Section 8: Reviewing the Appraisal of the Remainder After
Anchor: #i1001310Procedure
The review appraiser’s analysis should include the appraiser’s support for the value of the remainder after acquisition. The appraiser should make use of the market, cost, and income approaches to value and consider the remainder as a separate and distinct property. The review appraiser should also disregard its previous joinder with the part to be acquired, but give due consideration to the highest and best use of the part acquired.
Ordinarily the appraiser should not use the same market data that was used in evaluating the whole property by simply making additional adjustments, but should rely on sales that are actually comparable to the remainder after the part acquired. No comparison of the “remainder after” to the “remainder before” will be made for determining the “remainder after’s” value. Before a value is recommended or approved for a partial acquisition, the review appraiser should be sure that the appraisal of the whole property, the part to be acquired, and the remainder after are adequately supported as if each were a separate property.
In reviewing the appraiser’s opinion of value for the remainder after, it is necessary to ensure that all probable changes in its highest and best use have been considered. If there are any changes, these must be supported with adequate data. Further, an appraiser must consider the possibility of a change in the highest and best use, including the possibility of change in the highest and best use caused by the new facility. An appraiser may assume that there is no change, unless there is a decline in the quality of the same use (along with loss in value), which will necessitate the payment of damages. If the same use is assumed to continue, then a loss in value would occur only if the overall quality of its use has declined. However, if the highest and best use changes to a more valuable use, there would probably be no damages but would indicate some type of enhancement(s).
The review appraiser should also be alert to the possibility of illogical reasoning in measuring a reduction in value to the remainder after by using the cost to cure method. It must be remembered that the cost to cure method measures the maximum loss in value that is possible for a given cause, but the reduction in value may be less than the total cost to cure. As a check, the review appraiser should consider what the value of the remainder after would be with the addition of the curable item.
If the value of the remainder after “as cured” exceeds the value of the remainder before, then the reviewer knows that the cost to cure method has been applied improperly. This situation may occur if there is an improvement that contributes value to both the part to be acquired and the remainder after. For example, the appraiser may have properly valued this item as it contributes value to the whole property or just to the part to be acquired. In addition to this contributory value, the appraiser may then consider the remainder after to be of less value due to the loss of the improvement on the part to be acquired as measured by the cost to cure method. This may result in an error from two different causes.
The more frequent error is double compensation, caused by including a value for the improvement on the part to be acquired and allowing a reduction in value to the remainder after for its absence. An example would be the inclusion of a water well in the value of the part acquired and showing a lesser value for the remainder after for not having the water well. The remainder after, of course, should not suffer a loss more than the improvement’s contributory value to the whole property. If all of the water well’s value is attributed to the part to be acquired, then the remainder after should have no damages or loss in value due to its absence. The contribution of an item to the various parts of a property should not exceed the total property value.
Secondly, an error may occur when a depreciated improvement, with little or no contributory value, is located on the part to be acquired; the loss to the remainder after is measured by the cost to replace the improvement with one that is new. Since the existing improvement is not new, the reduction in value should not exceed the total contributory value of the improvement.
As a means of checking the appraiser’s method for accuracy, the reviewer should add together the value of the part to be acquired, the value of the remainder after, plus the estimated loss in value (damages) as determined by the cost to cure method. If the total does not equal the whole property value, an error probably exists. One of these three elements has not been considered properly. Assuming that the part to be acquired has been valued correctly and the remainder after has been properly appraised, then the error must be in the cost to cure method. If these three parts equal more than the whole property value, then in all likelihood the cost to cure method as a measure of damages exceeds the actual loss in value.
Another cause for a reduction in value of the remainder after that is difficult for the appraiser to support (and for the review appraiser to analyze) is a loss in value due to the proximity of a new road to the improvements on the remainder after. The tendency of some appraisers is to furnish no market analysis or support, but merely to state their opinion on “proximity damages” based on a description of the effect of the acquisition upon the remainder after. Unless this opinion of value is supported with appraisal data, the review appraiser has little on which to base conclusions. A generally logical, but otherwise unsupported, opinion on proximity damages should not be acceptable to the review appraiser.
Relevant market data is usually available to the appraiser. The essential problem is to find comparable sales (or rentals) that have a similar proximity to a comparable roadway. It is true that comparables may not be found in the subject’s neighborhood; however, there should be some past governmental right of way acquisitions of a property on a relatively similar roadway that was affected by proximity in a comparable way. The market data available may not be ideal, but the appraiser should be able to offer something more than just an opinion.
However, the review appraiser should be cautious when the appraiser uses a comparable sale of a remainder after as a basis for proximity damages by establishing a percentage loss in value for the sale property and then applying this same percentage to the subject property. While the degree of proximity may be similar between the two properties, they may not suffer the same percentage loss in value unless they are also very comparable. For example, a large estate type home that is normally located far away from a high traffic roadway may suffer a greater percentage decline in value due to proximity to a traffic artery than a small house with very few amenities. Moreover, the small and less expensive house is usually located in a less desirable location. Even though it may have the same physical proximity to the roadway as the estate house, the degree of change is usually less for the smaller house.
In reviewing an appraisal of the remainder after, the review appraiser should never become so engrossed in the details that he/she loses sight of the overall valuation methodologies. As an illustration, a matter that is frequently overlooked by the appraiser is enhancements to the remainder after. Some appraisers tend to be “damage oriented” when estimating the value of the remainder after; that is, they just naturally assume, because of the acquisition, the remainder after will be of less value. Some appraisers may consider enhancements speculative. Moreover, even though the appraiser does not include damages to the remainder after, but enhancements are indicated, the appraiser will not include any enhancements in his/her report. This will indicate that the remainder after has not been properly appraised.
One such example of an incorrect appraisal technique is seen when the size unit value (per square foot/acre) of the part acquired is estimated to be more valuable than the whole property’s size unit value. This may occur if the part to be acquired involves the more valuable street frontage of the whole property, but the remainder after will continue to have frontage on an equal or better facility. The remainder after, or at least part of the remainder in this instance, may assume a unit value equal to or less than the unit value of the part acquired when the new road is completed. If the unit value of the remainder after is valued at less than the unit value of the part acquired, it would reflect an enhancement. Note the following example:
|
Valuation Area |
Calculation |
|---|---|
|
Whole Property |
20 acres @ $5,000/ac = $100,000 |
|
Part to be Acquired |
5 acres @ $7,500/ac = - 37,500 |
|
Remainder Before |
15 acres @ $4,166/ac = 62,500 |
|
Remainder After |
15 acres @ $5,000/ac = 75,000 |
|
Enhancement |
$12,500 |
|
Compensation (Part to be Acquired less Enhancement) |
$25,000 |
The above illustration is incorrect because the enhancement of $12,500 in the remainder value was deducted from the part to be acquired. Such enhancements may only be offset against any damages found to the remainder.