Appraisers Are Like Tools: Don't Choose the Wrong One

Appraisers Are Like Tools: Don’t Choose the Wrong One

Story by Chris Singleton, American Forest Management

DO YOU REMEMBER that time when you had company coming and needed to sweep off the front porch, but your 6-year-old used the broom for a witch costume and left it somewhere in town on Halloween night, so you had to use a rake instead? Or that other time when you needed a spade to dig a hole to bury your three-year-old’s goldfish, so you bought a cheap one at the local market and the handle broke in half before it even touched the ground? Choosing an appraiser is kind of like choosing a tool: you might be able to make do with one that’s not quite made for the job, but it just won’t be as efficient or as good as it should be; or you can try to go cheap and it just won’t work at all.

Whether you own a patio home in a subdivision next to Augusta National, 250 acres of Thoreau-quality hardwood on Walden Pond or 10,000 acres of prime Douglas-fir overlooking Cannon Beach, the odds are good that at some point, you’ll have to use an appraiser to determine the value of your property. All appraisers are not created equal, and choosing a good one is important, so understanding the “3 Cs”—classification, competency and cause—are crucial to selecting the right appraiser for the job.

Classification Legally, an individual must be licensed or certified to work as an appraiser, and although the minimum education and experience qualifications are set at the federal level, licenses are handled by each state. Therefore, an appraiser must not only meet minimum education and experience criteria, they must also be licensed or certified in the state in which they work. It is very important that when choosing an appraiser, you make sure that he or she is licensed in the state in which the property is located, not the state in which you, or even the appraiser, are located. Failure to do so can lead to not only an invalid appraisal for you, but also legal trouble for the appraiser as they would be guilty of practicing without a license.

Each state has multiple appraiser classifications tied to the levels of education, training, experience and property type set federally. In addition to the state requirements, the federal government also imposes some limits and restrictions on appraisers, particularly for federally-regulated transactions. In other words, when a lender is involved. These restrictions are related to the complexity, property type and value for which each appraiser classification is allowed to assume responsibility. Although titles may vary slightly from state to state, appraisers fall into one of four categories: apprentice appraiser, licensed appraiser, certified residential appraiser or certified general appraiser. Each level requires progressively more education and experience in addition to examinations of increasing difficulty.

An apprentice appraiser, or trainee as they are known in some states, is a beginner who has completed 75 hours of introductory appraisal education and must work under another appraiser in order to gain the experience needed to work on their own. Apprentice appraisers, though they may be very knowledgeable, do not yet have the requisite coursework or experience to legally take responsibility for any assignment and must have a licensed or certified appraiser sign off on all of their work.

A licensed appraiser has completed at least 150 hours of education and has at least 2,000 hours of experience over at least one year. In addition, licensed appraisers must, at a minimum, have a high school diploma or its equivalent. A licensed appraiser is able to sign off on any “noncomplex” residential property of up to four units and a value of less than $1 million but is limited to a value of only $250,000 for complex residential properties. This may mean that he or she could legally appraise your home near Augusta National or your duplex at the beach, provided neither reach $1 million in value, but could not appraise your hunting tract, your cousin’s farm, or the snow cone and CBD oil shack that your best friend’s kooky Aunt Gracie just opened up on the corner.

A certified residential appraiser is essentially a licensed appraiser with a bit more experience and less restrictions. Though they are still restricted to appraising residential property, the additional 50 hours of coursework and 500 hours of experience earned over at least five years as a licensed appraiser (in addition to college coursework requirements) allows them to appraise any residential property with up to four units, regardless of complexity or value. This is the appraiser you would most likely want to hire for your Times Square condo and the quadplex you just bought in downtown Clemson to rent to college students, though, like the licensed appraiser, Aunt Gracie’s snow cone and CBD shack is still off limits to them.

The fourth and most robust appraisal classification is certified general. Certified general appraisers can legally appraise anything of any value. In order to be qualified as a certified general appraiser, an individual must have at least 300 hours of appraisal education and 3,000 hours of experience over a minimum of 18 months; at least half of the experience hours must be in non-residential properties. In addition, an individual seeking a certified general classification must hold at least a bachelor’s degree from an accredited college or university. They’re the ones who legally get to appraise your cattle ranch in Montana, your 80-unit condo in Daytona Beach, your ski resort in Vale, the local country club, all the hardwood on Walden Pond, your 10,000 acres of Douglas-fir in Oregon and yes, finally, Aunt Gracie’s Snow Cones and CBD Oil.

Competency Now if you’re thinking, “Wow! That’s a huge range of property types for one person to appraise,” you’re right. And that brings us to the second C—competency. Being legally qualified to appraise a property type doesn’t make a certified general appraiser competent to do so. And this is where, as someone looking for an appraiser, you’ll have to do most of your due diligence.

Appraisers have an ethical responsibility to be competent to appraise a property before taking an assignment. There are a number of aspects of competency, and when searching for an appraiser, it is not enough to simply ask potential appraisers if they are competent to appraise your property; it is imperative that you know enough to ask the right questions to make sure that they are.

For example, let’s suppose that you do own 250 acres of hardwood on Walden Pond. Your first question to an appraiser might be something along the lines of, “Do you know how to appraise land with trees on it?” Many appraisers will tell you that they do, and that may be true. But if their experience is with multiple thousand-acre pine timberland properties in Alabama, is that really sufficient to competently appraise your smallish hardwood property in Massachusetts? This hits at the heart of several very important distinctions in competency: property type, geography and market type.

First, even though pine and hardwood are both trees, they are very different; they grow differently, they are managed differently, and they are often owned for different reasons. Understanding pine trees may make one competent to appraise pine trees, but that does not necessarily translate to hardwood trees. As a generalization, large pine timberland properties are purchased as an investment for the primary purpose of earning a return on that investment. All decisions related to the value of that property are based on the expectation that the investor will earn a return on that investment. Buyers and owners of small hardwood properties, on the other hand, generally have a much different motivation for ownership. Though they may produce some income, more common motivations for owning these types of properties include recreation (hunting, bird watching, hiking, etc.), conservation, building a cabin to “get away from it all,” having something to pass down to future generations and the like. An appraiser must understand this in order to accurately assess the value of your property.

Second, as the saying goes, the three rules of real estate are “location, location, location,” and geographic competency is extremely important to understand when hiring an appraiser. Going back to our Walden Woods example, let’s focus not on the property type, but on the location of the appraiser’s experience as it compares to the location of the property. I think you will agree that Alabama and Massachusetts are quite different, not only in physical characteristics, but also demographically, economically and legislatively. An appraiser from Alabama who is completely competent to appraise a property next to Talladega Motor Speedway may be completely ill-equipped to appraise the same property on Walden Pond. The Alabama appraiser may not only not know important physical aspects such as timber growth rates and the time of year when harvesting is off limits (like in Spring when the snow melts and the ground is as solid as room temperature butter), but he or she may also not be familiar enough with state and local laws, regulations and ordinances to produce a legally compliant valuation.

C H O O S I N G T H E W R O N G A P P R A I S E R C A N C O S T Y O U I N T E R M S O F T I M E , M O N E Y A N D E V E N L E G A L C O M P L I C A T I O N S , S O Y O U S H O U L D A L W A Y S G I V E A G O O D D E A L OF THOUGHT AND CONSIDERATION TO THE PROCESS” —Chris Singleton

Finally, understanding the markets in which properties are located and in which they trade is of the utmost importance. Failure to do so makes it almost impossible to determine the correct use of the property, which in turn will prevent developing a reasonable appraisal. A potentially incomeproducing property like forestland trades at multiple market levels, all of which impact property value. At the primary level, one must understand the local timber markets—what mills are around, what products they purchase, how much do they need to purchase, and what prices are they willing to pay— in order to determine the timber income-producing potential of the property.

At the same time, local market factors related to land use, such as population growth rates, zoning and the path of growth to name a few, impact the highest and best use of a property. These all help to determine whether it will remain an income-producing timber property or eventually be purchased by Aunt Gracie to finally achieve her life-long dream.

A third market component that appraisers must be aware of is the type of buyers interested in a particular type of property. For instance, the buyer type for our 250-acre Walden hardwood forest is very different from the type of buyer interested in 10,000 acres of Douglas-fir plantation in Oregon. At the same time, however, if the hardwood forestland in the Northeast is 25,000 acres instead of 250 acres, the same buyer may be interested in both because buyers of properties of that size are interested in a return on investment. Understanding who the potential buyers are for a particular property type, and what motivates them, is key to an appraiser’s success and is, therefore, key in choosing the right appraiser.

Cause There are a number of reasons that cause an individual to need an appraisal, and whether you need one in order to borrow money, establish a value basis for estate planning, determine the value of the conservation easement you just donated, or a myriad of other reasons, the purpose of the appraisal is an important factor in selecting an appraiser. This is closely related to competency, in that appraisers often specialize in doing appraisals for particular purposes and may not have the experience necessary to handle your particular needs.

As an example, let’s suppose that 10,000-acre Douglas-fir property near Cannon Beach, Oregon, that you’ve been coveting for years is finally on the market, but you don’t happen to have $30–$40 million on hand to pay cash, so you have to borrow the funds. You’ve gone through a list of appraisers to determine their classifications and competencies and settled on an appraiser with a great reputation who specializes in large timber properties on the West Coast, and who also has worked with your lender before, so you feel very good about him or her. Everything goes beautifully and you purchase the property with no hiccups.

Now let’s say that not long afterward, you are introduced by a mutual friend to someone from a conservation organization who says that they would like to talk to you about donating a conservation easement on your property. You really like the idea and, after doing some digging, learn that you can get a tax deduction for the value of the donated easement. You also find out that you will need an appraisal of the property before and after the easement in order to determine the value of the easement donated, and that the IRS has very strict rules that must be followed. You contact the appraiser who did the original appraisal for your purchase because they did such a good job the first time but find out that they have never done a conservation easement appraisal and are not very familiar with the IRS regulations. However, they recommend another firm that has a great deal of experience in that arena and is at the top of the IRS’s short list of approved appraisers, so you ultimately decide to hire the second firm.

In this example, the original firm is perfectly competent to handle the appraisal of the property for acquisition lending purposes but is not the best choice to handle the appraisal for conservation and IRS reporting purposes due their lack of experience in that particular arena.

Conclusion Choosing the wrong appraiser can cost you in terms of time, money and even legal complications, so you should always put a good deal of thought and consideration to the process. If you follow the “3 Cs” and look for the right classification, competencies and sufficient experience with the area that causes you to need the appraisal, you will take the uncertainty out of finding a good appraiser. °