Appraisal assignments are rarely simple and straightforward. Further complications arise when an appraisal is ordered at the point a property is in, or about to enter, some form of transition. By transition, I mean any of the following:
•Change in zoning or deed restrictions
•Change in allowable density
•Plans or plat in the approval process
•Proposed development of a vacant site
•Proposed renovation or conversion of an already developed property
•Development, renovation, or conversion activities in process at time of appraisal
•Multi-tenant property requiring lease-up
For such assignments, USPAP allows appraisers to value a property as it will be when the transition is completed, without having to also value the property in its current condition. For example, a site is improved with a closed down fast food restaurant that has seen better days. The property has recently been purchased and the borrower intends to demolish the existing structure and construct a small office building on the site. In such a situation, the appraiser can value the property as if it were presently improved with an office building (using a hypothetical condition) and ignore the current condition of the property, all the while still complying with USPAP.
Banking regulations, however, look at properties in transition a bit differently. Accordingly banks are expected to know the “as is” value of their collateral even if the property is in transition. Thus, in a situation where a zoning change has been applied for or is likely, an appraisal performed for a bank must include the value of the property after up-zoning and the value of the property as currently zoned. These regulations are why bank engagement letters typically ask for “as is” and prospective values. Some smaller banks, however, may not be as conversant with the regulations. Appraisers who do work for them and have a passing knowledge of the regulations can do their clients a good turn by always including a value of the property in its “as is” condition.
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- How is an Unfinished Home Appraised?