In this article, we will look into the time aspect of appraising. We will briefly explore retrospective appraisals (past) current appraisals (present) and prospective appraisals (future), as well as specialized appraisals such as forensic and review appraisals. This article will also explain why an appraisal may be appraised for a different time, as well as an overview of the reasons and desired outcomes for each of these methods.
There are many different types of purposes of real estate appraisals. Single residential properties are appraised differently than condominiums. Single residential properties are appraised differently depending on the purpose of the appraisal, which may be for purchasing the property, or valuing it for a divorce appraisal, or appraising it to remove PMI (private mortgage insurance). On top of all of that, a property can be appraised to reflect the value for a different point in time. There are a lot of variables in an appraisal. That is good because the “scope of work” (SOW) for an appraisal is to be as specific as possible so there is no misunderstanding the purpose of an appraisal.
Appraisals are highly regulated with rules (standards), guidelines, and advisory opinions (suggested good practice, but not an official rule). To comply with regulations, real estate appraisers must comply with “Uniform Standards of Professional Appraisal Practice” (USPAP), which is the nationwide appraisal guideline manual developed by The Appraisal Foundation, which is typically updated in two-year cycles. In reporting the results of a real estate appraisal, an appraiser must “state the effective date and the report date” per Standard 2(a)(vi). The effective date of the appraisal valuation indicates the perspective from which the appraiser is examining the market, which could be any date in the past, present, or future. The report date of the appraisal is when the appraisal was completed, and it may not have any relationship to the effective date of the appraisal (for lending purposes these dates are usually the same).
USPAP, (pronounced as “YOOS-pap”) is published and maintained by the Appraisal Standards Board (ASB) of the Appraisal Foundation, a non-governmental entity charged by Congress with promulgating appraisal standards.
What is a Retrospective Appraisal?
In situations, where the client is in need of understanding what the value of their property was, as of a prior date, a retrospective appraisal is performed. Reasons for a retrospective appraisal include date of gift, tax assessment, death, estate settlement, divorce, partner dispute, deficiency judgments, or condemnation proceedings.
In estate planning and divorce situations it is common for an appraiser to perform a retrospective appraisal, meaning that even though the property might be inspected today, it isn’t valued off of today’s date, but instead based upon a previous date (usually the date of death of the owner of the property, hence the term “date of death” [DOD] appraisal, or for the settlement of a divorce). For example, if an owner of a property passed away on July 10, 2015, and the current date is March 23, 2019 (report date), the appraiser would inspect the property today, but the value conclusion would be based on what the market was doing on July 10, 2015 (effective date).
Retrospective appraisals can be particularly challenging the further back the date is because the appraiser needs to try to ascertain the market conditions and trends where there may be much less available or reliable data.
In addition to needing a retrospective value during the estate planning, divorce, or probate process, sometimes the ordering party will also request a current “as is” market value or value based upon present-day market conditions. In these cases, there are really two appraisals being done since there are two separate values issued.
Retrospective appraisals have sometimes been referred to as “historical” appraisals or “forensic” appraisals. The term “historical” is not appraisal terminology (although some appraisers do use it), but is somewhat common among other segments of the real estate industry, such as lenders or real estate agents, and which has been used to describe retrospective appraisals. Forensic appraisals are a completely different type of appraisal, which is a highly specialized type of appraisal.
Forensic and Review Appraisals Explained
A forensic appraisal is sometimes confused with a retrospective appraisal because they both analyze data from a prior date. However, a forensic appraisal is actually an in-depth analysis of an appraisal (not a property) that had been completed earlier by a different appraiser. The purpose of this analysis is to fully deconstruct the appraisal in order to determine exactly how the appraisal was created. This is usually done because of doubt or dispute as to the validity of the appraisal and is an extensive procedure.
A simpler procedure to analyze and verify an appraisal (but not as in depth as a forensic appraisal) is a “review appraisal” of which there two common types. The most common type is referred to as a desk review, which serves to check and verify that the data in an appraisal is correct, and the analysis and methodology of the appraisal are credible. A more intensive review of an appraisal is referred to as a field review appraisal which requires the same analysis as a desk review appraisal, but also requires physical inspections of the properties used in the appraisal in order to verify that the correct properties were used, and to ascertain whether any physical factors may have been present which could have significantly affected the results of the appraisal. Physical factors might include such features as a property being located on a high traffic street, or backing to a high noise industrial site, which would likely be detrimental factors that would affect the final valuation determination of the appraisal. Situations such as those are commonly hidden in mortgage fraud schemes, which is a prime reason why a field review would be utilized, in order to identify any such factors.
A forensic appraisal is the most intensive type of appraisal analysis which is available and is far more complex than a simple appraisal review. This type of review should only be performed by appraisers who are experienced with this type of work. Usually, a separate full appraisal is also ordered together with a forensic appraisal in order to show the way the original appraisal “should have” been performed.
What is a Prospective Appraisal?
An opinion of value known as a prospective appraisal analyzes value to a date in the future which is frequently sought in connection with projects that are proposed, under construction, under conversion to new use, under repair or remodeling, or those that have not yet achieved sellout or a stabilized level of long-term occupancy.
Because these properties have not been completed, a “hypothetical condition” is utilized within a prospective appraisal to describe how the property is being appraised as of the effective date of the appraisal, even though the property did not exist in a completed form when the appraisal was completed.
A hypothetical condition is when an appraiser considers something as fact for the sake of analysis even though it is not true. An appraiser does this regularly for new construction properties. Despite the house not being there, the appraiser can observe a builder’s plans and appraise a 3,000 square foot house even though it does not yet exist. Another example would be a client asking an appraiser to appraise a house without a roof as if it had a roof for an insurance claim, lawsuit or repair loan.
Conclusion – Trust the Experts
If you are in a situation like this or expect to be, take assurance that the type of appraisal is not something you need to worry about. A good attorney or accountant can help direct you toward the type of value needed for your estate, and an experienced appraiser will already know the questions to ask you. Your circumstances may be very difficult understandably, so let the professionals you work with manage the details.
For more insightful details of how I view and approach my work as an appraiser, and what separates me from most other appraisers, please visit my “why choose us” page.