Last month in this column, we looked at the requirements of appraising for financial reporting purposes. We learned that the most important element of appraisal reports is the clear, market-based support that the appraiser provides for the value conclusions that he puts forth. This month we look a bit deeper at appraisal reports and what they must contain according to existing appraisal standards and generally accepted practice.

Since most readers of this column are users of reports – and not appraisers themselves – I will not go into technical depth on compliance with the standards, but will try to provide information helpful for appraisal users when ordering and utilizing real estate appraisal reports.

Applicable Standards

There are a number of potentially applicable standards that regulate appraisers when they report the results of an asset appraisal, and they fall into two general categories: requirements of (1) governmental laws or regulations; and (2) standards set by professional organizations to which the appraiser may belong. Each standards document has a section on the reporting of appraisals which describes the minimum an appraiser should include in his report. Most standards documents contain the same minimum items, with only a few variations. The main goal of all standards is the same: to ensure that appraisal results are understandable by the user and not misleading.

Note that an appraisal report may be oral or written. The requirements for minimum content are the same for both types of report, although they may be accomplished differently. For written reports, none of the standards set format requirements for an appraisal report, so an appraiser may create any format, style or order of his report that he wishes. Except for Russia’s unique requirement for a string binding, and a physical seal, it is solely the content of the report that determines its compliance with any standard.

Whether a particular standard is required for an appraisal depends on the use of the final value estimate. In Russia, as in most countries, appraisals of real estate for most purposes may be written using most any standard. The appraiser is only obligated to identify and state which standard he is using in developing and reporting his work. Besides the standards set by Russian legislation, the most popular appraisal standard for appraisals in Russia is that of the International Valuation Standards Committee, a non-governmental organization of the United Nations working cooperatively with member States to harmonize valuation standards throughout the world. Other popular standards are available from the United States, the United Kingdom, and a group of European countries.

In each country there are some uses of appraisals which do require the use of a specific standard, usually the one specified by the local appraisal regulatory authority. These uses can include registration of a company’s charter capital, tax reporting, sale of state property, or use of government insured funds for lending.

Reasons for minimum requirements of a valuers report

Minimum requirements for a value report are created to ensure that the information about the value estimate is complete enough for its purpose, and is not misleading to any of the intended users. A real estate object is a complex asset, and the appraisal of rights to any property involve many assumptions and subjective interpretations. If all of the assumptions and limitations are not expressed clearly, it is relatively easy for a reported value to be misused for an important business decision. The overriding desire of those who set appraisal standards is to avoid this circumstance by requiring appraisers to include minimum items in the report.

Minimum requirements

1. Minimum appraisal reporting standards from all sources require that the content of the report must be consistent with the intended use of the appraisal, not be misleading, and contain the following items:
2. Identity of the client and any intended users, by name or type;
3. State the intended use of the appraisal;
4. Identify the real estate involved in the appraisal, including the physical and economic property characteristics relevant to the assignment;
5. State the real property interest appraised;
6. State the type and definition of value to be estimated, and cite the source of the definition;
7. State the effective date of the appraisal and the date of the report;
8. Describe the scope of work used to develop the appraisal;
9. Describe the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions, and conclusions;
10. Explain and justify the exclusion of any of the three approaches to estimate value (sale comparison, cost, or income approach.)
11. Clearly state all extraordinary assumptions and hypothetical conditions; and their impact on the value estimate.
12. Include a specific certification signed by the appraiser. 12. Russian standards further require that pages be consecutively numbered, the report be bound with string, assigned a specific numberl, and the appraiser’s official stamp be attached.

Note that nowhere is mentioned the requirement for a certain number of pages of a report. If conditions are appropriate for the user and the use of the report, the appraiser may accomplish everything needed to meet standards with only a few pages. Good minimum reports in Russia are as light as 5 pages, as against the typical 80-150 page reports often issued. Some may subscribe to the erroneous theory that the thicker the report, the more credible the value estimate may be.

The appraiser’s certification

Item 11 in the list above is what makes the appraisal report different from just a value analysis. The importance of this one single page of the appraiser’s report cannot be over-estimated. It is on this page where the appraiser states that the estimate is his honest, best professional opinion. Although there is not room in this article to examine what this required certification means to all parties, we will examine this issue in a future article.

Conclusion

From the minimum content of reports established by appraisal standards we can see that the report document is a complex collection of information for both the appraiser and the user. From both sides, the main requirement is (1) that the appraiser clearly and accurately set forth the appraisal process and results in a manner that is not misleading, (2) contain sufficient information to enable the intended users to understand the report properly, and (3) to clearly and accurately disclose all assumptions, hypothetical conditions, and limiting conditions used in the assignment.

An informed appraisal user, who receives an appraisal report that does not contain all these items may not even know it – and undisclosed or missing information can be the most dangerous of all. However, knowing what minimum content requirements exist, could help when discussing an appraisal scope with appraisers, and in relying on reports when making business decisions. If you don’t receive what you need for understanding, ask the appraiser to provide more.