Tag Archives: real estate

FF&E – FIRREA vs. USPAP

January 7, 2016 – Below is a question I received followed by my reply.  Happy New Year to all.

George – Hope your holidays were great and 2015 is finishing off strong.  I was hoping to get your opinion on an item below.

It’s just how non-realty items are reported in the appraisal report. No change at all in the new USPAP – I’ve just been inconsistent in how I treat it. Sometimes I show a $ allocation, sometimes I don’t and just say it is included in the value and has a positive effect on value. Either way, I’m always clear on whether non-real property items are in the value or not.

So just trying to nail down exactly what is right or what USPAP expects. I’ve seen personal property treated many different ways and some appraisers still don’t say anything about it… USPAP doesn’t say much on the topic.

Thanks for any input!

As stated in Standards Rule 1-4, part (G): When personal property, trade fixtures, or intangible items are included in the appraisal, the appraiser must analyze the effect on value of such non-real property items.

My question is what is the extent of “analyzing the effect on value?” For instance, in a multifamily property with appliances necessary for continued operation, do we need to actually state the estimated amount that the appliances contribute to value or is it sufficient to note that the market value includes all personal property items which contribute to the market value?  If the value needs to be broken down and allocated between real property and non-real property items – can the allocation be stated once near the beginning of the appraisal report or does the allocation have to be every place where there is a market value stated?

Just curious because I have heard several versions and I didn’t really see any Advisory Opinions on the topic.

============  MY REPLY ============================

Your question only exists because the ASB and AI and others won’t specifically address the various differences between USPAP and FIRREA.
The bottomline is USPAP does NOT require a value on the FF&E.  Albeit, it would probably help all clients to know such.  More info cannot hurt.
However, FIRREA DOES require values be allocated to FF&E and Business/Intangible Assets so that the appraiser provides the ONLY required value per FIRREA – Market Value As Is of REAL ESTATE ONLY.
So, when doing an appraisal for a Federally-Related Transaction, you MUST provide a value for the non-realty items.  It has been that way since 1990/1991.
Where you place it….well that is up to you.  But, technically, when you state Market Value As Is (as well as Upon Completion and Upon Stabilization) it should just be the Real Estate Only number.
However, 99%+ of appraisers state Market Value INCLUSIVE of FF&E and Biz Value and then have some kind of footnote or wording in parentheses saying ‘the above includes $1,400 of FF&E’. Something like that.  They let the Bank do the math to get to the real estate only number.
So, you can do it that way and you will be in line with your peers.  As I always tell appraisers though, if you want to stand out from the crowd provide what your client really needs, and in this case, state MV without the FF&E and Biz Value and then let the footnote say how much the FF&E and Biz Values are worth.

The reason banks need the Real Estate Only number is it is Federal law (FDICIA of 1991) that LTV must (!) be calculated on this number only.  Any MV number that includes FF&E and/or Biz Value is worthless to a bank!

Now, for non-Bank clients you can forget all of the above.  However, I still recommend providing the separate values.
I hope this helps.

THE DICTIONARY OF REAL ESTATE APPRAISAL, 6TH EDITION

October 26, 2015 – Per the Appraisal Institute’s web site:

http://www.appraisalinstitute.org/the-dictionary-of-real-estate-appraisal-6th-edition/

The Appraisal Institute is proud to present the sixth edition of The Dictionary of Real Estate Appraisal and grateful to the dozens of practicing appraisers who contributed to its development. This new edition features

  •  5,000+ dictionary entries
  • 1,250 revised definitions
  • 450 new terms

Also included are new and revised glossaries to help real property valuers understand the language of related professionals in architecture and construction; mathematics and statistics; environmental contamination; agriculture, forestry, soils, and wetlands; and green building. Other addenda contain information on real estate organizations; important US government agencies, legislation, and programs;  significant US Supreme Court decisions; and useful measures and conversions.

 

Adding value to the appraisal of the future – by Ed Pinto

August 24, 2015 – Ed Pinto of the American Enterprise Institute was a closing speaker at the Appraisal Institute’s national conference in Dallas a few weeks ago.  One of the new items he presented is summarized below.  As the title suggests, the idea is to make the appraisal of the future value-added – instead of simply providing Market Price as has been the case for the past 80 years.  The primary focus of Ed’s comments is residential appraising.

His ideas follow.  I will not add any commentary.  Just sharing the perspective from an independent party that is in contact with FHA, FNMA, Freddie Mac, etc – Ed was a prominent FNMA employee in the 1980s.

Determine (methodology):

–Market cycle history*

  • Create and review 10-year nominal and real home price trend to determine current position in market cycle relative to equilibrium
  • If the real price trend currently at equilibrium, robust comparable sales approach is likely appropriate.
  • If the real price trend currently elevated or depressed, the lesser of investment and replacement cost approaches is likely appropriate.

–History of buyer’s (>6 mo.) and or seller’s market (<=6 mo.) for existing homes**

  • Determine whether a buyer’s or seller’s market based on months of home inventory divided by listings/sales rate; determine whether a buyer’s or seller’s market
  • If real prices are increasing, it is almost certain that a seller’s market is present
  • Market disequilibrium more likely the longer an uninterrupted seller’s market continues

–Buying power due to change in power leverage**

  • AEI’s Center on Housing Risk plans to incorporate into its Mortgage Risk Index by year end

–Land value and change in land share trends**

  • Calculate land value by extraction using exchange value minus replacement cost

–Whether real price change due to leverage growth or improving utility or a mix

  • Evaluate role played by income leverage vs. fundamentals (i.e. job & real income growth)

*For the MSA, the subject property’s market area and price tier,(zip code or below), and the subject property

**For the MSA and the subject property’s market area and price tier (zip code or below)