Identifying and Understanding the Relevant Characteristics of the Subject Property of a Real Property Appraisal Assignment

Author: Cliff Odom, RAA, IFA - Cliff Odom Appraisal Services, Inc. is a residential real estate appraisal firm serving the Birmingham Metropolitan Area in North Central Alabama. Cliff Odom is a Certified Residential Property Appraiser providing timely, accurate residential appraisals to more than 30 mortgage lenders nationwide.

We as appraisers realize that each appraisal assignment begins with a “problem” which is an unsolved question. The term “solution” however refers to both the method for resolving the question and the answer. Every appraisal assignment begins with a question about value and involves a solution that is both a process and an answer. It is important to understand, however, that with respect to these two elements, USPAP addresses the method by which an appraiser arrives at an answer, not the specific answer itself.

The first step in the solution is called Problem Identification or what is sometimes referred to as Define the Appraisal Problem.

This step involves gathering specific information about the problem in order to identify what needs to be done to arrive at an appropriate and meaningful solution. In appraisal assignments there are certain factors that are included in Problem Identification.

They include:

1. intended use
2. intended users
3. the type and definition of value (these three are considered the drivers)
4. the property (as in the subject property)
5. relevant characteristics
6. effective date
7. assignment conditions (including assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions)

All seven combined . . . gives us the Scope of Work.

As we all began our appraisal careers, we attend USPAP courses and other type of educational courses each year for our qualifying education. I have set through many courses and I must admit that in many I was totally confused on some of the “terminology”, verbs, adverbs, nouns, pronouns, etc., which we all hear.

Relevant Property Characteristics of the subject property finally begin to flow to the top.  After attending many USPAP courses and constant study of USPAP terminologym, I finally realized that this was a very important subject and one that must be fully understood in order to complete appraisal assignments correctly.

This article is being written with reference to USPAP and Advisory Opinion 23 (AO-23), to help other appraisers who may have had (or still do) some misunderstanding and misconceptions of this subject article.

Click here to continue reading . . .

Standards Rule 1-2(e): An appraiser must identify the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal, including:

(i) its location and physical, legal, and economic attributes

(ii) the real property interest to be valued;

(iii) any personal property, trade fixtures, or tangible items that are not real property but are included in the appraisal;

(iv) any known easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, or other items of similar nature; and

(v) whether the subject property is a fractional interest, physical segment or partial holding.

Relevant characteristics are “significant” attributes, features or traits of the subject property. Since there can be many different characteristics of property, deciding which characteristics are relevant to a specific assignment is critical to the development of credible results. The relevancy or significance of a property’s characteristics is determined by intended use and the type and definition of value used in an assignment.

For example, in a market value appraisal assignment, the relevant characteristics are those that have a significant effect on the property’s marketability. These features include legal, economic and physical characteristics. The decision as to which characteristics are relevant cannot be made without knowledge of the market in which the property is sold. If the opinion to be developed is of investment value, then the relevant characteristics are those related to a particular use and a particular investor.

There is a direct relationship between the type and definition of value, intended use, relevant characteristics and the impact this relationship has on the appraiser’s scope of work decision. In short, the type and definition of value and intended use drive relevance in regard to property characteristics and all three of these are essential components of the scope of work decision.

The Subject of a Real Property Appraisal Assignment: The subject of a real property appraisal has both physical and legal characteristics. In combination, these characteristics define the subject property and, together with the type and definition of value and intended use of the assignment results provide the basis for deciding what data and analyses should be included in the scope of work.

Example #1

The subject is the fee simple interest owned in a single-family residence situated on an improved site. These components (the land, the improvements, and the ownership) are, together, the subject property of the appraisal assignment. The type of value used in this illustration is market value. The scope of work in this assignment should include gathering data about the characteristics of the subject that are significant in the market for this type of property under its highest and best use. Given the characteristics of the subject property, the analysis should include sales of other properties held in fee simple ownership situated in the subject’s market area that are similar to the subject in as many other respects as possible.

Example #2

If all the same characteristics of the property in Example No. 1 above apply, except that the land is a leased site, the subject property may become:

• a leasehold interest, if the intended user needs to know the value of the rights in the real estate owned by the lessee in the lease, or
• a leased fee interest, if the intended user needs to know the value of the rights in the real estate owned by the lessor in the lease.

Note that the subject real estate (physical asset) was the same, but the ownership interest of the subject changed. Changes in ownership characteristics impact the scope of work and the relevant data in each assignment. For example, when the appraisal involves an opinion of market value:

• If the subject property is the leasehold interest, the relevant analysis should include sales of leasehold interest properties that are as similar to the subject as possible, both physically and in terms of its lease (cash flow) characteristics.
• If the subject property is the leased fee interest, the relevant data should include sales of leased fee interest properties with similar physical and cash flow characteristics.

  There are other Examples for use and study mentioned in Advisory Opinion #23.

  Some Questions and Answers to Consider:

  1. What are relevant characteristics? Answer: Relevant characteristics are “significant” attributes, features or traits of the subject property that impact its utility. Since there can be many different characteristics of property, deciding which characteristics are relevant to a specific assignment is critical to the development of credible results. The “relevancy” or significance of a property’s characteristic is determined by intended use and the standard of value use in the assignment.
  2. What assignment factors are used to determine relevant characteristics? Answer: The standard of value (market value, investment value, other, liquidation) and intended use drive relevancy in regard to property characteristics, and all three of these are essential to the scope of work decision.
  3. How do relevant characteristics affect the scope of work decision? Answer: Identifying the relevant subject property characteristics, together with the other information gathered in response to Standards Rule 1-2, enables an appraiser to make a sound scope of work decision.

  SUMMARY

  Appraisers and property owners often discuss a subject property in physical terms, such as my home, the residence, my land, or the building. However, a physical object alone is not what is being appraised.

  Identifying the purpose of an assignment involves collecting many pieces of information. Even though most associate the “purpose of the assignment” with an opinion of value or a standard of value, the fact is that value does not stand alone because the value opinion always includes a subject property, its relevant characteristics, an effective date, and assignment conditions.

  Relevant characteristics are “significant” attributes, features or traits of the subject property. In an appraisal assignment, the standard of value provides the basis for deciding what is “relevant”. Identification of a property’s relevant characteristics is driven by assignment identification relating to the standard of value and intended use.

  Author: Cliff Odom, RAA, IFA - Cliff Odom Appraisal Services, Inc. is a residential real estate appraisal firm serving the Birmingham Metropolitan Area in North Central Alabama. Cliff Odom is a Certified Residential Property Appraiser providing timely, accurate residential appraisals to more than 30 mortgage lenders nationwide.