How to Describe Property
(by Dave Maloney 2012) With every appraisal assignment appraisers need to decide to what degree they must describe the subject property in the report. Must I describe the secondary woods of a 19th century highboy? Must I list the serial number of a flat screen TV? The computer’s color? The dimension of a round dining table? The exact quantity? Every piece of stainless steel flatware in the kitchen drawer? Can I group things such as everyday and common dishes, glassware, pots & pans, hand tools, etc. that are known to be depreciable in nature and of minimal value? Understanding the underlying requirements of USPAP will guide us in answering these types of questions.
According to USPAP, the report must be credible, understandable and non-misleading. The report should be such that the client can feel comfortable relying upon it. The report must also meet the needs of the client and other intended users. And (according the Standard Rule 8-2(a,b,c)(iii)) the report must describe/summarize/state (depending on the report format being used) sufficient information to identify the subject property including its value relevant characteristics that are “relevant to the assignment.”
What does “relevant to the assignment” mean? This refers to the Standard Rule 7-2(e) requirement that the appraiser identify certain elements of information regarding the subject property “that are relevant to the type and definition of value and intended use of the appraisal.” Note the emphasis here on describing property in a manner that is relevant to the type and definition of value as well as is relevant to the “intended use” of the appraisal.
Intended use is a critically significant term in our profession. From it flows all the appraiser does in order to develop credible assignment results. Intended use must be first identified before the appraiser can even identify the type and definition of value to employ or determine the scope of work that will be required to develop credible assignment results. And until scope of work is determined, the appraiser does not even know if he or she is competent enough to even accept the assignment! So, “intended use” is very important.
By the way, those of us who comply with USPAP make use of the term “intended use” as it is defined in USPAP’s DEFINITION section. We do not use any other term such as “assigned use.” “Assigned use” was a term Stephen Van Cline (RIP) and I made up in 1994 when I was asked to lead a team to completely re-write the ISA’s core course in appraisal fundamentals. We thought we were being clever by insisting that the use of the assignment be “assigned” and not merely “intended.” At the time we also were not following the requirements of the still-new USPAP very well. But over the years the preeminence of USPAP grew and the course eventually shifted over to being a fairly complete USPAP-centric course which made use of USPAP terminology to the exclusion of all others – especially ones we had made up!
Regarding property characteristics being “relevant to the assignment,” USPAP’s Standards Rule 7-2(e) states that the appraiser must identify sufficient characteristics to establish the identity and relative quality of the subject property. The appraiser must also identify all other physical and economic attributes (such as quantity, condition, origin, age, authorship, supply & demand, marketability, transferability of title, fads, bandwagon effect, etc. etc.) that have a “material effect on value.” In general, we refer to these as “value-relevant characteristics.”
The Comment section of Standards Rule 7-2(e)(iii) is the salient point of this discussion. It states that there are three factors which impact on which characteristics of the subject property will impact value and, consequently, must be disclosed in the report’s description of the subject property. Section 7-2(e)(iii) states that “The type of property, the type and definition of value, and the intended use of the appraisal determine which characteristics have a material effect on value.”
Wow! USPAP sure gives us a lot of leeway when it comes to which information regarding the subject property should be in the report. More on that in a minute. But what about the requirements of laws and regulations when it comes to describing property? Frankly, there is not much there. Tax Regulation Sec. 20.2031-6 (“Valuation of household and personal effects”) addresses only Federal estate appraisals. It states that “A room by room itemization of household and personal effects is desirable. All the articles should be named specifically, except that a number of articles contained in the same room, none of which has a value in excess of $100, may be grouped…”
But how many times do we do Federal estate appraisals? Hardly ever. However, I have to do MD state estate appraisals, and MD requires a listing of all items on a “line-by-line basis.” What do I do about all those minor glass, plastic, ceramic, wood and metal knickknacks in the living room? For them I use the above $100 suggestion as a basis for lumping them together as a single line item, but with some consideration of the needs of the client and other intended users as I will mention shortly. But other than this regulation (which only applies to Federal estate appraisals), are there any other laws or regulations that discuss combining items or how to describe property in the report? I cannot think of any.
In addition to the requirements of USPAP, appraisers have historically described property in a manner that would reflect the level of detail that is normally acceptable within the trade, i.e., an essential element in all personal property appraisals is that property be described in a manner that is understood by those who participate in the marketplace in which the property is commonly traded. This requires an accurate and complete reporting of the distinguishing features and value characteristics of the property as commonly understood by those participants. As an example, for an 18th century highboy, it is common practice to make note of the circa date, country of origin, primary woods, secondary woods, condition, hardware, features such as carvings, repairs, finish, maker or maker’s marks, dimensions, etc. But such detail would be uncalled for if describing a 1990s 6′ long particleboard work table with folding metal legs.
In addition, when required by the type of property or the intended use of the report, appraisers typically describe property in sufficient detail to allow someone unfamiliar with the subject property to identify it from among a group of similar items. Are there unique characteristics, inscriptions, serial numbers, marks or damages, or other identifiers which would differentiate the subject property from among a group of similar items? This level of description is necessary for the successful recovery of stolen property, so it would be particularly useful when preparing reports being used for the intended use of the client obtaining insurance coverage.
Before we continue, note that the amount and detail of information included in a report also depends on whether you are preparing a Self-contained, Summary or a Restricted Use appraisal report.
- The Self-contained report requires that the appraiser “describe” sufficient information to identify the property and its value-relevant characteristics (e.g., “Round, quarter-sawn oak extension dining table on a turned center columnar base having four cabriole legs terminating in carved claw-and-ball feet; partial paper label on underside of top marked “Johnson Mfg. / Grand Rapids, Mi.”; c. 1910; dia. 47” h-30”; overall wear to top, one toe chipped, otherwise in good condition”).
- The use of a Summary report requires the appraiser to only “summarize” such information (e.g., “Round oak dining table, c. 1910; good condition”).
- And the use of a Restricted use report merely requires the appraiser to “state” the identity of the of the property (e.g., “Round oak dining table”). Note that the appraiser need not address the value relevant characteristics at all! The only requirement with a Restricted use report is to “state” what the item is. But the report still must be “understandable,” so rather than just state that the subject property is a “table,” I add a little amplifying information so the client can tell that the subject property is the round oak dining table and not the mahogany side table.
Property Descriptions dependent on three factors
As we have learned so far, according to USPAP, the way we describe property (including combining items into a single line-item if and when appropriate) is dependent on three factors that will have a material effect on value:
- The type of property,
- The intended use of the appraisal report, and
- The type and definition of value
Type of property determines which characteristics have material effect on value
As alluded to above, if the property type is common, everyday, depreciable property such as used furniture, household goods, clothing or knickknacks of nominal value, do not spend a lot of time describing the property. Having said that, I would consult with the client to be sure that my minimalistic convention for describing such items is going to be satisfactory to the client as well as to any other identified intended users. Does sister Sally want greater detail in the descriptions, regardless? Are there some knickknacks I might be grouping together that brother Bob would rather have broken out separately in order that he might be able to purchase a few from the estate? Remember – the report must meet the needs of the client and other intended users, so discuss your plans with the client to ensure that it does. (And, yes, though it might sound blasphemous to some, descriptions of such items do resemble a glorified shopping list.)
Most items of depreciable personal property can normally be described in a brief manner—not only because it is typically acceptable to do so within the marketplace, but also because value levels are usually relatively low and the intended uses for which depreciable property is appraised are normally not very demanding.
On the other hand, if the subject property is appreciable in nature, my descriptions will be in a manner that is considered typical within the trade. Depending on the intended use (e.g., MD estate vs. litigation, for instance), the descriptions of these more valuable items could range from a few sentences to a paragraph or two – including photographs. Appreciable property such as antiques, collectibles, art and jewelry normally demand lengthier and more sophisticated descriptions due to their uniqueness, potentially high value, varying opinions as to possible worth, and the more complex and often litigious needs of the uses for which such appraisals are intended.
In a way, when describing the subject property in my report, I follow the spirit of Standards Rule 7-4(e) which admonishes the appraiser who is appraising multiple objects to “consider the significance of the value of the individual assets to the assignment results” and to give more analytic focus to “those objects which are more significant to the assignment results.”
Is the subject property an assemblage or grouping of items? Is so, the appraiser must clearly describe the various components of the assemblage. And, of course, when developing an opinion of value of the assemblage, the appraiser must analyze whether or not the value opinion for the assemblage is equal to a simple summation of the value of the individual parts, or if value is greater to or less than a summation of the value of the individual parts. More on assemblages below.
Intended use of the appraisal determines which characteristics have material effect on value
The intended use of the appraisal is one of the most important elements of information that must be identified by the appraiser as part of the very first step (i.e., the “Problem Identification” step) of the Appraisal Process. Intended use directs every subsequent step the appraiser takes — from identifying which type and definition of value to employ to determining a scope of work that will help ensure credible assignment results, to ascertaining if the appraiser is sufficiently competent to even accept the assignment in the first place.
Intended use also plays an important role in determining which characteristics of the subject property have a material effect on value. As mentioned above, the descriptive needs for a Summary appraisal report for the intended use of MD state estate appraisals is significantly less than would be the descriptive needs for a Self-contained federal donation appraisal report or for a Self-contained litigation appraisal report. The latter two intended uses will require a full “description” of the value relevant characteristics of the subject property (maybe even including comparable market data) in order to best support the appraisers value opinion. The MD estate appraisals, on the other hand, will require only a “summary” of the same descriptive information. What is more, a Restricted use appraisal (which can be used only by the client and by no other intended user) need not even describe the property’s value relevant characteristics at all! It need only “state” what the property is, e.g., a “round oak table” or a “Lalique glass vase” or a “Currier & Ives print”. Of course, these are minimum requirements. The appraiser should include any additional information thought necessary in order to help ensure that the assignment results are understandable and not misleading.
What about a hypothetical condition that is encountered by being asked to appraise an item for the intended use of the client making an informed decision? For instance, consider a client who owns a damaged painting and is wondering whether or not it’s worth having the painting professionally restored. Or might the cost of restoration exceed the value of the painting even after it’s been restored? Assuming that the painting has already been restored is an example of a hypothetical condition, i.e., a condition that does not exist as of the effective date of the report, but is “assumed” to exist for the purpose of the analysis. For such an intended use, the appraiser must describe the item’s “assumed condition” in the appraisal report.
Type and definition of value determines which characteristics have material effect on value
The type and definition of value to be developed may also have an impact on which property characteristics have a material effect on value and, therefore, should be included in the item’s description. For instance, consider a damage claims appraisal of a flat screen TV that has been destroyed in a fire. If the value type to be developed is “replacement value (new),” then sufficient information such as model number must be included in the report to help substantiate the development of an opinion of replacement value (new) for that particular model of television in order to fairly compensate the insured. On the other hand, including such detailed descriptive information would not be necessary in an estate appraisal in which the appraiser is developing an opinion of fair market value or in an assignment in which the appraiser is developing an opinion of forced-liquidation value. With these latter two value types, while age might have a material effect on the value of the TV, the model number would not.
In addition, when developing an opinion of market value (e.g., as fair market value, marketable cash value, orderly liquidation value) USPAP’s Standards rule 8-2(a,b,c)(viii) requires the appraiser to summarize the results of the appraiser’s analysis of past sales of the subject property, offers to sell, options and past listings of the subject property. If such information is available in the normal course of business and if it is relevant to the assignment, it must be summarized in the report. This is an example of the “economic” attributes of a property mentioned in Standards Rule 7-2(e)(iii) that might have a material effect on value.
Describing Assemblages: Groupings, Collections and Accumulations
The manner in which the appraiser describes assemblages such as groupings, collections and accumulations will depend largely on the issues addressed above. For a complementary discussion regarding describing assemblages please see this article.
© David J. Maloney, Jr. 2012