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OREP Risk Management Q&A: How to Disclose and Adjust for Carcinogens
By Tim Andersen, MAI
Question: In completing a recent appraisal assignment, I came across an article in the local newspaper indicating the wells in a specific subdivision, over an extended time, showed elevated levels of a known carcinogen. I called the reporter for confirmation and she emailed me a copy of the study. A local university carried out the study for the local utilities department. The study indeed showed elevated levels. Now, what am I supposed to do with this information relative to the appraisals I do in this subdivision?
Andersen: Since this information came to you from a local newspaper article, it is “public knowledge.” Since you confirmed the existence of the study with the article’s author, as well as by reading the study itself, you have determined to your own satisfaction that the existence of the study is true and correct, which is what USPAP demands in SR2-3. You do not have an independent way to determine if the results of the university study are correct (i.e., scientifically reliable), therefore you have the right to assume extraordinarily it is reliable.
In your appraisal report, you’d include a copy of the article (following all copyright laws), as well as a copy of the university study for reference (keep a copy in the workfile). If you are at all uneasy about either the article or the study, you’d make your final value opinion subject to the extraordinary assumption that the article and/or study are correct (see SR1- 2(f), as well as its Comment). Then, you’d disclose that its use might have affected the assignment results (see SR2-2(a)(xi)—i.e., that the value opinion might have been different had you not used it).
Question 2: How am I going to adjust for the presence of contaminated well water when I do appraisals in this subdivision?
Andersen: If your comparables already come from the same subdivision, then the influence of the contaminated well water is going to be baked into the sales from it (specifically into the value of the underlying site). Since all of such improved sales share this influence there would be no specific adjustment since the subject and the comps come from the same neighborhood. There would not be an adjustment in the Cost approach, either: this is because whatever influences the contamination has on the sale prices of comparable properties in the neighborhood would be reflected in the values of the underlying sites.
In this scenario, there is no external obsolescence to account for since the contamination is not external to the subdivision. If that contamination influences value at all, it is already part of historical sales prices.
However, there may be a problem if it is necessary to go outside of this neighborhood to find comps. First, you’d have to determine if the contamination in the subject’s neighborhood affected values in it. If the market did not recognize the presence of contamination, then to adjust for a non-extant difference would be to mislead the client, a step SR 2-1(a, b) admonishes us not to take. If, on the other hand, the market did recognize such a difference, the most likely way to isolate its influence on prices would be a comparison of the sales price of vacant sites within the subject subdivision to those outside of it.
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If such a comparison were not practical the next step would likely be to survey brokers, who work the two areas, to ask if their customers and clients perceived a measureable difference in price between the two subdivisions. The next question would be if that perceived difference were due to the presence of the contamination, some other influence or due to a combination of influences.
The “ideal” answer to this question would be to limit comparables to the contaminated subdivision. If that’s not possible (which is likely), then it would be necessary to analyze enough data from other subdivisions to be able to tease out the contamination adjustment from a comparison of them.
Finally, remember that just because contamination is present does not mean, in and of itself, the market recognizes that presence as a value loss or premium. First, you’d have to show the market even recognizes such a loss or premium, and then you’d have to quantify the dollar amount the market recognized (loss or premium).
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Follow-Up Question: Where do I show all of this on the 1004 form?
Andersen: Fannie Mae and the GSEs never meant the 1004 form to handle answers to questions as complicated as these. Therefore, there is no place on the 1004 form to do so. Given this, you’d have to add a summary of why the question came up and how you chose to answer it. This summary would be a narrative addendum as part of the overall appraisal report.
While USPAP (and the GSEs for that matter) have no specific requirements as to where to place such an addendum in the report, including a précis of the processes behind the analyses in the Letter of Transmittal would be wise. It then seems appropriate to include a detailed summary of the items behind your analyses in the Scope of Work section of the report. Inclusion there makes sense since your choice to analyze the issue and its influence on value, affected your scope of work (since typically such analyses exceed the level of analysis you do for a typical appraisal and report). Because these extra analyses affected your scope of work, they are, by definition, assignment conditions. It is always wise to explain any deviations from standard appraisal protocols.
About the Author
Tim Andersen, MAI, is author of the risk management course “How to Raise Appraisal Quality & Minimize Risk” (7 hours Approved Continuing Education). This course is FREE to OREP insureds; email info@orep.org for details. Tim also provides a one-on-one mentorship service for appraisers. OREP insureds enjoy this service at a discount.
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