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Due Diligence – When Is It Due?

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Disclaimer: Content reflects the opinion of the authors, and does not necessarily reflect AIC positions.

Most readers of appraisal reports are accustomed to the usual format of facts, discussion of comparable properties, and a conclusion on market value.  Thorough appraisals, completed according to this format, are usually sufficient.

Until they are challenged by questions like:

  • Why wasn’t Blackacre, in the same locale, included as a comparable sale?
  • Why was Whiteacre included as a rent comparable when Brownacre – which is more similar – was excluded? Both were in the same locale.
  • Why were the comparable sales at Jonestown – 50 miles away – included while the sales at Smith’s Point – 30 miles away – were not?
  • Why wasn’t the land residual approach used? Or,
  • Why was the land residual approach used, given the commentary in appraisal textbooks?

In their detailed professional standards, appraisal associations (AIC, AI, IVFA) have directed their members to discuss the scope of an assignment near the beginning of the report.  The phrases relevant to this commentary are, typically, that the appraiser must:

  • collect, verify, analyze and reconcile recent market information regarding properties of similar utilization; and
  • prepare a logical and supportable conclusion of the market value of the land and improved property, following recognized methods and techniques that are based on comparisons of similar properties to the subject [emphasis added].

Note that the scope description does not say that the appraiser has analyzed properties of the most similar utilization.  Nor does it say that the appraiser has carefully considered potential comparators beyond those that were included in their report.  Furthermore, the appraiser is not obligated to disclose discarded comparators.

The results of these two facts are that a challenger to the report, be it an appraiser adverse in interest, cross-examining lawyer, client with two appraisal reports in hand, or discipline committee, have an opening – a wide opening -through which to challenge the appraiser about information they may have initially noted in their file which they have not reviewed recently.

Have you ever had the experience of listening to one side of a debate, and finding the opinions convincing, until you hear the other side?  A logical and supportable conclusion of the market value will carry the day if there is no challenge.

Where there are challenges, even some excellent appraisers, experienced in litigation, have resigned themselves to being asked uncomfortably challenging questions.  I say it does not have to be that way.  Here’s why.

Keeping in mind that most clients are cost conscious, there are two shortcomings to the current standards:

  1. In my respectful view, standards should more clearly spell out that if a report is being to help resolve a contentious issue, that it should be prepared according to a litigation standard;
  2. The assignment and the report should follow through on the litigation standard, by describing what comparators were considered and discarded, and why. Likewise, there should be a brief description of why some methodologies were considered and discarded.

Aside from what the standards ought to say, the benefits of this approach are of such appeal that most appraisers should adopt them in any case:

  • Answering questions on a 2 year old report is much easier if the answers are in the report;
  • Having the explanations in the report often pre-empts questions;
  • From a tactical point of view, it is always better “to get off first,” having your statement out there from the outset, rather than playing catch-up to a challenge;

Remember that the facts, and your thoughts about the comparators which are eventually discarded, are immediately available to the appraiser at the time of writing.  Just write a paragraph into the report.  If written at the time of analysis, these additional conclusions should take a few minutes, and avoid increasing client cost significantly.

I’ll be blunt.  There is a perceived downside.  More than one well regarded appraiser who is experienced in litigation, has decided that less is better:  the less information in a report, the less likely the opposition will find mistakes or holes in it.  But in my view, as both witness and lawyer, the appraiser should write their comments at the time of doing the research, write them into their report rather than as a rebuttal submission, or to speak it as a cross-examination answer, and to have the information readily at hand in the initial report.

I described this more thorough approach to a new potential client who would have the task of eventually releasing my report to over a thousand affected landowners.  She smiled and said, “I prefer to have the answers to questions already in the report.”

Steven Thair, AACI, P.App

Mr. Thair has 15 years experience in commercial law and 20 yeaers experience in appraisal. He specializes in litigation appraisals. He has published numerous journal articles in North America and presented at conferences in Canada and the United States. He was an instructor of professional standards for the AIC and and IAAO for many years. He has appeared before numerous tribunals and courts. He was Chair of the national discipline committee for several years and served as Provincial President. Go to www..brunsdonlawrek.com for more information.

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