Data Verification. Professional Excellence Bulletin [PP-14-E] February 1995

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1 Professional Excellence Bulletin [PP-14-E] February 1995 Although obviously a cornerstone of appraisal practice, data verification has not been considered a major problem to real estate appraisers in the urban areas of Canada, as informational systems are relatively sophisticated and information is therefore fairly readily available. However, CUSPAP, includes some very specific guidelines as to data verification have now been formally introduced into appraisal practices that call for a very onerous level of data verification. The first point to make is this: the required level of data verification applies to all appraisers, residential and nonresidential, fee and non-fee, irrespective of location. There are no exceptions! Hopefully, each and every item of data that finds its way into an appraisal report is fully verified and therefore as accurate as possible. Obviously data that must be verified varies with the assignment, but there are some aspects of data verification that apply to all assignments and are indeed mandated under CUSPAP. It is these items that will be the focus of this bulletin. Sales History Standards Rules and require a sales history of the property being appraised. However, this is perhaps an overly simplistic title and has been the cause of some misunderstanding among appraisers. Sales History does not mean only a sales history but, within the time limit as set out in CUSPAP, all sales, listings, sales agreements, options and lease activity must be investigated and reported. But this is the minimum standard and should be treated as just that a minimum standard, not the norm! Practice Note states that sales history verification need not involve a search of public records (i.e., the Land Title Office), such a search depends upon the nature of the assignment and the common appraisal practices in the area. Obviously, however, it is the best verification available and should always be used where verification is critical to the assignment, such as litigation or expropriation appraisal work. For most narrative (as against form) reports, a search of public records should be made, and especially where the property is of an income-producing nature, as leases registered against title will show up in such a search. On the other hand, for the simple residential form report, a public records search may not be required nor, given the time and cost restraints with such assignments, economically feasible.

2 In any event, the Land Title Office will only show sales, options and perhaps leasing activity; it will not provide information on listings or sales agreements. The most obvious source for such verification is the owner, but the owner may have a vested interest and not be, therefore, totally reliable. If the property is known to be listed, the listing agent should be helpful, but the appraiser should be wary of non MLS listing agreements. Exclusive listing agreements can sometimes be just a tool to get better financing. That is not to say that the MLS system is perfect. It is not, but it is the best source for the appraiser to obtain a feel for the property, as competitive properties will also be available for comparison. If the subject property list price is overpriced, it will often be revealed to the appraiser by comparison with other MLS listings, and may be the fact it has been listed for sale for an unusually long period. Conversely, under-priced property on MLS does not tend to remain on the market long. Realtors are to be considered a very strong source of verification. By far the vast majority of realtors are honest, trustworthy and extremely receptive to a courteous request for assistance. As a profession, we have been very slow to recognize that a good realtor, with a highly localized knowledge of the real estate market, can be an appraiser s best friend, and be helpful in eliminating potential errors in the appraisal report. Where a sale is involved, the purchaser is a possible source of verification but, again, should not be considered totally reliable. A source that is probably more reliable is the actual conveyancing attorney, who may be able to verify sales terms and whether the sale was at arm s length. Many residential appraisals and a significant number of non-residential appraisals are for financing a proposed purchase. In this respect, the appraiser must make all reasonable efforts to obtain a copy of the sale agreement. Failure to do so will not be a breach of CUSPAP regulations, but failing to report that the appraiser was unable to obtain a copy of the sale agreement is a breach, and could lead to professional misconduct charges. Good appraisal practice is to request a copy of the sales agreement from the client at the time of taking instructions. Failing that, a copy should be obtained from either the selling or listing agent or from the owner, if neither of the former were cooperative. By far the greater proportion of realtors recognizes the advantages of cooperation with an appraiser, but there is still a minority that doesn t cooperate. If this is the case, the appraiser should contact the selling or listing office s manager, in the hope that cooperation will be extended from this source. This cannot be stressed too strongly: a copy of the sales agreement is one of the best tools for the appraiser. There are at least four or five sources from which to obtain a copy of the sales agreement: the owner, the prospective purchaser, the listing and/or selling agent and the lending institution. Surely one or more will be cooperative. As such, the appraiser had better be prepared 2

3 to explain just why a copy of the sales agreement is not in the appraisal file and/or within the report. Verification of Comparables CUSPAP Appraisal Standard Comments 7.5 and 7.16 require that all comparable data be verified. This applies at the very least to land sales data within the Cost Approach, all data within the Comparison Approach, and income expense, rental and cap rate data within the Income Approach. Let s be very clear about this: it is a very onerous obligation and one that applies to all appraisal assignments and to both fee and non-fee activities. The appraiser has no excuse in saying that he or she was told not to spend more than five minutes on each comparable or that the boss or client said don t bother to verify the sale (or other data), it s only for internal purposes. CUSPAP applies to each and every appraiser, fee and non-fee. As in actual fact it is the appraiser who has the responsibility of ensuring compliance with CUSPAP, the ultimate authority for appraisal- related matters must be the appraiser. The minimum level of verification for each comparable depends greatly on the amount of reliance placed on the data. Sales data, either land or improved sales, and capitalization rate data has a very high level of required verification, similar to that required under the Sales History requirement. At least two independent sources should be consulted for verification, and they must be independent. Obviously, the most reliable will be the Land Title Office records and this should be considered the most desirable first verification source. The second source can include any of the parties to the transaction: seller, buyer, selling and/ or listing agent, attorney, etc. However, the MLS system and the selling and/or listing agent are considered one and the same source. Capitalization Rate data is more problematical, due to the fact that no one source is likely to have all the required information. For the non-residential appraiser, such a requirement is probably not a material change from prior practices. For the residential appraiser, the change could be significant, as few sales, due to cost, are likely confirmed by reference to Land Title documentation. In this situation, as MLS data and the selling and/or listing agent are considered the same source, the appraiser will be forced to contact either the buyer, the seller or the attorney for the transaction, failing which the appraiser will be forced by standards to place less reliance on the data and to state that fact in the report. Not mandated, but certainly good appraisal practice, would be to state a sales history for each comparable used, remembering that sales history does not just mean sales. Where the property is income-producing, income and expense data for the subject is best confirmed by reference to at least two, and preferably three, years audited accounts. There are circumstances when such information is not available and, if this is the case, then the appraiser must state so very clearly in the report. There is absolutely no excuse for the appraiser failing to 3

4 ask for income and expense statements; there are excuses for not getting such statements despite asking. Rental data, depending on the circumstances, can be considered to have the same level of verification as sale data but, realistically, this can be a troublesome burden, especially in respect of property other than the subject, and even more so if the rental data is at all voluminous. However, rental data is best verified from the lease itself and from discussions with the owner or the property manager, as the tenant may not be the party to the initial transaction. Obtaining the actual lease can be relatively simple if it involves the subject property, but more complicated it if involves rental comparables. Here the most successful solution is to check Land Title documentation to see if any or all the leases are registered against title. But the appraiser should take care to ensure that what is registered is the latest version of the lease. As with income and expense data, there is absolutely no excuse for the appraiser not asking the subject s lease documentation; there are excuses for not getting such leases despite asking for them. Failure to obtain the most current lease documentation should be clearly mentioned in the report, cautioning the reader that less reliance should be placed on the report as a result. Of course other data in any appraisal report needs to be verified, and the same standards should apply. As each and every appraisal is different, it is difficult to be specific. However, certain items, such as zoning and services to the property, obviously are relatively more important to value considerations and attract the highest level of verification requirement. Some aspects of the property, such as building dimensions, can be verified directly by the appraiser by on-site measurements. However, even when building plans are provided and there could be a presumption that site measurements are not necessary, the appraiser should compare the plans very carefully with the actual building, and take at least a few check measurements. Data verification is a very onerous obligation on the appraiser and so it should be - it is the cornerstone of the whole report. CUSPAP Reference Sales History Appraisal Standard In the report the appraiser must analyze any Agreement for Sale, option, or listing of the property; In the report the appraiser must analyze any prior sales of the property; Appraisal Standard Comment 4

5 Must be analyzed and reported if any agreement for sale, option or listing of the subject property occurred within one year prior to the date of valuation, if such information is available to the appraiser in the normal course of business Must be analyzed and reported if any sale of the subject property occurred within three years prior to the effective date of the appraisal, if such information is available as at the date of valuation to the appraiser in the normal course of business Any impact on the price paid under known undue stimulus must be reported. Comparables Appraisal Standards Comment The amount and type of information researched and analysis applied. Scope includes, but is not limited to, the extent of: i. inspection ii. research into physical and economic factors that could affect the property [see 7.16] iii. data research, verification, and inspection of comparables iv. analysis applied The scope of work applied must be sufficient to result in opinions/conclusions that are credible in the context of the intended use of the appraisal. The appraiser has the burden of proof to support the scope of work decision and the level of information included in a report The appraiser must take reasonable steps to ensure that the information and analyses provided are sufficient for the client and intended users to adequately understand the rationale for the opinion and conclusions In the process of collecting and verifying relevant information the appraiser must perform this function in a manner consistent with Reasonable Appraiser standards. All three approaches require the collection of comparable data. The decision to inspect comparables and the extent of verification of data will be determined by the scope of the assignment, but in all cases the appraiser must conform to Reasonable Appraiser standards. Title Search Appraisal Standard Comment A title search will normally be required to reveal the legal attributes and restrictions that may affect property value. For litigation support purposes, title searches should also be conducted on properties used as comparables. A search is not intended to result in an expression of opinion as to the state of title itself. 5

6 Canadian Appraiser Magazine Reference Factual market Activity An Important Piece of the Report, Vol. 50, Book 2, page 40, Note: As with all professional practice bulletins, this publication is not intended to set out all professional/ethical responsibilities or regulatory requirements, nor to identify all valuation or theoretical aspects of the subject matter. The purpose is simply to raise areas of potential liability exposure in ordinary day-to-day practice to the attention of members, and to suggest professional practices that can help avoid liability insurance claims. Members are encouraged to suggest topics and/or writers for future bulletins by contacting the AIC offices at 6