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Real Estate Acquisition Guide For Local Public Agencies

V. Valuation

The first step in the process of acquiring a particular property is valuing the proposed acquisition.

Just Compensation

The U.S. Constitution and most State constitutions require that a property owner be paid just compensation when the government acquires private property. The Uniform Act requires that an "approved appraisal" be used to develop an amount the agency believes to be just compensation. The amount offered to the property owner must be at least the amount of the approved appraisal.

The Appraisal Requirement

The appraisal, and its review and approval by the acquiring agency, are the cornerstones on which the entire effort to provide property owners just compensation is built. The Uniform Act requires that the property be appraised before an acquiring agency begins negotiations to acquire it and that the amount of the approved appraisal be the basis of the offer of just compensation. In addition, the Uniform Act regulations in 49 CFR, Part 24, Subpart B (see appendix for copy) require that appraisals be reviewed and approved. However, the Uniform Act also gives the Lead Agency (which is FHWA) the authority to develop procedures for waiving the appraisal requirement in cases of non-complex, low-value acquisitions.

Appraisal Waiver and Waiver Valuations

Appraisal waiver provisions are found in §24.102(c) of 49 CFR. These procedures provide all acquiring agencies the option to waive the appraisal requirement under two circumstances. First, if an owner has indicated he intends to donate his property and if the owner releases the agency from its obligation to appraise the property. See the next chapter for more information on donations. The second circumstance is if the agency determines the property valuation problem is uncomplicated and has an anticipated value of less than $10,000. In such a case the agency could waive the appraisal requirement and prepare a waiver valuation instead. The decision process following receipt of authorization to proceed for when an appraisal is necessary is indicated in Figure 2.

The final determination to waive an appraisal may include consideration of other factors, such as the availability of recent sales or negotiation history in the local area, besides the complexity of the valuation problem and the approved low value threshold that might apply. Your SDOT will give you detailed procedures for use of an appraisal waiver and preparation of a waiver valuation. Keep in mind that a waiver valuation is not an appraisal, so appraisal-related requirements, such as owner accompaniment and appraisal review which are discussed in the Appraisal section below, are not Federal requirements when appraisal waiver procedures are used.

Appraisal Waiver Decision Process
(Figure 2)

Appraisal

What is an appraisal? The 1987 amendments to the Uniform Act provided, for the first time in Federal law, a definition of an appraisal.

42 USC 61 § 4601

(13) The term "appraisal" means a written statement independently and impartially prepared by a qualified appraiser setting forth an opinion of defined value of an adequately described property as of a specific date, supported by the presentation and analysis of relevant market information.

The definition contains all of the elements an appraisal must include to support use of Federal funds. Any real property valuation documentation that does not address these elements is not considered an appraisal. Once an appraisal of fair market value is reviewed and approved, it becomes the basis upon which the agency will establish an amount it believes to be just compensation. Having a well-prepared, unbiased and thoroughly documented appraisal report is the most critical step toward the goal of providing the property owner with the required estimate of just compensation.

In addition, each State and (possibly) local agency has developed a unique set of rules, regulations, and policies applicable to its jurisdiction.

Appraisal Standards and Requirements

Appraisal practice is guided by The Appraisal Foundation, a non-profit educational organization established in 1987. In 1989 the U.S. Congress gave the Foundation and its two independent Boards specific authority relating to real property appraiser qualifications and appraisal standards. The Uniform Standards of Professional Appraisal Practice(USPAP) authored by the Appraisal Standards Board is generally recognized as setting the ethical and performance standards for the appraisal profession.

USPAP is consistent with the appraisal requirements of Federal and most State governmental organizations. The jurisdictional exception rule within USPAP provides flexibility to accommodate laws or regulations applicable to agency appraisal requirements. The requirements for appraisals and appraiser performance contained in the regulations implementing the Uniform Act (See copy of the January 2005 Uniform Act regulation in the Appendix) are consistent with the standards in USPAP.

Appraiser Qualifications and State Certification

To implement appraisal standards, each State has established a State appraiser regulatory agency responsible for certifying and licensing real estate appraisers and supervising their appraisal-related activities. If your appraisal work requires use of contract (fee) appraisers, they must be State licensed or certified, and qualified by experience or training to perform the work assignment competently.

Under the Uniform Act regulations, each SDOT must develop criteria for determining the minimum qualifications of appraisers, consistent with the complexity of the appraisal assignment. You should review the qualifications of your staff appraisers, and utilize only those qualified for each assignment under SDOT requirements.

Note: We recommend that you contact your SDOT concerning appraiser qualifications, any technical questions about the appraisal process or the documentation formats preferred for appraisal reports.

Owner Accompaniment

The Uniform Act requires that the property owner (or the owner "s designated representative) be given the opportunity to accompany the appraiser during inspection of the property. The purpose of this requirement is to ensure that the owner has the opportunity to advise the appraiser of features of the property which might impact the valuation of the property, as well as allow the owner to indicate any features of the property that might not be obvious to the appraiser (such as the location of underground structures, i.e., wells, septic systems, storage tanks, utilities).

Either your agency or the appraiser must invite the property owner to accompany the appraiser during the inspection of the property. To assure that this requirement is not overlooked, you should advise your appraiser of this responsibility. Concurrently, you should contact the property owner to supply him or her with the name, address, and phone number of the appraiser. An invitation to accompany the appraiser should be in writing and allow sufficient lead time for the owner to arrange to be present or to request an alternate time. You should document these steps in your parcel file. If the owner declinesthe invitation, that fact should be documented in the parcel file.

If it later becomes necessary to update the appraisal, the owner does not have to be given an opportunity to accompany the appraiser on the re-inspection.

Appraisal Criteria

Section 24.103 of 49 CFR contains the requirements for real property appraisals for federally-assisted programs. It references USPAP and other supplemental requirements developed by State and local agencies involved in real property acquisition. The acquiring agency is expected to be involved in development of the scope of work and defining the appraisal problem for each property on which an appraisal will be prepared.

The Uniform Act requires the appraiser to disregard any decrease or increase in fair market value to the property caused by the project for which the property is to be acquired. The requirement reflects that owners should not be penalized because of a decrease in value caused by the proposed project nor rewarded by speculation created by knowledge of the proposed project.
Appraisals must be in writing and must be retained in your parcel file. The regulations found in 49 CFR Part 24 provide that the format and level of documentation for each appraisal are relevant to program needs and follow accepted appraisal practice. At a minimum an appraisal must comply with the above referenced definition of appraisal and include sufficient data and analysis to support the value conclusion.

Based on the scope of work and complexity of the appraisal problem the requirements as described in 49 CFR 24.103, must be used, whether the acquisition is of the whole property or only a part of it. The appraisal report should include an appropriate analysis of such factors as the highest and best use of the property (especially when that use is in transition or a change in the highest and best use will follow the acquisition), severance damages, special benefits, and special purpose properties.

Real and personal property items located on the property are to be clearly identified within the report. In certain instances, an appraisal may include the findings of a specialty report. A specialty report is a study of unique valuation aspects of the property, such as zoning and permit compliance, machinery or equipment on the property, mineral rights or forestation, or items that generally do not fall within the expertise of a real property appraiser.

An appraisal should reflect SDOT appraisal requirements and contain the following items:

Appraisal Review

If you get an appraisal, you must have that appraisal reviewed. The Uniform Act requires that the estimate of just compensation be not less than the agency"s estimate of fair market value from the recommended appraisal. An appraisal becomes "recommended" through appraisal review.

Federal requirements for appraisal review are found in 49 CFR 24.104. The regulations require that acquiring agencies have an appraisal review process and that a qualified review appraiser:

The complexity of the appraisal problem will have a bearing on the qualifications needed by the review appraiser and the degree of explanation required to support the review appraiser's recommended value. It is the review appraiser "s responsibility to determine if the appraisal report contains accurate data, adequate documentation, and appropriately supported conclusions.

The appraisal review process and your review appraiser also should ensure that there is consistency among the property valuations on a project wide basis. For example, two residences, which are similar in most respects and from which your agency is making similar acquisitions, should be appraised and valued consistently.

Deficient Appraisals

If an appraisal is deficient or contains errors, the review appraiser should return the appraisal report to the appraiser for correction, with the deficiencies noted.

There may be instances when the review appraiser discovers minor errors (i.e., insignificant math errors, misspellings, and typographical errors) in an appraisal report. In those cases where only minor changes and corrections are warranted, they can be made by the review appraiser without returning the report to the appraiser. All such changes should be initialed and dated by the review appraiser. It is sound policy to transmit a copy of the changes to the appraiser in the event an update is needed at a later date.

A review appraiser does not have to base his/her recommendation on a particular appraisal, although that is the preferred option. The following situation could occur and still produce acceptable results.

If acceptable corrections or revisions to an appraisal report cannot be obtained from the appraiser,

and the reviewing appraiser is unable to recommend the appraisal,

and your agency determines it is impractical to obtain an additional appraisal,

then the reviewing appraiser may develop appraisal documentation, either independently or by reference to acceptable relevant information developed by others, to support a recommended value.

Review Considerations

The review appraiser should inspect the appraised property and the comparable sales included in the appraisal report. If a field inspection cannot be made, the review appraiser should document the reason(s) in the review report. The review appraiser should examine the appraisal report to determine that it:

Contains an estimate of fair market value for the acquisition and, for partial acquisitions, an allocation of the estimate of fair market value for the real property and for damages, if any, to the remaining property

Appraisal Review and Just Compensation

The reviewing appraiser is also required to sign a certification that:

Upon completion of the appraisal review, the review appraiser should place in the agency's parcel file a signed and dated report setting forth:

The degree of detail provided in the review appraiser's written review report should reflect the complexity of the appraisal problem and report under review.

Note: The required certification forms for the appraiser and review appraiser should be available in your SDOT FHWA approved Right-of-Way or Appraisal Manual.

Appraisal Review Contracting

Following review the recommended appraisal provides the fair market value of the property needed for the project. This is the minimum amount that must be offered to the owner provided it is approved by an agency official. This may not necessarily constitute just compensation as there are situations where property is so unique in nature; or the appraisal, although properly prepared, does not estimate fair market value with any certainty; or the market value does not adequately measure just compensation. In these instances an amount above the recommended appraisal amount could be approved using other valuation evidence in order that the initial offer to the owner more accurately reflects just compensation.

Note: An acquiring agency may not delegate the function of determining the estimate of just compensation to be offered to the property owner to someone outside the agency including a contract review appraiser. This is a critical point that must not be overlooked.

Typically, it is the review appraiser who initiates the consideration that just compensation be based on considerations other than the approved appraisal. Depending on who is performing the appraisal review and agency policy, the appraisal review may include an estimate of just compensation; and that estimate may be based on more than the approved appraisal. In any case, agency files must contain documentation and justification for any amount of just compensation that is established.

Updated: 09/05/2014
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