The review of over 3,000 appraisal reports for the federal government and questions regularly answered by AgWare’s staff, point to either a weakness in the education or understanding of property rights. While the topic is basic and taught the first day of the first valuation class, something has been missed. Appraisers regularly report the “rights appraised” as fee simple, or sometimes appraisals are rejected by lenders because the appraiser reported something else than fee simple when full rights did not exist. The reasons vary, but such a tendency promulgates appraiser education or experience that reporting fee simple is always done — no matter what may exist. Properties have evolved over the years; therefore, it is rare to find property that does not have encumbrances for something. Properties have restrictions on title ranging from:
- Specific deed restrictions from prior owners or interested parties at the agreement of the landowner
- Life estates
- Utility and/access easements (electric, telephone, roads, ditches, railroads, etc.)
- Cell tower sites
- Conservation easements or restrictions on development rights
- Deed restrictions
- Mineral right or other subsurface reservations
- Other surface estate reservations, e.g., sand, gravel, building stone, etc.
On review, the first signal that something may be wrong is the appraiser talks about one or more of the items above in the appraisal, but reports “fee simple”. Some of those encumbrances ultimately may not have an impact on value; however, to report “fee simple” is misstating the facts and could create an issue or liability to the appraiser in some cases. If those encumbrances exist, the appraiser should make an affirmative statement as to their affect. If observation in the market (analysis of encumbered sales) shows there is no impact, that should be reported. But to say fee simple exits is misleading.
The seminar also discusses the impact of the encumbrances in cases where there is a resulting change in the highest and best use of the property as well as encumbrances that only change intensity of the same use.
- Attendee Preparation: research and bring hard copies of:
a. at least two differing encumbrances of any type on two different properties; multiple encumbrances (preferred). Either from Schedule B of the title policy or searching courthouse records under a selected property, or
b. present a research paper summarizing that at least three (3) related articles about encumbrances and/or the impact on prices were found, read, and evaluated with a minimum of a one-page (1) summary (no less than 300 words) to be presented to the instructor — possibly having that attendee present their findings in class.
- Each attendee will find at least one non-encumbered sale (without the specific easement and/or deed restriction, or lacking mineral rights, etc.) at least one (1) of the two encumbrances found in #1 above; and have a short, one-line summary on the impact of that encumbrance found in the marketplace.
- At the seminar, the instructor will form groups based on the similarity of encumbrance types. A “chair-person” for that group selected, then that person will present a summary of types and general findings by group. Assuming 3-5 groups, depending on breadth of examples.
Each attendee will be “invested” after performing the pre-class research and analysis. Additionally, there are several basic elements that should be learned, before and during the seminar:
- understand that encumbrances are present in nearly every property and property type,
- demonstrate and understand where to locate the encumbrances recorded for any one property,
- demonstrate and understand the concept of “paired sales analysis” or researching if the encumbrance has an impact on market prices (encumbered v. unencumbered sale). Examples presented that shows a differing impact on property and/or value depending on where an encumbrance (pipeline or powerline) cross a tract, i.e., through cropland v. pasture v. building site, v. irrigated, etc., a “second bite” with a second encumbrance parallel to or unrelated to the first easement.
- Understand that easements do not have value standing alone. Encumbrances of any type add to, detract from, or have no impact on the whole property to which they are attached. Simply, you cannot go to your Realtor, view their listings of easements, buy one and place it on someone’s property. Encumbrances are part of a larger bundle of rights — or contribute or detract from value of the whole. Attendees learn the value of the whole before the encumbrance v. the value of the whole after the encumbrance, is reported as the “difference or contribution due to the encumbrance”.
- understand how other attendees found and evaluated their specific examples within the groups,
- demonstrate and understand the importance of sale verification, i.e., as the number of encumbrances accelerate within any single property, verification of the details and way that is accomplished has an impact on the reliability and creditability of the data set,
- understanding your attention to the most rudimentary details affects your appraisal credibility and your client’s perception of your work product.
Either of the current editions of the following:
- The Appraisal of Real Property (Appraisal Institute (AI)), Real Estate Valuation in Litigation, J.D. Eaton, MAI, SRA also published by the AI, or The Appraisal of Rural Property (ASFMRA), if the fundamentals or advanced of real estate valuation procedures are not understood before class,
- a financial calculator would be helpful, but not mandatory,
- attendee Notebook [PowerPoint only; attached]; provided at class check-in, &
- written Examples of two encumbrances; one of which compared to non-encumbered property for “paired sales” analysis.