On September 28, 2012, New York State Attorney General Eric Schneiderman settled an investigation of CoreLogic, Inc., formerly The First American Corp., saying that "coercion of appraisers to inflate home values and the erosion of appraisal independence directly contributed to the housing crisis." The amount of the settlement was $7.8 million
In order to get a better handle on the subject of real estate appraisal, I met with Stephen Schuster at his home office in Sag Harbor. Steve has been an appraiser and a consultant with respect to commercial and residential properties in Sag Harbor since the mid 1990s.
JV: Please explain the different approaches to appraisal.
There are three basic approaches to appraisal. The direct sales comparison approach, the income capitalization approach, and the cost approach... The sales comparison approach is used for residential properties. We compare other sales in the area to the subject property. The second approach, the income capitalization approach is used for income-producing properties. In addition to looking at the property itself, we try to determine its potential rate of return. The cost approach is used for schools, churches, properties not bought and sold on the market. It is also used for new construction and insurance purposes.
JAV: Please define "highest and best use."
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It is the use that would provide the greatest return on you investment.
JAV: Doesn't that depend on whether the zoning permits that use?
There are several stages we go through in determining best use. Is it physically possible to develop this property, is it legally permissible, which is going to provide maximum productivity, (best return on investment), and then come up with a conclusion. When valuing a property for assessment purposes you always value the property "as is." That is required by NY State Law. A tax appeal case would not be based on highest and best use.
JAV: Please define market value, cost, and price.
Market value is what is known as a series of prices. We learn in our business "a sale does not the market make." Cost may or may not be equal to market value. It is used only in the situation mentioned earlier. Market value is what the property is most likely to sell for in a competitive market.
JAV: How do you appraise vacant land?
You would use the sales comparison approach however it's a little different out here. A "tear down" is considered a vacant land sale. Developers add the cost of demolition, but it is based upon "comparables."
JAV: The five towns of Eastern Long Island, in order to retain the rural character of the Peconic Region purchase development rights. How do you appraise those properties?
Development rights involve large tracts of land, 15 to 60 acres for example. We determine what the land would be valued at if it were developed. Over the years we have accumulated a file of properties that have been stripped of their development rights. We compare the prices of those properties to ones where the rights are still in tact, and come up with the difference, and that is the compensation that the owner will receive for the loss of the right to develop other than for agricultural purposes.
JAV: Which of the parties to the transaction would retain you?
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It could be either the town or the owner of the property. Sometimes the owner will take less than the property is worth and take the difference as a tax deduction.
JAV: Have you ever been involved in matters of Eminent Domain, the government's right to acquire ownership of private property?
That was the first extensive experience I acquired when I started in the appraisal business.
JAV: Did you have to appear in court as an expert witness?
Yes, quite often, on both sides of the issue.
JAV: Have you been involved in court cases where there is a dispute over the value of a property between family members or in divorce proceedings?
Yes. We call them "Family Feuds." Sometimes I'm appointed by the courts or by the attorney for one of the parties.
JAV: Do you also get involved in appraising properties for estate purposes?
Yes, quite often.
JAV: How do you compare today's market with pre-2008?
Before 2008 it was very difficult to value property at a particular point in time because of rising prices, 6 to 7% a month. After 2008 the market had gone down 15 to 25%.
JAV: With respect to residential, what is the bulk of your business?
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For every ten bank appraisals I do, one is a purchase and nine are refinances. My business in general is about 50% residential, 40% commercial, and 10% vacant land.
JAV: Where do you see the greatest return today?
I would say on land, especially if the owner has all the necessary permits to develop it. The Department of Health issues especially can slow down the process. Also properties that are on the water may involve other government agencies, the DEC, the Army Corps of Engineers for example.
JAV: Where do you think the strong areas for the market in the foreseeable future are?
Everybody has to live somewhere and not everyone can afford to buy, so I think that the need for rentals is very strong. The office market is weak. Retail depends on whether you have a better moose trap or not and if the consumers have the money to buy.
John is a St. John's University graduate, licensed Real Estate broker, lecturer, teaches real estate license classes at LIU, NYU, and Cook Maran Real Estate School, and is a well-respected consultant to the real estate industry. www.johnaviteritti.com