Inspecting the Subject Property: At Times Inspections are Unnecessary or Impossible to Perform
(by Dave J. Maloney, Jr., AOA CM) The primary reason for an appraiser to personally inspect a property is to gather information about the characteristics of the property that are relevant to its value. (In general, these are referred to as relevant property characteristics and consist of quality characteristics as well as value-relevant attributes of the property.)
But is a personal inspection by the appraiser required to gather the necessary information? The answer is “No” (though it is advised whenever possible.)
Though appraisers almost always conduct a hands-on inspection of the property which is the subject of the appraisal assignment, on some occasions such as in the case of a theft or loss, the property is no longer available for inspection. In such cases, a personal inspection simply is not possible. On other occasions, the high cost or risk of loss of shipping a valuable property to the specialist appraiser for examination might necessitate an appraisal being conducted without the benefit of a personal inspection. For items that remain available for inspection and which require special testing procedures or equipment to prove genuineness or quality, or which require authentication, or which are potentially so valuable as to warrant the expense of a hands-on inspection, the specialist appraiser should insist that arrangements be made for a personal inspection either by him/herself or by some other qualified appraiser. Otherwise, the appraiser should abandon the assignment.
The following discussion addresses USPAP’s requirements regarding the appraiser’s responsibility regarding “identification.”
USPAP requires that the appraiser:
Identify the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal, including:
(i) sufficient characteristics to establish the identity [emphasis added] of the item including the method of identification;
(ii) sufficient characteristics to establish the relative quality [emphasis added] of the item (and its component parts, where applicable) within its type;
(iii) all other physical and economic attributes with a material effect on value; [emphasis added]
Comment: Some examples of physical and economic characteristics include condition, style, size, quality, manufacturer, author, materials, origin, age, provenance, alterations, restorations, and obsolescence. The type of property, the type and definition of value, and intended use of the appraisal determine which characteristics have a material effect on value… (USPAP)
While in many cases the personal observations of the appraiser made during a hands-on inspection are the primary source of information regarding the relevant property characteristics of the subject property, an inspection is not required by USPAP even though one is more often than not conducted. USPAP does not require a personal inspection, but, as noted in the above, USPAP does require that the appraiser:
- identify the item,
- identify the item’s quality characteristics, and
- identify the item’s value-relevant attributes
The item’s quality characteristics combine with its value-relevant attributes to form what is referred to as “relevant property characteristics.”
- Quality characteristics. This is a “good, better, best” type of gauge and includes such characteristics as condition, alterations, restorations, repairs, conservation, additions, obsolescence, missing parts, physical deterioration, etc. All else being equal, the better the quality the higher the property’s value.
- Value-relevant attributes. These are economic and physical attributes that have a material effect on value. All else being equal, the more value-relevant attributes present, the higher the property’s value.
- Economic attributes are extrinsic to the property. Examples include:
- Is the property plentiful? Scarce?
- Is it in- or out-of-style?
- Is it made from out-of-favor animal fur or parts of illegal contraband material such as banned ivory?
- Is it a passing fad or a collecting trend with longevity?
- Physical attributes are intrinsic to the property. Examples include:
- Is the maker well known? A work of art might have the contributing physical attribute of having been made by a known and listed artist.
- Does the item have desirable features? Highly-carved back, knees and feet are physical value-relevant attributes of a period Chippendale chair, but porcelain casters added to it in Victorian times would not be a value-relevant attribute.
- Is the item genuine or is it a reproduction?
- Is the item’s importance enhanced by significant provenance?
- Does regionalism come into play? Often property attributed to a local maker is more valuable within the maker’s locale than at a distance.
Only by identifying the item itself as well as the property’s quality characteristics and value-relevant attributes (or, when necessary, making acceptable extraordinary assumptions regarding such relevant property characteristics) can the appraiser produce credible appraisal results.
The degree of inspection required to identify the quality characteristics and value-relevant attributes of the property is an aspect of the assignment’s scope of work. It is the appraiser’s responsibility to determine the assignment’s scope of work and, therefore, the degree of inspection required to produce credible assignment results given the intended use of the report. The degree of inspection or the source for obtaining the needed property information may vary based on conditions of the assignment and on the intended use of the appraisal report. For instance, conditions might be such that the appraiser does not have access to the subject property in which case he or she must rely on descriptive information provided by others; or, the intended use of the appraisal report might be for the personal use of the client. Such a restricted use appraisal report might permit only a cursory and brief inspection of the property rather than a more sophisticated inspection which would permit testing and authentication.
- An appraiser may make use of any number of information sources he feels reliable in order to identify the quality characteristics and value-relevant attributes of the property being appraised. While a personal inspection is one option, even it might not provide all the necessary information. The appraiser may need to additionally rely on input or reports from other professionals or appraisers, or from experts who have the necessary equipment to enable them to conduct special tests or observations.
The appraiser may also find it necessary to rely solely on client-provided information such as photographs, digital images, verbal and/or written descriptions, or even sketches in order to identify the relevant characteristics of the subject property. Such reliance might be necessary when the subject property is no longer available for inspection as would be the case if it was destroyed, lost or stolen, or when aaccess to the subject property is denied the appraiser as might be the case in a nasty divorce.
Perhaps the property is located a long distance from the appraiser and is too fragile or too expensive to ship, or it is potentially too valuable to risk shipping to the appraiser for a personal inspection. Conversely, perhaps the cost of the appraiser traveling to the property is cost prohibitive or unreasonable given the relatively low potential value of the subject property. In such instances, the appraiser may need to rely on input from other appraisers or experts who practice in the locale of the subject property.
What happens if adequate information about relevant subject property characteristics is not available through a personal inspection or from sources the appraiser believes are reliable? In such a case, the appraiser would be required to abandon the assignment unless he can either:
- Work with the client to modify the assignment conditions to expand the scope of work to include gathering the necessary information, or
- Use an extraordinary assumption about such information, if such assumptions would result in credible assignment results being developed
As an example, consider an appraiser engaged to appraise two sets of 19th century sterling silver flatware that are the subject of litigation regarding an estate. Unfortunately, the estate representative later informs the appraiser that while one set is available for inspection, the second set is located in another state and cannot be made available for the appraiser’s inspection until the court’s deadline for the submission of expert reports has passed. In this case, the assignment conditions have changed causing the scope of work to change as well. As it stands, the appraiser does not have sufficient information to produce credible assignment results regarding the second set. The appraiser must consult with the client to determine a proper course of action. Options would include the appraisal of only the one set of flatware or the use an extraordinary assumption regarding the quality characteristics and value-relevant attributes of the second set.
Regardless, in all assignments the appraiser must ensure that the degree of his personal inspection or the amount and type of information otherwise obtained or assumed (including when an inspection is not possible) is sufficient to identify the quality characteristics and value-relevant attributes of the subject property. It is the appraiser’s responsibility to identify these relevant property characteristics to the extent he feels necessary in order to develop credible assignment results that meaningfully address the appraisal problem, that answer the value questions, and that meet the requirements of the client’s stated intended use of the appraisal report.
Reporting Requirements. Appraisal reports must contain within the signed USPAP certification a statement indicating whether or not the appraiser personally inspected the subject property. All appraisal reports must also contain sufficient information (usually placed in the scope of work statement) to enable the client and intended users to understand the extent of the inspection that was (or was not) performed.
Because of the infinite variability of inspections, it is important that the appraisal report clearly communicates the degree of the inspection in order for the report to be meaningful. (USPAP AO-2)
© by Dave J. Maloney, Jr., AOA CM