Real Estate is the physical land and buildings. Real Property is the rights inherent in the ownership of real estate. Appraisals of real estate are involved in the valuation of real property rights.
Who or What Governs the Quality and Performance of Real Estate Appraisers?
The generally accepted appraisal standards governing how appraisals are performed are the Uniform Standards of Professional Appraisal Practice. (USPAP). There are no other nationally recognized appraisal standards although some appraisal associations publish their own set of standards.
There are basically three entities that govern appraiser performance or negligence performance in preparing an appraisal. These entities enforce USPAP and quality and performance of a real estate appraisers. If the real estate appraisal is intended for use in obtaining a mortgage, (federally related transaction) the state appraisal license board enforces compliance. If the appraisal is intended for use in an IRS issue, decedent estate, gift tax, or non-cash charitable donation, the IRS under Circular 230 enforces USPAP. Some appraisal associations handle complaints through their Ethics Committees. A less know governance, especially in litigation, is the application of ‘appraisal review'. Here, where the appraiser has signed a certification statement warranting that the appraisal was performed in accordance with USPAP, that appraiser can be found to in non-compliance with various USPAP Standard Rules.
Major Faults in Real Estate Appraisals
Failure to properly identify the Intended Use of the appraisal. Failure to identify the intended users by name or type, failure to identify the apposite type of value and cite the authority, misuse of skewed statistical data, small sampling of non-comparable sales; creating unsupported adjustments to comparable sales; Illogical Discounted Cash Flow analysis by forecasting revenues and expenses five, ten and twenty years into the future.
What Type of Value Applies to a Real Estate Appraisal?
Is the appropriate type of value Fair Market Value, Fair Value, Market Value, Fair Cash Value, Actual Cash Value, or Replacement Value? There are other types of defined economic exchange value.
USPAP requires the appraiser to identify the Intended Use of the appraisal; the Intended User(s) of the appraisal by name or type; and requires the appraiser to identify the appropriate type of value, define it, and cite the source of the definition.
Fair Market Value defined and Codified in IRS Regulation as applicable to decedent estates, gift tax and non-cash charitable donation.
Fair Value. Generally, applies to LLCs, Corporations, and Partnerships. If the appraiser is valuing the holding company entity that owns the real estate, fair value applies. Fair value means the pro rata share of the value of the whole entity. The Massachusetts and other state uses “fair value” consistent with the position taken by the American Law Institute and the national trend of interpreting “fair value” as the pro rata proportionate share of a going concern “without any discount for minority status or, absent extraordinary circumstances, lack of marketability.” American Law Institute, Principles of Corporate Governance: Analysis and Recommendation, § 7.22(a) (1994) (ALI Principles of Corporate Governance). Massachusetts has a long history of attempting to balance shareholder rights in oppression cases. The court established protection for minority shareholders beginning with the seminal case Donahue v. Rodd Electrotype Co. of New England, Inc.328 N.E.2d 505 (Massachusetts 1975), where the Mass, Supreme Judicial Court ruled that the defendant must buy a minority shareholder's stock on the same terms as it had purchased other shareholder's stock. The ruling held that, for close corporations, “the relationship among the stockholders must be one of trust, confidence, and absolute loyalty” and that shareholders owe one another a strict fiduciary duty.
Market Value. Is the term use in mortgage lending. It was established under Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. (FIRREA). The banking regulatory agencies (OCC, FDIC, FR,) publish the definition. “Market value means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) Buyer and seller are typically motivated; (2) Both parties are well informed or well advised, and acting in what they consider their own best interests; (3) A reasonable time is allowed for exposure in the open market; (4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.” [(12 CFR § 34.42
There are more types of value. The Bankruptcy Code has 34 slightly different types of market value. The three IRS Fair Market Value definitions are slightly different. There is full and fair cash value used for ad valorem by assessors. There is Peculiar Value. And insurance companies use Replacement Value an Actual Cash Value.
What Type of Real Estate Assignments Does Durkin Valuation Perform?
Our appraisal practice generally involves litigation related issues. This involves appraisals for Divorce (marital estates); IRS and State Decedent Estate 706 Tax Returns; Diminution in Value Issues involving Environmental Contamination. Ownership disputes which may involve family interest, partners, LLCs, shareholder disputes, Diminution in value issues involving public and or private nuisance claims. We prepare our appraisal reports in anticipation of expert testimony.
Decedent Estate M706 Tax Returns. Federal and State Tax Issues. Federal exemption is $11 million. Massachusetts exemption is $1 million with estate taxable from the first dollar if the value of the estate property exceeds $1 million You need a
Divorce, Marital Estate Property. Family Law Court Issues. All divorcing couples must divide their marital property and assign marital debts as part of the divorce process. Massachusetts law requires the division of property in a divorce to be equitable, meaning fair, though not necessarily equal. Some couples can agree about how to divide property, while others seek the help of an appraiser. The marital residence is likely the largest asset in the marital estate. If the residence is to be sold in the open market, then an appraisal is unnecessary except to give the parties an independent opinion to set the selling price, The purpose of an appraisal is to assist the parties in a settlement by providing an objective professionally researched fair value opinion. One party or the other may want to buy out the other party. We are often engaged by both parties to provide an independent, unbiased fair value opinion. However, in many instances, each side chooses his or her own appraiser with a mutual agreement to average the two appraisals. Do not do that! Because sometimes one appraiser may provide a bias low value resulting in the average being skewed to low end. A main reason this happens is he appraiser's use of a Fannie Mae Form Appraisal, the type used for mortgage financing. The fee for A Fannie Mae type appraisal is $350-$450. How can the appraiser inspect the property, research, visit, and photograph sufficient comparable sales, research the neighborhood market, research deed preclusions, easements, covenants, zoning, and write a report with persuasive logic and evidence? The fact is that they do not. Lawyers and clients like the low fee. We highly recommend having any appraisals reviewed/critiqued by use before agreeing to any split.
Ownership Disputes and Petitions to Partition. Land Court and Probate Court Issues. When two or more owners cannot agree to sell a co-owned property, any tenants in common owner can petition the land court to sell the property. We provide an appraisal to aid in setting the selling price.
Diminution Issues. Appraisals that demonstrate a property's diminished value causally connected to some stigma or environmental contamination.
Casualty Insurance Claims. Insurance Law Issues. Real property damaged or destroyed by fire or environmental contamination. The appraisal clause in the Richardson policy is typical. When the insurer and policyholder do not agree on the valuation of certain damage (whether "actual cash value," "cost of repair or replacement," or "amount of loss"), either can make written demand for appraisal, whereupon each selects a competent, independent appraiser, and the two appraisers choose an umpire. The two appraisers then set the amount of the loss, "stating separately the actual cash value and loss to each item." If the appraisers fail to agree on the amount, they submit their differences to the umpire. "An itemized decision agreed to by any two of these three and filed with [the insurer] will set the amount of such loss." [E.I. du Pont de Nemours v. Robinson, 923 S.W.2d 549 (Tex. 1995)].
Life Estate and Remainder Appraisals. The IRS, using statistical tables, values and taxes a decedent estate for the value of the life estate. Another issue involves divorce proceedings wherein one of the parties has a residual interest in the life estate property.
Appraisal Report Review (Critique). We provide objective professional appraisal report reviews (critiques). A ‘review' is a process governed by the Uniform Standards of Professional Practice (USPAP) Standard Rules 3 and 4. This important service can aid attorneys and any disputing parties in determining whether the underlying appraisal report meets the Professional Appraisal Standards, Whether the appraisers were credible and competent, and whether the appraisal contains sufficient evidence or is logically flawed.
Bankruptcy Court Valuation Issues. All real, personal and intangible assets owned by the Petitioner must be listed and appraised.
We do not provide commercial or residential real estate appraisals for federally related transactions, i.e. mortgages.
How is Real Property Interest Owned?
There are many forms of ownership. The appraiser is required to identify the interest being appraised [Uniform Standards of Professional Appraisal Practice (USPAP) i.e. the generally accepted appraisal standards].
Fee Simple Interest. The greatest possible estate in land, wherein the owner has the right to use it, exclusively possess it, commit waste upon it, dispose of it by deed or will, and take its fruits. A fee simple represents absolute ownership of land, and therefore the owner may do whatever he or she chooses with the land. If an owner of a fee simple dies intestate, the land will descend to the heirs.
Joint Tenancy with Rights of Survivorship (JTWROS). One or more people have an equal interest in the property. JTWROS is a type of ownership where all tenants have an equal right to the property and have survivorship rights in the event of the death of another joint tenant. In this type of property ownership, a surviving joint tenant will inherit the total value of the other joint tenant's share of property upon the death of that other joint tenant.
Tenancy by the Entirety is a form of co-ownership available only two owners are married. The document conveying the property expressly states that it is conveyed as a tenancy by the entirety. In a tenancy by the entirety, each spouse has the right to occupy and use the property, and there is a right of survivorship. Neither spouse can transfer their interest without the other spouse's agreement. While married, neither can lease their interest, mortgaged it, or sell it old, and the property cannot be divided or partitioned. Each maintains an undivided interest in the whole property. In divorce, the tenancy by the entirety automatically becomes a tenancy in common.
Leasehold Interest. A leasehold is a contractual relationship that the tenant-lessee enters with the property lessor-owner. There is a fixed term of years. The lessee can enjoy the use of that property for the purposes outlined in the lease for the term of that lease. When the term of the lease ends, the rights of use and enjoyment of the property revert to the owner. This may include any improvements, such as buildings, constructed on the land by the lessee. In cases where the contract specifies what happens to the improvements at the end of the lease, the lessee may remove the improvements instead.
Life Estate. A life estate is created by a deed that creates a lifetime interest allowing the owner to use the property during his or her lifetime and transfer the property at death. Life estate deeds divide the property into two types of interests. One interest is measured based on the owner's lifetime and is called a life estate. The interest that passes at the owner's death is called a remainder or remainder interest.
Tenancy for a Term. In the appraisal business this is commonly referred in real estate textbooks to as a Leased Fee Estate. It is the name given to the landlord's rights in real estate after the landlord signs a lease with a tenant. It consists of the right to receive rental payments and the right to retake possession of the premises at the end of the lease term, the reversionary right.
Professional Associations
Durkin has been active in the appraisal profession. He is a Member of the College of Fellows of the American Society of Appraisers; He has earned five individual American Society of Appraisers Designations. A sixth and seventh appraisal designation from the National Association of Professional Appraisers, Designation Senior Professional Member and the National Association of Independent Fee Appraisers, (NAIF) Senior Member. Active in Appraisal Associations. Past president Boston ASA Chapter, Past ASA Regional Governor and International Governor at Large, Past Member ASA International Ethics (Peer Review) Committee, Past Member ASA Examining Committee for Real Property and Appraisal Review. Past Member ASA Bylaws and Constitution Committee, Past Chair of the ASA Appraisal Review & Management Committee.
Legal Cases Involving Complex Real Property
Warren Woods and Joanne P. Woods v. Brimm, et al Barnstable County BACV2007-0 018. Wellfleet, Massachusetts erosion accretion, and environmental issues relative to (1) whether the continuing and rapid erosion is cause for a diminution in the market value of the subject property and (2) whether the property would have a diminution in market value if there were a remediation in the form of sand-filled coir envelopes, drift fences, and ongoing revetment maintenance.
Suffolk Superior Greenleaf Arms Realty Trust I, LLC, Joseph P. Baglione, And Faye P. Baglione, Plaintiffs, V. New Boston Fund, Inc., Jerome L. Rappaport, Jr., Jerome L. Rappaport, Sr., James W. Rappaport, Janet F. Aserkof. Real Property 1030 Exchange and Contamination Issue
Expert for the plaintiff counsel Clark, Sawyer & Phillips, P.C., and insured in the Water Street, Danvers port Real Property Explosion against Verlan Fire Insurance Company, in Insurance Settlement Negotiation
There is much misunderstanding and confusion in the appraisal licensing law.
The current state real estate appraisal licensing law was put in place to conform to the requirements of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). The purpose of FIRREA was to protect banks not consumers. Title XI of FIRREA mandated that all states adopt by statue the rules, regulations, and requirements of FIRREA re Title XI. That enabling legislation Chapter 112 §§ 173-195 incorporated the FIRREA Title XI requirements that people who wished to provide real estate appraisals for mortgages (federally related transactions) had to be qualified by education, experience and training in accordance with Title IX of FIRREA.
The federal banking regulations through the Appraisal Subcommittee control the education and licensing of real estate appraiser involved in federally related transaction, e.g. mortgage lending. The bank related federal regulations include Dodd Frank and Appraisal Subcommittee oversight govern the state licensing boards. They law and regulations do not govern any real estate appraisals for any purpose other than those involved in federally related transactions. 12 CFR § 225.63 Appraisal transactions requiring a State certified or licensed appraiser. (a) Appraisals required. An appraisal performed by a State certified or licensed appraiser is required for all real estate-related financial transactions.
The Massachusetts enabling legislation clearly stated that the purpose of the legislation was to comply with FIRREA Title XI. In Fidelity National Solutions, U. S. Federal District Court Judge held that the legislative history in Pennsylvania pointed to a singular purpose to comply with FIRREA, which is not to regulate the entire real estate appraisal process, but was only to protect federal financial institutions from fraudulent or poorly executed appraisals. Given this focus, it is unreasonable to read FIRREA as making any indication, express or otherwise, that the statute was intended to control real estate transactions beyond those involving federal financial institutions. the Court is confident both from the express language of FIRREA and from subsequent Congressional amendments, that FIRREA extends only to federally related transactions and any agency regulations that address non-federally related real estate transactions exceed that agency's statutory grant of authority” The federal judge found, “The federal financial regulatory agencies, pursuant to the Congressional authority granted under 12 U.S.C. § 3341(b), have exempted federally related real estate transactions from the state certified real estate appraiser requirement. Insofar as these federally related, but expressly exempt transactions are concerned, (the Pennsylvania Appraisal Board) REACA is preempted by FIRREA”. [Fidelity Nat'l Info. Solutions, Inc. v. Sinclair, 2003 U.S. Dist. LEXIS 369 (E.D. Pa., Jan. 8, 2003 March 31, 2004)]
Maine held itself out as the first state to require any real estate appraisal to require a Maine licensee. In federal tax court, the federal judge found that because the appraisal in question was not for a federally related transaction, that the appraisal did not fall under Maine Appraisal Law. “The purposes of (Maine Appraisal License Law) REALCA are manifest in the legislation enacting it. See sec. II.B., supra. Those purposes are to protect consumers and to meet certain requirements imposed by Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L. 101-73, 103 Stat. 511, 12 U.S.C. secs. 3310-3351 (Supp. 1994). The relevant requirement of FIRREA is that, after July 1, 1991, all appraisals performed in connection with “federally related transactions” are to be performed only by individuals certified or licensed in accordance with the requirements of FIRREA. 12 U.S.C. sec. 3348. Indeed, at least 27 States have appraiser licensing or certification laws that refer to FIRREA. The term “federally related transaction” relates to certain lending transactions and has no relevance here. See 12 U.S.C. sec. 3350. We have no information that the report was prepared for a consumer, in the sense we infer the Maine legislature intended for that word, or in connection with a federally related transaction. That is also true regarding any testimony that Hanan and Knoll may give. We ascertain State law as if we were sitting as the highest court of the State. See Commissioner v. Estate of Bosch, 387 U.S. 456, 465 (1967). We are convinced that the Supreme Judicial Court of Maine would not apply REALCA to Hanan and Knoll solely for preparing the report or testifying in this case. We conclude that REALCA is inapplicable to Hanan and Knoll's actions in connection with this case. Accordingly, we will not exclude the report or the testimony from evidence in this case. [Utilicorp United Inc. & Subsidiaries v. Comm'r of Internal Revenue.104 T.C. 670 (U.S.T.C. 1995] See full case in Exhibit F.
