Property Appraisals may contain enough wiggle-room disclosures, referred to as Assumptions, Limiting Conditions, and Departures from Uniform Standards of Professional Appraisal Practices (USPAP), that the resulting report is, at best, useless. Appraisers should use the market approach (sales comparison), the capitalization approach for income property, and the replacement cost approach. Some appraisers try to rely solely on the market approach.

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Why does a property owner order and receive an independent appraisal full of misstatements, misrepresentations, and faulty conclusions? Of course, there will be a certification that the appraiser is independent, licensed, and unbiased. The customary language and safety valve disclosures contained in the appraisal are statements by the assessment that the appraisal has been ordered by a principal for a limited purpose as instructed by the principal. The appraisal clearly states that no other party will rely on the conclusions found in the assessment.

It's a common scenario where the principal attempts to use the document as a bona fide, third-party, arm's-length appraisal representing a current-value conclusion.

Appraisers often cover their backsides with what are referred to as conditions, assumptions, and departures. These assumptions, particularly about the entitlement process and the readiness to build, are made without any verification or concern regarding their truth, completeness, or regulatory approvals. This lack of verification can pose significant risks to the reliability of the appraisal, and it's essential to be cautious about these assumptions as they can lead to potential hazards.

This lack of verification can pose significant risks to the reliability of the appraisal. They often do not try to authenticate the entitlements, building plans, or approvals.

They are given a job to appraise based on certain assumptions provided by the hiring manager. Some are done with transparency, and some are not.

An example would be an enthusiastic developer who may order an appraisal for a 50-story condominium in the middle of the Mojave Desert, far from adequate population, demand, and absorption possibilities. The instructions conveyed to the appraiser are that all entitlements are in place, this is an up-and-coming area, and there will be buyers for the condos. The appraiser may create a pro forma and use comparables that are distant and unrelated to the subject property. This appraisal process represents an illustrated and rationalized illusion.

A thorough reading of an appraisal is not just essential, it's crucial. It can reveal the 'assumptions, conditions, and departures,' which are often signs of sleight of hand. This underscores the significance of thorough reading and how it can empower you in the appraisal process, giving you the control and confidence to make informed decisions.

Appraisal No. 1"Actual Example: Let's examine a real-life appraisal to understand how assumptions and conditions can affect a property's value. In this case, we're examining an appraisal for a potential residential development in an upscale beach neighborhood.

A residential-based upscale beach neighborhood has lots that are approximately 50, 100, or 5,000 square feet each. If you assemble 4 of them in a row, you would have 20,000 square feet of land to build an apartment, condominium, or congregate care facility. The assumption is based upon an increased density that the lots would become far more valuable on what is referred to as a residual basis, or floor area analysis, when many units are considered and, of course, approved, with building permits ready to be pulled by the city or county building department.

For example, a builder has decided to build a 12-story congregate facility. All other structures in the neighborhood are single-family residences and one- or two-story dwellings. This new structure would require underground parking and massively increased density. A 12-story structure would be the first in the middle of an ordinary residential neighborhood. If you lived nearby, there might be concerns about non-conformity in the neighborhood. It is unlikely that the municipality would approve such a project.

Let's take a closer look at the assumptions that may or may not be correct in the appraisal:

It is assumed that the property conforms to all applicable zoning and use regulations and restrictions unless a non-conformity has been identified, described, and considered in the appraisal.

It is assumed that all required licenses, certificates of occupancy, consents, and other legislative or administrative authority from any local, state, or national government or private entity or organization have been or can be obtained or renewed for any use on which the opinion of value contained in this report is based.

It is assumed that the use of the land and improvements is confined within the boundaries or property lines of the property described and considered in the appraisal.

In other words, the appraiser assumed all the borrower's assets were proper, as the principal who ordered the appraisal reported. They make no effort to verify whether the entitlements are complete, whether plans are approved, or whether building permits are ready. This lack of verification can have serious consequences, as in The Wizard of Oz:

Why, anybody can have a brain. That's a very mediocre commodity. Every pusillanimous creature that crawls on the earth or slinks through slimy seas has a brain.

Back where I come from, we have universities, seats of great learning, where men go to become great thinkers. When they come out, they think deep thoughts with no more brains than you have. But they have one thing you haven't got: a diploma.

This highlights the potential consequences of a lack of verification and the need for a more attentive approach. It's crucial to be responsible and diligent in the appraisal process, as it can significantly impact the outcome.

Does this sound like an appraisal diploma or appraisal license and certification? Yes, it does.

Review your appraisals and verify the facts:

Did the appraiser visit the property?

Did the appraiser conform to USPAP?

Did the appraisal appear to be transparent or full of misinformation?

Are the zoning, building permits, and physical boundaries correct?

Are the comparable sales properties truly similar?

Are the rents, expenses, vacancies, and capitalization rates true factors?

Should lenders conduct a desk review of the appraisals and be willing to adjust the values and information when they appear incorrect? Absolutely, yes. There are far too many variables not to analyze every appraisal for conformity and truthful facts.