concise statement regarding delinquent real property taxes is necessary, and the name and telephone number of the representative from the taxing authority is also helpful.

An appraiser should present land and building assessments separately within this section. When an appraiser presents the total assessed value the reader does not always know the component assessments. If extreme differences between the appraised value and the assessed value exist, appraisers are advised to analyze and discuss the primary reasons for the difference.

Description of the improvements

The most common deficiency of the Description of the Improvements section is an appraiser's failure to properly consider and analyze the value-influencing factors of the subject building. What are the primary positive and negative value-influencing factors of the subject building and how do they relate to the market value of the property?

Appraisers spend a disproportionate amount of time and effort describing the detailed and minute physical characteristics of the building improvements rather than in analyzing the positive and negative value-influencing forces. A financial institution appraisal report user does not really think that a description of sub-flooring such as "4-inch concrete slab with 6" x 6", 10-gage wire mesh over vapor barrier on compacted fill" is primary data. To enhance user-friendliness, it is best to use the topic and comment format in the Description of the Improvements section rather than lengthy narrative text, as previously discussed, to physically describe the primary building components.

Surveys/site plans/exhibits

A user-friendly appraisal report always includes readily identifiable visuals rather than extensive narrative text.

Professionally prepared exhibits of surveys, site plans, and sale and rental maps are required. For site plans and surveys, it is recommended that appraisers either 1) present them on the facing page prior to the beginning page of the section; or 2) include them within the Addenda as exhibits. The use of a neighborhood map, labeled with numbers identifying pertinent properties, is extremely useful.

An aerial photograph should be included in appraisals of large parcels of vacant land. Aerial photographs have a tremendous cost benefit and are also useful in appraisal reports for other property types. Aerial photographs should be permanently bound within the appraisal report to prevent their removal. Aerial photographs are generally available from the property appraiser's office or a real estate sales service.

Most probable purchaser

An analysis of the most probable purchaser of the subject property is included in a user-friendly appraisal report. Is the most probable purchaser an owner-occupant; a partial owner-occupant; an adjacent owner; or a local, regional, national, or worldwide investor? This information is helpful to users, particularly when the downside of a proposed loan and the upside of a foreclosed property are analyzed.

Highest and best use

When the highest and best use of a property as if vacant is different than the highest and best use as improved, there is a conflict between highest and best uses. The highest and best use conflict is common with troubled properties.

For example, assume an appraiser estimates that the highest and best use of an existing retail property as if vacant is to hold for future development. The appraiser further states that a retail use is not financially feasible if the property is developed now. This is an inconsistent highest and best use because the existing use is not financially feasible at the date of appraisal.

Sometimes appraisers fail to consider, analyze, and discuss how such a highest and best use inconsistency affects the market value of a property. Apparently, supply and demand are not in balance in such a case because a retail development is not financially feasible if built today, and thus the risk associated with purchase of the subject property (as improved) is increased. Appraisers may also fail to properly analyze how a highest and best use inconsistency affects risk, selected capitalization rates, and market value.

Electronic/computer spreadsheets

Electronic/computer spreadsheets are not compatible with user-friendly appraisal reports. Spreadsheets are a major cause of confusion to users of appraisal reports within financial institutions. Real estate appraisers often merely display the spreadsheets within appraisal reports without explanation and expect readers to decipher them. It is an appraiser's responsibility to clearly describe all the valuation steps taken in conjunction with the use of spreadsheets.

According to Standards Rule 2-1, "Each written or oral real property appraisal must: (a) clearly and accurately set forth the appraisal in a manner that will not be misleading."(13) Further, in discussion of discounted cash flow (DCF) models, Guide Note 4 of the USPAP states that "Appraisals using DCF techniques, particularly computerized projections of itemized future cash flow supported by exhaustive printouts, can be misleading."(14)

Complex mathematical calculations such as iterative models, circular reference valuations, and simultaneous valuations are not widely understood and cannot be recalculated by financial institution users of appraisal reports. User-friendly appraisal reports do not incorporate these or other similarly complex mathematical formulas unless explained thoroughly in elementary terms and used in conjunction with traditional valuation models.

A user-friendly appraisal report communicates an analysis under the assumption that the user is an individual with a sound real estate background and a general knowledge of the basic principles of real estate appraisal. Overcomplication is the primary nemesis of a user-friendly appraisal report. For example, it is unrealistic to expect a financial institution user of an appraisal report to understand the Ellwood formula, inclusive of the J-factor adjustment.

Investor surveys of investment criteria

The selection of a proper capitalization rate is a difficult task and appraisers often cite investor surveys as bases of support. With particular regard to internal rates of return, appraisers must use extreme caution with investor survey data. Appraisers must be aware that the survey data may partially reflect oversupplied "sellers in disguise" trying to rid themselves of poor portfolios. Further, the historical success of the survey participants must be considered as a test of reliability.

Investor surveys reflect institutional investors' yield expectations of properties with national investment appeal. These "targeted yields" are not historic, involve unleveraged investment scenarios, and are not site specific relative to the property being appraised. It would be interesting to compare the actual yields of properties purchased subsequent to 1986 with their targeted yields.

A common deficiency of investor surveys is data support for the selected equity yield rate (|Y.sub.e~) of the Ellwood formula. It is crucial that appraisers acknowledge the difference between |Y.sub.e~ (assumes debt) and the unleveraged (i.e., free and clear) internal rate of return (IRR). Investor surveys reflect free and clear IRRs or unleveraged overall property yields (|Y.sub.o~).

|Y.sub.e~ has an increased risk rating compared with the |Y.sub.o~ of the property primarily because of the increased risk associated with paying annual debt service, the possibility of losing the property through foreclosure, the possibility of personal recourse by the lender, and the credit risk associated with defaulting on an obligation involving a regulated institution.

Appraisers must remember the generally accepted risk-rating relationship of the mortgage yield rate, the property yield rate, and the equity yield rate. This relationship is applicable in a normal real estate market, particularly in regard to recourse loans, and it drives the real estate investment market. This relationship is also applicable for DCF models including annual debt service.

|Y.sub.m~ is less than |Y.sub.o~

is less than |Y.sub.e~


|Y.sub.m~ = Mortgage yield (interest) rate; assumes debt

|Y.sub.o~ = Property yield rate; unleveraged IRR

|Y.sub.e~ = Equity yield rate; assumes debt

As is the case with all financial investments, there is an investment risk associated with buying real estate. Each property generally has a different risk level based on such factors as its physical characteristics, location, and lease structure, and estimating the degree of its investment risk can be difficult. In addition, the riskiness of investing in real estate has increased recently as a result of the difficulty of obtaining financing, the growth management/concurrency laws, the oversupply of most property types, and the uncertainty associated with current and future tax laws. A common appraisal report deficiency is a lack of analysis of the risk rating of the appraised property. User-friendly appraisal reports identify, analyze, and summarize the yields on alternative investments such as money market and capital market instruments before the selection of the capitalization rate for the subject property.

What are the primary investment risks associated with purchasing the subject property? How risky is the purchase of the subject property in relation to the purchase of competitive properties? A risk-rating system that enables an appraiser to classify the riskiness of the subject property as an investment in relation to competitive properties is constructive--for example:
07 =
06 = High
05 =
04 = Moderate
03 =
02 = Low
01 =

Disposition costs

In "Guidelines for the Computation of Net Realizable and Fair Value," Douglas D. Lovell defines disposition costs as "all direct costs incurred as a result of the final disposition of an asset. These costs include but are not limited to broker fees and commissions, settlement attorney fees, advertising expenses, title fees, survey fees, deed transfer taxes or stamps and other miscellaneous fees."(15)

For certain loans, financial institution users of appraisal reports need to estimate the disposition costs to assist in estimating internal write-downs. Thus, a user-friendly appraisal report contains a section to estimate disposition costs if applicable. The estimate of disposition costs is important regardless of the length of the reasonable marketing period. Although not a traditional disposition cost, it is suggested that delinquent real property taxes be mentioned in this section.


User-friendly appraisal reports include color photographs of all building elevations (i.e., north, east, south, west) of the subject building improvements. Confusion can be avoided by labeling building improvement photographs according to compass building elevation (e.g., north building elevation) rather than using ambiguous words such as "front" and "rear." Interior photographs not only aid readers in visualizing a building, they prove that an interior inspection was made.

User-friendly appraisal reports include either a "subject" arrow graphic directly on the photograph or a photograph subheading such as "North along Main Street; subject property to right," in street-scene photographs.

County/regional data

A user-friendly appraisal report presents the county/regional analysis within the Addenda of the appraisal report. A market overview analysis that includes property-specific data should not be confused for a county/regional analysis. A county/regional analysis is particularly important when a property is being considered by an out-of-region purchaser or debt investor. The number of pages within a county/regional analysis should not be greater than the number of pages of the balance of the appraisal report.


Important things to remember in the preparation of user-friendly appraisal reports are 1) to avoid long and repetitive narrative text, substituting chart summaries that use the topic/comment format; 2) to use visual aids to assist in shortening the narrative text; 3) to avoid over reliance on mathematical or computer software-related analysis; 4) to consider, analyze, and discuss in detail the positive and negative value-influencing factors of the subject property; and 5) to identify and quantify the risk rating associated with purchasing the subject property in comparison with competitive properties.

Words, photographs, and exhibits should evoke the significant details concerning a property. Most importantly, an appraisal report should be prepared on the assumption that the user has a sound real estate background and a general knowledge of the basic principles of real estate appraisal. Overcomplication, which distorts the communication process, is the primary nemesis of a user-friendly appraisal report. If the appraisal report is not clearly communicated to a user, the appraiser has failed.

Gregory F. Lynch, MAI, is vice president and senior appraiser for First Union Corporation, Miami, Florida. He received a BA from the University of Miami and has reviewed over 200 appraisal reports.

1. Department of the Treasury, Office of Comptroller of the Currency, 12 CFR Part 34 Final Rule as published in Federal Register, v. 55, no. 165 (August 24, 1990), 34697.

2. Ibid.

3. The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice (Washington, D.C.: The Appraisal Foundation, 1990), B-4.

4. Department of the Treasury, 34698.

5. Ibid.

6. Ibid.

7. William L. Pittenger, "Appraisal Regulations of the Federal Banking Agencies," (Appraisal Institute seminar, 1990): 7.

8. The Appraisal Foundation, B-10.

9. Department of the Treasury, 34698.

10. Ibid.

11. Ibid.

12. Office of Comptroller of the Currency, Comptroller's Handbook for National Bank Examiners, March 1990, "Other Real Estate Owned," Section 219.1, 1.

13. The Appraisal Foundation, B-14.

14. The Appraisal Foundation, D-10.

15. Douglas D. Lovell, "Guidelines for the Computation of Net Realizable and Fair Value," 4th rev. ed. (self-published, 1991): 83.
COPYRIGHT 1992 The Appraisal Institute
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Author:Lynch, Gregory F.
Publication:Appraisal Journal
Date:Oct 1, 1992
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