Deconstruction Appraisals for Tax Deductions

• Sales Comparison Approach (should be the predominant method) -the most appropriate market is researched to locate comparable items which have sold or listed for sale in the past on which an opinion of value can be based. Adjustments in value are made to reflect differences (if any) in value considering relevant characteristics between the comparable properties and the subject properties.
• Cost Approach (used rarely and only when necessary) -This approach may be used in rare instances where comparable sales are not readily available on the second hand market. In this approach, the basis for value is developed by evaluating the cost to reproduce or purchase a new suitable replacement property (adjusted downwards to reflect all forms of depreciation such as physical, functional and external). The market should be thoroughly researched to determine the appropriate depreciation due to the factors noted.

However, some appraisers take short-cuts and use the above-listed approaches incorrectly. Often, software meant for construction professionals to create budgets and estimate projects for new construction are erroneously used for deconstruction appraisals. One example of this software is called RS Means—cloud based access to a comprehensive database of construction costs in North America. While the software provides valid estimates for new construction it should never be used for deconstruction appraisal valuations.

Producing an accurate appraisal on a deconstructed home of approximately 2,000 square feet would take close to a week (25-40 hours) of research by the appraiser and support staff. However, simply dumping materials and property, through data entry, into RS Means tables could take 1 hour or less. The unethical appraiser cuts down the time needed to do the complex research necessary for appropriate valuation and charges the same fees as those appraisers who produce valuations using Generally Accepted Appraisal Standards and following USPAP. Hence, they can produce high numbers of appraisals, collect high fees and spend minimal time on valuations.

Equally concerning is the valuations generated using RS Means—on average, they are grossly inflated. For example, RS Means gives a cost range of $525 to $1875 for a 4+ cycle dishwasher, however, you can buy a 4+ cycle KitchenAid dishwasher for slightly over $200 and luxury brands such as Bosch, Miele and Fisher and Paykel can be purchased for less than $1000.

Additionally, unethical appraisers could take these practices beyond usage of RS Means and artificially inflate quantities of materials and quality of materials within the RS Means valuation grid. For example, 250 square feet of oak hardwood flooring can be changed to 500 and the type or width of hardwood can be changed to a much more expensive variety with very little oversight.

Please see the hypothetical valuation differences in the table below showing the valuation differences between using the Sales Comparison Approach and the correctly applied Cost Approach against valuations from RS Means software.

The total value of these 4 items from the RS Means is $9,371, from the Sales Comparison Approach the total value is $4,785 and from the appropriately applied Cost Approach the total value is $4,642. The RS Means resulted in a 51% inflation of the value. Apply this to a 2,000 to 3,000 sf house with a value of approximately $80,000 using the Sales Comparison Approach, with the RS Means it would be valued around $120,000.

It is of utmost necessity that you vet your deconstruction appraiser closely. The taxpayer is the final user who will bear the brunt of these grossly inflated deconstruction appraisals with punitive measures such as: underreporting penalties, high fines depending on the percentage of valuation inflation, late payment fees and underpayment penalties. It is up to those of us within the deconstruction industry to ensure only those with the requisite knowledge-base, education and experience remain within the industry.

Questions to ask your appraiser:

• 1.
  Name of appraiser and what company does he/she represent?
• 2.
  Is he/she a sole practitioner or does he/she have a company with support staff?
• 3.
  Is the company family-owned, or is it a verified business with unrelated employees and owners?
• 4.
  What level of education and experience does the appraiser have along with the business owner and staff?
• 5.
  What educational or vocational institutions did the appraiser attend, graduation dates, and concentrated area of study or major?s
• 6.
  To what appraisal organization(s) does the appraiser belong? If it is an organization besides ASA, ISA, or AAA, explain why he/she chose not to be a member of one of the three deconstruction appraisal organizations associated with The Appraisal Foundation.
• 7.
  What continuing education courses has the appraiser taken, and what were the dates of the coursework?
• 8.
  What methodology does he/she use in determining valuations? If it is not the Sales Comparison Approach (SCA) please explain why that methodology is not used.
• 9.
  Does the appraiser have a resume which includes detailed descriptions of work experience, including responsibilities and industries within which he/she worked.
• 10.
  Has he/she been peer reviewed, and if so, when was the review and what was the result?
• 11.
  Can he/she provide a redacted sample of a recently completed deconstruction appraisal?
• 12.
  What is the total number of appraisals completed independently? (allowing for administrative assistance)

Reference Links:

¹ The data is from 2011 RS Means software, which is what is available for trial. Current RS Means valuations are, most likely, slightly higher.