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Posted by Stan Tish, MAI on Tuesday, May 17, 2011

Forensic Appraisals Require Precisely Defined Problems in order to Provide Useful Answers - Diminution in Value

Defining the appraisal problem is the fundamental first step in the appraisal process. It includes such seemingly mundane items as identifying the client and intended users, the intended use, the purpose of the assignment, the type of value to be estimated, the effective date of the opinion, the characteristics of the property, and assignment conditions such as extraordinary assumptions and hypothetical conditions, if any. In the majority of appraisals, such as those for lending, the components of the appraisal problem seem fairly obvious and typically receive perfunctory consideration.

In forensic appraisal, however, definition of the appraisal problem is critical; neither diligent research nor skillful analysis will avail if the appraiser is answering the wrong question. The appraiser’s determination of the scope of work depends upon a proper identification of the problem, which (in its entirety or in its various components) can be difficult to discern, and may take weeks or months to achieve even with legal guidance from counsel. What is it exactly that must be measured, what is the appropriate methodology to employ, and what market data is to be researched?

Periodically we will pose an actual appraisal problem and elicit solutions from our readers. After a time, the actual solution that was employed will be described.

Appraisal Problem - Diminution in Value

Your client purchases a one-bedroom, one-bathroom unit on the second floor of a 1,200-unit garden complex that was converted to condominiums in 1983. On the day the client and his fiancé move in, they receive a death threat from the downstairs neighbor, which initiates a period of sustained obnoxious, harassing, and threatening behavior. Your client vacates the unit and attempts to rent it at a fraction of market rent, but a series of tenants can not endure the downstairs neighbor for more than a month or so before moving out.

The appraisal problem: The date of value is close of escrow. What is the diminution, if any, in the market value of your client’s condominium as a result of the sustained harassing behavior of the downstairs neighbor?

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