The DS Murphy Newsletter

By James Hyde, President- DSM Commerical and Sandee Pennington, Certified General Appraiser

An analogy is a great tool to convey otherwise unfamiliar concepts. Keeping with this, the appraisal process is likened to construction of a home. Would anyone build a home upon sand – most likely not. If it were, it would result in an unstable foundation, which could damage or completely negate the remaining components of the home. This holds true for appraisal engagement agreements, if the appraisal problem is not properly identified, the remaining components of the appraisal process could be inconsequential to the intended users or client.

The appraisal engagement agreement is synonymous with the foundation of the home. As such, an appraisal should be built, not upon sand, but instead, upon a solid foundation of bedrock. To shore up the foundation of the appraisal process, the proper development of an appraisal engagement agreement should ensure a meeting of the minds between both the client and the appraiser. This process is not only advantageous to the appraiser, but the client and intended users as well.

When it comes to information required to build this solid foundation, think of the “6w’s” – who, what, when, why, where, and how.

• WHO?
  • Who is the Client? Who is the Appraiser? Who is/are the Intended User(s) of the report? Who is the contact for access to the property? Are there other individuals we need the Client’s permission to communicate with? Their attorney? CPA? Real Estate Agent?
• WHAT?
  • What is the Subject to be appraised? Clearly identified by address, tax ID number, or preferably both. What type of property? Vacant Land? SFR? Retail? Multi-Family? Which type of report is appropriate? Narrative? Form? What type of value is appropriate? As-Is? As-Repaired? What is the agreed fee and terms of payment?
• WHEN?
  • When is the date of value? Current? Retrospective? Prospective? When is the date of delivery? Have you performed services to the property within the previous three years?
• WHY?
  • Why is the appraisal being performed? What is the Intended Use of the report? What is the appropriate Value needed?
• WHERE?
  • Will the assignment entail an on-site visit? Interior? Exterior? Will the appraiser be required to testify in court?
• HOW?
  • What is the proper scope of work for the assignment? Which approaches to value will be applicable? Will any hypothetical conditions or extraordinary assumptions be employed?

These are only a few of the foundational elements that should be addressed within the engagement agreement. A well-crafted engagement agreement clearly sets forth the expectations of the appraiser and the client and ensures a solid foundation for an efficient appraisal process and an effective outcome for both parties. The old adage, “It’s not how you start, it’s how you finish” could NOT be less applicable for an appraisal assignment. Rather in this case, “If you don’t START with a solid foundation, the appraisal process could be FINISHED!”