Ask Henry

Sale Value Differs from Appraised Value
Hi Henry,
What to do if the appraised value comes in at ~10% less than the accepted price in a foreclosure?

Thank You
(email withheld by request)

Dear AK,
The question you ask really covers all sales that are different from the appraised value.

When you make an appraisal on the Fannie Mae/Fredde Mac form you are using the federal definition of Market Value. This definition makes a lot of assumptions that often do not apply to an individual sale and often explain the difference between the appraised value and the sale price.

If you have not used this definition of market value and instead have used a custom definition like "distressed value" or "short sale value" it is more complicated but the same principles apply.

In most cases the appraiser should take the information about the sale and use if for another appraisal in the same market area if you get an assignment to make an appraisal where the definition of value is "foreclosed sale" value.

When a client askes you why your value is not the same as an individual sale you might reply, “I estimated market value based on it being a sale that fits the definition of market value which is different from "foreclosure sale" value which may explain the difference”. You might also say that your appraisal is just you opinion of what the value is based on the data available and it most likely will not be the same as a specific individual sale.

Unfortunately, the concept of different definitions of value will produce different appraised values is hard to explain which means that many of your client will not be happy with your explanation.

Good luck!

Ask Henry

Value of Lease

Dear Henry,
     If I lease some farmland to a farming family for 99 years, how do I calculate the value of this lease? Is it just a discounted cash flow plus the reversion of the land? Or does such a long lease typically include return on and return of capital and the reversion has no value? No buildings are involved in this deal. Thanks in advance for your help.


Dear Don,     For all practical purposes, a 99 year lease is a sale. It is not the original lease date that counts ~ it is how long the lease has to run.  Some states prohibit leases longer than 99 years and others say they are the same as sales. Trying to discount income for 99 years into the future, and then trying to add the present value of a reversion 99 years in the future results in a meaningless figure. Should you consider global warming (aka climate change) or that the population of the world may be 10 billion people or may be zero?  Some appraisers take the position that some small number is needed to reflect the difference between such a lease and ownership.  My problem is that I don't know whether it should be a plus or minus adjustment.  In most condemnations I am familiar with, a very long lease is treated as a sale.


Ask Henry

Tax Appeal Appraisal Fees

Dear Henry,
At one time, courses suggested appraising a property for the purpose of proving it was being assessed — and thus taxed — too high. If the result was a lowering of taxes, the agreed fee was often one year's tax saving. Can this still be done or have advocacy rules stopped this practice.


Dear Donald,
The Ethics Section (Management) of USPAP specifically prohibits an appraiser's fee being based on the outcome of the appraisal. Assessment appeals would be a great source of income to appraisers if they were allowed to do them with their fee based on the outcome of the appeal. Unfortunately, the USPAP is very clear that it is prohibited. Ironically, lawyers are permitted to be paid this way, and most often are.


Ask Henry

Burned Up Property Value

Hello Henry,

We have an REO assignment for a four-plex in Bakersfield, CA. The units are located in an older area with fair/poor quality properties and predominately REOs.

The front unit is burned and boarded and needs to be rebuilt. All units are 2/1 and 880 sf; Rents range from $550 to $650; Similar sales are selling at prices ranging from 90K to 135K. We figure the cost-to-rebuild the burned out unit at approximately 70K (at a minimum). The remaining 3 units have been trashed and each will need approximately $6,000 in repairs.

We're stuck!! Should we use the income approach (principle of anticipation) and the land / cost approach? The sales comparison approach is going to put the value estimate for this property below zero.

Do you have an expert opinion how to proceed? Thanks in advance for your help!

Christine Dawson-Koehn, Certified Appraiser
Bakersfield, CA

Dear Christine,

I am assuming that the definition of value to be used in the appraisal is the market value of the property in "as is" condition.

The first step of any appraisal is to determine what the highest and best use of the property is. If you decide the highest and best use of the property is to rebuild it, then you would estimate its value based on the assumption that it is rebuilt (using all the techniques you would normally use for this type of property) and then subtract from that value the cost to rebuild and repair, plus what a typical buyer would subtract for their efforts, cost to carry during the rehabilitation, and risk to during the rehabilitation.

If you conclude that the highest and best use is to demolish the improvements, rather than repair them, then the value of the site would be its value after the demolition, less the cost of the demolition, based on what a typical buyer would offer for such a property, after they subtract something for their efforts and their risks.

The real solution to your problem is to do a thorough and professional Highest and Best Use analysis. This requires you to consider all the potential uses of the site, once the existing improvements have been removed, versus the costs (and risks) associated with repairing, renovating and remodeling the existing damaged structure.


Ask Henry

Valuing Vineyards

Greetings Henry,

Over the years I have appraised a few rural properties that have possessed small vineyards. In every case, the owner has claimed the vineyard was not for commercial use, it was for hobby use only -- or, that there was only a very small "incidental income" attributable to the vineyard. Is there any hard criteria that can be applied in determining if the highest and best use is commercial wine production, based on the # of vines, etc. In discussions with other appraisers, it has always seemed to be a grey area with lots of appraiser discretion.

Rick Bacich

Dear Rick,

My daughter Kate did her college thesis at Vassar based on a survey of organic farms in the Hudson Valley in upstate New York, which is a wealthy semi-rural area. Her conclusion was that after you assigned some cost to the labor by the owners, the farms were not making any money at all! A well-known real estate author moved south with her husband to run a vineyard they had purchased. When I saw her at an educators' convention, she lamented that she made more money selling the grapes from a farm stand than she could by producing wine. Last I heard, they'd sold the vineyard and given up. There's lots more anecdotal evidence that indicates what the owners are telling you is true.

You might try the Lum Appraisal Library, 550 W. Van Buren Street, Suite 1000, Chicago, IL 60607; (312) 335-4100 to see what has been published on the subject. The librarians there are knowledgeable and helpful.


Ask Henry

Average in an Opinion of Value

Dear H2,

On a current appraisal, after all adjustments are made in the sales comparison grid of the URAR, the end adjusted values are as follows: Comp1: $125,000 - Comp 2: $127,000 - Comp 3: $124,000. I am unable to accord weight to any one of the comparables and would like to give weight to all of them, using an average that is in the middle of the indicated value range ($124,000-$127,000). I would like to add all three indicated values, and divide by three (= $125,333 average) and then reconcile the values to be $125,000.

However, I’ve been told many times not to derive an opinion of value using a mathematical method such as this one. Yet I have seen a few appraisals of my peers that do use this method, where appropriate. Of course, I want to be in compliance with Fannie/Freddie and USPAP. What's your opinion?


Dear Brooke,

If you are using a URAR form, the format calls for you to describe each comparable sale and then adjust it for any significant differences between it and the subject property. However, there is nothing in the USPAP that requires you to analyze comparables this way. In more complex appraisals (usually reported in a narrative appraisal report format), I have seen large sets of comparable data adjusted using averages. What you plan to do is fine, but the final value estimate of the subject should be based upon a reconciliation that, in your judgment considers everything about the subject, market and comparables that you think is significant.

The reason an "average" is not usually used by appraisers in the reconciliation process is that it is a statistical term that implies that you took a random sample of all the available comparable sales, and that the sample was large enough (usually a minimum random sample is at least 18 items). You would then also need to state if the average you obtained is the mean, median or mode.


Ask Henry

IRS Definition of Value

Dear Mr. Harrison,

I have received and read REV since its inception. Thanks very much for the opportunity to use this great resource!

I am writing regarding the recent “Ask Henry” entry entitled: Fair Market Value, Market Value, IRS Value. I wonder if the U.S. Code of Federal Regulations (available online at could be of use in resolving this question. For instance, in appraising real property for estate settlement, I use the definition of “fair market value” found at Section 20.2031–1(b), Part 20, Chapter I, Title 26. (This is under, “Estate Tax, ; estates of decedents dying after August 16, 1954” and “Definition of gross estate; valuation of property”.) The definition found there is, “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” Since USPAP requires that we also cite the source of our definition, I am able to give the appropriate citation as set out above. Would you concur with this methodology?

Thanks again for a great magazine/blog.
Best regards,
James P. Johnston
Wauneta, NE

Dear James,

I looked at the site and I think it is potentially a great resource for an attorney. However, I found it not useful as far as helping an appraiser determine what value to use. I entered each search term: "Market Value", "Fair Market Value" and "IRS Value". In each case, I got 200 references, which is the maximum it will give for one search. This means that I would have to read and understand 600 documents -- and it does not preclude the possibility that there might more. I need to stick to my original advice: for mortgage purposes, the FIREA definition must be used, and it is a useful definition for many other types of mortgages too. I would recommend that appraisers do not try to offer any other definition of value. This should be up to the lender/client, hopefully with the help of their attorney, and should be fully communicated to the appraiser as part of the required scope of work dialogue. The problem is that once the definition of value is changed, it requires selection of comparables that were sold under conditions that meet this atypical definition -- which is a good trick if you can do it.