Standing Up to Scrutiny
It is not unusual for one appraiser to
use paired sales and published studies
that indicate no damages, while
another appraiser might use paired
sales and published studies that suggest
damages of 10 percent or more. This
variance could potentially be avoided
if the question of proximity damages
were not addressed merely as part of
another appraisal assignment, but were
instead its own assignment.
The scope of such an assignment
should be to analyze proximity
impacts using data and methodologies
that stand up to scrutiny not only
by appraisers, but also by experts in
associated fields such as statistics and
economics, something that paired
sales and most published studies on
proximity impacts do not. While the
costs of such a study would obviously
be much greater than a typical
appraisal, it would yield better project
results when faced with balancing the
need to treat property owners fairly
with the need to prudently allocate
agency or company funds.
Recognizing the unreliability and
often wild inconsistencies of the status
quo, some right of way agencies have
commissioned larger studies. And
while some of these studies have been
published, most of them only address
proximity impacts from electrical
transmission corridors. These studies
have generally reflected value impacts
that are only loosely connected to
corridor characteristics such as width,
voltage, location on property and
associated property rights. While
the variance appears modest, an
understatement or overstatement of
damages by only a few percentage
points could easily translate into
millions of dollars annually—either
allocated to or withheld from property
owners.
With significant financial impacts
to right of way agencies and property
owners alike, questions regarding
the credibility of a given study in
estimating proximity impacts become
very practical for the right of way
community. Exacerbating the saliency
of these questions for the right of way
community is the fact that certain
federal agencies, such as the Federal
Energy Regulatory Commission, have
become increasingly concerned with
the impact that right of way projects
have on the value of abutting or
proximate properties. Unfortunately,
even cursory review of the scope and
methodology of currently available
studies indicates that proximity
impacts are not being adequately
analyzed, even when larger studies
have been commissioned.
Addressing the Inadequacies
The most serious shortcomings of the
published studies are lack of analytical
rigor, limited scope of data and time,
failure to use the latest advances
in geocoding and computing, and
failure to consider differences in the
type or scope of corridors. Resolving
these shortcomings requires that
practitioners and their clients alike
reconsider the assignment scope.
To ensure that a proximity impact
analysis will yield credible results
requires significantly more data than is
reflected in currently available studies.
Additionally, the modeling must
Getting a Fair Share
When an appraiser is hired to value
a partial acquisition, the primary
assignment is determining the before
and after valuation and any resulting
damages. The proximity impact
determination is usually relegated to
a secondary consideration. As such, if
the appraisal fee is only a few thousand
dollars for the entire assignment, it’s
likely that a relatively small portion will
be allocated to the question of damages.
Consequently, the scope of work that is
practical in analyzing proximity impacts
is limited, even if appraisers are unwilling
to admit it. As a result, the appraiser’s
primary research on proximity impacts
is likely to be some form of paired
sales analysis that attempts to quantify
proximity impacts by considering as few
as two sales transactions. Unfortunately,
much of the wide variances seen in
proximity damage estimates can be
attributed to the reality that paired
sales analysis is, at best, a minefield for
well-intended appraisers, while at the
same time serving as a goldmine for the
unscrupulous.
Given that disparate proximity impact
estimates often result from typical
appraisal assignments, the right of way
industry should consider whether there
is a more reliable means of analyzing
proximity damages. We also question
whether this should be part of a typical
appraisal assignment or whether it
requires a specific skillset and should be
contracted as a separate assignment.
In a typical appraisal assignment,
the appraiser is asked to estimate the
proximity impact for a specific property.
To do so, appraisers rely on proxy data
such as paired sales or published studies.
For example, to estimate proximity
damages, if any, for a property next to a
proposed transmission line, an appraiser
would use paired sales and/or published
data to derive a damage factor, generally
expressed as a percentage of value.
However, neither the paired sales nor the
published study is specific to the property
being appraised. Instead, the proxy data
reflects how proximity to power corridors
impacted the prices of other properties.
This information is then extrapolated to
the subject property. The credibility of
the damages estimate rests entirely on the
how reliable this proxy data is.
...millions of dollars are spent
annually on litigating the differences
of opinion... ”