Critiquing Appraisal Reports
A Non-Testifying Expert
(As quoting the attorney in
cross examination.)
IBA Symposium
June 23, 2006
Robert J. Strachota
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Responsibilities of the Appraisal Reviewer
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Accept that appraisers have differences of
opinion.
Do not make the review a personal matter.
Be objective and non-emotional about the report
Recognize the Unique Profession of being a
Review Appraiser
Be honorable and professional.
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Appraise the Appraisal
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Read the appraisal carefully and mark critical issues.
Note all spelling errors.
Identify poor grammar and look for sentences, phrases or
paragraphs that seem to drop in and are disconnected from the
text.
Statements left in from a previous report
Descriptive errors – subject, sales, age of business, equipment
listing, etc.
Date errors – date of death, event, divorce, etc.
Missing requirement for USPAP compliance.
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Leave the Bias at the Door
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It does not help the attorney to tell him you are “right” and the
other side is “wrong.”
As an advisor, you should not be trying to ‘build up’ your own
report.
It is not enough to tell the attorney something is wrong, you
must educate the attorney as to why it is wrong and what
impact it has on the overall report and value conclusions.
DO NOT substitute your opinion for the other appraiser’s
opinion. Respect the fact the other appraiser has a different
opinion but look at the foundations of that opinion.
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Understanding the Appraisal
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Identify Judgment Errors
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Condition of the Business
Size of Trade Market
Use of Guideline Companies (comparables)
Inconsistent methods of valuation relative to the
circumstances of the business.
Inconsistencies in different parts of the appraisal,
i.e., industry growth rate vs. projection of
subjects income.
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Evaluate the Appraisal Theory
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Conduct a Test of Reasonableness, ask;
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Questions about the data, reasoning, analyses, and
conclusions presented in the report as well as the
reasonableness of the assumptions and limiting
conditions.
Test whether the methods and techniques employed in
the appraisal are appropriate to the assignment.
Reviewers must determine whether the data has been
analyzed in a logical manner and whether the conclusions
are consistent with the data presented. Inconsistencies
arising from the use of non-standardized reporting formats
also require interpretation and verification.
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Evaluate the Appraisal Theory - continued
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Determine whether the appraiser has examined all
relevant economic indicators, considered all elements of
comparison, and applied all available techniques
appropriate to the appraisal problem.
Determine whether the value conclusion and estimated
cash flows reported, establish an appropriate level of
underwriting confidence in the loan-to-value and debt
service coverage ratios and other risk management
criteria. The descriptive portions of the report should alert
a lender to any special risks associated with the business.
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Identification of the Appraiser
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Is the appraiser qualified to conduct
appraisal?
Who did the work?
What other experience does the appraiser
have in this industry?
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Standard of Value
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Is the correct standard of value being
uses?
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Market Value
Fair Value
Investment Value
Liquidation Value
Synergistic Value
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Purpose of the Appraisal
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Is the purpose of the appraisal clearly
presented in the Letter of Transmittal?
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Is the value a 100% interest?
Is the value a minority interest
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Discounts?
What is the date of the appraisal? Is the data
adjusted in the report consistent with the date of
the Appraisal?
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Scope of Work
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Was the business inspected? How about the
remote locations?
If the physical premise of the business described?
Does the report describe the extent of research
into physical or economic factors that could affect
the business?
What was the extent of data research?
Does the assembly of pertinent assignment
information coincide with a correct identification of
the appraisal problem?
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Scope of Work - continued
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Was the data gathered that is needed to resolve
the appraisal problem?
Is the scope of the work outlined consistent with
the intended use of the report?
Do any of the assignment conditions affect the
gathering of factual information? Are there any?
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Hypothetical Conditions
Extraordinary Assumptions
Jurisdictional Assumptions
Supplemental Standards
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