1 Appraisals CLE Uses of Appraisals; Types of Appraisers; Types of Reports; Selection and Working With Appraisers; Appraisal Methods; Trial Strategy March 2, 2016 Douglas Patterson Property Law Firm INTRODUCTION 1) Need for an appraisal report and an appraiser expert witness any valuation question: a) Condemnation i) Partial takings: Cost to cute v. before and after value ii) Paired sales analysis iii) Full takings iv) Highest and best use analysis b) Highest and best use analysis for any evaluation question c) Divorce d) Defective construction cases e) Property damage cases Cost to cure v. diminution of value f) Business formation -Valuation of contributions g) Business breakups value of assets h) Estate Planning i) Estate tax planning ii) Distributions i) Probate
2 j) Foreclosure Confirmation hearings k) Justifications for Short Sale or Loan Modification applications l) Title Insurance failure to vest title claims m) Insurance damage casualty claims n) Construction casualty claims 2) Types of Appraisers and valuation resources a) Residential i) Generally work on an appraisal format ii) Limited flexibility to work outside the appraisal format. iii) Often have limited testimony experience and/or willingness b) Real Estate Brokers i) Often offer Broker s Price Opinions (BPO) for use in: (1) Short Sales (2) Loan Modifications (3) Sometimes divorces (4) Sometimes residential foreclosures ii) Often also used in commercial cases relating to market conditions, competition and unique characteristics of a property c) Commercial Appraisers i) Offer a more comprehensive report for residential matters ii) Confirm their willingness and experience to offer testimony iii) Offer a variety of types of reports
3 iv) Used in commercial property or development (residential or commercial) property questions d) Business appraisers i) Generally not real estate appraisers usually accounting or MBA type financial analysis ii) Often business and real estate appraiser is used for real estate valuations and the business appraiser values the business e) Personal property valuation questions i) Jewelers, art dealers, auto dealers, pawn shops, craigslist, ebay, KBB, etc. 3) Types of appraisal reports a) Any conclusion of value is an appraisal report for USPAP purposes b) Kansas relies upon USPAP as the proper standard for appraisal practices. K.S.A. Sec. 58-4121 c) Types of appraisal reports i) As of 2015 USPAP authorizes Restricted Report, Summary Appraisal Report, Self-Contained Appraisal Report, or any other term as long as it is followed or paired with Appraisal Report or Restricted Appraisal Report. ii) Appraisal reports for a specific purposes (1) Paired sales analysis (2) Highest and Best Use (3) Market absorption
4 iii) An oral report can be an appraisal report, so be careful asking your appraiser for his preliminary opinion of value. 4) Selection of and working with the appraiser a) MAI means Member of the Appraisal Institute, not that other phrase b) As with all other experts: i) choose your appraiser carefully state licensing, MAI, field of expertise, testimony experience, disciplinary issues, clients, CV, academics and other degrees-licenses ii) Identify the appraisal question with specifics - the documents, past appraisals, surveys, everything iii) Assume any document or conversation you have between you and your expert is discoverable. Your appraiser is obligated by USPAP to maintain a Work File of everything the appraiser has reviewed or used, including your markup of early report drafts. Which say, Make it higher. iv) It s fair to pay your appraiser to do enough work to ask the question: Do you think you can get to where we need to be - and if not, where are you wrong in your expectations or our approach to the appraisal question. 5) Appraisal approaches, methodology and testimony a) Appraisal approach i) Unitary approach ii) Focus on Highest and Best Use in development potential property iii) How to value trees and landscaping buffering
5 b) Methodology really, none of these preferred over the other in trials. Each has its own role in the appraisal question i) Depreciated Replacement Cost Approach. (1) Not often used, tough to use given the appropriate measure of damages in most cases. (2) Generally used in construction casualty insurance claims. ii) Sales Comparison/Market Approach (1) Takes sales of comparable properties, adjusts the difference between the Subject Property to comparable transactions and tries to make them apples to apples (2) Issues: (a) Are the comparison sales all that similar to the Subject Property re: date of sale, location, financing, physical characteristics, zoning, size, condition, highest and best use, etc? (b) Look for and question large line adjustments and aggregate adjustments. If adjustments are large, investigate whether the appraiser tried too hard to make a sale fit when better sales are available iii) Capitalization of income approach (1) Question assumptions about the market, risk, the interest rate assumes, the Cap. Rate, a realistic NOI 6) Trial technique
6 a) To depose or not depose your opposing appraiser same considerations as other experts you oppose i) Question procedures and practices of the appraiser ii) Questioning an appraiser s subjective conclusions and assumptions can lead to problems, as with all expert cross examination b) Make sure you properly designate your expert appraisal witness or face a fatal Motion to Strike or Limine on the eve of trial c) Question your and your opponent s expert designation. Tactically, a challenge to an expert designation following the case management order deadline can be heart stopping - Motions to Strike, Motions in Limine and Motions for Summary Judgement based upon the absence of admissible valuation evidence d) Watch out for Project Influence issues on both sides e) Jury view usually not the best idea for the owner. There can be potential Project Influences issues here f) If the budget works, visit all of appraiser s comparable sales and review status of title. i) Often the appraiser s view of comparable sales is by way of a Google Earth search which may not disclose significant issues for which the appraiser did not make an adjustment grade, easements, use ii) You might find some problems with your own appraiser s report g) Be careful about relying on the owner s opinion of value, either as your only evidence of value or as additional evidence of value
7 i) The owner can generally opine as the value of its property but not as an expert unless the owner qualifies as an expert ii) It s bad when the owner s opinion is too far above expert valuation evidence. Juries disregard it and might discount valuation altogether as unreliable h) When to use a review appraiser: i) To buttress your own appraiser s report in a complicated case. ii) Criticize your opponent s appraisal. iii) Generally, the review appraisal will comment on the practices and procedures of the appraisal report under review not to be used as a free standing determination of value i) The Tight Pattern issue: i) If you use one appraiser, see whether the approaches used (Replacement Cost, Sales Comparison, Income Approach, other) conclude values close to each other. If they do not, suggest not using the errant approach. Keep a tight pattern ii) If you use multiple appraisers, try to herd the values in these report into a tight patterns iii) Values all over the place confuse a jury and are fodder for your opposition