1.5.2.4. Sales Requiring Extraordinary Verification. Certain types of sales can be used only under certain circumstances or for limited purposes in appraisals for federal acquisitions. As a result, these sales require extraordinary verification to ensure the appraiser’s opinion does not reflect any legally improper considerations. Section 4.4.2.4 addresses several types of sales that require this extraordinary treatment and the legal reasons for this requirement. This Section explains the verification process required for sales to government entities, sales to environmental organizations, and contingency sales.60 

Sales to Government Entities.Because sales to government entities routinely involve nonmarket considerations, sales to the government should be immediately viewed by appraisers as suspect in appraisals for federal acquisitions.61 Sales to the government should not be used as comparable sales unless there is such a paucity of private market data as to make a reliable estimate of market value impossible without the use of government purchases. The types of transactions conducted and lands acquired by governments are often unique. For instance, lands acquired for conservation or preservation are often of extraordinary size, have little economic utility or value, and are located in remote areas with little market activity. To develop a reliable and supported estimate of market value in these situations, appraisers may be forced to consider sales to the government in the sales comparison approach to value. 

If the appraiser determines, after careful analysis and verification required under these Standards, that a sale to the government was a true open-market transaction, the sale may be appropriate to consider as a potential comparable sale. There are certain steps that the appraiser must take before a sale to the government can be qualified as a valid comparable sale. Comprehensive and documented verification of government transactions is essential. 

The type and amount of sales documentation and other information available to an appraiser about a sale to the government that is potentially comparable to the subject property will vary, depending on the land acquisition documentation requirements of the entity that acquired the potentially comparable property. Small governmental entities, such as local service districts, may acquire property without written appraisals, appraisal reviews, or written records of negotiations. On the other hand, state and federal government acquisitions are usually subject to the Uniform Act (or comparable state statutes) and require extensive documentation of land acquisitions, including formal documented appraisals, written appraisal reviews, and written records of the negotiating process. 

First, the appraiser should review the legislation that authorized and/or mandated the government’s acquisition of the potentially comparable property to determine whether the legislation provided that such property would be acquired at market value. Legislation that mandates acquisition at a price other than market value or provides for acquisition at a price unaffected by particular market forces (e.g., disregard of the influence of the Endangered Species Act) may not result in a valid comparable sale representative of market value. Likewise, legislation that allows the acquiring agency to deviate from the market value measure if it finds it in the public interest to do so will often not result in a price representative of market value. 

The appraiser should next contact the acquiring agency and ask to inspect the appraisal upon which the acquisition was based, the agency review of that appraisal, the negotiator’s report (or file) in conjunction with the acquisition, and the agency’s acquisition file. 

Examination and analysis of the agency’s appraisal should include: 

• Determination of whether the sale was a total acquisition of the landowner’s property indicating the value of the property acquired or a partial acquisition that reflects not only the value of the part acquired but also damage to the remainder. 

• Determination of whether the sale was for the fee simple interest in the property or a total interest similar to the interest being appraised (e.g., leasehold of the entire property). Sales of something less than the fee simple interest in an entire property (e.g., easement acquisitions) may not be valid comparable sales. 

• A review of the highest and best use determination. The highest and best use upon which the value opinion was based must be an economic use, and must be the same as, or highly similar to, the highest and best use of the property under appraisal before the transaction can be considered a reliable comparable sale. A highest and best use of sale to the government, conservation, or any use that contemplates noneconomic considerations is not a valid highest and best use upon which to estimate market value. 

• A review of the appraiser’s final opinion of value. Determine whether the price paid for the property was equivalent to its appraised value. If not, determine whether the price paid was within the range of values indicated by the appraiser’s comparable sales in the sales comparison approach and/or by the different approaches to value developed by the appraiser. 

• A review of the sales used by the appraiser in developing an opinion of value. If the sales relied on by the appraiser were influenced by nonmarket factors (e.g., political pressure), they would be invalid indicators of market value; thus, any value conclusion reached based on such sales may, likewise, be invalid. 

• A review of any value allocation or breakdown included in the appraisal report, such as different unit values for different land types included in the sale property or the contributory value of improvements. 

Next, the appraiser must examine the agency’s appraisal review, and make particular note of any technical or factual errors reported by the review appraiser. The requirements for appraisal reviews for federal acquisition purposes can be found in Section 3. 

The appraiser must also review the negotiator’s report and the agency’s acquisition file regarding the process of negotiation between the agency and the property owner. Any suggestion that the property would be condemned if agreement could not be reached should be noted. Likewise, any indication that the property owner accepted the price paid with the understanding that the agency would support (or not oppose) the property owner’s attempt to take a tax write-off for a donation for some amount in excess of the actual price paid should be noted. Either of these circumstances may suggest a price below market value. Any suggestion that a property owner may have threatened to damage the property for the government’s intended use (e.g., cutting the timber from land slated for acquisition as a park) if the owner’s asking price was not paid can result in a price in excess of market value. Sales involving the exchange of property are generally unreliable for use as comparable sales.62 

A determination should be made whether the property owner or the owner’s representative submitted an appraisal or any meaningful market data to the agency that may have supported a value higher than the government’s appraisal and the agency’s subsequent determination to pay more than its appraisal. If so, the submitted material should be analyzed. 

The appraiser should read any correspondence from the property owner’s political representatives, and the agency’s response thereto, to determine whether there may have been nonmarket pressure to consummate a sale at something other than market value. The appraiser should also review any media coverage concerning the property and the government project to determine whether there was an undue amount of public pressure on the agency or the property owner to consummate a quick sale. Such public pressure can result in a price that is above or below the market value of the property. 

Conveyance and closing documents will reveal the exact estate conveyed to the government. It should be confirmed that the estate that was conveyed is the same estate that was appraised. In negotiations, some agencies may allow the property owner to retain some rights in the property after acquisition not contemplated by the government’s appraiser (for example, a life estate in the property or an estate for years, at zero or nominal rent, or the right to continue to grow crops on the land or use it for grazing or a physical reduction in the land area acquired). 

If the estate acquired was only an easement, the sale is not a valid comparable either as an indication of fee simple value or of the value of the easement. If only an easement is being acquired from the subject property, the measure of value should not be based on the price paid for similar easements but rather upon the federal before and after method.63 

There are a number of legitimate reasons why a government agency would pay a price in excess of its approved appraisal for a specific acquisition. A reading and analysis should be undertaken of any documents produced by the agency or others in an attempt to justify payment in excess of the approved appraisal. An agency’s appraisal does not represent the only reasonable estimate of market value. But if the government paid more for the property than its approved appraisal, the appraiser must determine the government’s justification for doing so and whether it was based on market considerations. 

A price in excess of an agency’s approved appraisal may still represent a valid indication of market value if: 

• The appraisal is outdated in a rapidly appreciating market. 

• The price remains within the range of values indicated by the comparable sales developed by the appraiser. 

• The price remains within the range of values indicated by the different approaches to value developed by the appraiser. 

• Factual information about the property, the appraisal, or the comparable sales used came to light after the appraisal and review that revealed errors in the appraisal that could be mechanically corrected. 

On the other hand, a price in excess of an agency’s approved appraisal would not be a valid indication of market value, and therefore would not be a valid comparable sale (at least without adjustment) if: 

• The price in excess of market value was warranted due to costs and risks inherent in a condemnation trial. 

• The threat of imminent destruction of the property for the government’s intended use existed. 

• The cost of project delay caused by the failure to acquire the property offsets the price paid in excess of its market value. 

• The administrator of the public agency found it to be in the public interest to pay in excess of market value. 

• The tract acquired was a key tract, or the last tract to be acquired, for the government’s project. 

• The economy of land management of a consolidated ownership by the government outweighed the price in excess of market value paid for the tract. 

Once the foregoing investigation and analysis have been completed, the appraiser should personally verify the sale with the purchaser and the seller or their representatives. In conducting this verification, the appraiser should clear up any questions that may have arisen as a result of earlier research. 

Sales to Environmental or Other Public Interest Organizations.Sales to environmental or other public interest organizations are also prone to reflecting nonmarket considerations, as discussed in Section 4.4.2.4.2., Item (6). As a result, these transactions are subject to the same extraordinary verification measures as sales to government entities. When public interest organizations work closely with government agencies that administer conservation or similar projects, extensive sale documentation may be available. Before using such a transaction as a comparable sale, the appraiser must determine whether the sale was based on a competent appraisal of market value of the property for its economic highest and best use, whether any tax write-offs were taken, and whether the transaction was impacted by the pendency of the government’s project.64 If the purchase price was not based on the market value of the property for an economic highest and best use, the sale will normally have to be discarded as a comparable sale. The same is true if tax write-offs were involved or if project influence was present, although it is sometimes possible to make adjustments to the sale for these factors. If, subsequent to the sale, the property has been transferred by the environmental group to the government, the facts and circumstances of the transfer must be reported. 

Contingency Sales.Potentially comparable sales for a property with a highest and best use that requires procurement of rezoning or a land use permit must also be verified and treated with great care. Sales of such property in the private market generally take the form of initial options or contingency sales, with the contingency being the purchaser’s ability to procure the necessary rezoning or permitting to develop the property to its highest and best use. If the rezoning or 

permitting is denied, the contingency is not met and the sale does not close (or the option is not exercised). Therefore, when consummated, such sales reflect the price of property already rezoned or permitted for development to its highest and best use. All of the risks, time delays, and costs associated with a rezoning or permitting have been removed from the transaction. 

Such sales are typically not comparable to the property being appraised for federal acquisition purposes. Generally, properties under appraisal for government acquisition purposes that have a highest and best use that requires a rezone and/or permits to be developed to their highest and best use do not have the zoning or permitting in place. Thus, on the theoretical date of the sale’s closing (i.e., the effective date of valuation), the purchaser must assume the risks, time delay, and costs of procuring the rezone and/or permitting. Properties seldom sell in such a condition in the private market; thus, there are few truly comparable sales available for the appraiser’s use in developing a value for the property under appraisal by the sales comparison approach. 

Accordingly, appraisers must often resort to using sales that already have, on the date of consummation, their needed zoning/permitting in place. Under these circumstances, it is essential that the appraiser adjust the sales to reflect the differences in the regulatory environments of both the sales at the time of closing and the subject property as of the effective date of the appraisal. Such adjustments must account for the risks inherent in the procurement of a rezoning or permitting, including the possibility that the regulatory agency may deny such a request or place conditions on it.65 The time delays encountered in procurement of the rezoning and/or permitting and the costs associated with their procurement must also be considered. In certain circumstances, a purchaser may require an entrepreneurial profit in addition to an adjustment for risk. 

Appraisers cannot merely assume that such a rezoning/permit is in place for the subject property, or assume that such a rezone/permit will be granted. They must appraise the property only in light of the probability of obtaining the rezone/permit. If appraisers use sales of properties with zoning/permitting in place at the time of sale, they must clearly and specifically explain how they accounted for the regulatory environmental differences between these sales and the subject property and how they quantified the adjustment(s) for this factor, based on market evidence whenever possible.

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60 See Sections 4.4.2.4.2., Item (5) (Sales Involving the Government or Other Condemnation Authority), 4.4.2.4.2., Item (6) (Sales Involving Environmental or Other Public Interest Organizations), and 4.4.2.4.5 (Contingency Sales); see generally Section 4.4.2.4 (Transactions Requiring Extraordinary Care).

61 See Section 4.4.2.4.2, Item (5) (Sales Involving the Government or Other Condemnation Authority).

62 See Section 4.4.2.4.3.

63 See Section 4.6.1.64 Such transactions may well reflect project influence, as discussed in Section 4.5.65 See Section 4.3.2.4 regarding the consideration of the possibility of rezoning or permitting.

64 Such transactions may well reflect project influence, as discussed in Section 4.5.

65 See Section 4.3.2.4 regarding the consideration of the possibility of rezoning or permitting

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