Real Estate Valuation in Litigation Rev. by Stephen Traub, ASA

Real Estate Valuation in Litigation

by J.D. Eaton, MAI, SRA
Published by Appraisal Institute, Chicago, 1995

Review by Stephen Traub, ASA

[Bookcover]

ALTHOUGH THIS IS a great book, it is not a great book about real estate valuation litigation as one would expect. Instead, it is a great book about eminent domain and associated litigation matters. In it one gets an in-depth look into the world of eminent domain valuation (government land taking and condemnation).

Still, throughout the book the author brings up some of the common themes that eminent domain has to other litigation matters including the adversarial environment in which one will work as well as the importance of understanding the legal rules.

The first recorded condemnation action was in 871 BC. King Ahab took Naboth's vineyard. Naboth was compensated for the taking by being stoned to death for his refusal to sell the land voluntarily. No appeal was granted.

In the US in 1875, it became clearly established that the federal government had the power to take land for public use. Takings, however, had to include just compensation. Just compensation varies from jurisdiction to jurisdiction. So, it is imperative that the appraiser understand the definition of market value and the valuation techniques acceptable to the jurisdiction.

One of the major differences one will encounter is between the "Federal Rule" and the "State Rule". A table is included showing which rules are favored in each state. In my neck of the woods, NH and ME follow the "Federal Rule". Under this rule, if a partial taking occurs, the appraiser determines a value before the taking for the larger parcel, and then a value for the remainder. The owner is then compensated the difference.

Under the "Federal Rule", generally, compensation is paid only for takings, not damages. One example cited is a 1911 case in which a court disregarded an owner's contention that the construction of a railroad across his land would result in tramps using his barn. In another case, a court would not consider the argument of a farmer who contended that his laborers would stop work to watch trains go by.

Under the "State Rule" (which is used in MA) the value of the taken portion is determined plus any damages the owner suffers as a result of the taking. This rule does not allow benefits that may accrue to the remainder to be set off against the loss in value of the part taken and/or damages.

Benefits may arise from public improvement for which private property has been taken. Special benefits are specific to a property remaining. In some cases, special benefits are deductible from compensation. General benefits, on the other hand, accrue to the community at large and generally are not deductible.

Cost Approach and DCF Disfavored

With regard to valuation methods, the author suggests that the cost approach is generally disfavored. The courts view the income capitalization approach as superior to the cost approach, yet inferior to the sales comparison approach. He emphasizes that the courts insist that any capitalization rates selected not be just a mechanical calculation, but be supported by market data. Discounted cash flow (DCF) analysis, therefore, is not held in high regard, since DCF forecasts can not be proven. If an appraiser testifies about how much a property is going to sell for in 10 years, the courts will probably reject the testimony as conjectural.

Comparable sales, however, must be judged comparable before admittance. And, sales occurring after the valuation date have met with mixed reactions. These sales fall under the "hindsight rule". Nonetheless, they are not inadmissible per se (contrary to popular belief).

The current trend toward convergence between zoning and environmental restrictions (historically uncompensated), and actual takings (historically compensated) is examined. Although physical land may not be taken, environmental and zoning restrictions often can render a lot undevelopable. In recent cases, excessive restrictions have begun to become compensable.

Following 416 of 529 pages, the author begins to discuss more general valuation litigation advice with a look into writing the report. He emphasizes the importance of a report's appearance by dividing the appraisal fee by the number of pages in a finished report and points out that it can cost the client more than $100 per page. The client, therefore, deserves more than smeared type, "typos", and sloppily hand-sketched exhibits wrapped in a 25 cent binder. Still, he warns, no matter how aesthetically pleasing a report, a lousy report is still a lousy report.

An Objective and Neutral Party

Next, the author briefly discusses trial preparation and strategies. He discusses the differences between the role of the attorney as an advocate, and the role of the appraiser as an objective and neutral party. He points out that triers of fact have an uncanny ability to distinguish advocacy from objectivity.

When testifying, the best stance and attitude an appraiser can take is to help the trier of fact understand a technical subject not within the understanding of the average lay person. The testifying appraisal expert should consider himself to be working for the trier of fact. While testifying, therefore, the appraiser should address the trier(s) or jury, not the questioner. Ideally in the end, the appraiser should come down off the witness stand with his/her integrity and professional reputation intact.

He strongly suggests that an appraiser should begin by presenting a full description of his/her qualifications. Regardless of the acceptance of the other side, it is a mistake to not highlight one's qualifications. Otherwise, the jury may not give proper weight to one's testimony.

Next, the appraiser should outline a description of the appraisal process, as well as provide a description of the work undertaken in appraising the property. This should be followed by a description of the property, its highest and best use, and a description of how the property was valued with respect to each approach. Since an appraiser is not a party to sales transactions or present at the closing, information surrounding sales would otherwise be considered hearsay. "Federal Rules" of evidence, however, allow an expert to testify to the factors upon which an experts opinion is based, as long as the facts are of a type reasonably relied upon by experts in the field.

Cross-Examination Mauling

Following direct testimony, the appraiser will be cross-examined. It has been said that cross-examination takes the place that torture occupied in medieval times. So, appraisers who don't like to be questioned or confronted should stay away from appraisal litigation. The goal of cross is to destroy the witness's direct testimony completely. "Cross-examination is the anvil of truth and one must be prepared for the thorough hammering." One should not be surprised if one gets asked questions like, "Do you have any sales to back up your totally unsupported opinion?" But don't despair, after the mauling, one will then have a chance to be reconstructed (or if it went really badly), "resurrected" or "resuscitated" on redirect.

It can be a good idea for an attorney to hire a second appraiser to review his expert's appraisal report and the other side's report before "the games begin". Attorneys tend to talk "legalese" while appraisers may hear in "appraisalese". Consulting appraisers often can act as interpreters. Also, all work performed by the testifying appraiser generally is discoverable, while work of the consulting appraiser generally is protected from discovery. Moreover, a consulting appraiser, unlike a testifying appraiser, cannot be excluded from the hearing. He/she, therefore, can offer suggestions to the attorney about the weaknesses in the other sides' presentation which could be invaluable for cross-examination.

Depth of a Cereal Box, Yet Eminently Invaluable

Near the end of the book, the author finally discusses appraisals for litigation matters other than eminent domain. He touches upon divorce, trustee, fraud, bankruptcy, ad valorem taxation, and a few other areas. But once outside eminent domain, the book has about as much depth of information as one would find on a cereal box.

Still, I can't "condemn" the book for this, because with regard to eminent domain, it is filled with real life valuation examples, experiences, and information including its history, legal aspects, each states' laws, as well as federal laws all presented through a wide and clear window. The book, therefore, for this purpose is eminently invaluable.

The book above is available on-line at Amazon Books.

Stephen Traub, ASA, the reviewer, is chief commercial appraiser for Property Valuation Advisors, 63 Hill St., Newburyport, MA 01950. He is a certified general appraiser in NH, ME and MA.

To contact the author of this review, e-mail to: straub@shore.net or contact him at the address above, or call 978-462-4347.