PA R T

CHAPTER

Fundamentals

Part I of the text covers the fundamentals of real property, value, appraisal
principles, interests and ownership in real property, and the competition
between real estate and other investments for capital. Chapter 1, Real
Property and Its Appraisal, introduces the distinct concepts of real estate and
real property and outlines the services that professional real estate appraisers
commonly perform for their clients. Chapter 2, The Nature of Value,
discusses the various types of value appraisers deal with and how these types
of value are defined. Chapter 3, Foundations of Appraisal, explains the
economic principles on which the discipline of appraisal is based and dis-
cusses the forces that influence the value of real property. Chapter 4, The
Valuation Process, illustrates the step-by-step process that appraisers follow
to develop and report an opinion of value. Chapter 5, Real Property Owner-
ship and Interests, explains the various interests and forms of ownership that
make up the bundle of rights and discusses how less-than-complete owner-
ship of real property affects the valuation process. Chapter 6, Real Estate
Markets, Money Markets, and Capital Markets, defines how real estate
markets work in relation to the other investment options that compete for
investors’ funds.
CHAPTER
CHAPTER

1 Real Property and

Its Appraisal

Land provides the foundation for the social and economic activities of people.
It is both a tangible physical commodity and a source of wealth. Because land
is essential to life and society, it is important to many disciplines, including
law, economics, sociology, and geography. Each of these disciplines may
employ a somewhat different concept of real property.
Within the vast domain of the law, issues such as the ownership and the
use of land are considered. In economics, land is regarded as one of the four
agents of production, along with labor, capital, and entrepreneurial coordina-
tion. Land provides many of the natural elements that contribute to a nation’s
wealth. Sociology focuses on the dual nature of land:
• As a resource to be shared by all people
• As a commodity that can be owned, traded, and used by individuals
Geography focuses on describing the physical elements of land and the
activities of the people who use it.
Lawyers, economists, sociologists, and
Land is investigated and analyzed in a
geographers have a common understand- variety of disciplines—government, the
ing of the attributes of land: law, economics, geography, and environ-
mental studies.
• Each parcel of land is unique in its
location and composition.
• Land is physically immobile.
• Land is durable.
• The supply of land is finite.
• Land is useful to people.
Real estate appraisers view these attributes as the foundation of real estate’s
value. Contrasted with the physical character of land, value is an economic
concept. Appraisers recognize the concepts of land used in other disciplines
but are most concerned with how the market measures value. Markets reflect
the attitudes and actions of people in response to social and economic forces.

Concepts of Land
Although land and improvements to land can be viewed in a physical sense,
there are other concepts of land that are less obvious. These concepts help to
4 The Appraisal of Real Estate

characterize the importance of land and provide the foundation for land value
systems.

Governmental and Legal

Land use derives from the mandates of organized society. In countries where
the ownership and marketability of land are not free, government often
dictates the use of land. In free market economies, land use is regulated
within a framework of laws. To understand how the various forces affecting
land operate, the basic role of law must be recognized.
The cultural, political, governmental, and economic attitudes of a society
are reflected in its laws. The law does not focus on the physical characteristics
of land but on the rights and obligations associated with various interests in
land. In the United States, the right of individuals to own and use land for
material gain is maintained, while the right of all people to use the land is
protected. In other words, the law recognizes the possible conflict between
private ownership and public use.
“Whose is the land, his it is, to the sky and the depths.” This ancient
maxim is the basis of the following legal definition:
Land … includes not only the ground, or soil, but everything that is
attached to the earth, whether by course of nature, as are trees and
herbage, or by the hand of man, as are houses and other buildings. It
includes not only the surface of the earth but everything under it and
over it. Thus in legal theory, the surface of the earth is just part of an
inverted pyramid having its tip, or apex, at the center of the earth,
extending outward through the surface of the earth at the boundary
lines of the tract, and continuing on upward to the heavens.1
This definition suggests that land ownership includes complete possession of
land from the center of the earth to the ends of the universe. In practice,
however, land ownership is limited.
The U.S. Congress has declared that the federal government has com-
plete and exclusive sovereignty over the nation’s airspace and that every
citizen has “a public right to freedom of transit in air commerce through the
navigable air space of the United States.”2 Many states restrict ownership and
use of subsurface areas such as underground aquifers. Because land ownership
can be limited, ownership rights are the subject of law; the value of these
rights is the focus of real estate appraisal.
The laws that govern the use and development of land in the United
States give landowners great freedom in deciding how to use their land.
However, this freedom is not without restrictions. The basic concept of
private ownership calls for unrestricted use so long as such use does not
unreasonably harm the rights of others. In the past, the test of harm focused
1. Raymond J. Werner and Robert Kratovil, Real Estate Law, 10th ed. (Englewood Cliffs,
N.J.: Prentice-Hall, Inc., 1993), 4.
2. The Air Commerce Act of 1926 (formerly 49 USC 171 et seq.); the Civil Aeronautics Act of
1938 (formerly 49 USC 401 et seq.); and the Federal Aviation Act of 1958 (see 49 USC 401).
 Real Property and Its Appraisal 5

on owners of adjacent properties. The concept of harm has recently been

expanded to encompass broader social and geographic concerns. The defini-
tion of reasonable use has been argued in many court cases.
Legal matters of particular concern to appraisers include the following:
• Easements
• Access regulations
• Use restrictions
• The recording and conveyance of titles
Also, appraisers must be familiar with local and state laws, which have
primary jurisdiction over land.

Economic
Land is a physical entity with inherent ownership rights that can be legally
limited for the good of society. Land is also a major source of wealth, which,
in economic terms, can be measured in money or exchange value. Land and
its products have economic value only when they are converted into goods or
services that are useful, desirable, paid for by consumers, and limited in
supply. The economic concept of land as a source of wealth and an object of
value is central to appraisal theory.
The economic concept of land reflects a long history of thought on the
sources and bases of value, which is referred to as value theory.3 Value theory
contributes to the value definitions used in appraisal reports and appraisal
literature, and it is an important part of the philosophy on which professional
appraisal practice is founded.

Social
Modern society has become increasingly concerned with how land is used
and how rights are distributed. The supply of land is fixed, so increased
demand for land exerts pressure for land to be used more intensively. Con-
flicts often arise between groups that hold different views on proper land use.
Those who believe that land is a resource to be shared by all want to preserve
the land’s scenic beauty and important ecological functions. Others view land
primarily as a marketable commodity. They believe society is best served by
private, unrestricted ownership.
For example, environmental preservationist groups value the natural
amenities of old-growth or virgin forest differently than logging companies
do. Similarly, the developer of a proposed shopping center or a business park
may view a particular parcel of land as developable green space in a desirable
and affordable location serving a definable market area. On the other hand,
local residents may argue that, as the site of a significant Civil War battle, the

3. Paul F. Wendt, Real Estate Appraisal: Review and Outlook (Athens, Ga.: University of
Georgia Press, 1974), 17.
6 The Appraisal of Real Estate

parcel deserves government protection (if taxpayers could be persuaded to

support such a public investment in historical preservation). These conflicting
views do not alter the constitutional rights of ownership or market concepts
of land. Rather, they reflect controversies that arise between the property
rights of the individual and those of society. As a resource, land is protected
for the good of society. As a marketable commodity, the ownership, use, and
disposal of land are regulated so that individual rights are not violated.4
In 1876 the U.S. Supreme Court established the government’s right to
regulate “the manner in which [a citizen] shall own his own property when
such regulation becomes necessary for the public good.” The court quoted the
words of England’s Lord Chief Justice Hale: “When private property is
‘affected with a public interest,’ it ceases to be juris privati only.”5 Throughout
American history, land ownership has been recognized as fundamental. John
Adams wrote, “If the multitude is possessed of real estate, the multitude will
take care of the liberty, virtue, and interest of the multitude in all acts of
government.”6
All laws and operations of government are intended to serve the public.
Thus, in the public interest, society may impose building restrictions, zoning
and building ordinances, development and subdivision regulations, and other
land use controls. These controls affect what may be developed, where
development may occur, and what activities may be permitted subsequent to
development. In recent decades, the U.S. Government has increased its efforts
to regulate the air and water emissions from manufacturing processes and to
reduce pollution caused by dirt, chemicals, and noise. Protective controls over
land use extend to wetlands, beaches, and navigable waters and to the
preservation of the habitats of endangered species.7
As the nature and extent of land use controls change, so do the nature
and extent of private land ownership. Such changes impact markets and
ultimately real estate values. Consequently, real estate appraisers must be
familiar with the regulations and restrictions that apply to land use and
understand how these regulations affect a specific property.

Geographic and Environmental

The study of land includes consideration of its diverse physical characteristics
and how these characteristics combine in a particular area. Each land parcel is
unique, and location is a very important attribute. The utility of land and the
highest and best use to which land can be put are significantly affected by the
4. See also Charles E. Roe, “Land Use: The Second Battle of Gettysburg,” The Appraisal
Journal (October 2000): 441-449.
5. 94 U.S. 113 (1896). Quoted in “Land as a Commodity Affected with a Public Interest” by
Richard F. Babcock and Duane A. Feurer in Richard N. L. Andrews, Land in America
(Lexington, Mass.: D.C. Heath and Company, 1979), 110.
6. Ibid., 31.
7. For more information on the government’s control of land use, see J.D. Eaton, Real Estate
Valuation in Litigation, 2d ed. (Chicago, Appraisal Institute, 1995).
 Real Property and Its Appraisal 7

physical and locational characteristics of the land and other related consider-
ations, broadly referred to as geography.
Land is affected by a number of processes. Ongoing physical and
chemical processes modify the land’s surface, biological processes determine
the distribution of life forms, and socioeconomic processes direct human
habitation and activity on the land. Together, these processes influence the
characteristics of land use.
Land can be used for many purposes:
• Agriculture
• Commerce
• Industry
• Habitation
• Recreation
And land use decisions may be influenced by many factors:
• Climate
• Topography
• The distribution of natural resources, population centers, and industry
• Trends in economics, population, technology, and culture
The influence of each of these factors on a particular parcel of land varies.
Geographic considerations are particularly significant to appraisers. The
importance of physical characteristics such as topography, soils, water, and
vegetation is obvious, but the distribution of population, facilities, and
services and the movement of people and goods are equally important. The
geographic concept of land, which emphasizes natural resources, the location
of industry, and actual and potential markets, provides much of the back-
ground knowledge required in real estate appraisal.

Real Estate, Real Property, and Personal Property

In real estate appraisal, an important distinction is made between the terms
real estate and real property.8 Although these concepts are different, some state
laws and court decisions treat them as synonymous for legal purposes.
Real estate is the physical land and appurtenances affixed to the land—
e.g., structures. Real estate is immobile and tangible. The legal definition of
real estate includes the following tangible components:
• Land
• All things that are a natural part of land, such as trees and minerals
• All things that are attached to land by people, such as buildings and site
improvements
8. The definitions of real estate and real property used in the Uniform Standards of Professional
Appraisal Practice (USPAP) promulgated by The Appraisal Foundation can be found in
Appendix A.
8 The Appraisal of Real Estate

The distinction between real estate and

In addition, all permanent building
real property is fundamental to appraisal. attachments (for example, plumbing,
electrical wiring, and heating systems) as
well as built-in items (such as cabinets and
real estate: Physical land and appurte- elevators) are usually considered part of
nances attached to the land, e.g., the real estate. Real estate includes all
structures. An identified parcel or tract attachments, both above and below the
of land, including any improvements.
ground.
real property: All interests, benefits, and
rights inherent in the ownership of
Real property includes all interests,
physical real estate; the bundle of rights benefits, and rights inherent in the
with which the ownership of the real ownership of physical real estate. A right
estate is endowed. In some states, real or interest in real estate is also referred to
property is defined by statute and is as an estate. Specifically, an estate in land is
synonymous with real estate.
the degree, nature, or extent of interest
that a person has in it.
The total range of ownership interests in real property is called the
bundle of rights. Imagine a bundle of sticks where each “stick” represents a
distinct and separate right or interest. The bundle of rights contains all the
interests in real property, including the right to use the real estate, sell it, lease
it, enter it, and give it away, and each “stick” can be separated from the bundle
and traded in the market. The U.S. Constitution guarantees the private
enjoyment of these rights, subject to certain limitations and restrictions,
which are discussed in Chapter 5.
Appraisers not only distinguish between real estate and real property,
they also differentiate between real estate, personal property, and trade fixtures,
as illustrated in Tables 1.1 and 1.2. Appraisers must know whether an item is
personal property or a fixture to determine whether it will be included in the
property value indication. If an item is classified as a fixture, it is part of the
real estate, and its contribution to value is included in the reported opinion of
value.9 Because the distinction between fixtures and personal property is not
always obvious, appraisers should read leases carefully and know how these
items are treated in their areas. It is sometimes impossible to exclude personal
property from an opinion of value. Personal property that is related to real
estate and is to be included in the opinion of value should be identified and
described in the appraisal (see Chapter 26).

9. In 1999 the Appraisal Standards Board replaced the term estimate of value in the Uniform
Standards of Professional Appraisal Practice with the term opinion of value. One reason for
this change was to better clarify the difference between the output of an automated valuation
model (which provides an estimate of value) and the result of an appraisal performed by a
person (who applies judgment and experience in the process of rendering an opinion of value).
This text has been revised to reflect the evolution of the terminology used in USPAP.
 Real Property and Its Appraisal 9

Table 1.1 Distinctions Between Real Estate, Personal Property, and Trade Fixtures
Real Estate
Characteristics Items that have been installed or attached to the land or building in a rather
permanent manner. All real estate improvements were once personal property;
when attached to the land, they become real estate.
Examples • Land
• Buildings
• Fixtures—e.g., plumbing, lighting, heating, and air-conditioning in a residen-
tial property
Personal Property
Characteristics Movable items of property that are not permanently affixed to, or part of, the
real estate. Personal property is not endowed with the rights of real property
ownership.
Examples • Furniture and furnishings not built into the structure such as refrigerators
and freestanding shelves
• Items such as bookshelves and window treatments installed by a tenant
that, under specific lease terms, may be removed at the termination of
the lease
Trade Fixtures
Characteristics Unlike fixtures, which are regarded in law as part of the real estate, trade
fixtures are not real estate endowed with the rights of real property ownership.
They are personal property regardless of how they are affixed. A trade fixture is
to be removed by the tenant when the lease expires unless this right has been
surrendered in the lease. Also known as a chattel fixture.
Examples • Restaurant booths
• Gasoline station pumps
• Storage tanks
• Fitness equipment in a health club
• Plumbing, lighting, heating, and air-conditioning in an industrial building
• Industrial equipment such as air hoses, water pipelines, craneways, and bus
ducts

Table 1.2 Criteria for Distinguishing Between Personal Property and Fixtures
Criteria Explanation
The manner in which Generally an item is considered personal property if it can be
the item is affixed removed without serious injury to the real estate or to itself.
There are exceptions to this rule.
The character of the Items that are specifically constructed for use in a particular
item and its adaptation building or installed to carry out the purpose for which the
to the real estate building was erected are generally considered permanent parts
of the building.
The intention of the Frequently the terms of the lease reveal whether the item is
party who attached the item permanent or is to be removed at some future time.

Source: Raymond J. Werner and Robert J. Kratovil, Real Estate Law, 10th ed. (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1993),
11–17.
10 The Appraisal of Real Estate

Appraisal Practice
In our complex society, the words appraiser and appraisal can take on many
meanings. It is important to use these terms correctly and to distinguish
among the individuals involved in the appraisal process.
Buyers and sellers purchase and sell real estate and make decisions relating
to prices and other real estate matters. Home buyers often have little or no
background in real estate and must rely on others to make their decisions.
The only “appraisal” they make is an evaluation of the conditions they observe
or facts that are made known to them. At the opposite end of the spectrum,
institutional investors may have personnel who are trained in appraising.
Real estate salespeople are licensed to sell real estate. They have training in
their field but may or may not have extensive appraisal training. They are
generally familiar with properties in a given locale and have access to histori-
cal market information. Some may develop appraisal expertise. As a group,
real estate salespeople evaluate specific properties, but they typically do not
necessarily consider all the factors that professional appraisers do.
Real estate financial officers and executives include loan officers, closing
agents, agents at title companies, relocation officers and agents, and others.
This group also includes government officials who deal with land or land
values in the private marketplace. These professionals vary in their ability to
understand market forces in a given locale, develop opinions of value, and
apply appraisal concepts. Real estate investment advisors may have extensive
training in understanding appraisals even if they do not develop appraisals
themselves. Members of this group work with or review appraisals developed
by others. While they are knowledgeable about appraisals, they are rarely
trained appraisers.
Licensed and certified real estate appraisers meet educational, experience,
and testing requirements set by the state and can perform appraisals in the
jurisdiction covered by their licenses or certifications.10 The types of proper-
ties that can be appraised are dependent on the type of license or certification
held. Licensed and certified real estate appraisers are required to meet
continuing education requirements and must adhere to the Uniform Stan-
dards of Professional Appraisal Practice (USPAP) or risk disciplinary action,
including possible loss of license.
Full-time professional real estate appraisers are often licensed and certified
in more than one state and spend the majority of their time appraising. These
individuals have extensive training and experience and are committed to the

10. Although the federal government mandated that all states establish licensing or certifica-
tion programs to regulate appraisals for federally related transactions, some states
established laws requiring licensing/certification only for appraisals performed for these
purposes. Other states require licensing/certification for appraisals performed for any (or
almost any) purpose. In general, the courts do not require an appraiser to be licensed or
certified; however, possession of a state-issued license or certification has become a basic
indication of appraiser competency.
 Real Property and Its Appraisal 11

profession. This group includes those who perform and review real property
appraisals. Professional appraisers are bound to strict compliance with
regulatory requirements, and many are members of appraisal organizations
such as the Appraisal Institute, which fosters participation in professional
activities and educational development. Members agree to peer review of
their ethical conduct or work performance, which reflects their strong
commitment to professionalism.
Continuing education is the cornerstone of professional development. By
pursuing continuing education, appraisers demonstrate their commitment to
maintaining their skills at a level far above the bare minimum required to
satisfy state licensing requirements. Individuals who complete a rigorous
educational program and earn recognized professional designations find that
their employment and business prospects are considerably enhanced. A
commitment to professionalism helps regulate the industry and ensures
quality appraisal work.
According to USPAP, appraisal practice encompasses three type of
activities:
1. Appraisal
2. Appraisal consulting
3. Appraisal review
The nature of the real estate problem will indicate whether the task is an
appraisal (valuation) or an appraisal consulting assignment (analysis or
counseling).11 In both types of assignments, conclusions are derived from
appropriate analysis performed in conformance with accepted standards of
professional practice (see Table 1.3).
The application of appraisal procedures and the report that communi-
cates the appraiser’s conclusions are guided by the nature of the assignment,
i.e., its purpose and intended use. To avoid misunderstandings, it is advisable
for the client and the appraiser to agree upon the scope of work for the
assignment at the outset.

Appraisal Assignments and Reporting Formats

In the Uniform Standards of Professional Appraisal Practice (USPAP),
complete appraisals and limited appraisals are differentiated based on whether
or not the appraiser invokes the Departure Rule of the Uniform Standards.
Complete appraisals are performed without invoking the Departure Rule;
limited appraisals are opinions of value developed under the Departure Rule.
The Departure Rule states that an appraiser may enter into an agreement to
perform an assignment that calls for something less than, or different from,
the work that would otherwise be required by the specific guidelines, pro-
11. See also Advisory Opinion 21, “When Does USPAP Apply in Valuation Services?”
Uniform Standards of Professional Appraisal Practice (Washington, D.C.: The Appraisal
Foundation, 2001).
 12 The Appraisal of Real Estate

Table 1.3 Comparison of Appraisal, Consulting, and Review

Appraisal
Definition* The act or process of developing an opinion of value.
Characteristics Appraisal involves selective research into appropriate market areas, the
assemblage of pertinent data, the use of appropriate analytical techniques, and the
application of knowledge, experience, and professional judgment to develop an
appropriate solution to an appraisal problem. The appraiser provides the client
with an opinion of real property value that reflects all pertinent market evidence.
Examples • An opinion of market value for a fee simple estate, leasehold estate,
preservation easement, or other estate (to assist in mortgage lending
decisions, to assist in purchase or sale decisions, etc.)
• An opinion of investment value or some other properly defined value of
an identified interest in real estate as of a given date (for insurance
purposes, for relocation purposes, for property tax appeals, etc.)
Appraisal Consulting
Definition* The act or process of developing an analysis, recommendation, or opinion to
solve a problem, where an opinion of value is a component of the analysis
leading to the assignment results.
Characteristics Current market activity and evidence are studied to form a conclusion that may
not focus on a specific value indication. An appraiser develops a value opinion in
an appraisal consulting assignment as part of the process of answering some
other question about real estate, such as whether a proposed use of a given
property is economically feasible.
Examples • Economic feasibility studies
• Marketability or investment considerations that relate to proposed or
existing developments
• Land utilization studies
• Supply and demand studies
• Absorption analyses
Appraisal Review
Definition* The act or process of developing and communicating an opinion about the
quality of another appraiser’s work.
Characteristics Appraisal review procedures may be likened to a quality control or auditing
function. A review appraiser examines the reports of other appraisers to
determine whether their conclusions are consistent with the data reported and
other generally known information.
Examples • Field review
• Desk review
* From the Definitions section of the Uniform Standards of Professional Appraisal Practice (2001 edition)

vided that prior to entering into such an agreement the following conditions
are met:
1. The appraiser has determined that the service to be performed is not so
limited in scope that the resulting assignment would tend to mislead or
confuse the client and the intended users of the report.
 Real Property and Its Appraisal 13

2. The appraiser has advised the client that the assignment calls for
something less than, or different from, the work required by the specific
guidelines and that the report will identify and explain the departure(s).
3. The client has agreed that performance of a limited appraisal or consult-
ing service would be appropriate.
Appraisal reports communicating both complete or limited appraisals
may be presented in three formats:
1. Self-contained appraisal reports The Uniform Standards of Professional
2. Summary appraisal reports Appraisal Practice (USPAP) define two
3. Restricted use appraisal reports types of appraisal assignments—
complete and limited—and three
A self-contained appraisal report fully reporting formats—self-contained,
describes the data and analyses used in the summary, and restricted use.
assignment. All appropriate information is
contained within the report and not
referenced to the appraiser’s files. A summary appraisal report summarizes the
data and analyses used in the assignment. A restricted use appraisal report
simply states the conclusions of the appraisal.
Appraisal reports can be delivered to a client as oral reports or in writing,
either as a form report or a narrative report. (Further information on appraisal
reporting formats is included in Chapter 26.)

Purpose and Intended Use of an Appraisal

The purpose of an appraisal is the stated reason and scope of the appraisal
assignment. It is established by the client, and it points to the information
that the client needs to answer specific questions pertaining to real property.
If the client’s questions are clearly understood, the purpose of the appraisal
can be described in terms of the information requested.
When an opinion of value is required in an appraisal, the type of value
sought must be defined at the outset. The defined value may be
• Market value
• Going-concern value
• Assessed value
• Use value
• Investment value
• Other types of value
Distinctions among these terms are discussed in Chapter 2.
The purpose of the appraisal establishes the foundation for the final value
conclusion, which does not change to accommodate the use of the appraisal. The
structure of an appraisal report may be adapted to the intended use of the opinion
of value, but the value itself will not change. For example, the appraisal of a
single-family property might be reported on a form to facilitate a sale or mort-
14 The Appraisal of Real Estate

The purpose and the intended use of an

gage financing, in a restricted use report for
appraisal are related, but distinct, concepts.rehabilitation decisions, or in a self-
contained report for use in litigation.
Whatever the circumstances, the dollar
purpose of an appraisal: The stated figure or figures associated with the defined
reason for an appraisal assignment, i.e., value will be the same.
to develop an opinion of the defined The intended use of an appraisal is the
value of any real property interest or to
manner in which a client will employ the
conduct an evaluation study (consulting
assignment) pertaining to real property information contained in the appraisal
decisions. report. The intended use or function of an
intended use of an appraisal: The appraisal is determined by the client’s needs.
manner in which a client will employ For example, a client may want to know the
the information contained in an market value of a residence to avoid paying
appraisal report.
too much for it or accepting too little for it
in a sale. Corporate clients may need to
Appraisals are commonly used in
ascertain the rent levels or demographic
situations involving the transfer of trends in an area to determine the advisabil-
ownership, financing and credit, litigation, ity of relocating there. Or a developer may
taxation, and investment counseling and in need to understand the supply and demand
other business decision making. factors at work in a community before
constructing an apartment complex.
Because an appraisal provides a basis
for a decision concerning real property, the intended use of an appraisal
depends on the decision the client wishes to make. In defining the appraisal
problem, the appraiser should consider the client’s requirements and reach an
understanding that is acceptable to the client and the appraiser and is
consistent with accepted standards of professional appraisal practice.
An appraisal may be requested in a number of situations. Table 1.4 does
not reflect all possible uses for appraisals, but it does provide a broad sampling
of professional appraisal activities.

Appraiser Liability
As the appraisal industry strives for greater professionalism, the scope of
appraiser responsibility and potential liability grows. Appraisers may be held
liable for negligence, misrepresentation, fraud, breach of contract, or lack of
compliance with the standards imposed by government agencies, The
Appraisal Foundation, and the Appraisal Institute. Areas of potential
exposure include matters involving privity of contract,12 disclosure, and
litigation (e.g., discovery proceedings, interrogatories, and depositions).

12. Privity of contract concerns the relationship between two parties, e.g., an appraiser who has
entered into an agreement to perform an assignment and a client such as a bank or
accounting firm. The client may allege that the appraiser acted improperly and, as a result, a
third party (an investor) was harmed.
 Real Property and Its Appraisal 15

Table 1.4 Typical Uses of Appraisals

Transfer of ownership
• To help prospective buyers set offering prices
• To help prospective sellers determine acceptable selling prices
• To establish a basis for real property exchanges
• To establish a basis for reorganizing or merging the ownership of multiple properties
• To determine the terms of a sale price for a proposed transaction
Financing and credit
• To develop an opinion of the value of the security offered for a proposed mortgage loan
• To provide an investor with a sound basis for deciding whether to purchase real estate
mortgages, bonds, or other types of securities
• To establish a basis for a decision to insure or underwrite a loan on real property
Litigation
Eminent domain proceedings
• To develop an opinion of the market value of a property as a whole—i.e., before a taking
• To develop an opinion of the market value of the remainder after a taking
• To estimate the damages to a property created by a taking
Property divisions
• To develop an opinion of the market value of a property in contract disputes
• To develop an opinion of the market value of real estate as part of a portfolio
• To develop an opinion of the market value of partnership interests
Environmental litigation
• To estimate damages created by violations of environmental laws
• To estimate damages created by environmental accidents
Tax matters
• To develop an opinion of assessed value
• To separate assets into depreciable (or capital recapture) items such as buildings and nondepre-
ciable items such as land, and to estimate applicable depreciation (or capital recapture) rates
• To develop an opinion of the value of the real estate component of an estate plan that
represents the foundation for future capital gains and inheritance taxes
• To determine gift or inheritance taxes
Investment counseling, decision making, and accounting
• To set rent schedules and lease provisions
• To determine the feasibility of a construction or renovation program
• To help corporations or third parties purchase homes for transferred employees
• To serve the needs of insurers, adjusters, and policyholders
• To facilitate corporate mergers, the issuance of stock, or the revision of book value
• To develop an opinion of liquidation value for forced sale or auction proceedings
• To counsel clients by considering their investment goals, alternatives, resources, and constraints
and the timing of their activities
• To advise zoning boards, courts, and planners, among others, on the probable effects of
proposed actions
• To assist in arbitrating valuation issues
• To analyze supply and demand trends in a market
• To ascertain the status of real estate markets
• To value fixed assets and assist in asset value allocations
16 The Appraisal of Real Estate

Appraisers are advised to take

Appraisers may be held liable for profes-
sional violations or related misconduct.
liability: In appraisal, a legal obligation to
render services in compliance with
professional standards and to refrain
from malpractice, which includes
negligence, misrepresentation, fraud, and
breach of contract.
Uniform Standards of Professional
Appraisal Practice (USPAP):
Current standards of the appraisal
profession, developed for appraisers
and the users of appraisal services by
the Appraisal Standards Board of The
Appraisal Foundation. USPAP sets forth
the procedures to be followed in
developing an appraisal, analysis, or
opinion and the manner in which an
appraisal, analysis, or opinion is
communicated. The standards are
endorsed by the Appraisal Institute and
by other professional appraisal
organizations.
measures to safeguard themselves from
unintentional or involuntary malpractice.
Ensuring competency through continuing
education, the use of checklists and
backup reviews, and strict adherence to
the Uniform Standards of Professional
Appraisal Practice can help reduce an
appraiser’s exposure to civil action.13
Professional liability insurance is available
and required by many lenders. Appraisers
are advised to review all exclusions and
retroactive dates in their insurance policies
and to take normal precautions in their
business practices.
Contested opinions of value may
result from rapid changes in market
conditions, the presence of contaminated
materials on appraised properties, enforce-
ment of environmental and preservation
easements, and changes in legal and
regulatory guidelines. The proliferation of
legal proceedings suggests that litigation
will continue to increase in the appraisal
field as it has in other professions.

FURTHER READING
American Institute of Real Estate Appraisers. Appraisal Thought: A 50-Year Beginning. Chicago,
1982.
Andrews, Richard N. L. Land in America. Lexington, Mass.: D.C. Heath, 1979.
Appraisal Institute. Appraising Residential Properties. 3d ed. Chicago, 1999.
Benjamin, John D. “The Legal Liability of Real Estate Appraisers.” The Appraisal Journal (April
1995).
Davies, Pearl Janet. Real Estate in American History. Washington, D.C.: Public Affairs Press, 1958.
Derbes, Max J., Jr. “When Are Appraisers Not Liable?” The Appraisal Journal (October 1995).
Finch, J. Howard. “The Role of Professional Designations as Quality Signals.” The Appraisal Journal
(April 1999).
Gaglione, Claudia L. “Third-Party Liability: Does Privity Matter.” Valuation Insights & Perspectives,
vol. 2, no. 3 (Third Quarter 1997).
Kinnard, William N., Jr., ed. 1984 Real Estate Valuation Colloquium: A Redefinition of Real Estate
Appraisal Precepts and Practices. Boston: Oelgeschlager, Gunn & Hain and Lincoln Institute of
Land Policy, 1986.

13. For more information on appraiser liability, see Mark Lee Levine, Real Estate Appraisers’
Liability (New York: Clark Boardman Callaghan, 1995). The bibliography of this text
contains useful articles on areas of potential exposure for appraisers.
 Real Property and Its Appraisal 17

FURTHER READING (continued)

Kratovil, Robert, and Raymond J. Werner. Real Estate Law. 8th ed. Englewood Cliffs, N.J.: Prentice-
Hall, 1983.
Levine, Mark Lee. “The Death of Privity: Recent Decisions.” The Appraisal Journal (July 1998).
___. Real Estate Appraisers’ Liability. New York: Clark Boardman Callaghan, 1991.
Love, Terrence L. The Guide to Appraisal Office Policies and Procedures. Chicago: Appraisal Institute,
1991.
Martin, Michael M. “The Ethics of Desire.” The Appraisal Journal (July 1997).
Noyes, C. Reinold. The Institution of Property. London: Longmans, Green and Company, 1936.
Smalley, Steven P. “Appraisal: Science or Art?” The Appraisal Journal (April 1995).
Weinberg, Norman, Paul J. Colletti, William A. Colavito, and Frank A. Melchior. Guide to the New
York Real Estate Salespersons Course. New York: John Wiley & Sons, Inc., 1983.