PROPOSED
GUIDELINES FOR MORTGAGE FORECLOSURE APPRAISALS (1985)
Prepared
by:
Committee for
Foreclosure Valuation Guidelines, AB Assoc AIC
Bruce Anderson AACI
Andy Chopko AACI
BR Jensen AACI
Jim Wall AACI
Memorandum to Members,
The
Directors of the
Foreclosures
have gained prominence in the news since early 1982 and the rate of
foreclosures has had and will continue to have for some time to come a great
impact on the real estate market in
Statistical
data available indicates a second wave of foreclosures starting in 1983 added a
new dimension to foreclosures and were perceived to be caused by declining
property values. Property values continued to decline throughout 1982 and 1983
to a point where many property values were actually lower than the outstanding
mortgages. Under such circumstances owners were simply walking away from
properties as there was no equity and in some cases the loan exceeded the
market value.
With
the increasing number of foreclosures and related appraisals, wide variations
in property values are reported and no consistency in report writing is
evident. Many of the problems arise when appraisal reports are completed for
foreclosure proceedings where property values are estimated on the basis of
exterior inspections and/or lack of income and expense information etc. If
owners are not co-operative or if the property is vacant and access if not
provided, certain assumptions may be considered necessary in order to estimate
market value. These assumptions are not often stated and/or special terms of
reference relating to financing, leasing, etc., are not included in the valuator’s
report. Without prior knowledge of a property it is difficult if not impossible
to analyze differing estimates of value if the conclusions are not based on
stated assumptions or if a full inspection of the property has not been carried
out.
Therefore
it is being recommended to our membership that the attached guidelines and
certain definitions form part of the overall consideration in reporting
property values for foreclosure purposes. As stated these are recommendations
only and they are provided in order to improve our standards and to incorporate
an officially approved reference source which other organizations can
recognize. The committee is fully aware that further study into our role in
foreclosure procedures may be required in the future and further that there are
undoubtedly other definitions available, however the one stated are considered
by the committee to be acceptable.
In
closing I would urge you to incorporate these guidelines and definitions into
your mortgage foreclosure appraisals and I would welcome any constructive
criticism or comments you might have on the appraisers role in foreclosure
proceedings.
UPDATE
Guidelines
for preparation of valuator’s reports in conjunction with foreclosure
proceedings:
BACKGROUND
Current
economic circumstances prevalent throughout the
Research
conducted on appraisal reports filed with the courts in documented foreclosure
actions revealed that many valuators’ reports are of questionable quality
relative to the care and attention given to the amount of research and content
to support a reasonable estimate of value. Based on this research, it is
evident that the preparation of some appraisal reports have been in direct
contravention of the CODE OF ETHICS.
Further,
instructions received from lending institutions, legal firms, etc., have
included a request to provide the following:
A. Forced
B.
Forced
and,
more recently, requests have been made to include a MARKET VALUE estimate as
well. The perceived difference between MARKET VALUE and FORCED SALE VALUE is
viewed by many, as a reduction in time during which the property in question
would be exposed on the open market. There is some uncertainty as to which time
period this should relate to, example “the period of redemption, the period
over which the property will be exposed for sale through the tendering process,
or some other method.”
The
dilemma appears to be, in the court’s impression, that by virtue of previous
experience and long standing practice, appraisers have a clear understanding of
the concepts, definitions and appraisal techniques involved in arriving at
these three separate value conclusions. Appraisers on the other hand, have been
asked to provide value conclusions for two of the three items “forced sale value
on and cash basis and with terms” where no uniform (clear) definition has been
established.
In
order to alleviate some of the problems related to appraisals being carried out
for foreclosure purposes, the ALBERTA ASSOCIATION OF THE APPRAISAL INSTITUTE OF
CANADA has prepared reference guidelines for members directly involved in the
preparation of foreclosure appraisal reports (valuator’s reports attached as
Exhibit “A” to an Affidavit of Value). This information if considered by our
members when undertaking foreclosure appraisal assignments should serve to
provide a higher degree of consistency and a common, officially approved
reference source within our own profession.
Before
dealing with the reference guidelines and definitions, it may be useful to review
the main steps of the foreclosure procedures, and in particular as these
procedures impact on appraisers.
STATEMENT
OF CLAIM
Attached
to the Statement of Claim will be:
A: Affidavit of Default
B: Affidavit of Search
C: Affidavit of Value and Valuator’s Report
The
purpose of the Statement of Claim is to fix the amount of the total claim and
an attempt by the mortgagee to have the redemption period shortened. The
appraiser is involved at this point and the appraisal will be entered as an
Exhibit to the Statement of Claim. The appraisal may or may not include a
Statement of a Forced Sale Value. Appraisals for the mortgagor seldom, if ever
do. When the statement of claim is filed, it becomes a public document open for
review as does the appraisal.
ORDER
NISI
This
order provides that the Defendant (Mortgagor) may pay to the Palintiff (Mortgagee) or the court the stated amount at any
time before the final order for foreclosure is granted. Upon payment of the
total claim, the mortgagee shall discharge the mortgage, etc.
The
Order Nisi further provides that on default of payment as stated, the property
shall be offered for sale by tender.
ORDER
FOR
This
order provides that as it was not redeemed in accordance with the Order Nisi,
the property shall be offered for sale by tender and all tenders received be
submitted to the court for approval. If no sale occurs, the mortgagee may apply
for foreclosure. Tenders provide for payment of a 10% deposit with the balance
to be paid within 30 days of acceptance of the tender.
DIRECTION
FOR ADVERTISING
Copies
of advertisements are sent to the real estate brokers, to all parties shown on
titles having a registered interest in the property, as well as to newspapers
for publication once a week for two consecutive weeks.
In
ORDER
FOR FORECLOSURE
This
order provides for the transfer of the property to the mortgagee and further
orders the mortgagor to deliver possession of the property within a stated
period of time.
PERSONAL
COVENANT
When
a personal covenant is involved, the mortgagor may be held liable to the
mortgagee for the difference between the market value and the total claim.
Source: Rules of Court (Rule 695 Forms Q1-Q18)
CODE
OF ETHICS
Dealing
specifically with the members of the
PART
C, ARTICLE 11:
“The following shall be considered mandatory
practice in the preparation and presentation of the appraisal report resulting
from the valuation process.
1.
An adequate written appraisal containing a supported value estimate
shall be prepared for each appraisal assignment accepted, and shall include the
following as minimum requirements.
1)
An adequate description of the property being appraised.
2)
The purpose of the appraisal and a definition of the rights and value
estimated
3)
The effective date of the appraisal
4)
Pertinent zoning as of the effective date of the appraisal
5)
A statement of the estimated highest and best use of the subject
property
6)
A reasonably documented and factually supported value conclusion based
on at least one approach to value considered most applicable to the type of
property being appraised
7)
Reasoning supporting the value conclusion
8)
The final estimate of value
9)
Special and limiting conditions, if any
10)
The appraiser’s certification and signature
This
does not prohibit the use of form appraisals when specifically requested by the
client. The appraiser must have the minimum data requirements outlined in a)
above in his file to properly support the final estimate of value.”
Source: Code of Ethics, Regulation No. 1,
In
addition to the foregoing when completing a valuator’s report for foreclosure
purposes the following should be considered:
1.
Date of Inspection
2.
A comment on interior or exterior inspection stating assumptions
considered
3.
Where applicable, state lease data, rental income, etc., or statement
of assumptions considered. Where applicable if specific terms of reference are
supplied or specific financing will be provided, a statement in that regard
should be included in the Letter of Transmittal and Limiting Conditions.
4.
Definition of values stated, i.e. market value, forced sale value, etc.
5.
Final conclusions stating market value, forced sale value on a cash
basis and forced sale value with terms.
The
foregoing information is provided as a guide and is not intended to limit the content
of an appraisal report but rather to suggest that a valuator’s report contain
at least the minimum content of an appraisal report as required by the
DEFINITION
OF MARKET VALUE
The
Source: Introduction to Real Estate Appraising,
Implicit
in this definition is the consummation of a sale as of a specified date and the
passing of title from seller to buyer under conditions whereby:
“buyer
and seller are typically motivated – both parties are well informed or well
advised, and each acting in what he considers his own best interest:
a reasonable time is
allowed for exposure in the market;
payment is made in cash
or its equivalent;
financing, if any, is
on terms generally available in the community at the specified date and typical
for the property type in its locale;
the price represents a
normal consideration for the property sold unaffected by special financing
amounts and/or terms, services, fees, costs or credits incurred in the
transaction.
Source: Introduction to Real Estate Appraising,
DEFINITION
– FORCED
“A
sale made without the consent or concurrence of the owner of the property but
by virtue of a judicial process, such as writ of execution or an order under a
decree of foreclosure.”
Source: Black’s Law Dictionary (p. 1504)
DEFINITION
– FORCED
The
highest price which a property can reasonably be expected to bring, if offered
for sale without the consent or concurrence of the owner by virtue of judicial
process, in what may be a restricted market place, within a restricted time
frame, to a prudent, willing and able purchaser who may have limited knowledge
about the property, its uses and capability.
Source: Committee for foreclosure valuation guidelines
Note: It is important to state what may be a
typical selling period under normal market conditions for a property, example:
90 days, with the understanding that reasonable market exposure for residential
property may be somewhat different to commercial-industrial properties or farm
and acreages. It is also important to state in the definition of forced sale
value, the restricted time period which is less than normal market exposure.
(Example: 30 days or 60 days.) It is recommended that the client instruct the
appraiser as to the time limit to be imposed on the appraisal. Consideration
should be given for court processing time which should not include any lengthy
delays from the effective date of appraisal to the stated date of completion.
It
is possible that forced sale values – CASH AND TERMS – may at times be the
same. It may also be appropriate to assume that a bonus is paid for terms,
rather than a discount for cash.
The
appraiser must clearly state in the Letter of Transmittal, Limiting Conditions
and the report itself, whether or not the imposed time limit can be regarded as
a reasonable period of time for the property and the effect on value.
In
addition to the time limit, the imposition of terms will be meaningless unless
the terms are stated as to interest, ratio of loan to value, amortization
period and renewable terms. Terms can be either:
TYPICAL: Meaning that such terms as
would likely be applied to the subject property as at the effective date of
appraisal assuming the loan is made by a lender normally financing the type of
property being appraised and that the borrower would be approved.
ATYPICAL: (Specified Terms) – terms
specified by the client which are not typical for the subject property and/or
the effective date of appraisal. The appraiser must clearly state in the Letter
of Transmittal, Limiting Conditions and in the report itself, the terms considered
in the appraisal and the effect typical or atypical terms have on the value
conclusions.
SUMMARY
It
is recommended that the foregoing definitions be accepted by the members of the
Submitted by:
Committee
for Foreclosure Valuation Guidelines
Bruce
Anderson AACI
Andy Chopko AACI
B R
Jensen AACI
Jim
Wall AACI